Select Harvests Limited
Annual Report 2005

Plain-text annual report

(cid:83)(cid:85)(cid:83)(cid:84)(cid:65)(cid:73)(cid:78)(cid:65)(cid:66)(cid:76)(cid:69) (cid:71)(cid:82)(cid:79)(cid:87)(cid:84)(cid:72) (cid:65)(cid:78)(cid:78)(cid:85)(cid:65)(cid:76)(cid:223)(cid:82)(cid:69)(cid:80)(cid:79)(cid:82)(cid:84)(cid:223)(cid:18)(cid:16)(cid:16)(cid:21) pg02 Highlights & achievements Australia is currently one of the top three almond growers in the world and Select Harvests manages over 60% of Australia’s almond orchards. pg04 Our business at a glance at a glance Contents Mission Statement Our Year in Brief pg09 Summary of Achievements Our Business at a Glance Our brands Milestones From the Chairman and Managing Director Our Brands Review of Operations Maintaining Quality pg10 Environmental Sustainability Our operations Review of Operations Our People Our Social and Community Involvement Our Board Our Management Statistical Summary Financial Contents Financial Reports Auditor’s Declaration Directors’ Declaration Independent Audit Report ASX Additional Information 19 20 21 22 23 24 32 73 74 75 1 2 3 4 5 6 9 10 16 17 18 Shareholder Information Annual General Meeting 2005/06 Calendar pg17 Environmental Sustainabilityiniti atives The Annual General Meeting will be held on Monday 24 October 2005 at the ASX Theatrette, 530 Collins Street Melbourne Victoria, commencing at 2pm. A separate notice of meeting has been posted to all shareholders. Feb Announcement of interim results Apr Payment of interim dividend Aug Announcement of preliminary full year results Sept Annual Report to shareholders Oct Payment of final dividend Oct Annual General Meeting pg 19 Social & Community Our mission To continue to develop and expand our business model to generate sustainable earnings growth into the future thereby delivering increased value to shareholders. Our strategy Through an ongoing process of diversification and expansion of our income stream by leveraging our core strengths of almond growing and knowledge of edible nuts and their markets, we will continue to develop a fully integrated food company with sustained earnings growth and reduced volatility from agricultural risk. Our activities From origins as a commodity-based almond grower, Select Harvests has successfully transformed itself into a significant integrated agri-food business with a diversified income stream. Our activities now include managing orchards for investors, marketing almonds in the domestic and export markets, and processing and marketing an extensive range of nut and fruit based products to retailers, distributors and food manufacturers. Our outlook We are one of the largest growers of almonds in Australia and globally, and our food products division has a significant footprint in the Australian market. Increasing nut consumption domestically and internationally, the existence of strong fundamentals in the international almond market, and increasing investor interest in almonds as a mainstream horticultural investment, are expected to contribute to a positive future outlook for the company. As a result of these key drivers, we are planning a further 6,000 acres of new almond projects in 2006, and scaling up our nursery and development resources to facilitate further projects into the future. We are targeting sales, market, and distribution growth from our food products division with a focus on our branded products, which are well positioned to continue to capitalise on the growing trend towards healthier diets and an increasing awareness of the health benefits associated with the regular consumption of nuts. Select Harvests Annual Report 2005 1 Highlights • Increased acres of new almond • Increased yields from company developments by 15% owned orchards by 24% • Expanded the total acres under • Almond price achieved per kilogram management by 29% increased by 11% • Increased production from investor owned orchards by 124% • Acquisition of the Nibbles business and branded product sales growth increased food products sales by 48% Our year in brief (cid:17)(cid:16)(cid:16)(cid:12)(cid:16)(cid:16)(cid:16) (cid:52)(cid:79)(cid:84)(cid:65)(cid:76)(cid:0)(cid:51)(cid:72)(cid:65)(cid:82)(cid:69)(cid:72)(cid:79)(cid:76)(cid:68)(cid:69)(cid:82)(cid:83)(cid:7)(cid:0)(cid:37)(cid:81)(cid:85)(cid:73)(cid:84)(cid:89) (cid:16) (cid:16) (cid:16) (cid:4) (cid:19)(cid:21)(cid:12)(cid:16)(cid:16)(cid:16) (cid:19)(cid:16)(cid:12)(cid:16)(cid:16)(cid:16) (cid:18)(cid:21)(cid:12)(cid:16)(cid:16)(cid:16) (cid:18)(cid:16)(cid:12)(cid:16)(cid:16)(cid:16) (cid:17)(cid:21)(cid:12)(cid:16)(cid:16)(cid:16) 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(cid:18)(cid:16)(cid:16)(cid:18) (cid:18)(cid:16)(cid:16)(cid:19) (cid:18)(cid:16)(cid:16)(cid:20) (cid:18)(cid:16)(cid:16)(cid:21) (cid:24)(cid:16)(cid:12)(cid:16)(cid:16)(cid:16) (cid:22)(cid:16)(cid:12)(cid:16)(cid:16)(cid:16) (cid:20)(cid:16)(cid:12)(cid:16)(cid:16)(cid:16) (cid:18)(cid:16)(cid:12)(cid:16)(cid:16)(cid:16) (cid:16) (cid:16) (cid:16) (cid:4) (cid:16) (cid:21)(cid:16) (cid:20)(cid:16) (cid:19)(cid:16) (cid:18)(cid:16) (cid:17)(cid:16) (cid:16) (cid:83) (cid:84) (cid:78) (cid:69) (cid:67) 2 Select Harvests Annual Report 2005 Summary of our achievements for the 2004/2005 financial year Almond Operations Our strategic objectives • Total production up to 6,036 metric Our objectives for 2005/06 tonnes from 3,538 in 2004 • Expansion of processing capacity to cater for increased crop levels. • Costs per kilogram decreased by 6% on the previous year from our owned orchards • These efficiency gains consolidate the cost savings achieved in previous years and make us one of the most efficient producers in the world • Planted 4,108 acres of new orchards in 2005, totalling 15,773 acres of investor owned orchards representing 87% of total acreage under management. • Continue to extract efficiency gains from additional acres under management and the processing of increasing crop levels • Plan the further expansion of processing capacity • Anticipate further plantings totalling 6,000 acres of investor owned orchards for 2006 • Scale up nursery and development resources to support future developments. Maintain our position as a low cost almond producer and develop additional investor owned orchards operated by Select on a fee basis to deliver long term stable income streams, economies of scale, and guaranteed supply to meet increasing market demand. Our achievements during 2004/05 • Crop from company owned orchards up 24% to a record 2,350 metric tonnes in 2005 Investor owned crop increased from 1,643 tonnes in 2004 to 3,686 tonnes in 2005 • Food Products Our strategic objectives Our achievements during 2004/05 Our objectives for 2005/06 Grow distribution and market share to enhance our position as the leading processor, marketer, and distributor of almonds, other nuts, and dried fruits, and add value to the marketing and distribution of almonds harvested from our almond operations division. • Increased sales revenue by 48% over the prior year to $131 million. • Acquired the Chiquita Nibbles business, contributing to revenue and EBIT together with improved distribution in the fresh produce category Increased market share in the branded cooking and muesli categories of Australian supermarkets. • • Continue to build our branded products in the cooking, health, and muesli categories • Expand domestic distribution for our products outside the grocery channel • Continue to develop and expand our export business in Asia and Europe • Utilise our competencies in product sourcing, processing, marketing and distribution to maximise our retail and industrial business. Earnings Our strategic objectives Our achievements during 2004/05 • Total EBIT increased by 39% to Earnings growth, improved quality of earnings, diversification of earnings streams, with less dependency on almond pricing. • Total sales revenue increased by 40% to $178 million • EBIT contribution from activities other than company owned orchards increased during 2004/05 further reducing exposure to agricultural risk $33.3 million • Net profit after tax increased by 43% to $21.7 million. Our objectives for 2005/06 • Continue to deliver earnings growth. Shareholders Equity Our strategic objectives • Total shareholders’ equity increased Our objectives for 2005/06 Enhance shareholder value. by 15% to $91.5 million • Return on shareholders’ equity Our achievements during 2004/05 increased to 23.7% p.a. • Total dividends increased by 62% to 42 cents per share • Earnings per share increased by 40% to 55.9 cents per share • Share price increased by 45% to $9.70 at 30 June 2005. • Continue to increase shareholder value through investment in the existing business Identification and evaluation of appropriate expansion opportunities. • Select Harvests Annual Report 2005 3 Sustained growth during 2005 saw the expansion of total acres under management by 29% and increased acres of new almond developments by 15%. Our Business at a glance Select Harvests Limited, Australia’s largest almond grower, manages in excess of 60% of Australia’s almond orchards, and is one of the largest almond growers globally. It is Australia’s leading manufacturer, processor and marketer of a range of nuts, fruit based, and associated products to the Australian retail and industrial markets, and exports almonds to several countries in Asia, Europe and the Middle East. Through a focused diversification and growth strategy, Select Harvests has delivered an increase in profit after tax of 314% over the last six years. Select Harvests’ business streams are as follows: Almond Operations Food Products • Owns/leases 2,375 acres of almond orchards in the Robinvale area of north-west Victoria. • Manages on a fee for service basis, 15,773 acres of almond orchards on behalf of a number of external investors. These services include orchard establishment, tree supply, farm management, harvesting, processing, and marketing. • Currently processes approximately 6,000 metric tonnes of almonds representing approximately 40% of Australia’s crop. Future tonnage will exceed 20,000 metric tonnes as new orchards come into full production. • Exports approximately 40% of its almond production to a range of countries including India, Japan, China, Indonesia, Germany, Spain, United Kingdom, Russia, France, Holland and Belgium. • Produces an extensive range of packaged nuts and associated products (snacks, cooking ingredients, mueslis, natural health foods, dried fruits, etc). • Australia’s leading supplier of processed and packaged nuts to Australian supermarkets. The Company markets product through the Lucky, Sunsol, Nu-Vit, Meriram, and Soland brands. • Manufactures a range of nut-based ingredients for food manufacturers and distributors. Pesticide Products • This business will be divested in the first half of the 2006 financial year. Please refer to The Chairman and Managing Director’s Report for further details on page 6. 4 Select Harvests Annual Report 2005 John Bird, Managing Director and future growth prospects, and we are targeting “ Our strategic initiatives have expanded our business further growth in the current year.” Milestones 1 July 95 – 30 June 96 1 July 98 – 30 June 99 1 July 02 – 30 June 03 – Defender Limited changed its name to Select Harvests Limited – Stage 1 of hulling and shelling plant upgrade commenced – Sorting and packing plant moved to Euston - NSW 1996 – Acquired 3,950 acres of land. – Max Fremder joined the Board 1 July 96 – 30 June 97 – Sold ‘DEFENDER’ Brand name (but retained manufacturing agreement) – Development of own tree nursery – Max Fremder became Chairman of Select Harvests Limited – 236 acres planted at Carina (first major plantings since 1988) 1997 upgrade commissioned. – Stage 2 of hulling and shelling plant 1 July 97 – 30 June 98 – Installed an inshell processing line for export markets – 168 new acres planted at Carina – John Bird joined the Company as CEO 1998 – Sandy Clark joined the Board – Stage 3 of hulling and shelling plant upgrade commissioned. – Acquired Lucky Candy Company in October 1998, the leading marketer of nuts, dried fruits and seeds in the cooking section of supermarkets 1999 – First major plantings of investor owned orchards (510 acres). – Achieved the position of “One of the top 5 almond growers in the world” 2003 – Relocated and consolidated our manufacturing operations to Thomastown facility from Northcote and Scoresby. 1 July 99 – 30 June 00 1 July 03 – 30 June 04 – Planted an additional 727 acres of investor owned orchards – Entered into Strategic Alliance with Timbercorp Limited to develop 10,000 acres of almond orchards over the next 5 years – Acquired Munch Nuts Pty Ltd in December 1999, a leading snack nut producer 2000 – All food processing plants accredited under ISO 9002 and HACCP. 1 July 00 – 30 June 01 – Planted over 3,000 acres of new investor owned orchards HACCP accreditations. – Orchards earned ISO 9002 and – Acquired Renshaw Foods in October 2000, a leading ingredient supplier to food manufacturers 2001 2002 – Planted an additional 518 acres of investor owned orchards. – Replaced 160 acres of 30 year old trees at Boundary Bend 1 July 01 – 30 June 02 – MILLIONTH TREE PLANTED!!! July 2003 – Acquired the Meriram business in 2004 – Curt Leonard joined the Board. – Dan O’Brien joined the Board 1 July 04 – 30 June 05 – Acquired Chiquita Nibbles business from Chiquita Brands South Pacific in October 2004 – New Strategic Alliance with Timbercorp finalised to develop a further 10,000 acres over the next five years – Expanded and upgraded hulling and shelling plant to 10,000 metric tonne capacity – Ross Herron joined the Board – New Laser sorter installed in the Thomastown processing plant – Internal microbiological laboratory established in the Thomastown processing plant 2005 – Almond price hits record highs. Select Harvests Annual Report 2005 5 Max Fremder: Chairman John Bird: Managing Director form of profit growth, increased dividend “ We continue to deliver value in the payments and share price appreciation.” From the Chairman and Managing Director Delivering Shareholder Value We are pleased to report to shareholders that our business model continues to deliver value in the form of profit growth, increased dividend payments and share price appreciation. At the same time we have made further progress in expanding our core activities providing a larger base to underpin future shareholder returns. The sixth consecutive year of earnings growth in excess of 25% delivered a profit after tax of $21.7 million, up 43% on the previous year. Directors declared a final dividend of 26 cents per share, bringing the total dividend for the year to 42 cents (fully franked), an increase of 62% on the previous year. Over the financial year our share price increased by 45% from $6.67 to $9.70, and has since increased further. Our key performance indicators were all positive showing an increased area under management, larger crops from both company owned and investor owned orchards, higher almond prices, and increased sales and market expansion in our food products division. Over recent years Select Harvests has established and now operates an integrated agri-food business. Our activities include owning almond orchards, managing almond orchards for investors, marketing almonds in domestic and international markets, and processing and marketing an extensive range of nut and fruit based products to retailers, distributors and food manufacturers. Our chosen markets continue to be kind to us with almond prices at record highs driven by a sustained period of global consumption growth and more recently by a reduced 2005 USA crop, and consumption of our product range growing in the Australian market place. While appreciative of being in the right place at the right time, we continue to do the right thing to ensure we maximise the opportunities provided by our competitive position. In the last year we have expanded both our orchard management services and food products division which are the cornerstone of our expansion and diversification strategy. We have recently completed the establishment of a further 4,108 acres of almond orchards increasing our total area under management by 29% to 18,148 acres providing an increased base for generating orchard management services income. As a result, we estimate that we are managing over 60% of the total Australian almond acreage and are one of the three largest growers in the world. The acquisition of the Nibbles business completed in October 2004 contributed to an increase in food product sales for the year from $88 million to $131 million, and at the same time significantly increased our share of the important and growing fresh produce area. We now have an expanded business with a leadership position servicing all categories of supermarkets in which our products are ranged. These initiatives have expanded our business model and future growth prospects and we are targeting further growth in the current year. Our markets We have spoken before about the key drivers of our business; the strong fundamentals of the international almond market, and the increasing consumption of our products in both the domestic and international markets. These conditions continued through the financial year and present indications are that they will continue into the future. A sustained period of consumption growth over the last 5 years coupled with a plateauing of supply out of the USA due to low levels of plantings in recent years pushed almond prices to seven year highs. More recently, an anticipated 15% drop in the 2005 USA almond crop will see global almond supply drop below the previous year’s consumption levels, driving prices to new record highs. USA growers accelerated new plantings this year and we expect to see this continue, however it will take a number of years to deliver the increased supply necessary to match potential consumption growth. The health message continues to gain momentum with increased awareness 6 Select Harvests Annual Report 2005 (cid:18)(cid:16)(cid:16)(cid:18)(cid:0)(cid:37)(cid:34)(cid:41)(cid:52)(cid:0)(cid:4)(cid:17)(cid:20)(cid:14)(cid:23)(cid:0)(cid:77)(cid:73)(cid:76)(cid:76)(cid:73)(cid:79)(cid:78) (cid:18)(cid:16)(cid:16)(cid:19)(cid:0)(cid:37)(cid:34)(cid:41)(cid:52)(cid:0)(cid:4)(cid:17)(cid:23)(cid:14)(cid:20)(cid:0)(cid:77)(cid:73)(cid:76)(cid:76)(cid:73)(cid:79)(cid:78) (cid:33)(cid:76)(cid:77)(cid:79)(cid:78)(cid:68)(cid:223)(cid:47)(cid:80)(cid:69)(cid:82)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:83)(cid:223) (cid:22)(cid:19)(cid:5) (cid:38)(cid:79)(cid:79)(cid:68)(cid:223)(cid:48)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:83)(cid:223) (cid:48)(cid:69)(cid:83)(cid:84)(cid:73)(cid:67)(cid:73)(cid:68)(cid:69)(cid:83)(cid:223) (cid:19)(cid:16)(cid:5) (cid:23)(cid:5) (cid:33)(cid:76)(cid:77)(cid:79)(cid:78)(cid:68)(cid:223)(cid:47)(cid:80)(cid:69)(cid:82)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:83)(cid:223) (cid:23)(cid:16)(cid:5) (cid:38)(cid:79)(cid:79)(cid:68)(cid:223)(cid:48)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:83)(cid:223) (cid:48)(cid:69)(cid:83)(cid:84)(cid:73)(cid:67)(cid:73)(cid:68)(cid:69)(cid:83)(cid:223) (cid:18)(cid:20)(cid:5) (cid:22)(cid:5) (cid:18)(cid:16)(cid:16)(cid:20)(cid:0)(cid:37)(cid:34)(cid:41)(cid:52)(cid:0)(cid:4)(cid:18)(cid:19)(cid:14)(cid:24)(cid:0)(cid:77)(cid:73)(cid:76)(cid:76)(cid:73)(cid:79)(cid:78) (cid:18)(cid:16)(cid:16)(cid:21)(cid:0)(cid:37)(cid:34)(cid:41)(cid:52)(cid:0)(cid:4)(cid:19)(cid:19)(cid:14)(cid:19)(cid:0)(cid:77)(cid:73)(cid:76)(cid:76)(cid:73)(cid:79)(cid:78) (cid:33)(cid:76)(cid:77)(cid:79)(cid:78)(cid:68)(cid:223)(cid:47)(cid:80)(cid:69)(cid:82)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:83)(cid:223) (cid:23)(cid:17)(cid:5) (cid:38)(cid:79)(cid:79)(cid:68)(cid:223)(cid:48)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:83)(cid:223) (cid:48)(cid:69)(cid:83)(cid:84)(cid:73)(cid:67)(cid:73)(cid:68)(cid:69)(cid:83)(cid:223) (cid:18)(cid:22)(cid:5) (cid:19)(cid:5) (cid:33)(cid:76)(cid:77)(cid:79)(cid:78)(cid:68)(cid:223)(cid:47)(cid:80)(cid:69)(cid:82)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:83)(cid:223) (cid:38)(cid:79)(cid:79)(cid:68)(cid:223)(cid:48)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:83)(cid:223) (cid:48)(cid:69)(cid:83)(cid:84)(cid:73)(cid:67)(cid:73)(cid:68)(cid:69)(cid:83)(cid:223) (cid:23)(cid:19)(cid:5) (cid:18)(cid:19)(cid:5) (cid:20)(cid:5) amongst health professionals and other food and diet influencers. Nut based products continue to grow in popularity showing strong consumption growth both domestically and in international markets. There is continuing evidence of a move towards natural snacks with a greater focus by retailers and increased marketing activity from retailers, suppliers and industry groups. The strong almond market improves returns for both Select Harvests and our investor growers and underpins the attractiveness of almond orchards as an investment in Australia. The consumption trends towards healthy eating matches the branding position of our food products division and the market growth provides the base for revenue growth and an expanded market for our future almond crops. Future Prospects Global almond prices continue to be buoyant and will continue to impact positively on our business. We are planning to establish a further 6,000 acres of investor owned orchards in 2006 with potential to increase this further. The larger area under management and increased production from maturing orchards will increase orchard management services revenue for the year. The strong fundamentals of the international almond market and Australia’s competitiveness as an almond grower and marketer, has increased the demand to own almond orchards. To match this demand we are planning, with our alliance partners, to expand our orchard establishment activities over the next few years. To facilitate this expansion, we have upgraded our tree nursery capacity and development infrastructure and resources, and are focussing on identifying suitable land reserves to support this growth. Our food products division continues to operate in a growth market and we are looking for further sales and distribution growth in 2006, particularly from our branded business. We continue to look for further expansion opportunities by acquisition which would complement and add value to our existing business. Divestment of Pesticides Business We have entered an agreement to sell Riverina Pelletising Services Pty Ltd (Pesticides Business) for a total consideration of $5.7 million. Settlement is expected to occur on 14th October and we estimate a net profit before tax of approximately $4 million from the transaction. The business has been a good contributor to our earnings over a number of years. However given it is today a non core activity operating in a market in which we have minimal influence, it is appropriate we take this opportunity to divest the business and concentrate on the further development of our core activities. The Directors thank Vince Cavanagh and his team for their efforts and dedicated service and wish them well under the new ownership. Select Harvests Annual Report 2005 7 Our People We have in the last year significantly grown our business in terms of sales, acreage, processing capacity, and people. Our ability to successfully manage this ongoing expansion and at the same time deliver improved results is in no small part due to the skill, effort and dedication of our staff at all of our locations and to the continued support of our customers and suppliers. We thank board members, management and staff for their efforts over the last year and their contribution to the ongoing development of the company. We take the opportunity to welcome Mr Ross Herron to the board. His skill base and wealth of experience will serve the company well in the future. We are pleased with the progress the company has made in recent years; our business model has served us well and will continue to do so in the coming years. We are operating in a marketplace that continues to provide opportunities for further growth and once again we can say that we approach the future with confidence. We remain committed to profitably growing the company and delivering shareholder value in the future. Max Fremder Chairman John Bird Managing Director The Almond Harvest Cycle Winter activity The months following harvest are used for orchard maintenance where trees are pruned and prepared for the next season. Cold weather during the winter months helps the trees to rest before the next growing season begins. Winter is also a time for planting new trees and rootstock seeds for the following year. Nursery trees that have reached heights over 90 cm are wrenched from the nursery and planted in prepared orchards. In the processing plants, the hulling and shelling of the crop concludes but grading, packing and dispatching continues in earnest. Spring activity Spring on the almond orchards is beautiful. As the warmer temperature returns, the bud swells and flowering commences. The potential size of the new crop depends upon the pollination by bees placed in the orchard. Insects and fungus must be controlled to protect the emerging flower so foliar spraying plays a key role. Post bloom the flowers drop from the trees and the pollinated almonds begin to grow. The ‘nutlets’ are susceptible to wind and frost damage so for optimum growth, fair, warm and calm conditions are needed during this period. Winter Spring Autumn Summer Autumn activity Almonds are shaken, picked up and transported to the hulling and shelling plant where the processing and grading of almonds commences. Following this they are transported to the sorting and packing facility where they are further sorted and packed after which dispatching commences. Some almonds are packed with the hull removed but the inner shell intact. This type of presentation is called ‘inshell’ and is preferred by certain export markets. Summer activity As the nuts grow the tree drops those that exceed its ability to nourish leaving the remaining nuts to mature, increasing in size until early summer. During this period irrigation and fertigation is critical to sustaining the size and quality of the almond crop. As the nut reaches maturity growth stops and the nut begins to dry. The ‘orchard floor’ is prepared for harvest by removing weeds and smoothing the surface. Harvest commences at the end of this season. At the same time tree grafting takes place in the nursery where the almond tree begins its growth from the grafted bud. 8 Select Harvests Annual Report 2005 Our Brands Lucky Sunsol Nu-Vit The Nu-Vit brand was developed in 1984. Nu-Vit premium health food products include a range of specially formulated wholefoods, organics, gluten free muesli and nutritional snack products, natural food supplements, and food blends. The Nu-Vit health food range also includes the distinctive Funpack/Multipack range with the fun character N.E.D. Nibbles ( Nuts Every Day). Nu-Vit branded products are distributed through major supermarket chains in Australia and in Asia. Lucky branded products include healthy nut based snacks and cooking ingredients. The brand was developed in 1957 and its distinctive brown and gold packaging has become synonymous with home cooking. Lucky products are located in the dried fruit and nut section of supermarkets nationally. Sunsol branded products include the top selling Sunsol ‘Natural Fruity Muesli’ and ‘Sunsol Natural Muesli’. Sunsol wholefoods include a range of nuts, seeds and dried fruits packaged in the bright yellow, blue and red pack. Sunsol products also include a range of portion controlled lunch box packs with blends of natural fruits, nuts and yoghurt coatings. The brand was developed in 1984. Meriram Meriram branded products include a quality range of breakfast mueslis, cooking nuts, seeds, dried fruits, and wholefoods. The brand was developed in 1982. With a distinctive design and unique packaging artwork on the muesli range, the Meriram range is distributed throughout supermarkets nationally. Soland Soland supplies health food stores in Australia with a range of branded health foods, muesli, dried fruits, nuts and seeds. The Soland brand was developed in 1984 and includes a range of organic foods in the distinctive Soland packaging. Select Harvests Limited 2005 9 Review of Operations Our Almond Operations have undertaken a shift in direction over recent years with a focus on establishing and managing investor owned orchards. The Australian almond crop is harvested from late February to April which is counter seasonal to the northern hemisphere where harvest commences in late August. 10 Select Harvests Annual Report 2005 Almond Operations Result for the year The division increased EBIT for the year by 44% to $26.3 million. The increased earnings were driven by the further expansion of our orchard management services business and improved returns from our company owned orchards in both yield and price. • Area of new investor owned orchards developed up 15% to 4,108 acres • Expansion of total acres under management up 29% to 18,148 acres • Total 2005 crop production up 71% to 6,036 tonnes • 2005 crop production from investor owned orchards up 124% to 3,686 tonnes • 2005 crop production from company owned orchards up 24% to 2,350 tonnes • Almond price received per kilogram up 11% on previous financial year • Revenue from almond sales pool up 90% to $40 million on previous financial year Strategic Development – a shift to investor owned orchards Our almond operations have undertaken a shift in direction over recent years with a focus on establishing and managing investor owned orchards. The company’s origins were as an almond grower around the township of Robinvale in North West Victoria. Our initial orchards were planted at Boundary Bend in the mid-1970’s with Wayne Turner: General Manager Almond Operations although a small player, is able to compete effectively “ Almond prices are currently at record highs. Australia, in terms of cost, quality and market access.” Almond Operations at a glance 2005 2004 EBIT $26,297 $18,264 % of Group EBIT 74% No of Employees 126 71% 121 further expansion from 1980 to 1988 making the company Australia’s largest grower, farming approximately 1,870 acres. Today we remain a significant grower with a total of 2,375 acres. By the mid-1990’s the company was operating at world’s best practice in crop yields and an investment in new processing capacity positioned us to expand our growing and processing activities. In 1998 the company embarked on a strategy to expand the acreage under management and the tonnage produced and sold by developing new almond orchards on behalf of external investors. This changed the income stream of the business from the revenue from our almond crop to a fee based recurring income stream from orchard development, farm management, harvesting, processing and marketing. This second phase of the company’s development started with plantings of around five hundred acres per annum. This has accelerated in recent years and we now manage over 15,000 acres of investor owned orchards, with this year’s plantings exceeding 4,000 acres. Almonds are now established as a main stream horticultural investment in Australia and, together with our strategic alliance partner Timbercorp Limited, we are planning to further expand into the foreseeable future. Almond acres under management today Investor Owned Orchards company Owned/Leased Orchards Year Planted 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total Acres 236 168 510 727 3,133 518 2,800 3,573 4,108 15,773 Year Planted 1980 1982 1984 1987 1988 2002 2004 Acres 243 200 200 590 470 160 512 Total 2,375 Total area under management 18,148 Acres 2005 Crop The Australian almond crop is harvested from late February to April, which is counter seasonal to the northern hemisphere where harvest commences in late August. Almond production commences in the third year after tree planting with a yield of approximately 15% of full production, which is typically reached in the seventh or eighth year after planting. Mature trees continue to crop for a further twenty years. Our 2005 crop yielded 6,036 tonnes, up from 3,538 tonnes in 2004. Crop yields from company owned orchards increased by 24% to a record 2,350 tonnes, and investor owned orchards increased to 3,686 tonnes from 1,643 tonnes in 2004, as new orchards came into production. Our investor owned orchards have a young profile with only 66% in production and only 3% fully mature. We anticipate that the future almond crop from almond trees currently planted will exceed 20,000 tonnes when all orchards reach maturity. Approximately 40% of our 2005 crop was shipped to export markets from March to July 2005. Destinations included India, China, Japan, Indonesia, Spain, UK, Russia, France, Holland, Belgium and Germany. The balance of the crop is contracted to domestic customers and will be delivered progressively through to January 2006 when we commence preparation for the intake of the 2006 crop. Processing Capacity The company operates a hulling and shelling facility to extract the almond kernel from the outer hull and shell and a separate facility to sort, grade, and pack almonds as required by the market. To accommodate the increase in our 2005 crop and beyond, the existing hulling and shelling facility was substantially upgraded ($2.2 million) prior to the harvest of the 2005 crop. This upgrade increased capacity to approximately 10,000 tonnes, which is sufficient to process the 2006 and 2007 crops. To accommodate future increases in production a new processing facility will be established and commissioned prior Select Harvests Annual Report 2005 11 Planting … Growing … Harvesting … to the 2008 harvest. We will also upgrade our sorting, grading and packing capacity. The need to further expand processing capacity will be assessed as additional orchard developments are undertaken. The relatively predictable crop increases allow for the detailed planning of processing capacity expansion and for a smoothing of the required investment. in the short to medium term. The USA almond industry accelerated its planting programs in 2005, but this will take a number of years to significantly impact on almond supply. The increased supply from these new plantings will be required to meet anticipated consumption growth in the coming years. Why Almonds – Australia well placed Almond prices are currently at record highs and the current market fundamentals indicate a positive outlook going forward. Australia, although a small player, is able to compete effectively in terms of cost, quality and market access. We are operating in a growth market in which we can compete effectively and we have an opportunity to substantially expand production without a major impact on world supply. Our market Global consumption of almonds has grown strongly over the last five years. Current consumption levels are now matched with a flat supply from the USA as a result of low planting activity in the mid to late 1990’s. This has resulted in upward pressure on prices over the last 12 months. Expectations for a lower 2005 USA almond crop (expected to be down by 15%) has exerted further pressure on prices, which are currently trading at record highs. These conditions, together with increasing demand, provide strong support for the almond market Australia’s competitive position Australia has an established competitive position as an almond grower on the global stage. Production is currently around 15,000 tonnes contributing 3% of world supply, contrasted to the USA, which provides over 80% of world supply. However, from this small base we can effectively compete with the major player due to following advantages: • Comparable growing cost with higher average yields per acre, lowering the cost per kilogram of almonds produced • USA almond crop is susceptible to insect damage, lowering the quality of their almonds and restricting their access to higher quality customers • Australia’s crop is counter-seasonal to the northern hemisphere providing a source of fresh almonds to our export markets. We are able to supply these markets at competitive freight costs to USA growers. Ongoing development activity in Australia is likely to see us pass Spain as the second largest almond producer in the next 10 years. Select currently manages around 60% of Australia’s almond orchards and will move from 40% to 60% of total almond production as our orchards mature. On a world scale, Select is in the top three almond growers and will move into the top ten suppliers as our crops mature. Therefore, as an almond grower, we have scale both domestically and internationally and operate at a competitive advantage to USA growers. Outlook The almond price is expected to remain firm in the short-term on the back of a reduced USA crop, and the fundamentals appear favourable in the medium-term. Australia’s competitiveness as a grower and marketer of almonds and the scale and industry exposure achieved in recent years has increased the attractiveness and demand for almond orchard investments. We plan to expand the area of investor owned orchards over the next few years. A further 6,000 acres will be planted in 2006. We are scaling up our tree nursery facilities and development resources and infrastructure to support increased developments in 2007 and beyond. 12 Select Harvests Annual Report 2005 Strategic Acquisitions Acquisition Lucky Candy (1998) Details Cooking needs distributed to major retailers under the leading “Lucky” brand. Category has since expanded to healthy snacking Munch Nuts (1999) Major supplier of a range of private label salty snacks to major retailers. Renshaw Foods (2000) Meriram (2003) Nibbles (2004) Manufacturer and processor of nut based ingredients to major and small food manufacturers, and supplier to food service and other distributors and wholesalers. Manufacturer of branded products to cooking needs, health and muesli categories of major supermarkets. Wider distribution network to smaller retailers and health food stores. Category specialist and major supplier to the fresh produce section of major supermarkets. Food Products Result for the year The division increased EBIT for the year by 19% to $8.1 million. The increased earnings were driven by increased sales for the year from the acquisition of the Nibbles business, and sales and market share growth from branded product sales. • Sales revenue for the year increased by 48% to $131 million • Continued sales growth of nut based products in supermarkets • Cooking needs category grew in retail dollar sales by 23% • Select Harvests branded products increased market share • Larger quantity of company almond production processed in-house Food Products Division at a glance 2005 2004 EBIT $8,115 $6,813 % of Group EBIT 23% No of Employees 132 26% 117 Strategic Development – establishment of a processing and marketing capability The second limb of our core strategy was to be more involved in the selling and marketing of our almonds, to participate in added value processing, and to move closer to the consumer. Our intent was to build more sustainable distribution channels for our almond production and to derive additional income from these activities. From our origins as a farm gate seller of almonds, the establishment of a processing and marketing business was identified as the strategy to become more involved in the further processing and marketing of our almond crop. We recognised the benefit of a product range that could be marketed to a number of channels rather than a single product with limited channels. The diversification into processing and marketing would also enable the company to lock in distribution channels for the future almond production from new orchards developed on behalf of investors. Over the last six years a number of strategic acquisitions have been made to give the company a manufacturing base to produce a range of nut based products with a market leadership position in Australia. The consolidated group resulting from this acquisition program is what is now known as our food products division. Current Position Today we produce an extensive range of packaged nuts and associated products including snacks, cooking ingredients, mueslis, natural health foods, dried fruits etc. We are Australia’s leading supplier of processed and packaged nuts to Australian supermarkets with a presence in all categories where nuts are ranged. We market through the Lucky, Sunsol, Nu- Vit, Meriram and Soland brands as well as manufacturing a number of private label and bulk products for retailers. In addition we manufacture a number of nut-based ingredients for food manufacturers, food service distributors and health food stores. The division operates two manufacturing facilities; Thomastown, Melbourne, and Everton Hills, Brisbane. We currently process in excess of 15,000 tonnes of product per annum of which almonds make up a large percentage. We service all major supermarkets and smaller independent retailers and run a national merchandising team of 40 staff to service our product ranges in major retailers. Our market The increase in consumption of nut based products continues with a growing awareness of the health benefits amongst consumers, health professionals and food influencers. The sales growth is encouraging a greater focus from market participants. This is evident from increased space being allocated by retailers and additional promotional and marketing activity by suppliers and industry groups. The major growth is being seen in the natural snacking and health food area with a move by consumers towards healthy and natural foods. Select Harvests Annual Report 2005 13 Ray Tanti: Sales and Marketing Manager (Melbourne) and leverage our strong position to further grow “ We plan to capitalise on current market growth our brands across the supermarket space.” Our brands are positioned in these categories and we are benefiting from this trend in terms of sales and market share growth. We have over the last 12 months launched a number of new products under the Lucky and Nu-Vit brands aimed at the healthy snacking market, and they are performing well. It has been widely reported in the press that the supermarket landscape is changing with an increased focus by retailers on developing their own brands. This has a two fold impact; a margin squeeze when supplying house brands, and an impact on the branded products the housebrands compete against. We are fortunate that our categories are growing strongly, providing the opportunity to continue to grow our branded sales and market share in the current environment. Private label supply remains an important component of our business and we will continue to operate in this area, particularly in arrangements that provide reasonable returns and tenure of supply. Nibbles Acquisition During the year we acquired the Nibbles business from Chiquita Brands South Pacific Limited. Nibbles is a major supplier to the fresh produce category of Australian supermarkets. This category now has the largest share of nut product sales in the supermarket and the largest share of almond sales. This acquisition positioned Select Harvests as the major supplier to this important sector and increased our almond distribution at supermarket level. We have incorporated the Nibbles operations into our Thomastown facility bringing in-house the processing and raw material sourcing activities. Operations We currently operate in two locations, Melbourne and Brisbane. The Melbourne operation is a consolidation of four Melbourne based acquisitions, and the Brisbane operation houses the Meriram acquisition. We have to date operated these facilities independently, but in the future will operate the division as a national business. We have recently appointed a Group Operations Manager – Derek Jones, who has national responsibility for purchasing, manufacturing and logistics. In this role, Derek has responsibility for both sites and for the delivery of operational efficiencies and synergies across the division. Food Safety Food safety and quality management is a key component of our management systems. Our major raw materials are natural agricultural products which can be subject to foreign material and microbacterial contamination. We have enhanced our foreign material management by the addition of electronic sorting machines at both our almond processing facilities and Thomastown facility. During the year we established an in-house micro testing laboratory at Thomastown. This enables a more timely and extensive testing of our products for microbacterial contamination. This laboratory is now fully operational and services both the Thomastown facility and our almond processing facilities. Outlook We expect the market for nuts to continue to grow, supported by the increased marketing activity. Our plan is to capitalise on the market growth and leverage our strong position to further grow our brands across the supermarket space. Our product development focus will be in the “healthy snacking” area and we will continue to maximise ranging and sales of almond based products. Our business in non-supermarket channels is today underdeveloped and we are looking to expand our distribution in this area. We have had some success in ranging our products in Asia and we will continue to develop this market, as well as more broadly looking for opportunities to export processed almond products. From an operational perspective we will adopt a national management approach to our business. This will improve operating efficiencies, enhance customer service, and facilitate further market development and sales growth. 14 Select Harvests Annual Report 2005 Max Ciobo: General Manager Natalie Hennessy: Executive Manager – Meriram “The increase in consumption of nut based products benefits amongst consumers and health professionals.” continues, with a growing awareness of the health Promoting our Products As part of our marketing plans, we are involved in a range of industry initiatives, and actively participate in a number of national and local programs, all aimed at promoting the great taste and numerous health benefits associated with the regular consumption of nuts. Almond Board of Australia (ABA) Select Harvests and our almond orchard investors contribute to ABA marketing programs aimed at: 1) Increasing the consumption of almonds in Australia, and 2) Differentiating Australian almonds from Californian almonds in the international market place. ABA activities include magazine promotions, exhibition participation, Heart Foundation sponsorship and alignments with key sporting and dietician associations. For more information visit www.aussiealmonds.com.au Nuts for Life Campaign Select Harvests is an active participant in the ‘Nuts for life’ campaign which is an educational initiative of the Australian Tree Nut Industry of which we are a strong supporter and contributor. The goal of ‘Nuts for Life’ is to raise the awareness of the health benefits of tree nuts, particularly amongst health professionals. A number of promotional and research based activities including promotions through health clubs, seminars, printed matter, recipe competitions and media releases are conducted on a regular basis. Recent surveys have shown strong acceptance amongst health professionals and further promotion is planned to focus on consumer education. For more information on ‘Nuts for Life’ visit www.nutsforlife.com.au Promoting health and fitness On a national level we are involved in numerous programs including the Cardiology Specialist Conference, Coeliac Society Promotions, National Health Foundation, Diabetes Australia, AMA Events, and special education and the Special Olympics. We also participate in health and lifestyle expos, community expos, youth expositions and royal shows around Australia. On a smaller scale we also participate in promotion through product donation – look out for baskets of our products at your local charity functions or children’s school events. Select Harvests Annual Report 2005 15  In addition to investments made in the past, the 2005 financial year saw the implementation of further initiatives to build on our existing food safety and quality practices across the group. Maintaining Quality The products processed by the company are agricultural products that, through the growing and harvesting process, are subject to possible contamination as well as inherent unwanted material, for example, shell and hull. Being natural products, there is also some risk of contamination from microorganisms. Laser Sorting As was highlighted last year, a fully automated sorting technology for our Thomastown processing plant was installed to improve the quality of our products. Sourced from Belgium, the new sorter uses a full spectrum of lasers to identify different types of foreign materials that may be present in raw materials used, and through timed, high speed air guns, remove foreign material. Our Laboratories In early 2005 a microbiological laboratory was commissioned at our Thomastown site. The new laboratory is equipped with technology to provide testing and monitoring services to our processing plants and orchards, thereby helping to further enhance our quality control systems. The microbiological laboratory employs qualified staff and uses industry recognised and globally accepted methods of analysis. Our existing physical testing laboratory, established at the Thomastown site in July 2003, is where we analyse and evaluate our raw and finished products. Raw product particulars such as size, grade and colour are checked and finished goods are analysed for a number of factors that can affect shelf life including peroxide value, free fatty acids, moisture, and oxygen levels. The combination of our internal microbiological and physical laboratories, in conjunction with our overall quality systems, enables Select Harvests to maintain a high level of quality across all products. The laboratory team from left, Alex Harrison, Robert Angeleski, Helen Lazarus and Winnie Saputra. The laboratory is equipped to provide testing and monitoring services. 16 Select Harvests Annual Report 2005 We are committed to maintaining a healthy environment and the natural biodiversity of the region. Environmental Sustainability The Regent Parrot has now become a protected species. Water Water is a scarce but valuable resource to residential and commercial users, and is vital for the healthy growth of our almonds. Our management practices promote awareness of the need to use water effectively. This is achieved through: • The use of soil moisture monitoring equipment to ensure that water is fed to our orchards when required • The staging of water distribution to our orchards to ensure a smooth demand on the Murray River throughout the day • Working closely with the authorities and our orchard managers to monitor the water table • Working in partnership with the authorities to develop strategies to meter water drawn from the Murray River and used on orchards to enable more accurate forecasting of water demand. Native Vegetation A number of steps have been taken to ensure the development and management of land for almond production does not adversely impact the natural vegetation that exists in the Robinvale district. These include: • The establishment of fenced native vegetation buffer zones, protecting and enhancing existing native vegetation • The establishment of native vegetation corridors on known flight paths for native birds in the area, creating protected flight corridors • The revegetation of areas that have been cleared through previous farming practices • The eradication of pest weeds from native vegetation plots • Fulfilling the role of Managing Secretary of the Narcooyia Creek, a 15 km waterway off the Murray River that supplies several major horticultural developments in the Tol Tol area (Robinvale) • Working in partnership with various environmental and government authorities in the development of a long term environmental management plan for the Narcooyia Creek. The plan focuses on long- term environmental enhancement and development of the creek and its surrounding habitats. Energy Over the last few years, increased demands have been placed on the local power supply due to the increased level of horticultural developments within the Robinvale and surrounding areas. As a major user of electricity during various parts of the year, we work with the authorities to better utilise the current power infrastructure and to reduce the sudden draw on power. This is being achieved through the strategic staging of pump start-ups and pumping time frames and we are investigating other initiatives to further support the existing system and increase efficiencies through appropriate upgrades. The Regent Parrot Over the years, changes to the landscape and native habitat as a result of human activity has seen the Regent Parrot’s population reduced to critical levels, and it is now listed as an endangered species. The habitat is being preserved through the establishment of native vegetation corridors on known flight paths, and developing and implementing long term sustainable environmental management plans. Narcooyia Creek A comprehensive Environmental Impact Assessment was undertaken in relation to Narcooyia Creek by the Narcooyia Creek Pumping Syndicate, of which Select Harvests is a member. The Narcooyia Creek is a natural branch of the Murray River, which is used as a source of irrigation water for a number of farms and orchards. The environmental factors assessed included water seepage, water evaporation and salinity, and the impact on the fish community, geomorphology, and native vegetation. The assessment concluded that any likely negative impacts arising from the increase in water flow were insignificant compared with the benefits that may arise. Overall the findings were very positive. Regent Parrot photo courtesy of Peter Rogers, Bird Observers Club of Australia. Select Harvests Annual Report 2005 17 Annabel Galea: Group OH&S Manager “ With a sound framework in place, the company’s to meet the challenges of the future.” health and safety programs are in good shape Our People We continue to experience significant change and new challenges as we rapidly expand our business. Our ability to manage these changes and at the same time deliver improved results is due to the skill, efforts and dedication of our staff at all locations. Health and Safety Program As a result of improvements in safety initiatives and risk management undertaken progressively over the last few years, our health and safety program has evolved into an integral part of the business. Starting with our Occupational Health, Safety and Environment Policy and the ongoing review and contributions made at Board level, an annual plan is developed with each business unit containing clear targets. These are reviewed on a regular basis throughout the year. Health and safety performance is measured by performance indicators and monitored by health and safety committees, involving both management and staff representatives, that meet regularly to review and discuss a range of health and safety matters including hazards and risks, results of audits, procedures, training requirements, special projects, and accidents and their prevention. Staff Training and Development Training programs covering specific health and safety matters are conducted periodically throughout the year to educate staff and reinforce previously learned concepts. Feedback from staff is an important part of health and safety development, and opportunities to voice opinions are provided through training sessions, health and safety meetings, risk assessments, and health and safety representatives. Our Future The last twelve months have demonstrated continued progress in our health and safety management program. This has been achieved through the dedication and commitment of management and staff alike. With a sound framework in place, the company’s health and safety programs are in good shape to meet the challenges of the future. Feedback from staff is an important part of health and safety development. 18 Select Harvests Annual Report 2005 Orchard visits: A regular event in the Robinvale area, we are involved in supporting “ Due to the size and the scale of our operations the local and surrounding communities.” Our Social and Community Involvement We directly or indirectly employ the services of a large number of people and businesses in and around the Robinvale area of North Western Victoria. In 2005 Select Harvests sponsored the Robinvale and District Harness Racing Association’s final meeting held at Robinvale, and assisted the Mildura Show Society by sponsoring the vests used by officials at the district’s largest community based event as a way to help the Society meet its OH&S obligations. Chaplaincy Program Select Harvests continues its commitment to the Robinvale Secondary School Chaplaincy program, which was established after a need was identified to provide counselling, guidance and support to young people attending the local secondary school. The program provides guidance services to the students of the Robinvale community with a ‘spiritual’ focus on student welfare. Contributing to the Melbourne Community Select Harvests is also proud to be an annual contributor to: • The Rotary Club of Preston, which promotes ‘CIRCUS QUIRKUS’ – an event for special needs and disadvantaged children. Select Harvests has been a proud sponsor of this event since 1998. • The Lions Club of Melbourne, which hosts the ‘WORLD FESTIVAL OF MAGIC’ a family magic show held at the Melbourne Convention Centre for disabled, terminally ill and handicapped children. Select Harvests has been a proud sponsor of the World Festival of Magic since 2000. We are the largest employer of full time and casual staff in the district, with a full time staff of approximately 130, and casual employees who assist us with planting, pruning, and harvesting varying seasonally at approximately 150 workers . Due to the size and scale of our operations in this area, we are involved in the support and development of the local and surrounding communities. With a view to ensuring that community development, welfare and social activities are maintained throughout the district, Select Harvests supports a number of different community and sporting groups and programs. These include: The Robinvale Football Club, Euston Football Club, Robinvale Netball Association, Robinvale Tennis Club, Robinvale Rowing Club, Robinvale/Euston Cricket Association, Robinvale Swimming and Diving Association, and Robinvale and District Harness Racing Association. Our people are also on the boards of local committees such as Robinvale Pre-School, Robinvale Kinder-Gym, and Robinvale Play Group, helping to build the community through their involvement. Select Harvests Annual Report 2005 19 Left-right: Max Fremder, Chairman; Dan O’Brien, Non-Executive Director; Ross Herron, Non-Executive Director: John Bird, Managing Director; Sandy Clark, Non-Executive Director; Curt Leonard, Non-Executive Director, and Marcello Mattia, Company Secretary. Our Board Directors M A Fremder (Chairman) Joined the board in March 1996. Formerly a director of IAMA Limited, and founder of Nufarm, one of Australia’s largest chemical manufacturers for the rural industry. Mr Fremder also was Non-Executive Director of Tassal Limited between 3 October 2003 and 18 March 2005. Member of the Remuneration Committee, and the Nomination Committee. J Bird (Managing Director) Joined the board in September 2001. Has had many years experience in the food industry and international trade. Formerly Managing Director of Jorgenson Waring Foods and has been the Managing Director of Select Harvests Limited since January 1998. Member of the Nomination Committee. C G (Sandy) Clark, B.Comm, Dip.Ag.Econ (Non-Executive Director) Joined the board in January 1998. Is currently Chairman, Aviva Australia Holdings Limited; Chairman, The Myer Family Office Limited; Director, Southern Cross Broadcasting Australia Ltd; Director, The Myer Foundation; Trustee, The William Buckland Foundation; Chairman of Council, Melbourne Grammar School; and a director of a number of private companies. Member of the Audit and Risk Committee, and the Nomination Committee, and Chairman of the Remuneration Committee. 20 Select Harvests Annual Report 2005 G F Dan O’Brien, B.Sc, B.VMS, MBA (Non-Executive Director) R M Herron, FCA & FAICD (Non-Executive Director) Joined the Board on 29 March 2004. Currently principal of Dromoland Capital, a private equity group, and a director of Coates Hire Limited, and Hexima Limited. Mr O’Brien has significant commercial experience having held CEO positions for BIL Australia Limited, Mattel Asia Pacific, and The King Island Company. He holds an MBA, having graduated with distinction from Harvard Business School and is a qualified veterinary surgeon. Member of the Audit and Risk Committee, Remuneration Committee, and Nomination Committee. Mr O’Brien was a director of SPC Ardmona Limited between 9 January 2002 and 4 March 2005. J C Leonard, B.Mktng & Bus. Admin, MBA (Non-Executive Director) Joined the Board on 21 July 2004. Has held senior management positions with the Mars group of companies in Australia including General Manager of Mars Confectionery, Managing Director of Uncle Bens, and Managing Director of Mars Australia and New Zealand. In addition, he has served as President, Asia Pacific of all Mars businesses, and a Director of the Managing Board of Mars Incorporated global business. Member of the Audit and Risk Committee, and Nomination Committee. Joined the Board on 27 January 2005. A Chartered Accountant, Mr Herron retired as Senior Partner of Price Waterhouse Coopers in December 2002. He was a member of the Coopers & Lybrand (now Price Waterhouse Coopers) Board of Partners where he was Deputy Chairman and was the Melbourne office Managing Partner for six years. He also served on several international committees within Coopers & Lybrand. He is a Non- Executive Director of GUD Holdings Ltd, Heemskirk Consolidated Ltd and a major industry superannuation fund. He is also a Director of Variety Club Inc. He was a non-Executive Director of National Telecoms Group Ltd from 6 July 2001 to 30 June 2003. Chairman of the Audit and Risk Committee, and member of the Nomination Committee. Company Secretary M Mattia, B.Bus (Acc), ACA (Company Secretary) Appointed to the position of Company Secretary and Chief Financial Officer on 1 May 2003. He is qualified as a Chartered Accountant having had several years consulting experience with a leading international professional services firm. He has also held general management and senior finance roles in private and international organisations. Our Management Corporate Managing Director John Bird Chief Financial Officer and Company Secretary Marcello Mattia B.Bus(Acc), ACA Group OH&S Manager Annabel Galea M.App.Sc(Tox), B.Ag.Sc, MSIA,RSP(Aust) Almond Operations General Manager Wayne Turner Horticultural Manager Tim Millen Dip.Hort Distinct Commercial Manager Garry Watkins B.Comm Food Products Sales and Marketing Manager (Melbourne) Ray Tanti Sales Manager – Trading Laurence Van Driel Group Operations Manager Derek Jones Financial Controller Rob Anstey General Manager – Meriram Max Ciobo Executive Manager – Meriram Natalie Hennessy Commercial Manager – Meriram Ian Allen Select Harvests Annual Report 2005 21 Statistical Summary SELECT HARVESTS CONSOLIDATED RESULTS FOR YEARS ENDED 30 JUNE Total sales 2005 2004 2003 2002 2001 2000 178,029 127,380 80,994 78,327 64,996 43,002 $000 (except where indicated) Earnings before interest and tax 33,263 23,836 17,421 14,749 12,196 Operating profit before tax Net profit after tax Earnings per share (Basic) (cents) Return on shareholders’ equity (% pa) Dividend per ordinary share Dividend franking Dividend payout ratio Financial ratios Net tangible assets per share Net interest cover Debt/equity ratio Current asset ratio (cents) (% pa) (%) ($) (times) (%) (times) Balance sheet data as at 30 June Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Shareholders’ equity Share capital Reserves 31,995 22,587 16,110 12,803 10,260 21,716 15,225 10,962 8,554 6,564 55.9 23.7 42.0 100 75.7 1.64 26.2 0.9 1.45 40.0 19.2 26.0 100 65.7 1.35 19.1 10.2 1.70 31.3 18.3 18.5 100 62.8 1.08 13.3 15.4 1.61 25.4 17.3 13.5 100 54.5 0.77 7.6 38.9 1.30 20.0 15.5 10.0 100 50.0 0.56 6.3 70.2 1.31 8,389 7,586 5,239 16.0 15.9 8.0 100 50.0 0.43 10.4 54.9 0.87 55,022 32,591 25,077 22,599 23,584 17,981 77,290 74,364 60,672 63,090 66,405 53,556 132,312 106,955 85,749 85,689 89,989 71,537 37,908 19,077 15,581 17,381 18,048 20,705 2,859 8,610 10,162 18,971 29,568 17,967 40,767 27,687 25,743 36,352 47,616 38,672 91,545 79,268 60,006 49,337 42,373 32,865 46,925 43,940 36,206 34,199 31,124 31,108 Retained profits (accumulated losses) 30,429 21,137 14,191 14,191 9,458 14,342 9,458 5,680 9,458 1,791 4,386 (2,629) Total shareholders’ equity Other data as at 30 June Fully paid shares Number of shareholders Select Harvests’ share price: – year’s high – year’s low – close 91,545 79,268 60,006 49,337 42,373 32,865 (000) 39,069 38,525 35,455 34,585 32,841 32,824 2,999 2,413 2,054 1,610 1,286 1,167 ($) ($) ($) 10.20 6.47 9.70 7.00 4.44 6.67 4.95 2.60 4.80 3.25 1.49 3.10 1.70 1.18 1.68 1.20 0.90 1.19 Market capitalisation 378,970 256,965 170,184 107,214 55,173 39,061 22 Select Harvests Annual Report 2005 Financial contents Directors’ Report Auditor’s Independence Declaration Corporate Governance Statement Statement of Financial Performance Statement of Financial Position Statement of Cash Flows Notes to the Financial Statements 1. Summary of Significant Accounting Policies 2. Revenue from Ordinary Activities 3. Expenses and Losses/(Gains) 4. Income Tax 5. Dividends Paid or Provided for on Ordinary Shares 6. Receivables (Current) 7. Inventories (Current) 8. Other Current Assets 9. Receivables (Non-Current) 10. Other Financial Assets (Non-Current) 11. Property, Plant and Equipment 12. Self-Generating and Regenerating Assets 13. Intangibles 14. Payables (Current) 15. Interest-Bearing Liabilities (Current) 16. Provisions (Current) 17. Payables (Non-Current) 18. Interest-Bearing Liabilities (Non-Current) 19. Provisions (Non-Current) 20. Contributed Equity 21. Reserves and Retained Profits 22. Statement of Cash Flows 23. Expenditure Commitments 24. Subsequent Events 25. Earnings Per Share 26. Remuneration of Directors and Executives 27. Auditor’s Remuneration 28. Related Party Disclosures 29. Segment Information 30. Financial Instruments 31. Controlled Entities 32. Employee Benefits 33. Contingent Liabilities 34. Impact of Adopting Australian Equivalents to International Financial Reporting Standards Directors’ Declaration Independent Audit Report ASX Additional Information 24 32 33 38 39 40 41 41 47 47 48 49 49 50 50 50 50 51 53 53 53 53 54 54 54 54 54 55 56 57 58 58 59 63 63 64 67 69 69 70 71 73 74 75 Select Harvests Annual Report 2005 23 directors’ report The Directors present their report together with the financial report of Select Harvests Limited and controlled entities for the year ended 30 June 2005 and the independent auditor’s report thereon. Directors The qualifications, experience and special responsibilities of each person who has been a Director of Select Harvests Limited at any time during or since the end of the financial year is provided below, together with details of the company secretary as at the year end. Directors were in office for this entire period unless otherwise stated. Names, Qualifications, Experience and Special Responsibilities M A Fremder (Chairman) Joined the Board in March 1996. Formerly a Director of IAMA Limited, and founder of Nufarm, one of Australia’s largest chemical manufacturers for the rural industry. Mr Fremder also was Non-Executive Director of Tassal Limited between 3 October 2003 and 18 March 2005. Member of the Remuneration Committee, and the Nomination Committee. Interest in Shares and Options: 5,598,352 fully paid shares. J Bird (Managing Director) Joined the Board in September 2001. Has had many years’ experience in the food industry and international trade. Formerly Managing Director of Jorgenson Waring Foods and has been the Managing Director of Select Harvests Limited since January 1998. Member of the Nomination Committee. Interest in Shares and Options: 271,122 fully paid shares, 103,600 options expiring 28 October 2005 exercisable at $3.31, and 29,200 options expiring 1 November 2006 exercisable at $5.60 each. C G (Sandy) Clark, B.Comm, Dip.Ag.Econ (Non-Executive Director) Joined the Board in January 1998. Is currently Chairman, Aviva Australia Holdings Limited; Chairman, The Myer Family Office Limited; Director, Southern Cross Broadcasting Australia Ltd; Director, The Myer Foundation; Trustee, The William Buckland Foundation; Chairman of Council, Melbourne Grammar School; and a Director of a number of private companies. Member of the Audit and Risk Committee, and the Nomination Committee, and Chairman of the Remuneration Committee. Interest in Shares and Options: 22,927 fully paid shares. G F Dan O’Brien, B.Sc, B.VMS, MBA (Non-Executive Director) Joined the Board on 29 March 2004. Currently principal of Dromoland Capital, a private equity group, and a Director of Coates Hire Limited, and Hexima Limited. Mr O’Brien has significant commercial experience having held CEO positions for BIL Australia Limited, Mattel Asia Pacific, and The King Island Company. He holds an MBA, having graduated with distinction from Harvard Business School and is a qualified veterinary surgeon. Member of the Audit and Risk Committee, Remuneration Committee, and Nomination Committee. Mr O’Brien was a Director of SPC Ardmona Limited between 9 January 2002 and 4 March 2005. Interest in Shares and Options: 50,000 fully paid shares. J C Leonard, B.Mktng & Bus. Admin, MBA (Non-Executive Director) Joined the Board on 21 July 2004. Has held senior management positions with the Mars group of companies in Australia including General Manager of Mars Confectionery, Managing Director of Uncle Bens, and Managing Director of Mars Australia and New Zealand. In addition, he has served as President, Asia Pacific of all Mars businesses, and a Director of the Managing Board of Mars Incorporated global business. Member of the Audit and Risk Committee, and Nomination Committee. Interest in Shares and Options: 414,258 fully paid shares. 24 Select Harvests Annual Report 2005 R M Herron, FCA & FAICD (Non-Executive Director) Joined the Board on 27 January 2005. A Chartered Accountant, Mr Herron retired as Senior Partner of Price Waterhouse Coopers in December 2002. He was a member of the Coopers & Lybrand (now Price Waterhouse Coopers) Board of Partners where he was Deputy Chairman and was the Melbourne office Managing Partner for six years. He also served on several international committees within Coopers & Lybrand. He is a Non-Executive Director of GUD Holdings Ltd, Heemskirk Consolidated Ltd and a major industry superannuation fund. He is also a Director of Variety Club Inc. He was a Non-Executive Director of National Telecoms Group Ltd from 6 July 2001 to 30 June 2003. Chairman of the Audit and Risk Committee, and member of the Nomination Committee. Interest in Shares and Options: 5,000 fully paid shares. M Mattia, B.Bus (Acc), ACA (Company Secretary) Appointed to the position of Company Secretary and Chief Financial Officer on 1 May 2003. He is qualified as a Chartered Accountant having had several years consulting experience with a leading international professional services firm. He has also held general management and senior finance roles in private and international organisations. Interest in Shares and Options: 2,000 fully paid shares, 8,800 options expiring 1 November 2006 exercisable at $5.60. Corporate Information Nature of Operations and Principal Activities The principal activities during the year of entities within the consolidated entity were: • Processing, packaging, marketing and distribution of edible nuts, dried fruits, seeds, and a range of natural health foods; • The growing, processing and sale of almonds to the food industry, from company owned almond orchards, and the provision of management services to external owners of almond orchards, including consultancy, orchard development, tree supply, farm management, land rental, and irrigation infrastructure; and the marketing and selling of almonds on behalf of external investors; and, • The production of pelletised snail, slug and rodent baits for other marketers. There have been no significant changes in the nature of those activities during the year. Employees The consolidated entity employed 276 full time employees as at 30 June 2005 (2004: 252 employees). Review and Results of Operations Refer to Chairman and Managing Director’s report in the front section of the Annual Report. Significant Changes in the State of Affairs No significant changes in the state of affairs of the Company occurred during the financial year. Significant Events after the Balance Date On 23 August 2005, the Board announced that a contract of sale was signed to sell all of the shares in Riverina Pelletising Services Pty Ltd, for a total consideration of $5.7 million to Australian Businesspoint Pty Ltd. Subject to certain conditions precedent being satisfied, the sale is scheduled to be completed on Friday 14 October 2005, with an effective date of 1 October 2005. No other matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Company, the results of those operations, or the state of affairs of the Company in future financial years. Likely Developments and Expected Results Refer to Chairman and Managing Director’s report in the front section of the Annual Report. Select Harvests Annual Report 2005 25 directors’ report Environmental Regulation and Performance The economic entity’s operations are subject to environmental regulations under laws of the Commonwealth or of a State or Territory. Details of the economic entity’s performance in relation to such environmental regulations follow: The economic entity holds licences issued by the Environmental Protection Authority which specify limits for discharges to the environment which are the result of the economic entity’s operations. These licences regulate the management of discharge to the air and stormwater run-off associated with the operations. There have been no significant known breaches of the economic entity’s licence conditions. Directors’ and Senior Executives’ Remuneration Report Remuneration levels are set to attract and retain appropriately qualified and experienced Directors and senior executives. The Remuneration Committee may obtain independent advice on the appropriateness of remuneration packages, given trends in the marketplace. Remuneration packages include a mix of fixed remuneration, performance-based remuneration, and equity-based remuneration. Executive Directors and senior executives may receive short term incentives based on achievement of specific business plans and performance indicators, which include financial and operational targets relevant to performance at the economic entity level, divisional level, or functional level, as applicable, for the financial year. In addition, the economic entity offers Executive Directors and senior executives participation in the long-term incentive scheme involving the issue of options to the employee under the executive share option scheme. The executive share option scheme provides for the offer of a parcel of options to participating employees on an annual basis, with a three-year expiry period, exercisable at the market price set at the time the offer was made. The options are granted annually in three tranches on achievement of the performance hurdles. The contracts for service between the economic entity and specified Directors and executives are on a continuing basis, the terms of which are not expected to change in the immediate future. Non-Executive Directors receive fees and do not receive options or bonus payments, and further details regarding components of Directors’ and executive remuneration are provided in the notes to the financial statements. The names and positions of each person who held the position of Director at any time during the financial year have been provided on pages 22-23. The nature and amount of each major element of the remuneration of each Director of the Company and each of the five named executive officers of the Company and the consolidated entity, receiving the highest remuneration, for the financial year is detailed below. The percentage value of each person’s total fixed remuneration that consists of options is shown in brackets. Remuneration of Directors of Select Harvests Limited 2005 ANNUAL REMUNERATION BASE FEE $ SHORT TERM INCENTIVES $ NON CASH SUPERANNUATION CONTRIBUTIONS $ BENEFITS $ LONG TERM REMUNERATION OPTIONS GRANTED NUMBER VALUE $ 84,000 Non Executive M A Fremder C G Clark G F Dan O’Brien 42,000 J C Leonard (appointed 21/07/04) 39,773 R M Herron (appointed 27/01/05) 18,025 42,000 – – – – – – – – – – 7,560 3,780 3,780 3,580 1,622 – – – – – – – – – – TOTAL $ 91,560 45,780 45,780 43,353 19,647 Executive J Bird 332,823 155,041 32,766 29,478 136,400 77,089 627,197 (25%) 26 Select Harvests Annual Report 2005 Remuneration of Directors of Select Harvests Limited 2004 ANNUAL REMUNERATION BASE FEE $ SHORT TERM INCENTIVES $ NON CASH SUPERANNUATION CONTRIBUTIONS $ BENEFITS $ LONG TERM REMUNERATION OPTIONS GRANTED NUMBER VALUE $ 70,370 Non Executive M A Fremder B P Burns (retired 30/06/04) C G Clark 35,185 D J Williams (resigned 16/02/04) 23,457 G F Dan O’Brien (appointed 29/03/04) 35,185 9,179 – – – – – – – – – – 6,333 3,167 3,167 2,111 826 – – – – – – – – – – TOTAL $ 76,703 38,352 38,352 25,568 10,005 Executive J Bird 286,470 119,093 39,576 25,633 176,000 70,593 (25%) 541,365 Remuneration of the Five Most Highly Paid Executive Officers of the Company and the Consolidated Entity 2005 M Mattia M Ciobo W Turner L Van Driel T Millen 2004 M Ciobo M Mattia W Turner C Lukauskas L Van Driel ANNUAL REMUNERATION BASE FEE $ 159,332 SHORT TERM INCENTIVES $ 57,168 NON CASH SUPERANNUATION CONTRIBUTIONS $ 14,149 BENEFITS $ 37,984 NUMBER 8,800 LONG TERM REMUNERATION OPTIONS GRANTED 210,000 115,705 – 27,067 30,530 19,000 18,900 12,759 – 7,000 99,163 17,487 14,821 9,625 19,800 96,195 13,930 5,000 9,826 9,300 ANNUAL REMUNERATION BASE FEE $ 210,000 139,635 111,046 93,615 SHORT TERM INCENTIVES $ – 4,366 10,237 10,000 NON CASH SUPERANNUATION CONTRIBUTIONS $ 18,900 BENEFITS $ 15,989 40,900 19,000 26,000 12,462 10,196 9,236 NUMBER – – – 12,400 LONG TERM REMUNERATION OPTIONS GRANTED 107,939 18,594 – 9,625 15,900 TOTAL $ 277,433 259,430 181,531 152,070 130,107 TOTAL $ 244,889 197,363 150,479 144,877 143,232 VALUE $ 8,800 (15%) – 7,000 (15%) 10,974 (10%) 5,156 (5%) VALUE $ – – – 6,026 (15%) 7,074 (10%) In accordance with the remuneration policy described above, options granted as remuneration are subject to continuing service with the economic entity. Options granted as remuneration are valued at grant date in accordance with AASB 2: ‘Share-based Payments’. No options previously granted as remuneration have lapsed during the year. Select Harvests Annual Report 2005 27 directors’ report Notes The terms ‘Director’ and ‘officer’ have been treated as mutually exclusive for the purposes of this disclosure. The elements of remuneration have been determined on the basis of the cost to the Company and the consolidated entity. Options granted as part of remuneration have been valued using the Black-Scholes option pricing model, which takes account of factors such as the option exercise price, the current level and volatility of the underlying share price, and the time to maturity of the option. Executives are those directly accountable and responsible for the operational management and strategic direction of the Company and the consolidated entity. The category ‘other’ includes the value of any non-cash benefits provided and includes FBT where applicable. Share Options Executive Share Option Scheme The current executive share option scheme provides for the offer of a parcel of options to participating employees on an annual basis, with a three-year expiry period, exercisable at the market price at the time the offer was made. The options are valued using the Black-Scholes valuation method and individual parcels are based on a percentage of fixed remuneration. The options are granted annually in three tranches on achievement of performance hurdles. The following table is a summary of the Executive Share Option Schemes currently in place. PARTICIPATING EMPLOYEES 7 9 9 OPTION VALUATION $ 0.486 1.00 0.98 2002 Offer 2003 Offer 2004 Offer Total Options Issued EXERCISE EXPIRY DATE $ 3.31 NUMBER PRICE OF OPTIONS OFFERED 277,500 28 October 2005 193,200 1 November 2006 234,300 20 October 2007 705,000 5.60 7.78 GRANTED SEPTEMBER 03 GRANTED AUGUST 04 BALANCE 92,500 - – 85,200 85,200 64,400 128,800 – 234,300 92,500 149,600 448,300 During or since the end of the financial year, the Company granted options over unissued ordinary shares to the following Executive Director and the following five most highly remunerated officers of the Company as part of their remuneration. Director J Bird J Bird J Bird Officers M Mattia W Turner L Van Driel L Van Driel L Van Driel T Millen T Millen T Millen 28 Select Harvests Annual Report 2005 NUMBER OF OPTIONS GRANTED EXERCISE PRICE $ EXPIRY DATE 55,400 51,800 29,200 8,800 7,000 8,600 7,300 3,900 3,800 3,700 1,800 1.66 3.31 5.60 5.60 5.60 1.66 3.31 5.60 1.66 3.31 5.60 20 October 2004 28 October 2005 1 November 2006 1 November 2006 1 November 2006 20 October 2004 28 October 2005 1 November 2006 20 October 2004 28 October 2005 1 November 2006 Unissued Ordinary Shares Under Option At the date of this report unissued ordinary shares of the Company under option are: OFFER 2002 2003 NUMBER OF SHARES 131,900 56,300 EXERCISE PRICE $ 3.31 5.60 EXPIRY DATE 28 October 2005 1 November 2006 All options expire on the earlier of their expiry date or termination of the employee’s employment. Current option holders do not have any right, by virtue of the option, to participate in any share issue of the Company or any related body corporate. Shares Issued on Exercise of Options During or since the end of the financial year, the Company issued ordinary shares as a result of the exercise of options as follows: NUMBER OF SHARES 212,900 35,200 8,100 AMOUNT PAID ON EACH SHARE $ 1.66 3.31 5.60 There were no amounts unpaid on the shares issued. Options granted as remuneration that have been exercised or lapsed during the financial year DIRECTORS AND EXECUTIVES VALUE AT 1 JULY 2004 $ VALUE GRANTED $ VALUE EXERCISED $ VALUE LAPSED $ VALUE AT 30 JUNE 2005 $ Directors J Bird Executives M Mattia W Turner L Van Driel T Millen Dividends Final dividends proposed and not recognised as a liability: • on ordinary shares Fully Franked Dividends paid in the year: Interim for the year • on ordinary shares Final for 2004 shown as recommended in the 2004 report • on ordinary shares 70,603 77,089 68,142 – – 3,548 4,914 8,800 7,000 10,974 5,156 – – 7,074 4,674 CENTS 26.0 16.0 – – – - - 79,550 8,800 7,000 7,448 5,396 $ 10,157,971 6,224,599 16,382,570 16.0 6,200,728 Select Harvests Annual Report 2005 29 directors’ report Indemnification and Insurance of Directors and Officers During the year the Company has paid a premium in respect to an insurance contract to indemnify Directors and officers against liabilities that may arise from their position as Directors and officers of the Company and its controlled entities. Officers indemnified include the Company Secretary, all Directors and executive officers participating in the management of the Company and its controlled entities. Further disclosure required under section 300 (9) of the Corporations Act 2001 is prohibited under the terms of the contract. Directors’ Meetings The number of meetings of Directors (including meetings of committees of Directors) held during the financial year and the number of meetings attended by each Director were as follows: DIRECTORS’ MEETINGS NUMBER ELIGIBLE TO ATTEND 12 NUMBER ATTENDED 12 12 12 12 12 6 12 11 12 12 6 AUDIT AND RISK MEETINGS OF COMMITTEES REMUNERATION NOMINATION NUMBER ELIGIBLE TO ATTEND - - 4 4 4 2 NUMBER ATTENDED - - 4 4 4 2 NUMBER ELIGIBLE TO ATTEND 1 - 1 1 - - NUMBER ATTENDED 1 - 1 1 - - NUMBER ELIGIBLE TO ATTEND 1 1 1 1 1 - NUMBER ATTENDED 1 1 1 1 1 - M A Fremder J Bird C G Clark G F Dan O’Brien J C Leonard (appointed 21/07/04) R M Herron (appointed 27/01/05) Committee Membership During or since the end of the financial year, the Company had an Audit and Risk Committee, a Remuneration Committee, and a Nomination Committee comprising members of the Board of Directors. Members acting on the committees of the Board during or since the end of the financial year were: Audit and Risk Remuneration Nomination R M Herron (Chairman) C G Clark (Chairman) M A Fremder (Chairman) (appointed 31/01/05) M A Fremder (appointed Chairman 22/06/05) G F Dan O’Brien C G Clark G F Dan O’Brien J C Leonard (appointed 21/07/04) J Bird C G Clark G F Dan O’Brien J C Leonard (appointed 21/07/04) R M Herron (appointed 27/01/05) 30 Select Harvests Annual Report 2005 Directors’ Interests in Contracts Directors’ interest in contracts are disclosed in Note 28 to the financial statements. Auditors Independence Declaration A copy of the auditor’s independence declaration in relation to the audit for the financial year is provided with this report. Non-audit Services Non-audit services are approved by resolution of the Audit and Risk Committee and approval is provided in writing to the Board of Directors. Non-audit services provided by the auditors of the consolidated entity during the year, Pitcher Partners, are detailed in note 27. The Directors are satisfied that the provision of the non-audit services during the year by the auditor is compatible with the general standard of independence for auditors imposed by Corporations Act 2001. Rounding The amounts contained in this report and in the financial report have been rounded to the nearest $1,000 (where rounding is applicable) under the option available to the Company under ASIC Class Order 98/100. The Company is an entity to which the Class Order applies. Proceedings on Behalf of the Company There are no material legal proceedings in place on behalf of the Company as at the date of this report. Corporate Governance In recognising the need for the highest standards of corporate behaviour and accountability, the Directors of Select Harvests Limited support and have adhered to the ASX principles of corporate governance. The Company’s corporate governance statement is contained in detail in the corporate governance section of this Annual Report. Signed in accordance with a resolution of the Directors. M A Fremder Chairman Melbourne, 23rd August 2005 Select Harvests Annual Report 2005 31 auditor’s declaration Auditor’s Independence Declaration To the Directors of Select Harvests Limited In relation to the independent review for the financial year ended 30 June 2005, to the best of my knowledge and belief there have been: a) No contraventions of the auditor independence requirements of the Corporations Act 2001; and b) No contravention of any applicable code of professional conduct. Pitcher Partners T J BENFOLD Partner Melbourne 23 August 2005 32 Select Harvests Annual Report 2005 governance Corporate Governance Statement This statement outlines the key corporate governance practices of the economic entity which considers the ASX Corporate Governance Council recommendations. Board of Directors and its Committees Role of the Board The Board of Directors of Select Harvests Limited is responsible for the overall corporate governance of the economic entity. The Board guides and monitors the business and affairs of Select Harvests Limited on behalf of the shareholders by whom they are elected and to whom they are accountable. Details of the Board’s charter is located on the Company’s website. The Board seeks to identify the expectations of the shareholders, as well as other regulatory and ethical expectations and obligations. In addition, the Board is responsible for ensuring that management’s objectives and activities are aligned with the expectations and risks identified by the Board and ensuring arrangements are in place to adequately manage those risks. To ensure that the Board is well equipped to carry out its responsibilities it has established guidelines for the nomination and selection of Directors and for the operation of the Board. The Board has delegated responsibility for the operation and administration of the Company to the Managing Director and the executive management team. The Board ensures that this team is appropriately qualified and experienced to carry out its responsibilities and has in place procedures to assess the performance of the Managing Director and the executive management team. Board Processes To assist in the execution of its responsibilities, the Board has established a Remuneration Committee, and an Audit and Risk Committee. The Board also performs, as part of its function, the role of Nomination Committee. These Committees have written charters, which are reviewed on a regular basis and are located on the Company’s website. The Board has also established a framework for the management of the economic entity. The full Board holds twelve scheduled meetings each year, plus any additional meetings at such other times as may be necessary to address any specific matters that may arise. The agenda for meetings is prepared and includes the Managing Director’s report, financial reports, business segment reports, strategic matters, governance and compliance. Submissions are circulated in advance. Executives are involved in Board discussions where appropriate, and Directors have other opportunities, including visits to operations, for contact with a wider group of employees. Director Education The economic entity has a process to educate new Directors about the nature of the business, current issues, the corporate strategy, and the expectations of the economic entity concerning performance of Directors. Directors also have the opportunity to visit the facilities of the economic entity and to meet with management to gain a better understanding of business operations. Directors are able to access continuing education opportunities to update and enhance their skills and knowledge. Independent Professional Advice and Access to Company Information Each Director has the right of access to all relevant Company information and to the Company’s executives and, subject to prior consultation with the Chairman, may seek independent professional advice at the economic entity’s expense. Select Harvests Annual Report 2005 33 governance Composition of the Board The names of the Directors of the Company in office at the date of this report are set out in the Directors’ report. The composition of the Board is determined in accordance with the following ASX principles: • The Board should comprise at least four Directors; • The Board should maintain a majority of independent Non-Executive Directors; • The Chairperson must be a Non-Executive Director; and • The Board should comprise Directors with an appropriate range of qualifications, skills and experience. The Board assesses the independence of each Director in light of interests known to the Board, as well as those disclosed by each Director. In accordance with the ASX Corporate Governance Council’s recommendations, the Board wishes to outline the following: • The Chairman of the Company, Mr M A Fremder, is a substantial shareholder, having a 14.3% shareholding at 30 June 2005. • The Chairman of the Company, Mr M A Fremder, owns (directly or indirectly) almond orchards totalling 300 acres in respect to which the economic entity provides Orchard Management Services under contract at market rates. Nomination Committee The Board of Directors, as one of its important functions, performs the role of Nomination Committee. The Board’s role as Nomination Committee is to ensure that the composition of the Board of Directors is appropriate for the purpose of fulfilling its responsibilities to shareholders. The duties and responsibilities of the Board in its role as Nomination Committee are as follows: • To access and develop the necessary and desirable competencies of Board members; • To develop and review Board succession plans; • To evaluate the performance of the Board; • To recommend to the Board, the appointment and removal of Directors; and • Where a vacancy exists, to determine the selection criteria based on the skills deemed necessary and to identify potential candidates with advice from external consultants. The Chairman of the Board evaluates the performance of each Board member annually in the last quarter of each financial year. The Chairman of the Audit Committee reviews the performance of the Chairman of the Board in the same period. The performance of each Board member is reviewed against the Board charter and any specific objectives agreed and set by the Board for the economic entity. The Nomination Committee meets annually unless otherwise required. The Committee met once during the financial year and the Committee members’ attendance record is disclosed in the table of Directors’ meetings. The members of the Nomination Committee are disclosed in the Directors’ Report. Further details of the Nomination Committee’s charter are available on the Company’s website. Remuneration Remuneration Committee The Remuneration Committee reviews and makes recommendations to the Board on remuneration packages and policies applicable to the Managing Director, senior executives and the Directors themselves. It evaluates the performance of the Managing Director and is also responsible for share option schemes, incentive performance packages, superannuation entitlements and fringe benefits policies. Remuneration levels are reviewed annually and the Remuneration Committee may obtain independent advice on the appropriateness of remuneration packages, given trends in the marketplace. The members of the Remuneration Committee are disclosed in the Directors’ Report. 34 Select Harvests Annual Report 2005 The Managing Director is invited to Remuneration Committee meetings as required to discuss senior executives’ performance and remuneration packages. The Remuneration Committee meets once a year or as required. The Committee met once during the financial year and the Committee members’ attendance record is disclosed in the table of Directors’ meetings. Further details of the Remuneration Committee’s charter is available on the Company’s website. Remuneration Policies Remuneration levels are set to attract and retain appropriately qualified and experienced Directors and senior executives. The Remuneration Committee may obtain independent advice on the appropriateness of remuneration packages, given trends in the marketplace. Remuneration packages include a mix of fixed remuneration, performance-based remuneration, and equity-based remuneration. Executive Directors and senior executives may receive short term incentives based on achievement of specific business plans and performance indicators, which include financial and operational targets relevant to performance at the economic entity level, divisional level, or functional level, as applicable, for the financial year. In addition, the economic entity offers Executive Directors and senior executives participation in the long-term incentive scheme involving the issue of options to the employee under the executive share option scheme. The executive share option scheme provides for the offer of a parcel of options to participating employees on an annual basis, with a three-year expiry period, exercisable at the market price set at the time the offer was made. The options are granted annually in three tranches on achievement of the performance hurdles. Non-Executive Directors do not receive any performance related remuneration. Audit and Risk Committee The Audit and Risk Committee has a documented charter, approved by the Board. All members of the Committee are Non-Executive Directors with a majority being independent, and the Chairman of the Audit and Risk Committee is not the Chairman of the Board of Directors. The members of the Audit and Risk Committee during the financial year are disclosed in the Directors’ Report. The external auditors, the Managing Director and Chief Financial Officer are invited to Audit and Risk Committee meetings at the discretion of the Committee, and the external auditor also meets with the Audit and Risk Committee during the year without management being present. The Committee met four times during the year and the Committee members’ attendance record is disclosed in the table of Directors’ meetings. The Managing Director and the Chief Financial Officer have provided a statement in writing to the Board that the economic entity’s financial reports for the year ended 30 June 2005 present a true and fair view, in all material respects, of the economic entity’s financial condition and operational results and are in accordance with the relevant accounting standards. This statement is required annually. Further details of the Audit and Risk Committee’s charter are available on the Company’s website. The duties and responsibilities of the Audit and Risk Committee include: • Recommending to the Board the appointment of the external auditors; • Recommending to the Board the fee payable to the external auditors; • Reviewing the audit plan and performance of the external auditors; • Determining that no management restrictions are being placed upon the external auditors; • Evaluating the adequacy and effectiveness of the reporting and accounting controls of the Company through active communication with operating management and the external auditors; • Reviewing all financial reports to be made to shareholders and/or the public prior to their release; • Evaluating systems of internal control; Select Harvests Annual Report 2005 35 governance • Monitoring the standard of corporate conduct in areas such as arms-length dealings and likely conflicts of interest; • Requiring reports from management and the external auditors on any significant regulatory, accounting or reporting development to assess potential financial reporting interest; • Reviewing and approving all significant company accounting policy changes; • Reviewing the Company’s taxation position; • Reviewing the annual financial statements with the Chief Financial Officer and the external auditors, and recommending acceptance to the Board; • Evaluating the adequacy and effectiveness of the Company’s risk management policies and procedures including insurance; and • Directing any special projects or investigations deemed necessary by the Board or by the Committee. The Audit and Risk Committee is committed to ensuring that it carries out its functions in an effective manner. Accordingly, it has undertaken a review of its charter during the financial year and will review its charter at least once in each financial year. Risk Management The Board oversees the establishment, implementation, and review of a system of risk management within the economic entity. The economic entity’s areas of focus in respect of risk management practices include, but are not limited to, environment, occupational health and safety, property, financial reporting and internal control. The Board is responsible for the overall risk management and internal control framework, but recognises that no cost-effective risk management and internal control system will preclude all errors and irregularities. The Board has the following procedures in place to monitor performance and to identify areas of concern: • Strategic Planning – The Board reviews and approves the strategic plan that encompasses the economic entity’s strategy, designed to meet the stakeholders’ needs and manage business risk. The strategic plan is dynamic and the Board is actively involved in developing and approving initiatives and strategies designed to ensure the continued growth and success of the economic entity; • Financial reporting – Monthly actual results are reported against budgets approved by the Directors and revised forecasts prepared during the year; • Functional Reporting – Key areas subject to regular or periodical reporting to the Board include, but are not limited to, operational, treasury (including foreign exchange), environmental, occupational health & safety, insurance, and legal matters; • Continuous disclosure – A process is in place to identify matters that may have a material effect on the price of the Company’s securities and to notify them to the ASX; and • Investment appraisal – Guidelines for capital expenditure include annual budgets, appraisal and review procedures, due diligence requirements where businesses are being acquired or divested. The Managing Director and Chief Financial Officer have provided a statement in writing to the Board that the declaration made in respect of the economic entity’s financial reports is founded on a system of risk management and internal compliance and control which reflects the policies adopted to date by the Board, and that the economic entity’s risk management and internal control and compliance system is operating effectively in all material respects based on the criteria for effective internal control established by the Board. 36 Select Harvests Annual Report 2005 Ethical Standards All Directors, managers and employees are expected to act with the utmost integrity and objectivity, striving at all times to enhance the reputation and performance of the economic entity. The economic entity’s code of conduct includes the following: Conflict of Interest Directors must keep the Board advised, on an ongoing basis, of any interest that could potentially conflict with those of the Company. Should a situation arise where the Board believes that a material conflict exists, the Director concerned shall not receive the relevant Board papers and will not be present at the meeting when the item is considered. Details of Director related entity transactions with the Company and economic entity are set out in the notes to the financial statements. Dealings in Company Shares Directors and senior management are prohibited from dealing in Company shares except within a four week trading window that commences 48 hours after the release of the economic entity’s results at year-end and half year on the basis that they are not in possession of any price sensitive information. Directors must advise the ASX of any transactions conducted by them in shares in the Company. Communication with Shareholders The Board of Directors aims to ensure that shareholders are informed of all major developments affecting the economic entity’s state of affairs. Information is communicated to shareholders as follows: • The Annual Report is distributed to all shareholders (unless a shareholder has specifically requested not to receive the document), including relevant information about the operations of the economic entity during the year, changes in the state of affairs and details of future developments; • The half-yearly report contains summarised financial information and a review of the operations of the economic entity during the period. The half-year audited financial report is lodged with the Australian Securities and Investments Commission and the ASX, and sent to any shareholder who requests it; • The economic entity has nominated the Company Secretary to ensure compliance with the economic entity’s continuous disclosure requirements, and overseeing and co-ordinating disclosure of information to the ASX; • Information is posted on the economic entity’s website immediately after ASX confirms an announcement has been made to ensure that the information is made available to the widest audience. The economic entity’s website is www.selectharvests.com.au • The Board encourages full participation of shareholders at the Annual General Meeting to ensure a high level of accountability and identification with the economic entity’s strategy and goals. It is the policy of the economic entity and the policy of the auditor for the lead engagement partner to be present at the Annual General Meeting to answer any questions about the conduct of the audit and the preparation and content of the auditor’s report; and • Occasional letters from the Chairman and Managing Director may be utilised to provide shareholders with key matters of interest. Select Harvests Annual Report 2005 37 performance Statement of Financial Performance Year ended 30 June 2005 Sales revenue Cost of sales Gross profit Other revenues from ordinary activities Other revenues from SGARA stock adjustment Distribution expenses Marketing expenses Occupancy expenses Administrative expenses Borrowing costs expensed Other expenses from ordinary activities Other expenses from SGARA tree adjustment Profit from ordinary activities before income tax expense Income tax expense relating to ordinary activities Profit from ordinary activities after income tax expense Net profit NOTES ECONOMIC ENTITY PARENT ENTITY 2005 $’000 2004 $’000 2005 $’000 2004 $’000 2 3(a) 178,029 127,380 (131,605) (91,242) 46,424 36,138 2 2 3 870 787 (3,334) (659) (1,608) (2,724) (1,361) (6,171) (229) 31,995 446 561 (2,467) (522) (1,314) (2,500) (1,369) (6,044) (342) 22,587 - - - - - - 18,829 16,304 - - - - - - - - (1,980) (1,219) (561) - (1,333) (1,182) (661) - 15,069 13,128 4 (10,279) (7,362) (366) (618) 21,716 21,716 21,716 15,225 15,225 15,225 14,703 14,703 14,703 12,510 12,510 12,510 Net profit attributable to members of Select Harvests Limited 21(b) Total changes in equity other than those resulting from transactions with owners as owners attributable to members of Select Harvests Limited Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 21,716 15,225 14,703 12,510 25 25 55.9 55.7 40.0 39.7 The Statement of Financial Performance is to be read in conjunction with the Notes to the Financial Statements. 38 Select Harvests Annual Report 2005 position Statement of Financial Position At 30 June 2005 Current assets Cash assets Receivables Inventories Other Total current assets Non-current assets Receivables Other financial assets Property, plant and equipment Deferred tax assets Self-generating and regenerating assets Intangible assets Total non-current assets Total assets Current liabilities Payables Interest-bearing liabilities Current tax liabilities Provisions Total current liabilities Non-current liabilities Payables Interest-bearing liabilities Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained profits (accumulated losses) Total equity NOTES ECONOMIC ENTITY PARENT ENTITY 2005 $’000 2004 $’000 2005 $’000 2004 $’000 6 7 8 9 10 11 4 12 13 14 15 4 16 17 18 4 19 20 21 21 4,539 24,862 24,796 825 55,022 - 21 43,991 395 5,516 27,367 77,290 489 15,702 15,444 956 32,591 - 19 41,792 322 4,986 27,245 74,364 132,312 106,955 4,231 10 - 770 5,011 - 19 - 784 803 41,205 12,195 41,673 12,195 523 83 - - 747 124 - - 54,006 59,017 54,739 55,542 32,044 14,344 1,370 486 3,239 2,139 957 2,229 1,547 - 318 191 587 205 378 150 37,908 19,077 1,879 1,320 - 376 2,123 360 2,859 40,767 91,545 46,925 14,191 30,429 91,545 - 13,490 7,123 1,263 224 8,610 27,687 79,268 43,940 14,191 21,137 79,268 - - 48 13,538 15,417 43,600 46,925 3,270 (6,595) 43,600 9,150 6,700 - 36 15,886 17,206 38,336 43,940 3,270 (8,874) 38,336 The Statement of Financial Position is to be read in conjunction with the Notes to the Financial Statements. Select Harvests Annual Report 2005 39 cash flows Statement of Cash Flows Year ended 30 June 2005 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Borrowing costs Income tax paid Net cash flows from/(used in) operating activities 22(a) 22(d) Cash flows from investing activities Proceeds from sale of property, plant and equipment Purchase of property, plant and equipment Purchase of other non-current assets Net cash flows from/(used in) financing activities Cash flows from financing activities Proceeds from issues of ordinary shares Proceeds from borrowings – other Repayments of borrowings – other Payment of dividends on ordinary shares Net cash flows from/(used in) financing activities Net increase/(decrease) in cash held Add opening cash brought forward Closing cash carried forward 22(b) NOTES ECONOMIC ENTITY PARENT ENTITY 2005 $’000 2004 $’000 2005 $’000 2004 $’000 180,687 125,862 - - (137,414) (102,405) (1,328) (1,682) 94 (1,361) (8,478) 33,528 774 (6,155) (6,933) 120 (1,369) (7,281) 14,927 359 (4,329) (9,145) (12,314) (13,115) 515 - (7,597) (9,955) (17,037) 4,177 362 4,539 6,318 - (1,286) (7,012) (1,980) (168) 530 362 69 (1,219) (382) (2,860) 134 (133) - 1 515 - 16,657 (9,955) 7,217 4,358 (127) 4,231 101 (1,182) (499) (3,262) - (545) - (545) 6,318 - 3,848 (7,012) 3,154 (653) 526 (127) The Statement of Cash Flows is to be read in conjunction with the Notes to the Financial Statements 40 Select Harvests Annual Report 2005 notes to the financial statements as at 30 June 2005 1. Summary of significant accounting policies (a) Basis of accounting The financial report is a general purpose financial report which has been prepared in accordance with the requirements of the Corporations Act 2001 which includes applicable Accounting Standards. Other mandatory professional reporting requirements (including Urgent Issues Group Consensus Views) have also been complied with. The financial report covers Select Harvests Limited as an individual parent entity and Select Harvests Limited and controlled entities as an economic entity. Select Harvests Limited is a company limited by shares, incorporated and domiciled in Australia. The financial report has been prepared on an accruals basis and is based on historical costs, except where AASB 1037: ‘Self Generating and Regenerating Assets’ has been applied, and does not take into account changing money values or, except where stated, current valuations of non-current assets. Cost is based on the fair value of consideration that would be given in exchange for assets. The following is a summary of the material accounting policies adopted by the economic entity in the preparation of the financial report. The accounting policies have been consistently applied, unless otherwise stated. (b) Principles of consolidation The consolidated financial statements are those of the consolidated entity, comprising Select Harvests Limited (the parent entity) and all entities which Select Harvests Limited controlled from time to time during the year and at balance date. The financial statements of subsidiaries are prepared for the same reporting period as the parent entity, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies which may exist. All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. (c) Foreign currencies Translation of foreign currency transactions Transactions in foreign currencies of entities within the consolidated entity are converted to local currency at the rate of exchange ruling at the date of the transaction. Foreign currency monetary items that are outstanding at the reporting date (other than monetary items arising under foreign currency contracts where the exchange rate for that monetary item is fixed in the contract) are translated using the spot rate at the end of the financial year. A monetary item arising under a foreign currency contract outstanding at the reporting date where the exchange rate for the monetary item is fixed in the contract is translated at the exchange rate fixed in the contract. Except for certain specific hedges, all resulting exchange differences arising on settlement or re-statement are recognised as revenues and expenses for the financial year. Any gains or costs on entering a hedge are deferred and amortised over the life of the contract. Specific hedges Where a purchase or sale is hedged specifically, exchange gains or losses on the hedging transaction arising up to the date of purchase or sale and costs, premiums and discounts relative to the hedging transaction are deferred and included in the measurement of the purchase or sale. Exchange gains and losses arising on the hedge transaction after that date are taken to the Statement of Financial Performance. This accounting policy will be impacted on first-time adoption of AIFRS (refer to Note 34). Select Harvests Annual Report 2005 41 notes to the financial statements as at 30 June 2005 1. Summary of significant accounting policies (continued) (d) Cash and cash equivalents Cash on hand and in banks and short-term deposits are stated at nominal value. For the purposes of the Statement of Cash Flows, cash includes cash on hand and in banks, and money market investments readily convertible to cash within two working days, net of outstanding bank overdrafts. Bank overdrafts are carried at the principal amount. Interest is charged as an expense as it accrues. (e) Inventories Inventories are valued at the lower of cost and net realisable value except for almond stocks which are measured at net market value in accordance with AASB 1037: ‘Self Generating and Regenerating Assets’ – refer to (f) below. Costs incurred in bringing each product to its present location and condition are accounted for as follows: • Raw materials and consumables – purchase cost on a first-in-first-out basis; • Finished goods and work-in-progress – cost of direct material and labour and a proportion of manufacturing overheads based on normal operating capacity; and • Almond stocks are valued in accordance with AASB 1037: ‘Self Generating and Regenerating Assets’ whereby the cost of the non-living (harvested) produce is deemed to be its net market value immediately after it becomes non-living. This valuation takes into account current almond selling prices and current processing and selling costs. (f) Self-generating and regenerating assets Almond trees Almond trees are classified as a self generating and regenerating asset and valued in accordance with AASB 1037: ‘Self Generating and Regenerating Assets’. Developing almond trees are valued at their growing cost until the year they achieve economic maturity. The values of economically mature almond trees are calculated using a discounted cash flow methodology. The discounted cash flow incorporates the following factors: • Almond trees have an estimated 30-year economic life, with crop yields consistent with long-term yield rates; • Selling prices are based on long-term average trend prices; • Growing, processing and selling costs are based on long-term average levels; • Cash flows are discounted at a rate that takes into account the cost of capital plus a suitable risk factor; and • Asset values to be deducted from the cumulative cash flow, to determine the tree value, are based on current valuation and then adjusted annually to account for capital expenditure, depreciation and utilised acreage. Growing almond crop The growing almond crop is valued in accordance with AASB 1037: ‘Self Generating and Regenerating Assets’. This valuation takes into account current almond selling prices and current growing, processing and selling costs. The calculated crop value is then discounted to take into account that it is only partly developed, and then further discounted by a suitable factor to take into account the agricultural risk until crop maturity. New orchards growing costs All costs associated with the establishment, planting and growing of almond trees for a new orchard are accumulated for the first three years of that orchard. Once immature trees commence bearing a commercial crop a proportion of the annual growing costs are expensed on the basis of yield achieved as a proportion of anticipated yield of a mature tree. At the end of the eighth year full maturation is deemed to occur, after which the tree is considered to be mature in terms of revenue generation and the annual growing costs are then expensed in full and the almond trees are valued as described above. 42 Select Harvests Annual Report 2005 (g) Property, plant and equipment Cost and valuation Plantation land, water rights and buildings on freehold land are measured on a fair value basis. Carrying amounts are regularly reviewed by Directors to ensure that they do not differ materially from the asset’s fair value at reporting date. Where necessary, the asset is revalued to reflect its fair value. All other classes of property, plant and equipment are measured at cost. The carrying amount of plant and equipment is reviewed annually by Directors to ensure it is not in excess of the recoverable amount from those assets. The recoverable amount is assessed on the basis of the expected net cash flows which will be received from the assets employment and subsequent disposal. The expected net cash flows have not been discounted to present values in determining recoverable amounts. Where assets have been revalued, the potential effect of the capital gains tax on disposal has not been taken into account in the determination of the revalued carrying amount. Where it is expected that a liability for capital gains tax will arise, this expected amount is disclosed by way of note. Depreciation The depreciable amount of all fixed assets including buildings and capitalised leased assets, but excluding freehold land water rights, and almond trees, are depreciated on a straight line basis over their estimated useful lives to the entity commencing from the time the asset is held ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements. The useful lives for each class of assets are: Buildings Leasehold improvements Plant and equipment Leased plant and equipment Plantation land and irrigation systems 2005 2004 25 to 40 years 5 to 40 years 5 to 20 years 5 to 10 years 10 to 40 years 25 to 40 years 5 to 40 years 5 to 20 years 5 to 10 years 10 to 40 years Capital works in progress Capital works in progress are valued at cost and relate to costs incurred for orchards and other assets under development. (h) Leases Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement so as to reflect the risks and benefits incidental to ownership. Operating leases The minimum lease payments of operating leases, where the lessor effectively retains substantially all of the risks and benefits of ownership of the leased item, are recognised as an expense on a straight line basis. Finance leases Leases which effectively transfer substantially all of the risks and benefits incidental to ownership of the leased item to the group are capitalised at the present value of the minimum lease payments and disclosed as plant and equipment under lease. A lease liability of equal value is also recognised. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the assets and the lease term. Minimum lease payments are allocated between interest expense and reduction of the lease liability with the interest expense calculated using the interest rate implicit in the lease and charged directly to the Statement of Financial Performance. The cost of improvements to or on leasehold property is capitalised, disclosed as leasehold improvements, and amortised over the unexpired period of the lease or the estimated useful lives of the improvements, whichever is the shorter. Select Harvests Annual Report 2005 43 notes to the financial statements as at 30 June 2005 1. Summary of significant accounting policies (continued) (i) Intangibles Brand names Brand names are measured at cost. Directors are of the view that brand names have an indefinite life. Brand names are therefore not depreciated. This accounting policy will be impacted on first-time adoption of AIFRS (refer to Note 34). Goodwill Goodwill represents the excess of the purchase consideration plus incidental costs over the fair value of identifiable net assets acquired at the time of acquisition of a business or shares in a controlled entity. Goodwill is amortised on a straight line basis over the period during which benefits are expected to be received. This is taken as being 20 years. This accounting policy will be impacted on first-time adoption of AIFRS (refer to Note 34). ( j) Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Sale of goods Control of the goods has passed to the buyer. Rendering of services Revenue from the rendering of services is recognised upon the delivery of the service to the customer. Certain clients may be invoiced in advance of provision of services. Interest Interest revenue is recognised when it becomes receivable on a proportional basis taking into account the interest rates applicable to the financial assets. Dividends Control of the right to receive a dividend is evidenced by the approval of the dividend at a meeting of the Board of Directors in accordance with the Company’s constitution. Almond stocks Increments or decrements in the net market value of almond stocks are recognised as revenues or expenses in the Statement of Financial Performance in the financial year in which they occur. The net increment or decrement in the total market value of the almond stocks is determined as the difference between the net market value and quantities at the beginning of the year and at year end, less any further costs required to get the almonds stocks to a saleable state. Almond pool revenue Under the contractual arrangements with external growers the Company simultaneously acquires and sells the almonds and does not make a margin on those sales. These transactions are disclosed in Note 2 and are not recognised as revenue. As at 30 June 2005 the Company held almond inventory on behalf of external growers which was not recorded as inventory of the Company. All revenue is stated net of the amount of Goods and Services Tax (GST). 44 Select Harvests Annual Report 2005 (k) Taxes Tax-effect accounting is applied using the liability method whereby income tax is regarded as an expense and is calculated on the accounting profit after allowing for permanent differences. To the extent timing differences occur between the time items are recognised in the financial statements and when items are taken into account in determining taxable income, the net related taxation benefit or liability, calculated at current rates, is disclosed as a future income tax benefit or a provision for deferred income tax. The net future income tax benefit relating to tax losses and timing differences is not carried forward as an asset unless the benefit is virtually certain of being realised. The amount of benefits brought to account or which may be realised in the future is based on the assumption that no adverse change will occur in income tax legislation, and the anticipation that the economic entity will derive sufficient future assessable income to enable the benefit to be realised and comply with the conditions of deductibility imposed by the law. Where assets are revalued no provision for potential capital gains tax has been made. This accounting policy will be impacted on first-time adoption of AIFRS (refer to Note 34). Tax consolidation The parent entity of Select Harvests Limited and its subsidiaries have implemented the tax consolidation legislation and formed a tax-consolidated group from 1 July 2003. The parent entity and subsidiaries in the tax-consolidated group have entered into a tax funding agreement such that each entity in the tax consolidated group recognises the assets, liabilities, expenses and revenues in relation to its own transactions, events and balances only. All entities in the tax-consolidated group have adopted UIG 52 to account for the effects of the tax funding agreement under the tax consolidation system. This means that: • The parent entity recognises all current and deferred tax amounts relating to its own transactions, events and balances only; • The subsidiaries recognise current or deferred tax amounts arising in respect of their own transactions, events and balances only; • All expenses and revenues arising under the tax funding agreement are recognised as a component of income tax expense or income tax revenue by each individual entity; and • All assets and liabilities arising under the tax funding agreement are recognised as tax-related amounts receivable from or payable to other entities in the group, rather than as tax assets or tax liabilities. Deferred tax balances relating to the subsidiaries have been remeasured by reference to the carrying amounts of the subsidiaries’ assets based on the reset tax value under tax consolidation. The tax-consolidated group also has a tax sharing agreement in place to limit the liability of subsidiaries in the tax-consolidated group arising under the joint and several liability requirements of the tax consolidation system in the event of default by the parent entity to meet its payment obligations. Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST except: • Where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and • Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the Statement of Financial Position. Cash flows are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. Select Harvests Annual Report 2005 45 notes to the financial statements as at 30 June 2005 1. Summary of significant accounting policies (continued) (l) Employee benefits Provision is made for employee benefits accumulated as a result of employees rendering services up to the reporting date. These benefits include wages and salaries, annual leave and long service leave. Liabilities arising in respect of wages and salaries, annual leave and any other employee benefits expected to be settled within twelve months of the reporting date are measured at their nominal amounts based on remuneration rates which are expected to be paid when the liability is settled. All other employee benefit liabilities are measured at the present value of the estimated future cash outflow to be made in respect of services provided by employees up to the reporting date. In determining the present value of future cash outflows, the market yield as at the reporting date on national government bonds, which have terms to maturity approximating the terms of the related liability, are used. Employee benefit expenses and revenues arising in respect of the following categories are charged against profit on a net basis in their respective categories: • Wages and salaries, non-monetary benefits, annual leave, long service leave, sick leave and other leave benefits. • Other types of employee benefits. Contributions are made by the economic entity to an employee superannuation fund and are charged as expenses when incurred. (m) Financial instruments Terms and Conditions Financial assets Trade receivables are carried at full amounts due less any provision for doubtful debts. A provision for doubtful debts is recognised when collection of the full amount is no longer probable. Amounts receivable from other debtors are carried at full amounts due. Other debtors are normally settled on 30 days from month end unless there is a specific contract which specifies an alternative date. Amounts receivable from related parties are carried at full amounts due. Details of the terms and conditions are set out in Note 30. Financial Liabilities The bank overdraft is carried at the principal amount. Interest is charged as an expense as it accrues. The bank overdraft is secured by a floating charge over the Company’s assets. Liabilities are recognised for amounts to be paid in the future for goods and services received, whether or not billed to the economic entity. Trade liabilities are normally settled on 30 days from month end. Finance lease liability is accounted for in accordance with AASB 1008: ‘Leases’. As at balance date, the Company had finance leases with an average lease term of four years. The average discount rate implicit in the leases is 7%. The lease liability is secured by a charge over the leased asset. (n) Comparatives Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosures. (o) Rounding amounts The Company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relation to the ‘rounding off’ of amounts in the financial report. Amounts in the financial report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. 46 Select Harvests Annual Report 2005 2. Revenue from Ordinary Activities Revenues from operating activities Total revenues from operating activities Revenues from non-operating activities Management fees Dividends and distributions – Controlled entities – Other corporations Total dividends and distributions Interest – Wholly owned entities – Other persons/corporations Total interest Other Income Proceeds from disposal of property, plant and equipment Total revenues from non-operating activities SGARA Revenue – Stock increment Total revenues from ordinary activities Revenue/Cost of goods sold from almond pool Revenue from almond pool sales Cost of goods sold from almond pool sales 3. Expenses and Losses/(Gains) (a) Expenses Cost of goods and services sold Depreciation of non-current assets – Freehold land and buildings – Buildings – Plantation land and irrigation systems – Plant and equipment Total depreciation of non-current assets NOTES ECONOMIC ENTITY PARENT ENTITY 2005 $’000 2004 $’000 2005 $’000 2004 $’000 178,029 127,380 - - - - 2 2 - 94 94 774 870 787 - - - - - 120 120 2 324 446 561 3,011 2,608 13,907 11,300 - - 13,907 11,300 1,708 69 1,777 - 134 2,295 101 2,396 - - 18,829 16,304 - - 179,686 128,387 18,829 16,304 12,632 (12,632) - 5,163 (5,163) - 131,605 91,242 5 55 342 2,453 2,855 5 75 303 2,173 2,556 - - - - 1 - - - - - - 1 - - 166 167 107 108 Select Harvests Annual Report 2005 47 notes to the financial statements as at 30 June 2005 3. Expenses and Losses/(Gains) (continued) NOTES ECONOMIC ENTITY PARENT ENTITY 2005 $’000 2004 $’000 2005 $’000 2004 $’000 (a) Expenses (continued) Amortisation of non-current assets – Goodwill – Leased plant and equipment Total amortisation of non-current assets Total depreciation and amortisation expenses Borrowing costs expensed – Wholly owned entities – Other persons Total borrowing costs Movement in provisions for doubtful debts Net expense (revenue) for movement in provision for employee entitlements Net expense (revenue) for movement in provision for stock diminution Operating lease rental – Minimum lease payments Total operating lease rental (b) Losses/(gains) Net loss on disposal of property, plant and equipment 4. Income Tax The prima facie tax, using tax rates applicable in the country of operation, on profit and extraordinary items differs from the income tax provided in the financial statements as follows: Prima facie tax on profit from ordinary activities Tax effect of permanent differences – Rebateable dividends – Amortisation of intangible assets – Other non allowable items Under/(over) provision of previous year 1,514 323 1,837 4,692 - 1,361 1,361 24 1,166 (105) 3,713 3,713 1,413 380 1,793 4,349 - 1,369 1,369 27 589 67 2,189 2,189 78 17 - 8 8 175 - 1,219 1,219 - 117 - - 44 - 25 25 133 - 1,182 1,182 - 54 - - - 9,599 6,776 4,520 3,939 - 454 237 (11) - 424 130 32 (4,172) (3,390) - 8 10 366 - 6 63 618 378 - 124 Income tax expense attributable to ordinary activities Deferred tax assets and liabilities Provision for income tax – current Provision for deferred income tax – non-current Future income tax benefit – non-current This future income tax benefit will only be obtained if: (a) future assessable income is derived of a nature and of an amount sufficient to enable the benefit to be realised; 3,239 2,229 1,263 2,123 395 322 318 83 - 10,279 7,362 (b) the conditions for deductibility imposed by tax legislation continue to be complied with; and (c) no changes in tax legislation adversely affect the consolidated entity in realising the benefit. 48 Select Harvests Annual Report 2005 5. Dividends Paid or Provided for on Ordinary Shares (a) Dividends paid during the year (i) Current year interim Franked dividends (16.0c per share) (2004:10.0c) (ii) Previous year final (paid 1st October 2004) Franked dividends (16.0c per share) NOTES ECONOMIC ENTITY PARENT ENTITY 2005 $’000 2004 $’000 2005 $’000 2004 $’000 6,225 6,225 6,199 12,424 3,840 3,840 4,590 8,430 6,225 6,225 6,199 12,424 3,840 3,840 4,590 8,430 (b) Dividends proposed and not recognised as a liability Franked dividends (26.0c per share, $10,157,971) (c) Franking credit balance Balance of franking account at year-end adjusted for franking credits arising from payment of provision for income tax and dividends recognised as receivables, franking debits arising from payment of proposed dividends and any credits that may be prevented from distribution in subsequent years. 28,229 25,894 The dividend franking account has been measured at the after tax profits basis not the income tax paid basis in accordance with the New Business Tax System (Imputation) Act 2002. The tax rate at which paid dividends have been franked is 30% (2004: 30%). 6. Receivables (Current) Trade debtors Provision for doubtful debts Other receivables 24,829 15,710 (24) (27) 24,805 15,683 57 19 24,862 15,702 – – – 10 10 – – – 19 19 Select Harvests Annual Report 2005 49 notes to the financial statements as at 30 June 2005 NOTES ECONOMIC ENTITY PARENT ENTITY 2005 $’000 2004 $’000 2005 $’000 2004 $’000 7(a) 7(a) 28 28 7,234 (51) 7,183 7,649 (466) 7,183 5,318 5,318 5,112 5,112 3,248 (31) 3,217 6,061 (381) 5,680 2,569 2,569 3,978 3,978 24,796 15,444 (412) (105) (517) (479) 67 (412) - - - - - - - - - - - - - - - - - - - - - - - - - - - - 825 956 770 784 - - - 21 - 21 - - - 42,304 (1,099) 41,205 42,772 (1,099) 41,673 19 - 19 - 12,195 12,195 - 12,195 12,195 7. Inventories (Current) Raw materials Raw materials at cost Provision for diminution in value Finished goods Finished goods at cost Provision for diminution in value Other inventory Other inventory at cost Almond stocks At net market value Total inventories (a) Movements in provision for diminution in value Beginning of the financial year Movement during the year End of the financial year 8. Other Current Assets Prepayments 9. Receivables (Non-current) Related party receivables Wholly-owned group – Controlled entities – Provision for diminution 10. Other Financial Assets (Non-current) Investments at cost comprise: Shares Other corporations Controlled entities – unlisted 50 Select Harvests Annual Report 2005 11. Property, Plant and Equipment Freehold land and buildings At cost Accumulated depreciation Buildings At fair value Accumulated depreciation Plantation land and irrigation systems At fair value Accumulated depreciation Total land and buildings Plant and equipment under lease At cost Accumulated amortisation Plant & equipment At cost Accumulated depreciation Capital works in progress At cost Total plant and equipment Total property, plant and equipment Fair value Cost Accumulated depreciation and amortisation Total written down amount (a) Valuations NOTES ECONOMIC ENTITY PARENT ENTITY 2005 $’000 2004 $’000 2005 $’000 2004 $’000 315 (83) 232 2,792 (261) 2,531 24,147 (1,162) 22,985 25,748 2,771 (1,457) 1,314 465 (81) 384 2,792 (206) 2,586 23,822 (819) 23,003 25,973 3,368 (1,664) 1,704 11(b) 11(a) 11(b) 11(a) 11(b) 11(b) 31,165 25,762 (15,424) (13,084) 11(b) 15,741 12,678 11(b) 1,188 1,188 1,437 1,437 18,243 15,819 26,939 35,439 62,378 26,614 31,032 57,646 (18,387) (15,854) 43,991 41,792 - - - - - - - - - - - - - 1,198 (689) 509 14 14 523 - 1,212 1,212 (689) 523 150 (1) 149 - - - - - 149 144 (69) 75 1,049 (526) 523 - - 598 - 1,343 1,343 (596) 747 The fair values of freehold land, and buildings on freehold land have been determined by the Directors, based upon information and advice received during the previous financial year. Such valuations are performed on an open market basis, being the amounts for which the assets could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arm’s length transaction at the valuation date. Select Harvests Annual Report 2005 51 notes to the financial statements as at 30 June 2005 11. Property, Plant and Equipment (continued) NOTES (b) Reconciliations Reconciliations of the carrying amounts of property, plant and equipment at the beginning and end of the current financial year. ECONOMIC ENTITY PARENT ENTITY 2005 $’000 2005 $’000 Freehold land and buildings Carrying amount at beginning Additions Depreciation expense Disposals Buildings Carrying amount at beginning Depreciation expense Plantation land and irrigation systems Carrying amount at beginning Additions Disposals Transfer between classes Depreciation expense Plant and equipment under lease Carrying amount at beginning Additions through acquisition of entities/operations Transfers between classes Depreciation expense Plant and equipment Carrying amount at beginning Additions Disposals Additions through acquisition of entities/operations Transfers between classes Depreciation expense Capital works in progress Carrying amount at beginning Additions Transfers Total written down value 52 Select Harvests Annual Report 2005 384 25 (5) (172) 232 2,586 (55) 2,531 23,003 434 (382) 272 (342) 22,985 1,704 505 (572) (323) 1,314 12,678 4,648 (113) 142 839 (2,453) 15,741 1,437 1,048 (1,297) 1,188 43,991 149 24 (1) (172) - - - - - - - - - - 75 (67) - (8) - 523 95 (6) - 63 (166) 509 - 14 - 14 523 NOTES ECONOMIC ENTITY PARENT ENTITY 2005 $’000 2004 $’000 2005 $’000 2004 $’000 5,516 2005 2,375 4,986 2004 2,375 – – 12. Self-Generating and Regenerating Assets SGARA Almond Trees – at net market value (a) Physical quantity of trees Almond Trees (acres) (b) Movement in carrying amounts 2005 Balance at the beginning of the year – Additions – SGARA tree adjustment 13. Intangibles Goodwill – at cost Accumulated amortisation Brand names – at cost 14. Payables (Current) Trade creditors Other creditors SGARA PLANTATION $’000 4,986 759 (229) 5,516 31,032 (6,565) 24,467 2,900 27,367 29,396 (5,051) 24,345 2,900 27,245 – – – – – 7,042 25,002 32,044 5,275 9,069 14,344 97 1,273 1,370 15. Interest-Bearing Liabilities (Current) Lease liability Borrowings secured by floating charge 15(a),(b),23 – Bank overdraft 15(b) (a) Secured lease liability – finance lease (b) Terms and conditions relating to the above financial instruments: 486 – 486 486 830 127 957 830 (i) A registered mortgage debenture is held as security over all the assets and undertakings of Select Harvests Limited and the entities of the wholly owned group. (ii) A deed of cross guarantee exists between the entities of the wholly owned group. Select Harvests Annual Report 2005 53 – – – – – 124 463 587 78 127 205 78 notes to the financial statements as at 30 June 2005 NOTES ECONOMIC ENTITY PARENT ENTITY 2005 $’000 2004 $’000 2005 $’000 2004 $’000 16. Provisions (Current) Employee benefits Other 17. Payables (Non-Current) Aggregate amounts payable to related parties – Wholly owned companies 18. Interest-Bearing Liabilities (Non-Current) Lease liability 18(a),(b),23 Borrowings secured by floating charge – Bills of exchange and promissory notes 18(b) (a) Secured lease liability – finance lease (b) Terms and conditions relating to the above financial instruments: 19 (a) 2,059 80 2,139 1,547 - 1,547 191 - 191 - - 376 - 376 376 - - 13,490 13,490 423 6,700 7,123 423 - - - - 150 - 150 9,150 9,150 - 6,700 6,700 - (i) A registered mortgage debenture is held as security over all the assets and undertakings of Select Harvests Limited and the entities of the wholly owned group. (ii) A deed of cross guarantee exists between the entities of the wholly owned group. 19. Provisions (Non-Current) Employee entitlements (a) Aggregate employee entitlements liability (b) Number of full time employees at year end 20. Contributed Equity (a) Issued and paid up capital Ordinary shares fully paid (b) Movements in shares on issue Beginning of the financial year Issued during the year – Dividend reinvestment scheme – Employee share scheme – Other shares issued End of Financial year 54 Select Harvests Annual Report 2005 19 (a) 360 2,419 276 224 1,771 252 48 239 11 36 186 7 46,925 46,925 43,940 43,940 46,925 46,925 43,940 43,940 2005 NUMBER OF SHARES $’000 NUMBER OF SHARES 2004 $’000 38,525,552 43,940 35,455,341 36,206 287,268 256,300 - 2,470 515 234,311 1,416 302,400 491 - 2,533,500 5,827 39,069,120 46,925 38,525,552 43,940 20. Contributed Equity (continued) (c) Share options Options over ordinary shares: Employee share scheme The Company continued to offer employee participation in short-term and long-term incentive schemes as part of the remuneration packages for the employees of the Companies. Both the short-term and long-term schemes involve payments up to an agreed proportion of the total fixed remuneration of the employee, with relevant proportions based on market-relativity of employees with equivalent responsibilities. The employee is able to receive payments under the short-term incentive scheme based on the achievement of agreed business plans by the individual. This performance is measured and reported by a balanced scorecard approach. The long-term scheme involves the issue of options to the employee, under the executive share option scheme. During or since the end of the financial year, 228,700 options (2004: 502,000 options) have been granted under this scheme (refer note 26 and Directors’ Report for further details). The market value of ordinary Select Harvests Limited shares closed at $9.70 on 30 June 2005 ($6.67 on 30 June 2004). 21. Reserves and Retained Profits Capital reserve Asset revaluation Retained profits (a) Capital (i) Nature and purpose of reserve The capital reserve is used to isolate realised capital profits from disposal of non-current assets. (b) Asset revaluation (i) Nature and purpose of reserve The asset revaluation reserve is used to record increments and decrements in the value of non-current assets. The reserve can only be used to pay dividends in limited circumstances. (ii) Movements in reserve Balance at beginning of year Surplus on revaluation Balance at end of year (c) Retained profits Balance at the beginning of year Net profit attributable to members of Select Harvests Limited Total available for appropriation Dividends paid Balance at end of year NOTES ECONOMIC ENTITY PARENT ENTITY 2005 $’000 2004 $’000 2005 $’000 2004 $’000 21(a) 21(b) 21(c) 3,271 10,920 14,191 30,429 3,271 10,920 14,191 21,137 3,270 3,270 - 3,270 (6,595) - 3,270 (8,874) 10,920 - 6,187 4,733 10,920 10,920 - - - - - - 21,137 21,716 42,853 (12,424) 30,429 14,342 15,225 29,567 (8,874) (12,954) 14,703 5,829 12,510 (444) (8,430) (12,424) (8,430) (6,595) 21,137 Select Harvests Annual Report 2005 55 (8,874) notes to the financial statements as at 30 June 2005 22. Statement of Cash Flows (a) Reconciliation of the net profit after tax to the net cash flows from operations Net profit Non-cash Items Depreciation and amortisation Amortisation of goodwill SGARA revenue – stock SGARA expense – trees Net (profit)/loss on disposal of property, plant and equipment Dividends received from controlled entities Interest received Management fees received Management fees paid Changes in assets and liabilities (Increase)/decrease in trade receivables (Increase)/decrease in inventory (Increase)/decrease in receivables and other assets Increase in trade and other creditors (Decrease)/increase in income tax payable (Decrease)/increase in deferred income tax liability (Decrease)/increase in employee entitlements Net cash flow from operating activities (b) Reconciliation of cash Cash balance comprises: Cash at bank Bank overdraft Closing cash balance ECONOMIC ENTITY PARENT ENTITY 2005 $’000 2004 $’000 2005 $’000 2004 $’000 21,716 15,225 14,703 12,510 3,178 1,514 787 (229) (106) - - - - (9,122) (5,685) 341 18,793 1,010 833 498 2,936 1,413 561 (342) (11) - - - - (3,330) (4,733) 234 2,194 137 (56) 699 175 - - - 44 133 - - - - (13,907) (11,300) (1,708) (3,011) (2,295) (2,608) - - - 23 787 (60) 42 52 - - - 58 74 170 (57) 53 33,528 14,927 (2,860) (3,262) 4,539 - 4,539 489 (127) 362 4,231 - 4,231 - (127) (127) (c) Credit stand-by arrangements and loan facilities The economic entity and the Company have a bank overdraft facility available to the extent of $2,000,000 (2004: $2,000,000). As at 30 June 2005 the economic entity and the Company have used $Nil (2004: $Nil) of the facility. The economic entity and the Company have a commercial bill facility available to the extent of $28,000,000 (2004: $22,900,000). As at 30 June 2005 the economic entity and Company have used $Nil (2004: $6,700,000). 56 Select Harvests Annual Report 2005 (d) Acquisition of entities and businesses There were no acquisitions of entities during the year. In the 2004 year Select Harvests Marketing Pty Ltd, a wholly owned subsidiary of Select Harvests Limited, acquired 100% of the share capital of Meriram Pty Ltd and Kibley Pty Ltd at an initial cost of $9.145 million. During the year the economic entity paid $1.5 million to the shareholders of Meriram Pty Ltd and Kibley Pty Ltd in relation to the achievement of the EBIT target for the financial year ended 30 June 2004. During the year the economic entity acquired the Chiquita Nibbles business from Chiquita Brands South Pacific Limited for a total consideration of $5.4 million. ECONOMIC ENTITY PARENT ENTITY Details of this transaction are: Purchase consideration Cash consideration Assets and liabilities held at acquisition date: Receivables Inventories Property, plant and equipment Intangible assets Other assets Creditors Interest liabilities Provisions Other liabilities Goodwill on consolidation 2005 $’000 6,933 6,933 - - 4,225 647 - 81 - (505) (150) - 4,298 2,635 6,933 2004 $’000 9,145 9,145 - 2,278 3,046 2,544 1,168 406 (2,909) (691) (668) (314) 4,860 4,285 9,145 2005 $’000 2004 $’000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - At 30 June 2005 an additional amount of $500,000, as noted in Note 33, became due and payable and was recognised as a liability as at 30 June 2005. This amount has been added to the goodwill on consolidation. ECONOMIC ENTITY PARENT ENTITY 2005 $’000 2004 $’000 2005 $’000 2004 $’000 23. Expenditure Commitments Lease expenditure commitments (i) Operating leases (non-cancellable) Minimum lease payments – Not later than one year – Later than one year and not later than five years – Later than five years – Aggregate lease expenditure contracted for at reporting date Aggregate expenditure commitments comprise: Aggregate lease expenditure contracted for at reporting date 3,860 13,599 13,442 30,901 2,659 10,815 14,413 27,887 30,901 27,887 - - - - - - - - - - Operating lease payments are for rental of premises, farming and factory equipment. Select Harvests Annual Report 2005 57 notes to the financial statements as at 30 June 2005 (ii) Finance leases – Not later than one year – Later than one year and not later than five years – Total minimum lease payments – Future finance charges – Lease liability – Current liability – Non-current liability ECONOMIC ENTITY PARENT ENTITY 2005 $’000 536 426 962 (100) 862 486 376 862 2004 $’000 2005 $’000 2004 $’000 882 441 1,323 (70) 1,253 830 423 1,253 - - - - - - - - 78 - 78 - 78 - - 78 24. Subsequent Events On 23 August 2005, the Board announced that a contract of sale was signed to sell all of the shares in Riverina Pelletising Services Pty Ltd, for a total consideration of $5.7 million to Australian Businesspoint Pty Ltd. Subject to certain conditions precedent being satisfied, the sale is scheduled to be completed on Friday 14 October 2005, with an effective date of 1 October 2005. There has been no other matter or circumstance, which has arisen since 30 June 2005 that has significantly affected or may significantly affect: a) the operations, in financial years subsequent to 30 June 2005, of the economic entity, or b) the results of those operations, or c) the state of affairs, in financial years subsequent to 30 June 2005, of the economic entity. 25. Earnings Per Share The following reflects the income and share data used in the calculations of basic and diluted earnings per share: Net profit Earnings used in calculating basic and diluted earnings per share Weighted average number of ordinary shares used in calculating basic earnings per share Effect of dilutive securities Share options Adjusted weighted average number of ordinary shares used in calculating diluted earnings per share 21,716 21,734 15,225 15,264 NUMBER OF SHARES 2005 2004 38,864,450 38,041,423 153,518 439,622 39,017,968 38,481,045 58 Select Harvests Annual Report 2005 26. Remuneration of Directors and Executives Remuneration levels are set to attract and retain appropriately qualified and experienced Directors and senior executives. The Remuneration Committee may obtain independent advice on the appropriateness of remuneration packages, given trends in the marketplace. Remuneration packages include a mix of fixed remuneration, performance-based remuneration, and equity-based remuneration. Executive Directors and senior executives may receive short term incentives based on achievement of specific business plans and performance indicators, which include financial and operational targets relevant to performance at the economic entity level, divisional level, or functional level, as applicable, for the financial year. In addition, the economic entity offers Executive Directors and senior executives participation in the long-term incentive scheme involving the issue of options to the employee under the executive share option scheme. The executive share option scheme provides for the offer of a parcel of options to participating employees on an annual basis, with a three-year expiry period, exercisable at the market price set at the time the offer was made. The options are granted annually in three tranches on achievement of the performance hurdles. Non-Executive Directors each receive a base fee of $45,780 per annum. The Chairman receives up to twice the base fee. Non-Executive Directors do not receive any performance related remuneration nor are they issued options on securities. The following table provides the details of all Directors of the economic entity (‘specified Directors’) and the five or more executives of the economic entity with the greatest authority (‘specified executives’) and the nature and amount of the elements of their remuneration for the year ended 30 June 2005. Remuneration of Directors of Select Harvests Limited 2005 ANNUAL REMUNERATION BASE FEE $ SHORT TERM INCENTIVES $ NON CASH SUPERANNUATION CONTRIBUTIONS $ BENEFITS $ LONG TERM REMUNERATION OPTIONS GRANTED NUMBER VALUE $ – – – – – – – – – – 7,560 3,780 3,780 3,580 1,622 – – – – – – – – – – TOTAL $ 91,560 45,780 45,780 43,353 19,647 42,000 84,000 Non Executive M A Fremder C G Clark G F Dan O’Brien 42,000 J C Leonard (appointed 21/07/04) 39,773 R M Herron (appointed 27/01/05) 18,025 Executive J Bird Total Specified Officers 2004 558,621 332,823 70,370 35,185 Non Executive M A Fremder B P Burns (retired 30/06/04) C G Clark 35,185 D J Williams (resigned 16/02/04) 23,457 G F Dan O’Brien (appointed 29/03/04) Executive J Bird Total Specified Officers 459,846 286,470 9,179 155,041 155,041 32,766 32,766 29,478 49,800 136,400 136,400 77,089 77,089 627,197 873,317 – – – – – – – – – – 6,333 3,167 3,167 2,111 826 – – – – – – – – – – 76,703 38,352 38,352 25,568 10,005 119,093 119,093 39,576 39,576 25,633 41,237 176,000 176,000 70,593 70,593 541,365 730,345 Select Harvests Annual Report 2005 59 notes to the financial statements as at 30 June 2005 26. Remuneration of Directors and Executives (continued) Remuneration of the five or more executives of the economic entity with the greatest authority. 2005 ANNUAL REMUNERATION BASE FEE $ SHORT TERM INCENTIVES $ NON CASH SUPERANNUATION CONTRIBUTIONS $ BENEFITS $ LONG TERM REMUNERATION OPTIONS GRANTED NUMBER VALUE $ TOTAL $ 91,477 159,332 M Mattia (Chief Financial Officer and Company Secretary) M Ciobo (General Manager – Meriram) 210,000 R Tanti (General Manager – Food Products, Melbourne) (commenced 29/09/04) V Cavanagh (General Manager – Pesticides) 80,665 T Millen (Horticultural Manager) W Turner (General Manager – Almond Division) L Van Driel (Trading Manager) Total Specified Officers 2004 852,537 115,705 96,195 99,163 139,635 M Ciobo (General Manager – Meriram) 210,000 M Mattia (Chief Financial Officer and Company Secretary) V Cavanagh (General Manager – Pesticides) 74,980 T Millen (Horticultural Manager) P Petropolous (Operations Manager) W Turner (General Manager – Almond Division) L Van Driel (Trading Manager) Total Specified Officers 805,207 111,046 107,939 85,854 75,753 60 Select Harvests Annual Report 2005 57,168 37,984 14,149 8,800 8,800 277,433 – – 30,530 18,900 – 6,060 – – – 259,430 – 97,537 9,984 16,800 8,109 18,200 10,162 125,720 13,930 5,000 9,826 9,300 5,156 130,107 27,067 19,000 12,759 7,000 7,000 181,531 17,487 14,821 125,636 124,135 9,625 79,428 19,800 63,100 10,974 152,070 42,092 1,223,828 – 15,989 18,900 4,366 40,900 12,462 – – – – 244,889 197,363 11,063 16,800 7,681 24,100 9,630 120,154 9,317 5,000 8,510 7,500 3,356 112,037 3,660 19,000 6,804 10,237 19,000 10,196 – – 105,217 – 150,479 18,594 57,237 – 116,689 9,625 74,178 15,900 47,500 7,074 143,232 20,060 1,073,371 Options and rights over equity instruments granted as remuneration During the reporting period, the following options over ordinary shares were granted and vested during the current year under the executive share option scheme: Remuneration Options Specified Directors J Bird Specified Executives M Mattia V Cavanagh T Millen W Turner L Van Driel GRANT DATE GRANTED & VESTED NUMBER VALUE PER OPTION AT GRANT DATE $ 27/08/04 27/08/04 27/08/04 27/08/04 27/08/04 27/08/04 27/08/04 27/08/04 27/08/04 27/08/04 27/08/04 27/08/04 27/08/04 27/08/04 55,400 51,800 29,200 8,800 7,700 6,800 3,700 3,800 3,700 1,800 7,000 8,600 7,300 3,900 0.410 0.486 1.000 1.000 0.410 0.486 1.000 0.410 0.486 1.000 1.000 0.410 0.486 1.000 EXERCISE PRICE FIRST EXERCISE DATE LAST EXERCISE DATE $ 1.66 3.31 5.60 5.60 1.66 3.31 5.60 1.66 3.31 5.60 5.60 1.66 3.31 5.60 27/08/04 27/08/04 27/08/04 20/10/04 28/10/05 01/11/06 27/08/04 01/11/06 27/08/04 27/08/04 27/08/04 27/08/04 27/08/04 27/08/04 20/10/04 28/10/05 01/11/06 20/10/04 28/10/05 01/11/06 27/08/04 01/11/06 27/08/04 27/08/04 27/08/04 20/10/04 28/10/05 01/11/06 All options vest immediately upon granting. Options expire up to three years after vesting. Exercise price equals the market price at date of offer. The service and performance criteria, together with other details are described above. All options expire on the earlier of their expiry date or termination of the individual’s employment. The options are exercisable at any time after they have been granted. Shares issued on exercise of remuneration options During the financial year, the following shares were issued on the exercise of options previously granted as remuneration: NUMBER OF SHARES AMOUNT PAID PER SHARE $ Specified Directors J Bird Specified Executives V Cavanagh (General Manager – Pesticides) T Millen (Horticultural Manager) L Van Driel (Trading Manager) 166,200 23,100 11,400 8,600 7,300 1.66 1.66 1.66 1.66 3.31 There are no amounts unpaid on the shares issued as a result of the exercise of the options. Select Harvests Annual Report 2005 61 notes to the financial statements as at 30 June 2005 26. Remuneration of Directors and Executives (continued) Number of options held by Directors and specified executives The movement during the financial year in the number of options over ordinary shares in the Company held, directly or indirectly, by each specified Director and specified executive is as follows: HELD AT GRANTED AS 1 JULY 2004 REMUNERATION EXERCISED HELD AT 30 JUNE 2005 VESTED AND EXERCISABLE AT 30 JUNE 2005 Specified Directors J Bird Specified Executives M Mattia (Chief Financial Officer & Company Secretary) V Cavanagh (General Manager – Pesticides) T Millen (Horticultural Manager) W Turner (General Manager – Almond Division) L Van Driel (Trading Manager) 162,600 136,400 (166,200) 132,800 132,800 – 22,200 11,300 – 8,800 18,200 9,300 7,000 – (23,100) (11,400) – 8,800 17,300 9,200 7,000 8,800 17,300 9,200 7,000 7,300 19,800 (15,900) 11,200 11,200 No options held by specified Directors or specified executives are vested but not exercisable. Number of shares held by Directors and specified executives The movement during the financial year in the number of ordinary shares of the Company held, directly or indirectly, by each specified Director and specified executive, including their personally related entities is as follows: 2005 HELD AT 1 JULY 2004 RECEIVED AS REMUNERATION RECEIVED ON EXERCISE OF OPTIONS OTHER – DRP, SALES & PURCHASES TOTAL Specified Directors Non-Executive M A Fremder J C Leonard (appointed 21/07/2004) C G Clark R M Herron (appointed 27/01/05) G F Dan O’Brien Executive J Bird Specified Executives M Mattia (Chief Financial Officer & Company Secretary) M Ciobo (General Manager – Meriram) L Van Driel (Trading Manager) V Cavanagh (General Manager – Pesticides) T Millen (Horticultural Manager) 5,548,911 – 22,079 – 20,000 266,107 – 35,728 8,600 141,365 11,514 Other transactions with specified Directors and specified executives – – – – – – – – – – – – – – – 49,441 5,598,352 413,091 413,091 848 5,000 30,000 22,927 5,000 50,000 166,200 (161,185) 271,122 – – 15,900 23,100 11,400 2,000 – (4,000) 2,000 35,728 20,500 (52,000) 112,465 – 22,914 There were no other transactions with specified Directors and specified executives that require disclosure in accordance with AASB 1046 for the year ended 30 June 2005. 62 Select Harvests Annual Report 2005 NOTES ECONOMIC ENTITY PARENT ENTITY 2005 $’000 2004 $’000 2005 $’000 2004 $’000 27. Auditors’ Remuneration Amounts received or due and receivable by Pitcher Partners for: • An audit or review of the financial report of the entity and any other entity in the consolidated entity • Other financial services 118,800 126,380 118,800 126,380 (a) 80,987 29,765 80,987 29,765 199,787 156,145 199,787 156,145 (a) Amounts paid or payable to an auditor for non-audit services provided during the year by the auditor to any entity that is part of the consolidated entity for: 2005 17,858 24,892 29,505 8,732 80,987 2004 12,000 3,100 - 14,665 29,765 Taxation compliance and advice Tax consolidation advice IFRS advice Other 28. Related Party Disclosures Directors The Directors of Select Harvests Limited during the financial year were: M A Fremder J C Leonard (appointed 27/07/05) J Bird C G Clark R M Herron (appointed 27/01/05) G F Dan O’Brien Wholly-owned group transactions Loans Loans made by Select Harvests Limited to controlled entities under normal terms and conditions. Loans made to Select Harvests Limited by controlled entities under normal terms and conditions. Management fees are received by Select Harvests Limited from controlled entities under normal terms and conditions. Director-related entity transactions Services Select Harvests Limited has an Almond Orchard Management Agreement and a Land Lease Agreement with Maxdy Nominees Pty Ltd, a company in which Mr M A Fremder is a Director. Under the terms of the agreements, Select Harvests Limited has developed and continues to manage 300 acres of almond orchard on a fee basis for Maxdy Nominees Pty Ltd. In addition, Select Harvests Limited will process and sell the entire production of the orchard for the entire 25-year life of the orchard. The economic entity received an amount of $951,906 during the financial year in relation to the above contract. The agreements are under normal terms and conditions no more favourable than those which it is reasonable to expect the entity would have adopted if dealing with the Director or Director-related entity at arms length in the same circumstances. Select Harvests Annual Report 2005 63 notes to the financial statements as at 30 June 2005 29. Segment Information Segment products and locations During the financial year, a review was conducted and substantially similar segments in the almond operations of the economic entity combined to reflect the continuing shift in strategic direction and growth of the almond business from owned orchards to orchards managed on behalf of third parties. The economic entity has the following business segments: • The food products division processes, markets, and distributes edible nuts, dried fruits, seeds, and a range of natural health foods. • The almond operation comprises the growing, processing and sale of almonds to the food industry, from company owned almond orchards; the sale of a range of management services to external owners of almond orchards, including consultancy, orchard development, tree supply, farm management, land rental, and irrigation infrastructure; and the sale of almonds on behalf of external investors. • The pesticide products operation comprises the production of pelletised snail, slug and rodent baits for other marketers. The economic entity operates predominantly within the geographical area of Australia. 64 Select Harvests Annual Report 2005 BUSINESS SEGMENTS 2005 FOOD PRODUCTS $’000 ALMOND OPERATIONS $’000 PESTICIDE PRODUCTS $’000 ELIMINATIONS & CORPORATE $’000 ECONOMIC ENTITY $’000 Revenue Sales to customers outside the consolidated entity Intersegment revenues Sale of Almonds to customers outside the economic entity on behalf of managed orchard owners* Less Cost of Almonds sold by the economic entity on behalf of managed orchard owners* Other revenue Total segment revenue Unallocated revenue Total consolidated revenue Results Segment result Unallocated expenses Consolidated entity profit from ordinary activities before income tax expense Income tax expense Consolidated entity profit from ordinary activities after income tax expense Net profit Assets Segment assets Liabilities Segment liabilities Other segment information Acquisition of non-current segment assets Depreciation and amortisation of segment assets 131,381 721 - - 89 132,191 42,483 19,075 12,632 (23,508) 1,364 52,046 4,165 509 - 178,029 (20,305) - - - 1 - 12,632 10,876 (12,632) 134 1,588 4,675 (9,295) 179,617 8,115 26,297 1,259 (2,408) 69 179,686 33,263 (1,268) 31,995 (10,279) 21,716 21,716 70,938 58,316 2,349 709 132,312 7,829 30,381 631 1,926 40,767 1,548 2,971 4,457 1,446 17 100 133 175 6,155 4,692 Select Harvests Annual Report 2005 65 notes to the financial statements as at 30 June 2005 29. Segment Information (continued) BUSINESS SEGMENTS 2004 Revenue Sales to customers outside the consolidated entity Intersegment revenues Sale of Almonds to customers outside the economic entity on behalf of managed orchard owners* Less Cost of Almonds sold by the economic entity on behalf of managed orchard owners* Other revenue Total segment revenue Unallocated revenue Total consolidated revenue Results Segment result Unallocated expenses Consolidated entity profit from ordinary activities before income tax expense Income tax expense Consolidated entity profit from ordinary activities after income tax expense Net profit Assets Segment assets Liabilities Segment liabilities Other segment information Acquisition of non-current segment assets Depreciation and amortisation of segment assets FOOD PRODUCTS $’000 ALMOND OPERATIONS $’000 PESTICIDE PRODUCTS $’000 ELIMINATIONS & CORPORATE $’000 ECONOMIC ENTITY $’000 88,442 18 – – 321 35,164 7,205 5,163 (8,117) 584 3,775 443 (1) 127,380 (7,666) – – – – – 5,163 2,954 (5,163) – 905 88,781 39,999 4,218 (4,713) 128,285 102 128,387 6,813 18,264 752 (1,993) 23,836 (1,249) 22,587 (7,362) 15,225 15,225 61,729 46,889 2,279 (3,942) 106,955 9,493 10,326 265 7,603 27,687 1,225 2,510 2,637 1,377 15 114 557 348 4,434 4,349 * The economic entity provides a range of management and other services to externally owned or third party orchards. The income and expenses associated with the provision of orchard establishment, orchard management, harvesting, maintenance services and processing and marketing are included in the ‘Almond Operations’ segment of the above summary. In addition to these services, the economic entity sells the crop of almonds harvested from the orchards of the external owners. Almond pool sales are sales of almonds for externally owned almond orchards, which are sold by the economic entity on a pooled basis, the proceeds from which are distributed to the pool participants. 66 Select Harvests Annual Report 2005 30. Financial Instruments (a) Interest rate risk The consolidated entity’s exposure to interest rate risks and the effective interest rates of financial assets and financial liabilities, both recognised and unrecognised at the balance date, are as follows: FINANCIAL INSTRUMENTS FLOATING INTEREST RATE FIXED INTEREST RATE MATURING IN: 1 YEAR OR LESS OVER 1 TO MORE THAN 5 YEARS 5 YEARS NON INTEREST BEARING TOTAL CARRYING AMOUNT AS PER THE STATEMENT OF FINANCIAL POSITION $’000 2005 (i) Financial assets Cash Trade and other receivables Total financial assets (ii) Financial liabilities Bank overdraft Trade creditors Other creditors Finance lease liability Bills of exchange and promissory notes Foreign exchange contracts Total financial liabilities 2004 (i) Financial assets Cash Trade and other receivables Total financial assets (ii) Financial liabilities Bank overdraft Trade creditors Other creditors Finance lease liability Bills of exchange and promissory notes Foreign exchange contracts Total financial liabilities $’000 $’000 $’000 $’000 $’000 537 - 537 - - - - - 10,295 10,295 487 – 487 127 – – – – 17,504 17,631 4,000 - 4,000 - - - 486 - - 486 – – – – – – 830 6,700 – 7,530 - - - - - - 376 - - 376 – – – – – – 423 – – 423 - - - - - - - - - - – – – – – – – – – – 2 24,862 24,864 - 7,042 25,002 - - - 4,539 24,862 29,401 - 7,042 25,002 862 - - 32,044 32,906 2 15,597 15,599 – 5,275 9,069 – – – 489 15,597 16,086 127 5,275 9,069 1,253 6,700 – 14,344 22,424 WEIGHTED AVERAGE EFFECTIVE INTEREST RATE % 3.0 - - - - - 7.0 - - - 2.5 – 9.1 – – 7.0 6.0* – * There is one facility for fixed borrowings at an interest rate of 6.18%. The average interest rate is included in the table. Select Harvests Annual Report 2005 67 notes to the financial statements as at 30 June 2005 (b) Credit risk exposures The maximum exposure to credit risk, excluding the value of any collateral or other security, at balance date to recognised financial assets is the carrying amount of those assets, net of any provisions for doubtful debts of those assets, as disclosed in the Statement of Financial Position and Notes to the Financial Statements. Credit risk for derivative financial instruments arises from the potential failure by counterparties to the contract to meet their obligations. The credit risk exposure to forward exchange contracts is the net fair value of these contracts. The economic entity does not have any material credit risk exposure to any single debtor or group of debtors under financial instruments entered into by the economic entity. Concentrations of credit risk The Company minimises concentrations of credit risk in relation to trade receivables by undertaking transactions with a large number of customers from across the range of business segments in which the group operates. Refer also to Note 29 – Segment Information. (c) Net fair values For other assets and other liabilities the net fair value approximates their carrying value. The aggregate net fair values and carrying amounts of financial assets and financial liabilities are disclosed in the Statement of Financial Position and in the Notes to the Financial Statements. (d) Forward exchange contracts The economic entity enters into forward exchange contracts to buy and sell specified amounts of foreign currency in the future at stipulated exchange rates. The objective in entering the forward exchange contracts is to protect the economic entity against unfavourable exchange rate movements for both the contracted and anticipated future sales and purchases undertaken in foreign currencies. The full amount of the foreign currency the economic entity will be required to pay or purchase when settling the brought forward exchange contracts should the counterparty not pay the currency it is committed to deliver to the Company. At balance date the net amount was $10,295,000 (2004: $17,503,960). The accounting policy in regard to forward exchange contracts is detailed in Note 1(c). At balance date, the details of outstanding forward exchange contracts are: BUY UNITED STATES DOLLARS SETTLEMENT Less than 6 months 6 months to 1 year Greater than 1 year BUY AUSTRALIAN DOLLARS SETTLEMENT Less than 6 months 6 months to 1 year 1 year to 2 years 2 years to 3 years 68 Select Harvests Annual Report 2005 SELL AUSTRALIAN DOLLARS 2004 $’ 000 2005 $’000 AVERAGE EXCHANGE RATE 2004 $ 2005 $ 10,994 1,080 248 12,322 3,654 - - 3,654 0.76 0.76 0.77 0.71 - - SELL UNITED STATES DOLLARS 2004 $’ 000 2005 $’000 AVERAGE EXCHANGE RATE 2004 $ 2005 $ 15,796 1,770 5,051 - 7,850 - 8,257 5,051 22,617 21,158 0.64 0.49 0.59 - 0.54 - 0.57 0.59 31. Controlled Entities (a) Parent Entity Select Harvests Limited Subsidiaries of Select Harvests Limited – Allinga Farms Pty Ltd – Kyndalyn Park Pty Ltd – Riverina Pelletising Services Pty Ltd – Select Home Garden Pty Ltd – Select Harvests Marketing Pty Ltd Subsidiaries of Select Harvests Marketing Pty Ltd – Meriram Pty Ltd – Kibley Pty Ltd (b) Controlled entities acquired COUNTRY OF INCORPORATION PERCENTAGE OWNED (%) 2005 100 100 100 100 100 100 100 100 Australia Australia Australia Australia Australia Australia Australia Australia 2004 100 100 100 100 100 100 100 100 No controlled entities were acquired during the financial year ended 30 June 2005. 32. Employee Benefits Executive share option scheme The economic entity has in place an executive share scheme. The scheme provides for the Board to offer to eligible employees a parcel of options, which will be granted for no consideration in three equal tranches over a period of approximately three years from the date of each result announcement to the ASX in each financial year. Each option is convertible into one ordinary share. The exercise price of the options, determined in accordance with the rules of the scheme, is based on the weighted average price of the Company’s shares over the first 50 sales of shares in the ordinary course of trading on the stock market of the ASX immediately following the result announcement. All options expire on the earlier of their expiry date or termination of the employee’s employment. The granting of options is conditional upon the economic entity achieving growth of at least 10% in Earnings Per Share in each financial year over the preceding financial year. Accordingly, the scheme does not represent remuneration for past services. There are no voting or dividend rights attached to the options. Select Harvests Annual Report 2005 69 notes to the financial statements as at 30 June 2005 32. Employee Benefits (continued) Summary of options over unissued ordinary shares Details of options over unissued ordinary shares at the beginning and ending of the reporting date and movements during the year are set out below: NUMBER OF OPTIONS AT END OF YEAR GRANT DATE EXERCISE DATE ON OR AFTER EXPIRY EXERCISE NUMBER OF DATE PRICE OPTIONS AT GRANTED OPTIONS OPTIONS LAPSED OPTIONS EXERCISED ON ISSUE VESTED PROCEEDS NUMBER FAIR VALUE FAIR VALUE RECEIVED OF SHARES PER SHARE AGGREGATE $ ISSUED $ $ 2004 30/08/01 30/08/01 20/10/03 28/08/02 28/08/02 20/10/03 01/09/03 01/09/03 20/10/03 28/08/02 28/08/02 20/10/04 01/09/03 01/09/03 20/10/04 01/09/03 01/09/03 20/10/05 2005 28/08/02 28/08/02 20/10/04 01/09/03 01/09/03 20/10/04 27/08/04 27/08/04 20/10/04 01/09/03 01/09/03 20/10/05 27/08/04 27/08/04 20/10/05 27/08/04 27/08/04 01/11/06 $ BEGINNING OF YEAR 1.55 1.55 1.55 1.66 1.66 3.31 1.66 1.66 1.66 3.31 3.31 5.60 82,900 82,900 – – – 93,300 79,100 – – – 87,500 92,500 66,900 66,900 – – – 79,100 82,000 – – – 85,200 64,400 – – – – – – – – – – – – 82,900 82,900 93,300 – – – – 128,495 82,900 1.77 146,733 – 128,495 82,900 3.15 261,135 – 144,615 93,300 5.60 522,480 12,200 66,900 66,900 20,252 12,200 3.15 38,430 20,600 66,900 66,900 34,196 20,600 5.60 115,360 10,500 82,000 82,000 34,755 10,500 5.60 58,800 66,900 66,900 79,100 – – – – 111,054 66,900 3.15 210,735 – 111.054 66,900 5.60 374,640 – 131,306 79,100 7.82 618,562 19,700 62,300 62,300 65,207 19,700 5.60 110,320 15,600 69,600 69,600 51,636 15,600 7.82 121,992 8,100 56,300 56,300 45,360 8,100 7.82 63,342 The fair value of shares issued as a result of exercising the options during the reporting period is the market price of the Company’s shares on the ASX as at the close of trading on the exercise date. The amounts recognised in the financial statements of the economic entity in relation to executive share options exercised during the financial year were: Issued and Paid up Capital 2005 $’000 515 2004 $’000 491 33. Contingent Liabilities Upon achieving an EBIT target of $2.5 million in each of the financial years ending 30 June 2004 and 30 June 2005, further payments to a maximum of $2 million are to be made in respect of the acquisition of Meriram Pty Ltd and Kibley Pty Ltd. During the year the economic entity paid $1.5 million to the shareholders of Meriram Pty Ltd and Kibley Pty Ltd in relation to the achievement of the EBIT target for the financial year ended 30 June 2004. As at 30 June 2005 $500,000 became payable in accordance with the share purchase agreement and this amount has been recognised as a liability as at 30 June 2005. 70 Select Harvests Annual Report 2005 34. Impact of Adopting Australian Equivalents to International Financial Reporting Standards (AIFRS) The economic entity has evaluated the key differences in accounting policies that are expected to arise from adopting AIFRS and the key differences in accounting policies that are expected to arise from adopting AIFRS are detailed below. The transition date for first-time adoption of AIFRS is 1 July 2004. A reconciliation of estimated adjustments to opening balances at 1 July 2004, together with restated results under AIFRS for the financial year to 30 June 2005, is provided below. Share-based payments Under AASB 2: ‘Share-based Payments’, the economic entity will be required to determine the fair value of equity settled transactions and recognise an expense in the Statement of Financial Performance. Share-based payments to Directors and other employees (such as the grant of options under the Employee Option Plan) will also be expensed under AIFRS. On first-time adoption of AIFRS, retained earnings at 1 July 2004 and reported results for the financial year to 30 June 2005 will be adjusted for all share-based payments granted after 7 November 2002, which do not vest prior to 1 January 2005. An estimate of the financial impact is provided in the reconciliation note below. Goodwill and brand names Goodwill on consolidation will be recalculated to derecognise intangible assets acquired in business combinations that do not meet the identifiability criteria under AIFRS, and to recognise deferred tax liabilities at the acquisition date under the balance-sheet method. Amortisation of goodwill will cease on first-time adoption of AIFRS. Therefore on adoption of AIFRS, reported results for the financial year to 30 June 2005 will be adjusted for amortisation charges from 1 July 2004. However, amortisation charges prior to 30 June 2004 may not be reversed under the first-time adoption provisions. Under AIFRS, goodwill and brand names will be subject to annual impairment testing. The economic entity does not anticipate any write-downs for impairment of goodwill on first-time adoption of AIFRS. Impairment of assets The recoverable amount test under Australian GAAP will be replaced by impairment testing whereby the recoverable amount is determined as the higher of fair value less costs to sell and value in use. Value in use incorporates the use of discounted cash flows. The economic entity does not anticipate any write-downs for impairment of non-current assets on first-time adoption of AIFRS. Income taxes Under AIFRS a balance sheet approach will be adopted under which temporary differences are identified for each asset and liability rather than accounting for the effect of timing and permanent differences between taxable and accounting profit. In addition, a future income tax benefit must be recognised for tax losses where their realisation is considered probable. Under Australian accounting standards tax losses may only be recognised where realisation is considered to be virtually certain. On first-time adoption of AIFRS, adjustments to the provision for deferred tax will be required for initial asset revaluations, foreign currency exchange provisions, and tax losses. Derivative financial instruments The entity uses derivative financial instruments for hedging purposes. These instruments have not previously been recognised in the financial statements. Hedging instruments will be recognised in the financial statements on first-time adoption of AIFRS. An estimate of the financial impact is provided in the reconciliation overleaf. Select Harvests Annual Report 2005 71 notes to the financial statements as at 30 June 2005 34. Impact of Adopting Australian Equivalents to International Financial Reporting Standards (continued) 1. Reconciliation of Total Equity at 1 July 2004 Total equity at 1 July 2004 as reported under Australian Accounting Standards Share-based payments/options reserve: DR Retained Earnings CR Options Granted Reserve Adjustments relating to the recalculation of deferred income tax using the balance sheet method at 30 June 2004 Deferred gains/losses on cash flow hedges not previously recognised at 30 June 2004 Total equity at 1 July 2004 as restated under AIFRS 2. Reconciliation of Operating Profit after Tax for the year ended 30 June 2005 Operating profit after tax for the financial year to 30 June 2005 as reported under Australian Accounting Standards Share-based payments earned during the year Goodwill on consolidation adjustments: – Reversal of amortisation for the year Operating profit after tax as restated under AIFRS for the year ended 30 June 2005 3. Reconciliation of Total Equity at 30 June 2005 Total equity at 30 June 2005 as reported under Australian Accounting Standards Share-based payments/options reserve: DR Retained Earnings CR Options Granted Reserve Adjustments to operating profit for the year as described above – Goodwill Increase/decrease in fair value of financial instruments designated as cash flow hedging instruments for the year Adjustments to equity for the year as described above Total equity at 30 June 2005 as restated under AIFRS $’000 79,268 54 (54) (5,739) 3,820 77,349 $’000 21,716 (219) 1,514 23,011 $’000 91,545 219 (219) 1,514 59 (1,919) 91,199 72 Select Harvests Annual Report 2005 declaration Directors’ Declaration The Directors declare that the financial statements and notes set out on pages 36 to 70 in accordance with the Corporations Act 2001: (a) Comply with accounting Standards, the Corporations Regulations and other mandatory professional reporting requirements; (b) Give a true and fair view of the financial position of the consolidated entity as at 30 June 2005 and of its performance as represented by the results of its operations and its cash flows, for the financial year ended on that date; and (c) That the Directors have been given the declaration required under section 295A of the Corporations Act 2001 from the Managing Director and Chief Financial Officer for the financial year ended 30 June 2005. In the Directors’ opinion there are reasonable grounds to believe that Select Harvests Limited will be able to pay its debts as and when they become due and payable. This declaration is made in accordance with a resolution of the Directors. M A Fremder Chairman Melbourne, 23 August 2005 Select Harvests Annual Report 2005 73 audit report Independent Audit Report To the members of Select Harvests Limited Scope We have audited the financial report of Select Harvests Limited and controlled entities for the financial year ended 30 June 2005 comprising the Directors’ Declaration, Statement of Financial Performance, Statement of Financial Position, Statement of Cash Flows and Notes to the Financial Statements. The Company’s Directors are responsible for the financial report. We have conducted an independent audit of this financial report in order to express an opinion on it to the members of the Company. Our audit has been conducted in accordance with Australian Auditing Standards to provide reasonable assurance whether the financial report is free of material misstatement. Our procedures included examination, on a test basis, of evidence supporting the amounts and other disclosures in the financial report, and the evaluation of accounting policies and significant accounting estimates. These procedures have been undertaken to form an opinion whether, in all material respects, the financial report is presented fairly in accordance with Accounting Standards and other mandatory professional reporting requirements in Australia and Corporations Act 2001 so as to present a view which is consistent with our understanding of the Company’s financial position and performance as represented by the results of their operations and their cash flows. The audit opinion expressed in this report has been formed on the above basis. Audit Opinion In our opinion, the financial report of Select Harvests Limited and controlled entities is in accordance with: (a) the Corporations Act 2001, including: (i) giving a true and fair view of the Company’s and consolidated entities financial position as at 30 June 2005 and of its performance for the financial year ended on that date; and (ii) complying with Accounting Standards in Australia and the Corporations Regulations 2001; and (b) other mandatory professional requirements in Australia. Pitcher Partners T J Benfold Partner Melbourne Date: 23 August 2005 74 Select Harvests Annual Report 2005 ASX information ASX Additional Information Additional information required by the Australian Stock Exchange Limited and not shown elsewhere in this report is as follows. The information is current as at 29 July 2005. (a) Distribution of equity securities The number of shareholders, by size of holding, in each class of share are: NUMBER OF ORDINARY SHARES 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over NUMBER OF SHAREHOLDERS 1,089 1,260 308 301 41 (b) Twenty largest shareholders The names of the twenty largest holders of quoted shares are: J P Morgan Nominees Australia Limited 1 Maxdy Nominees Pty Ltd 2 Almonds Australia Pty Ltd 3 M F Custodians Ltd 4 Westpac Custodian Nominees Limited Invia Custodian Pty Limited 5 6 Thurston Investments Pty Ltd 7 National Nominees Limited 8 9 Frank Hadley Pty Ltd 10 Mr Peter Charles Nicholas Middendorp 11 AMP Life Limited 12 Ellise Investments Pty Ltd 13 Longo Pty Ltd 14 Mr Rodney Milton Fitzroy 15 Est Mr James Ronald Mackinnon c/o Mr Bourne and Mr Macauley 16 Mid Manhattan Pty Ltd 17 Mirrabooka Investments Limited 18 Mutual Trust Pty Ltd 19 John Bird 20 Dr John Carey NUMBER OF NUMBER OF SHAREHOLDERS ORDINARY SHARES The number of Shareholders holding less than a marketable parcel of shares are: 59 1,029 LISTED ORDINARY SHARES NUMBER OF SHARES PERCENTAGE OF ORDINARY 5,598,352 4,500,000 1,906,334 1,721,174 1,302,339 950,000 901,035 832,679 645,000 436,767 421,567 409,497 400,947 331,347 322,003 319,161 314,687 300,000 271,122 225,556 14.3 11.5 4.9 4.4 3.3 2.4 2.3 2.1 1.7 1.1 1.1 1.0 1.0 0.8 0.8 0.8 0.8 0.8 0.7 0.6 Select Harvests Annual Report 2005 75 ASX information ASX Additional Information (continued) (c) Substantial shareholders The names of substantial shareholders are: Maxdy Nominees Pty Ltd Almonds Australia Pty Ltd (d) Voting rights All ordinary shares (whether fully paid or not) carry one vote per share without restriction. (e) The Company is listed on the Australian Stock Exchange. The home exchange is Melbourne. NUMBER OF SHARES 5,598,352 4,500,000 76 Select Harvests Annual Report 2005 Corporate Information ABN 87 000 721 380 Directors M A Fremder (Chairman) J Bird (Managing Director) C G Clark (Non-Executive Director) G F Dan O’Brien (Non-Executive Director) J C Leonard (Non-Executive Director) R M Herron (Non-Executive Director) Company Secretary M Mattia Registered Office Select Harvests Limited 360 Settlement Road Thomastown VIC 3074 Postal address PO Box 5 Thomastown VIC 3074 Telephone (03) 9474 3544 (03) 9474 3588 Facsimile Email info@selectharvests.com.au Solicitors Gadens Lawyers Bankers Australia and New Zealand Banking Group Limited Share Register Computershare Investor Services Pty Limited Yarra Falls, 452 Johnston Street Abbotsford VIC 3067 Telephone 61 3 9415 5040 Facsimile 61 3 9473 2562 Auditors Pitcher Partners Internet Address www.selectharvests.com.au At Narcooyia Creek, Select Harvests has found a balance which conserves the environmental values of the area – see page 17 for full story. (cid:83)(cid:69)(cid:76)(cid:69)(cid:67)(cid:84)(cid:223)(cid:72)(cid:65)(cid:82)(cid:86)(cid:69)(cid:83)(cid:84)(cid:83) Select Harvests Limited ABN 87 000 721 380 360 Settlement Road Thomastown VIC 3074 Australia Telephone (03) 9474 3544 (03) 9474 3588 Facsimile Email info@selectharvests.com.au our locations (cid:55)(cid:33) (cid:46)(cid:52) (cid:51)(cid:33) (cid:49)(cid:44)(cid:36) (cid:46)(cid:51)(cid:55) (cid:34)(cid:82)(cid:73)(cid:83)(cid:66)(cid:65)(cid:78)(cid:69) (cid:50)(cid:79)(cid:66)(cid:73)(cid:78)(cid:86)(cid:65)(cid:76)(cid:69) (cid:51)(cid:73)(cid:76)(cid:86)(cid:69)(cid:82)(cid:87)(cid:65)(cid:84)(cid:69)(cid:82) (cid:33)(cid:35)(cid:52) (cid:54)(cid:41)(cid:35) (cid:52)(cid:72)(cid:79)(cid:77)(cid:65)(cid:83)(cid:84)(cid:79)(cid:87)(cid:78) (cid:45)(cid:69)(cid:76)(cid:66)(cid:79)(cid:85)(cid:82)(cid:78)(cid:69) www.selectharvests.com.au 

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