Select Harvests Limited
Annual Report 2006

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Shareholder Information Annual General Meeting 2006/2007 Calendar The annual general meeting will be Feb Announcement of interim results pg20 held on Monday, 30 October, 2006, Apr Payment of interim dividend at the ASX Theatrette, 530 Collins St, Aug Announcement of preliminary Melbourne Victoria, commencing full year results at 2:00 pm. A separate notice of Sept Annual report to shareholders meeting has been posted to all Oct Payment of fi nal dividend shareholders. Oct Annual general meeting Inaugural shareholder open day Almond Vegetable Tagine Description A simple one pot meal (Serves 4) Ingredients 2 tablespoons vegetable oil 75g pkt (X cup) blanched almonds 1 red onion, chopped 2 cloves garlic, crushed 1 teaspoon ground coriander V teaspoon ground cumin 2 X cups sweet potato, peeled and cut into chunks 415g or similar weight can chopped tomatoes 2 cups vegetable stock 3 V cups green beans, trimmed, cut in half 10-15 spinach leaves rinsed Salt, freshly ground pepper or chilli flakes Instructions Almonds at their best, a delicious addition to any dish Heat 1 tablespoon oil in a large pan, stir fry almonds until golden. Remove, drain on paper towel. Add remaining oil to pan, add next 5 ingredients, fry over moderate heat, stirring occasionally for 5 minutes. Add tomatoes, stock and beans. Bring to the boil, reduce heat, cover, simmer 10-15 minutes until vegetables are tender. Stir through spinach, cook until just wilted. Add almonds. Season to taste. Serve with couscous or rice, tossed with chopped coriander and whole pitted black olives. Handy Tips Alternate the vegetables, eg diced eggplant, pumpkin, zucchini or capsicum. Nutrition Information* 1294kJ Energy Protein Fat, total - saturated - monounsaturated - polyunsaturated Carbohydrates, total - sugars Sodium Dietary fibre 9.6g 20.2g 2.00g 13.4g 3.3g 22.8g 12.4g 558mg 10.8g *Source: Nuts for Life Newsletter 1 July 2003 issue Our mission Is to continue to develop and expand our business model, generating sustainable earnings growth and delivering increased value to shareholders. Our strategy Is to develop a fully-integrated food company via ongoing diversification and expansion of our income streams, leveraging core strengths – almond growing and knowledge of edible nuts and their markets – to develop sustained earnings growth and reduced volatility from agricultural risk. Our activities Today, we operate our own orchards, manage orchards for investors, market almonds in domestic and export markets, and process and market an extensive range of nut- and fruit-based products to all market sectors. Select Harvests has rapidly and successfully migrated into an integrated agri-food business with diversified income streams. Our outlook Select Harvests is one of the world’s biggest almond growers. Our food products division has a significant – and growing – share of the Australian market. Our future outlook is positive, thanks to increasing world nut consumption, the existence of strong fundamentals in the domestic and international almond markets, increasing interest in almonds as a healthy food product and increasing investor interest in almonds as a mainstream horticultural investment. A further 11,000 acres of new almond plantings, significant technological and scientific advances, further upscaling of nursery and development resources and processing capacity are planned for 2007 and the years ahead. Ambitious sales, market, and distribution targets from our food products business will continue to capitalise on growing consumer demand, and our strong balance sheet and cash flows will enable us to both fund and accelerate our growth strategies into the future. Select Harvests Annual Report 2006 1 Our year in brief 2006 Highlights · New almond developments UP 102 percent · 2 millionth tree planted! · Acres under management UP 48 percent · Established high-tech tissue · Inaugural shareholder open day held culturing laboratory in Robinvale · Largest planting year – over 800,000 trees · Laid groundwork for a further 11,000 acres of planting in 2007 · Employed additional specialised, technical personnel to meet the challenges of a larger, more diversified business Total shareholders’ equity Earnings before interest and tax (EBIT)* Earnings per share (EPS)* (cid:17)(cid:18)(cid:16)(cid:12)(cid:16)(cid:16)(cid:16) (cid:17)(cid:16)(cid:16)(cid:12)(cid:16)(cid:16)(cid:16) (cid:24)(cid:16)(cid:12)(cid:16)(cid:16)(cid:16) (cid:16) (cid:16) (cid:16) (cid:4) (cid:180) (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:18)(cid:16)(cid:16)(cid:16) (cid:18)(cid:16)(cid:16)(cid:17) (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:18)(cid:16)(cid:16)(cid:22) (cid:20)(cid:16)(cid:12)(cid:16)(cid:16)(cid:16) (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:16) (cid:16) (cid:16) (cid:4) (cid:180) (cid:18)(cid:16)(cid:12)(cid:16)(cid:16)(cid:16) (cid:17)(cid:21)(cid:12)(cid:16)(cid:16)(cid:16) (cid:17)(cid:16)(cid:12)(cid:16)(cid:16)(cid:16) (cid:21)(cid:12)(cid:16)(cid:16)(cid:16) (cid:16) (cid:18)(cid:16)(cid:16)(cid:16) (cid:18)(cid:16)(cid:16)(cid:17) (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:18)(cid:16)(cid:16)(cid:22) (cid:83) (cid:84) (cid:78) (cid:69) (cid:67) (cid:24)(cid:16) (cid:23)(cid:16) (cid:22)(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:18)(cid:16)(cid:16)(cid:16) (cid:18)(cid:16)(cid:16)(cid:17) (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:18)(cid:16)(cid:16)(cid:22) Dividend per ordinary share (DPS) Net profit after tax (NPAT)* Total sales* (cid:83) (cid:84) (cid:78) (cid:69) (cid:67) (cid:24)(cid:16) (cid:23)(cid:16) (cid:22)(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:18)(cid:16)(cid:16)(cid:16) (cid:18)(cid:16)(cid:16)(cid:17) (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:18)(cid:16)(cid:16)(cid:22) (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:16) (cid:16) (cid:16) (cid:4) (cid:180) (cid:17)(cid:21)(cid:12)(cid:16)(cid:16)(cid:16) (cid:17)(cid:16)(cid:12)(cid:16)(cid:16)(cid:16) (cid:21)(cid:12)(cid:16)(cid:16)(cid:16) (cid:16) 2 Select Harvests Annual Report 2006 (cid:18)(cid:21)(cid:16)(cid:12)(cid:16)(cid:16)(cid:16) (cid:18)(cid:16)(cid:16)(cid:12)(cid:16)(cid:16)(cid:16) (cid:16) (cid:16) (cid:16) (cid:4) (cid:180) (cid:17)(cid:21)(cid:16)(cid:12)(cid:16)(cid:16)(cid:16) (cid:17)(cid:16)(cid:16)(cid:12)(cid:16)(cid:16)(cid:16) (cid:21)(cid:16)(cid:12)(cid:16)(cid:16)(cid:16) (cid:16) (cid:18)(cid:16)(cid:16)(cid:16) (cid:18)(cid:16)(cid:16)(cid:17) (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:18)(cid:16)(cid:16)(cid:22) * FY05 and FY06 exclude discontinued operations. (cid:18)(cid:16)(cid:16)(cid:16) (cid:18)(cid:16)(cid:16)(cid:17) (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:18)(cid:16)(cid:16)(cid:22) Our business at a glance Almond Division 2,368 acres owned 9% Almond Operations 2006 EBIT $32.1 million 2005 EBIT $26.3 million Nursery Orchard establishment Farm management Harvesting Processing Almond Sales $50.1 million 5,500 metric tonnes Food Products Division Sales and Marketing 2006 EBIT $9.2 million 2005 EBIT $9.3 million 2006 Sales $152.5 million 2005 Sales $131.4 million 91% 24,485 acres managed Lucky Sunsol Nu-Vit Meriram Soland Temptations 40% Export 60% Domestic 35% domestic sales Supply to major supermarkets, independent supermarkets and health food stores Supply to manufacturers Supply to other distributors Select Harvests Annual Report 2006 3 Select Harvests – A snapshot “ Our strategic initiatives, Australia’s competitiveness in international almond markets and a high demand for almonds as a horticultural investment vehicle continue to help us to expand our business and enhance future growth prospects and returns.” John Bird: Managing Director Select Harvests Limited is Australia’s largest almond grower. Today, it manages over 50 percent of Australia’s almond orchards and is one of the world’s largest and most forward- looking growers, supplying almonds to domestic and export markets in Asia, Europe and the Middle East. More than this, Select Harvests is also Australia’s leading manufacturer, processor and marketer of a range of packaged nuts, fruit- and nut-based foods and associated products, with distribution into Australian supermarkets, healthfood stores, and industrial markets, as well as to export markets in Asia. This integrated business model has been deliberately created via a focused diversification and growth strategy which has delivered an annual increase in after-tax profit of 20 percent or more for the seventh consecutive year. Balanced business streams Select Harvests operates a comprehensive ‘seedling-to- supermarket’ almond growing and marketing operation, made up of two, balanced business streams: almond operations and food products. Our almond operations · Own or lease 2,368 acres of almond orchards in northwest Victoria. · Manage 24,485 acres of almond orchards for external investors on a fee-for-service basis. Our comprehensive service includes orchard establishment, tree supply, farm management, harvesting, processing, and marketing. · Currently process approximately 6,200 metric tonnes of almonds – approximately 40 percent of Australia’s crop. Future tonnage will exceed 30,000 metric tonnes as orchards planted in the recent past mature and come into full production. · Export approximately 40 percent of almonds produced to India, Japan, China, Indonesia, the Middle East, Germany, Spain, the United Kingdom, Russia, France, Holland, Belgium and other markets. Our food products division · Produces an extensive and innovative range of packaged cooking ingredients, snacks, muesli, and natural health foods from nuts, seeds, grains, and dried fruits. · Leads the Australian market in the supply of processed and packaged nuts to retail stores through the Lucky, Sunsol, Nu-Vit, Meriram, Soland and now Select Harvests Temptations. · Manufactures a range of ingredients for food manufacturers and distributors. 4 Select Harvests Annual Report 2006 Owned and managed orchards 0 10.0km N Robinvale NSW Happyp Valleyey ne Banne Bannerton Boundry oundn Bendd Hattah Wemen Liparoo VICTORIA Wandown Annuello Kooloonongg oo YEAR ESTABLISHED ACRES YEAR ESTABLISHED ACRES 2006 1987 2002-2005 2001 2006 2005 1981 2004-2006 1,041 420 596 2,474 2,051 2,240 1,083 2,120 1997-2003 1978-2002 2003 2004-2005 2006 Other orchards (not shown) 2,420 360 2,763 4,279 3,751 1,255 Total 26,853 Select Harvests Annual Report 2006 5 From the Chairman and Managing Director Delivering Shareholder Value We are once again pleased to report to shareholders that our business model continues to deliver value in all important sectors: profit growth, increased dividend payments and share price appreciation. At the same time we have made further progress in expanding our core activities, creating a larger and more secure base upon which to secure future shareholder returns. Our pattern of integration into a balanced agri-food business operation spanning both almond growing and the production of nut-based products continues, with the ongoing expansion of our almond operations and aggressive and effective marketing in our food products business. We have made conscious and determined efforts over the past year to increase our technical capabilities. This has been achieved in two ways: Firstly, by employing new, highly- qualified personnel in key areas; and secondly, by adopting appropriate systems and technologies in key areas. This strategy of combining the best available expertise and the latest technologies will ensure our capabilities and efficiencies in the challenging times ahead. Naturally, we continue to operate responsibly in all areas, contributing to our communities, exercising all due care in resource use and waste disposal, and exercising all due environmental care. Our achievements for the year Earnings Strategic objectives Earnings growth, improved quality of earnings and diversification of earnings streams, with reduced dependency on almond pricing. Achievements during 2005/06 · Total sales revenue from continuing operations increased by 25 percent to $217.9 million. · Total EBIT from continuing operations increased by 16 percent to $38.4 million. · Net profit after tax from continuing operations increased by 20 percent to $26.5 million. Objectives for 2006-07 · Continue to deliver earnings growth through the aggressive expansion of our almond operations and branded food products business. Shareholder value Strategic objectives: Enhance shareholder value. Achievements during 2005/06 · Total dividends increased by 50 percent to 63¢ per share. · Earnings per share increased by 18 percent to 67.1¢ per share. · Total shareholders’ equity increased by 15 percent to $101 million. · Return on shareholders’ equity increased to 26 percent p.a. · Share price increased by 34 percent to $13.02 at 30 June 2006. Objectives for 2006/07 · Utilise our strong balance sheet and cash flow to fund expansion, R&D activity, new business opportunities, and returns to shareholders. 6 Select Harvests Annual Report 2006 2006 EBIT $38.4 million 2005 EBIT $33.1 million Almond operations Food products 78% 22% Almond operations Food products Pesticide products 73% 23% 4% 2004 EBIT $23.8 million 2003 EBIT $17.4 million Almond operations Food products Pesticide products 71% 26% 3% Almond operations Food products Pesticide products 70% 24% 6% The past year’s results Dual expansion Market opportunities A sustained period of consumption growth, coupled with the USA’s supply plateau (brought about by low additional planting levels in that country) have contributed to a rise in almond prices. The anticipated 15 percent drop in the 2005 USA almond crop did occur, bringing global almond supply significantly below the previous year’s demand – and helping maintain prices at higher-than-usual levels. The lag we expected between US plantings and resultant enhanced crop levels will continue to benefit us as our past years’ plantings become mature and commence production. Almond prices have now returned to lower levels than the records of 2005 – but they are at historical highs and provide good returns. The strong fundamentals of the almond market improves returns for both Select Harvests and our investor growers and underpins the attractiveness of almond orchards as an investment in Australia. Domestic and international almond demand continues to grow. However, due to climatic conditions, and the effects of a record 2005 almond crop, yields achieved from our company owned orchards were adversely affected. This was partly offset by the sale of the balance of our 2005 almond crop at historically high prices. The increase in earnings for the year was driven by the growth of our managed orchard operations. In food products, sales increased by 16 percent, but margin pressure, increased competition, and higher operating costs (notably fuel- related) have impacted on our financial result. It has been a challenging year, and we anticipate 2007 being equally competitive. We are doing everything possible to maximise opportunities in an environment of increasing consumer demand and increasing retail response to that demand. We are launching new products, we have employed key personnel and have ambitious plans. From a strong base, we are maximising economies of scale resulting from our deliberate growth strategies, and continuing to position ourselves for the future. In the last year we have expanded both our orchard management services and food products division – the cornerstones of our expansion and diversification strategy. Our footprint across Victoria continues to increase: We have recently established a further 8,300 acres of almond orchards (bringing our total area under management to 26,853 acres, a 48 percent increase). This will provide an increased base for generating orchard management services income and brings our share of all Australian almond acreage above 50 percent, cementing our ranking in the top three almond growers globally. Significantly, the groundwork was completed this year for a planting of a further 11,000 acres in 2007. The wisdom of previous strategic acquisition decisions continued to pay off, adding significantly to an increase in food product sales for the year from $131 million to $153 million. The appointment of dedicated specialist staff and aggressive growth in long-established brands such as Lucky significantly increased our share in important supermarket and healthfood market sectors. These initiatives have expanded our business model and future growth prospects and we are targeting further growth in the current year. Select Harvests Annual Report 2006 7 providing opportunities for growth and are delighted to once “ We are fortunate to be operating in a marketplace that goes on again report that we approach the future with confidence.” Max Fremder: Chairman & John Bird: Managing Director Emphasising the ‘nut’ in nutrition Internationally, the nut health message continues to gain momentum. Australia is a strong promoter of nut- based products, and Select Harvests is working with others to create and increase awareness of the beneficial effects of regular and increased nut consumption. We have targeted health professionals and other food and diet influencers, and will continue promoting to our end users – the consumers who buy our products. 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 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 The strong fundamentals of the international almond market and Australia’s competitiveness as an almond grower and marketer, has increased the demand for 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 will upgrade our tree nursery capacity and development infrastructure and resources, and with our partners we are focussing on identifying suitable land reserves to support this growth. We are planning to establish a further 11,000 acres of investor-owned orchards in 2007. The larger area under management and increased production from maturing orchards will increase orchard management services revenue for the year. Our food products division continues to operate in a growth market and we are looking for further growth in 2007, particularly from our branded businesses. Our strong balance sheet and future cashflow position will allow us to fund the expansion of our business to support and deliver growth in to the future. We will continue to aggressively expand our almond operations over the next few years with external investors and investigate other tree crops that may be suitable to our business model. We continue to look for further expansion opportunities by acquisition which would complement and add value to our existing food products business. In addition, we will continue to monitor and assess opportunities to increase dividends to shareholders. Our People We have in the last year significantly grown our business in terms of sales, acreage and, most significantly, people. A restructuring of the management organisation of both our almond and food products divisions has been conducted to support our aggressive growth objectives. Our ability to successfully manage our 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 levels, at all of our locations. The continued support of our customers and suppliers has also been vital. 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 are pleased with the progress the company has made in recent years: Our business model continues to serve us well today and we anticipate it will do so in the coming years as well. We are fortunate to be operating in a marketplace that goes on providing opportunities for growth and are delighted to once again report that we approach the future with confidence. We remain committed to profitably growing the company and delivering even more enhanced shareholder value in the future. Max Fremder, Chairman John Bird, Managing Director 8 Select Harvests Annual Report 2006 Our almond operations Our achievements for the year Strategic objectives: · Maintain and enhance our position as a low-cost almond producer. · Significantly develop investor-owned orchard acreage to deliver long-term stable income streams, economies of scale, and guaranteed supply to meet increasing market demand. Achievements during 2005/06: · Increased investor-owned crop up from 3,721 tonnes in 2005 to 4,606 tonnes in 2006. · Increased area of investor-owned orchards by nearly 50 percent to 24,485 acres. Our objectives for 2006-07 · Plant 11,000 or more acres of new almond orchards. · Further scale up nursery, tissue culturing and technical capabilities to support future developments. Our almond operations continue their shift from owned into managed orchards. Large-scale developments of over 800,000 trees were planted in Winter 2006. The almond division has been enhanced by the appointment of new specialist personnel and the creation of new technical facilities. Over the past year, we established four new almond projects covering approximately 8,300 acres (compared to 4,100 additional acres planted in 2005) – our largest development ever. The technical division has established a new laboratory which is developing tissue culturing techniques with the goal of creating new almond rootstocks which may enable us and our partners to broaden our plantable areas and enhance yields. Our nursery operation continued to meet the high demands of our ambitious planting programs, and we are further ramping up its capabilities to meet even greater planned future demand. Results for the year The division increased EBIT for the year by 22 percent to $32.1 million, with increased earnings driven by the further expansion of our orchard management services business. · The area of investor-owned orchards developed up 55 percent to 24,485 acres · Expansion of total acres under management up 48 percent to 26,853 acres · Total 2006 crop production increased to 6,230 tonnes · 2006 crop production from investor- owned orchards up 24 percent from 3,721 tonnes · 2006 crop production from company-owned orchards down 33 percent to 1,624 tonnes Select Harvests Annual Report 2006 9 Almond Operations 2006 2005 EBIT (A$,000) 32,075 26,270 % of group EBIT No. of employees 78 152 74 126 History – and change Select Harvests is a vastly different company today compared to our earliest days. Our first orchards were planted at Boundary Bend near Robinvale in northwest Victoria in the mid-1970s. Further expansion from 1980 to 1988 made us Australia’s largest almond grower, farming approximately 1,870 acres. Today, we are a major grower with a total of 26,853 acres under management. In 1998 the company embarked on a strategy to expand acreage under management and 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 increased plantings on an annual basis. Today we manage over 24,000 acres of investor- owned orchards, with this year’s plantings exceeding 8,300 acres. Almonds are now established as a mainstream horticultural investment in Australia and, together with our strategic alliance partners we are planning to further expand our almond plantings into the foreseeable future. The 2006 Almond Crop Our 2006 crop yielded 6,230 tonnes, up 1.5 percent from 6,140 tonnes in 2005. After a record crop in 2005, the crop from company-owned orchards was down by approximately 33 percent in 2006 due to heavy crop load in 2005 and the impact of climatic conditions which reduced flowering density and eventual almond production. The financial impact of 2006’s lower crop was offset somewhat by the price achieved on the balance of 2005 crop sold during the financial year. Investor-owned orchards increased tonnage produced to 4,606 from 3,721 tonnes in 2005 as new orchards came into production. Our investor- owned orchards have a young profile, with only 32 percent in production to date and only 6.5 percent fully mature. We anticipate that the future almond crop from these orchards will increase in line as almond trees come into maturity. Approximately 40 percent of our 2006 crop was exported to markets including India, China, Japan, Indonesia, Spain, UK, Russia, France, Holland, Belgium and Germany. The balance of the crop is contracted to be delivered progressively through to March 2007, when new crop supplies will become available. Processing Capacity Select Harvests operates a hulling and shelling facility to extract the almond kernel from the outer hull and shell. We also operate a separate facility to sort, grade, and pack almonds as required by the market. Shareholders may recall that we upgraded the shelling and hulling plant to accommodate 2005, 2006 and 2007’s projected crops. Plans are in place to establish a further 30,000 metric tonnes of processing capacity in stages prior to the 2008 and subsequent harvests. This will enable us to upgrade our sorting, grading and packing capacity to meet the increased tonnage which will be produced by our developing orchards. The by-product from our almond hulling and cracking processing plant is currently sold to feed lots within the local area. Investigations are being carried out on developing potential new markets for the use of this by-product. Our market Almond prices have settled below the record highs of 2005 but remain robust. Current market fundamentals indicate a positive outlook and our improving economies of scale allow us to compete effectively in terms of cost, quality and market access, with ample opportunity to substantially expand production without making a major impact on world supply. Global consumption of almonds has grown strongly over recent years. The USA’s low planting levels in the mid- to late-1990s continue to advantage us due to the resultant flat world supply. Increasing demand is providing strong support for the almond market in the short- to medium-terms, and while the USA almond industry accelerated plantings in 2005, these will take a number of years to come on-stream. Australia retains its competitive position Australia has an established competitive position as an almond grower on the global stage, with today’s production of around 16,000 tonnes contributing around three percent of world supply. This is in contrast to the USA’s industry, which provides over 80 percent of world supply. This will grow to 50,000 tonnes as recently planted orchards come into full production over the next 7 years. 10 Select Harvests Annual Report 2006 almond division has been the sheer growth we’re experiencing. “ “The biggest change for me personally and Select Harvests’ We planted our two-millionth tree in June…” Tim Millen: Group Horticultural Manager In addition, Australia’s competitiveness as a grower and marketer of almonds and the scale and industry exposure achieved in recent years has increased the attractiveness of and demand for almond orchard investments. We plan to expand the area of investor- owned orchards over the next few years, with a further 11,000 acres to be planted in 2007. In addition, we are scaling up our tree nursery facilities, development resources and infrastructure to support increased developments in 2008 and beyond. Finally, early signs (good nut set) indicate that the 2007 crop will be a significant improvement on last year’s. From this small base we can effectively compete with the major player due to: · Our comparable growing costs and higher average yields per acre combining to lower our cost per kilogram produced. · The US almond crop’s susceptibility to insect damage – which lowers almond quality and restricts access to higher quality customers. · Australia’s counter-seasonal crop, which allows us to supply fresh almonds to our export markets at times when US growers cannot, at competitive freight rates. Ongoing development activity in Australia is likely to see us overtake Spain as the world’s second largest almond producer in the next 10 years. Select Harvests currently manages around 50 percent of Australia’s almond orchards and will continue to increase as we develop additional orchards into the future. On a world scale, Select Harvests is in the top three almond growers. Due to our integrated model, we are also a major player in the almond processing and marketing areas, and we anticipate becoming one of the world’s top 10 suppliers in the next few years as our crops mature. Therefore, as an almond grower, we have scale both domestically and internationally and operate at a competitive advantage to US growers. Outlook The fundamentals of the international almond market appear favourable at present and in the medium-term. Tissue Culturing Laboratory The ongoing rapid expansion of Select Harvests’ almond orchards will, amongst other things, be dependent upon access to sufficient quantities of vigorous almond rootstock, as well as rootstock suited to different soil types. Accordingly, the decision was taken to conduct research into more rapid rootstock cultivation as well as development of a variety of rootstocks to suit different soil types and growing conditions. We entered into an arrangement with the Victorian Dept. of Primary Industry and collaboratively have succeeded in culturing the GF677 rootstock tissue in the laboratory. With the help of our new Research and Development Manager Dr. Narender Pathania, his wife Dr. Nandita Pathania and Dr. Guizhen Li, as well as our lab technicians and consultants, we hope to be able to accelerate rootstock propagation significantly and create vigorous new rootstocks for a variety of soil types – allowing us to plan to achieve more rapid planting rates in varied environments to support our increased developments into the future. Tissue culturing involves accelerating plant growth in vitro (i.e. ‘in glass’, in the laboratory) by exposing plant tissue to a carefully balanced ‘diet’ of nutrients, hormones and light under sterile conditions. This system allows the production of many identical new plants extremely quickly. Select Harvests Annual Report 2006 11 needs to satisfy the world’s increasing demand for almonds “ Our challenge is to be farmers of the future. Someone – why not the Australian almond industry?” John Bird: Managing Director The World Almond Market and Australia’s place in it In the next five years, the Australian almond industry and Select Harvests are poised to gain extra market share in world almond markets thanks to several factors. Driven largely by the USA, almond demand has grown over recent years thanks to growing awareness of almond’s health benefits and strong marketing efforts. With growth came additional plantings, which so far have met the increasing demand. This growing demand worldwide and high levels of new plantings prior to 1999 remained in balance until 2002- 2005, when the USA’s almond crop plateaued. The US then experienced a lower-than-usual crop in 2005 (approximately 10 percent down on the previous year), which provoked October 2005’s record high price for almonds (a 30 percent spike). As the world’s biggest producer (accounting for some 80+ percent of total almond output), the USA’s performance affects all players. Between 1999 to 2006, Australian almond acreage has increased five-fold (from around 9,000 to some 45,000 acres). This will increase production capacity from today’s 16,000 tonnes to over 50,000 tonnes by 2012. We may challenge Spain for the position of the world’s Number Two producer in the next few years. Our increased capacity and the USA’s lower level of plantings from 1999 out mean that in a growing market, Australia is positioned to win increased market share in the next five to seven years as our current plantings mature and come into production. World almond consumption (cid:17)(cid:12)(cid:21)(cid:16)(cid:16) (cid:17)(cid:12)(cid:18)(cid:16)(cid:16) (cid:83) (cid:66) (cid:76) (cid:223) (cid:78) (cid:79) (cid:73) (cid:76) (cid:76) (cid:73) (cid:77) (cid:25)(cid:16)(cid:16) (cid:22)(cid:16)(cid:16) (cid:19)(cid:16)(cid:16) (cid:16) (cid:17)(cid:25)(cid:25)(cid:21) (cid:17)(cid:25)(cid:25)(cid:22) (cid:17)(cid:25)(cid:25)(cid:23) (cid:17)(cid:25)(cid:25)(cid:24) (cid:17)(cid:25)(cid:25)(cid:25) (cid:18)(cid:16)(cid:16)(cid:16) (cid:18)(cid:16)(cid:16)(cid:17) (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:18)(cid:16)(cid:16)(cid:22) (cid:8)(cid:69)(cid:83)(cid:84)(cid:73)(cid:77)(cid:65)(cid:84)(cid:69)(cid:9) (cid:55)(cid:79)(cid:82)(cid:76)(cid:68)(cid:223)(cid:51)(cid:85)(cid:80)(cid:80)(cid:76)(cid:89) (cid:35)(cid:79)(cid:78)(cid:83)(cid:85)(cid:77)(cid:80)(cid:84)(cid:73)(cid:79)(cid:78) 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(cid:72)(cid:65)(cid:82)(cid:86)(cid:69)(cid:83)(cid:84)(cid:73)(cid:78)(cid:71) (cid:33)(cid:76)(cid:77)(cid:79)(cid:78)(cid:68)(cid:83)(cid:223)(cid:83)(cid:72)(cid:65)(cid:75)(cid:69)(cid:78)(cid:223)(cid:70)(cid:82)(cid:79)(cid:77)(cid:223)(cid:84)(cid:82)(cid:69)(cid:69)(cid:83)(cid:14)(cid:223) (cid:45)(cid:69)(cid:67)(cid:72)(cid:65)(cid:78)(cid:73)(cid:67)(cid:65)(cid:76)(cid:223)(cid:83)(cid:87)(cid:69)(cid:69)(cid:80)(cid:73)(cid:78)(cid:71)(cid:223)(cid:65)(cid:78)(cid:68)(cid:223) (cid:67)(cid:79)(cid:76)(cid:76)(cid:69)(cid:67)(cid:84)(cid:73)(cid:79)(cid:78)(cid:14)(cid:223)(cid:52)(cid:82)(cid:65)(cid:78)(cid:83)(cid:80)(cid:79)(cid:82)(cid:84)(cid:223)(cid:84)(cid:79)(cid:223) (cid:72)(cid:85)(cid:76)(cid:76)(cid:73)(cid:78)(cid:71)(cid:15)(cid:67)(cid:82)(cid:65)(cid:67)(cid:75)(cid:73)(cid:78)(cid:71)(cid:223)(cid:70)(cid:65)(cid:67)(cid:73)(cid:76)(cid:73)(cid:84)(cid:89)(cid:14)(cid:223) (cid:48)(cid:82)(cid:79)(cid:67)(cid:69)(cid:83)(cid:83)(cid:73)(cid:78)(cid:71)(cid:12)(cid:223)(cid:80)(cid:65)(cid:67)(cid:75)(cid:73)(cid:78)(cid:71)(cid:223)(cid:65)(cid:78)(cid:68)(cid:223) (cid:84)(cid:82)(cid:65)(cid:78)(cid:83)(cid:80)(cid:79)(cid:82)(cid:84)(cid:223)(cid:84)(cid:79)(cid:223)(cid:77)(cid:65)(cid:82)(cid:75)(cid:69)(cid:84)(cid:14) Select Harvests Annual Report 2006 13 Our food products Result for the year Our achievements for the year The division increased sales for the year by 16 percent to $152 million, while experiencing a slight drop in EBIT. The key developments for the year were: • Increased sales and market share in branded products. • Increased consumption of nuts and associated products, particularly in the natural food and healthy snacking areas. Strategic objectives: Grow distribution and market share to enhance our position as the leading processor, marketer, and distributor of almonds, other nuts, and dried fruits. Further add value to the marketing and distribution of almonds harvested from our almond operations. Achievements during 2005/06: · Increased sales revenue by 16 percent to $152 million. • Increasing attention in nut categories shown by retailers and suppliers. · Increased market share in the branded cooking, health, snacking and muesli categories of Australian supermarkets and healthfood outlets. • Continuing aggressive private label · Launched our own brand and category: Select Harvest ‘Temptations’ strategies by retailers. • Higher costs in fuel-related activities. fruit, nut and chocolate snacking blends. · Consolidated division under a single, national management team. Sticking to our strategy Objectives for 2006/07: Our established core strategy of moving closer to the consumer remained in place through 2006, with a heightened emphasis on brand management. We have come a long way from our origins as a farm gate seller of almonds. Over the past eight years we have established a processing and marketing business to allow us to value-add to our almond crop and to other nut types, marketing the resultant ranges to a number of channels rather than concentrating on a single product (almonds) with limited channels. Our diversification into processing and marketing has enabled us to ‘lock in’ distribution channels for the future almond production from new orchards developed on behalf of investors. The strategic acquisitions made in the past have given us the manufacturing base needed to produce a range of nut- based products which lead the market in Australia. 14 Select Harvests Annual Report 2006 · Continue to build our branded products in the cooking, health, snacking 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. Current Position Today Select Harvests’ Food Products Division produces an extensive range of packaged nuts and associated products including snacks, cooking ingredients, mueslis, natural health foods, seeds, pastes, dried fruits and more. 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. We also produce a number of nut-based ingredients for food manufacturers, food service distributors and healthfood stores. We service all major supermarkets and smaller independent retailers and run a national merchandising team to service our product ranges in major outlets. “ We plan to leverage our strong position to further grow our brands across both supermarkets and healthfood stores.” Joseph Ebbage, Group Marketing Manager Our market Promoting nuts Food Safety Food safety and quality management remain key components of our management systems. Our major raw materials are natural agricultural products which can be subject to contamination by foreign materials and/or microbacterial invasion. New safety systems we have adopted include our own microbiological laboratory – which has saved turnaround time and money on testing, notably of our own almonds. Our quality system now focuses more closely on raw material assessment and is more tightly linked to an approved supplier regime which is improving the quality of our suppliers and their supplies. The ‘nuts = health’ message continues to gain momentum among key audiences, with resultant increases in consumption of nut-based products. This is assisted by new interest in almonds among key influencers including health professionals and dietary specialists. Retailers are responding to this increased interest and demand by both increasing the shelf space they make available to nut- based products (a positive for us) and creating their own ‘private label’ nut lines (a challenge for us in marketing and margin terms). There is also additional promotional and marketing activity being seen from suppliers and industry groups, with the major growth occurring in the natural snacking and health food area, with a move by consumers towards healthy and natural foods. Our brands are well positioned in these categories and we are benefiting from this trend in terms of sales and market share growth, while also exploiting opportunities to innovate with range extensions and new category launches. Exports In export sales, we have had some success in ranging our products in Hong Kong, Singapore and Malaysia, and we will continue to develop these markets in future, as well as seeking other opportunities to export processed almond products. Select Harvests is involved in a range of industry initiatives and collaborations designed to promote the great taste and numerous health benefits associated with the regular consumption of nuts. Through the Almond Board of Australia (ABA), we are actively promoting almonds to the local market with the slogan: ‘Love your heart, love your waist – eat a handful of almonds a day!’ Over the past year the ABA has conducted marketing programs aimed at both: 1) Increasing the consumption of almonds in Australia, and 2) Differentiating Australian almonds from Californian almonds in the international marketplace. ABA activities have included magazine promotions, exhibitions, Heart Foundation sponsorship, and alignments with key sporting and dietetic associations. For more information visit www.aussiealmonds.com.au In addition, we are involved in an Australian tree nut industry association which supports the ‘Nuts for Life’ campaign. This campaign encourages consumers to ‘Eat a handful of nuts, five times a week’ and focusses on informing GPs and health professionals about the benefits of nut consumption. For more information on ‘Nuts for Life’ visit www.nutsforlife.com.au Our involvement in ‘Nuts for Life’ provides information and aims to increase awareness of the benefi ts of nut consumption. Select Harvests Annual Report 2006 15 Food Products Division 2006 2005 EBIT (A$,000) 9,212 9,341 % of group EBIT No of employees 22 134 26 132 Lucky growth Mueslis Soland The 49-year-old Lucky brand grew by 21 percent is sales during the year. In mueslis, we continued category growth, consolidating on our strengths in supermarkets of all sizes, nationwide. We remain a major player in Coles’ and Woolworths’ cereal sections with our Meriram and Sunsol brands. The Soland brand – created specifically to suit healthfood stores – is a leading brand in the healthfood store sector. Soland has a comprehensive range of products including a growing organic offering. Driving this growth was the continued sales increase in Lucky snacking products, with Lucky Six Pack and Lucky Share Pack sales growing significantly in 2006. Within Lucky’s core cooking nut business, growth was generated through innovative new products such as Lucky Pine Nuts and Slivered Almonds. Meriram and Sunsol, our supermarket stars Nu-vit Nu-vit is a major brand within the important healthfood sections in Woolworths and Coles supermarkets. Key growth drivers during 2006 were Nu-vit’s healthy snack packs for children and its gluten-free range of mueslis and seeds. Soland – a market leader in healthfood stores Select Harvests Temptations The new Select Harvests Temptations range comprises a delicious blend of chocolate with nuts and fruit. This is an innovative new entrant into the snack area. Nu-Vit – strong in supermarket healthfood sections Our newest brand and product: Select Harvests Temptations 16 Select Harvests Annual Report 2006 “ The increase in consumption of products containing almonds continues, with growing acceptance and endorsement of the health benefits of almonds by health professionals helping the increased uptake among consumers.” Outlook We expect the market for nuts to continue to grow, supported by our increased marketing focus and activity. Our plan remains to capitalise on market growth and leverage our strong position to further grow our brands across supermarkets. Our product development focus in the ‘healthy snacking’ area is proving viable and we will continue to maximise ranging and sales of almond-based products. We will also continue to concentrate on business opportunities in non- supermarket channels (including healthfood stores), and we envisage continuing expansion in this area. Almonds and Health Australian almonds are both great tasting and good for health. In fact, current research indicates that a handful (just 30g) of almonds eaten every day will help adults to reach their recommended Vitamin E intake. Most Australians probably only get about half the amount of Vitamin E they ideally require each day – so the message to ‘eat a handful of almonds a day’ will help bridge that gap. Almonds also offer fibre, protein, iron and zinc – all important parts of a balanced diet. And almonds are 100 percent cholesterol free. Almonds and weight management Almonds are also an important part of a weight management diet. This is because a handful of almonds eaten each day can replace other foods with high levels of saturated fats. This can be good for Australian waistlines. In fact, several important studies have shown that almonds can be included as part of a healthy, balanced diet for weight maintenance. They can even be “ Almonds are fantastically nutritious – offering not just energy but also protein, ‘good’ fats, dietary fibre, essential minerals including iron and zinc, and vitamins including Vitamin E… which may contribute to better heart health.” included as part of a calorie-controlled diet and assist with weight loss. For more information on the health benefits of Australian almonds, visit the almond industry website at www.australianalmonds.com.au Promoting almonds Select Harvests is working hard in its own right and with other nut growers and marketers to spread the good news about the benefits of almond consumption – as well as to promote Australian almonds to the world. Almonds with breakfast, as a snack, as an ingredient in a main meal or as part of dessert are encouraged through the ‘Nuts for Life’ campaign. In other work, the Almond Board of Australia is promoting frequent nut consumption (with slogans such as ‘Love your heart, love your waist – eat a handful of almonds a day!’ and ‘Eat a handful of nuts, five times a week!’). For more information on nut health, visit the site above, or www.nutsforlife.com.au Select Harvests is active in promoting almonds generally via our support of the Almond Board of Australia Select Harvests Annual Report 2006 17 Our environment As a major agricultural concern and a major participant in the economy – and therefore the ecology – of the Robinvale district in north-western Victoria, Select Harvests has a significant responsibility towards stewardship of the local environment. We are proud of our approach to the environment and our positive results there – particularly in two areas we receive the most questions about: our use of water – and our reliance on bees! A Water-wise Approach In a State impacted by drought, water is a precious resource which Select Harvests treats with all due respect. We are acutely aware of the value of our water allocations, and manage it meticulously. In fact, we rely heavily on high technology to sense, monitor and alert us to water use and water requirements in our orchards. So efficient was our water management in 2006, we were delighted to donate back a significant volume of unused quota to the State Dept. of Sustainability and Environment for inclusion in Lower Murray Water’s unused ‘pool’, which was subsequently employed to flood river redgum stands in the local floodplain. To ensure we manage water responsibly, we: · Monitor soil moisture to enhance more efficient use of water. · Monitor the efficiency of our use of water to optimise almond production results. · Work with all appropriate authorities as well as our farm managers to accurately monitor shallow and deep water tables. · Work with authorities to develop strategies to better meter the volumes of water we draw from the Murray and use on our farms – enabling us to forecast demand and schedule draws with greater accuracy. Who’s a busy bee, then? The cover of this report highlights an important and all-natural collaboration that we exploit – that of almonds and bees (which we rely upon exclusively for almond pollination). The expansion of almond orchards in Robinvale and greater Sunraysia has created increased demand for bees not just locally but nationally. In fact, at three hives required per acre of mature almonds, this demand is already impacting significantly on the national bee industry. Our planned 11,000 extra acres of plantings next year will require 33,000 bee hives for pollination – a significant planning issue for us and for the bee industry. Over recent years we have worked with our principal bee contractor in the planning and supply of our increased hive requirements for now and in the future. By promoting and sourcing new apiarists to provide pollination services this will ensure all our demand is met. With the numbers of hives required, quality control systems are in place to ensure that each hive is strong and maintained during the pollination season. New challenges are, of course, arising. Over the last two years Select Harvests has been working with relevant authorities on understanding the bio-security issues involved with the interstate transfer of hives – as well as the prevention of outbreaks of pests and disease. Bees are an important part of our success. The Australian almond and bee industries plan to hold a summit in the year ahead to enhance understanding of the likely impact of our increased demand for bees. This conference will involve apiarists and other specialists, and will cover issues such as increase in bee supply, the costs involved, optimal beehive numbers per acre, movement of hives around the country, and risks – with a focus on pests and diseases that may impact on bees. 18 Select Harvests Annual Report 2006 Our community The Power to Improve Select Harvests’ – and other agricultural concerns’ – increased demand on the local power supply have created opportunities for enhanced power supply to Robinvale and the district. Today, Select Harvests is playing a lead role in: · Working with authorities (our electricity retailer, Powercor) to better use the existing power backbone and to reduce the sudden draws on power through strategic staging of pump start-ups and pumping timeframes. · Paying for upgraded power facilities (a spin-off of our size and the volume of demand we require – which benefits the entire community). 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 (we have been a proud sponsor 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 (we have been a sponsor since 2000). 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. We are the largest employer of full- time and casual staff in the district (approximately 150 full-time staff work for us, and approximately 200 casual employees assist us with planting, pruning, and harvesting on a seasonal basis). We also employ staff in other locations in Australia. Our impact on the community is therefore significant, and by default we are involved in the support and development of many facilities in the area via financial and product contributions, including new sponsorships for groups including: · Cancer Council Victoria’s ‘Relay for Life’ · Braybrook College’s Alpine School Leadership program · Rotary Australia’s National Conference in Broken Hill, NSW · Starlight Foundation · Pater Macallum Foundation · Robinvale SES · Commonwealth Games 2006 · Oxfam Trailwalkers Select Harvests Annual Report 2006 19 Our inaugural shareholder open day day. Staff donated their time and showed they really do care “ The inaugural Open Day was a big thing for us – a big, exciting about the business. It was a great success…” Select Harvests held its inaugural Shareholder Open Day in March this year. The day was organised by Select Harvests staff, was attended by staff and senior management and provided an opportunity for shareholders to view at first hand the almond operation ‘in action’ in Robinvale. The day involved lunch with tours of the orchards and processing facilities. Approximately 200 shareholders attended with three coaches travelling to Robinvale from Melbourne. Shareholders from a number of locations across Australia took time to visit us, and judging from the number of congratulatory emails and letters, they gained a positive overview of the business and its people. Robinvale Open Day – some shareholder comments “…the thing that impressed us most was the staff of the company and the way they worked together to make the day such a success. You must be enormously proud of the people who work for Select Harvest… I would like to congratulate both of you [Chairman Max Fremder and MD John Bird]... for making yourselves available to shareholders, non stop, during the day.” R Smart, Mt Waverley Vic “It was great to finally meet you and other members of the Select Team... It is pleasing to know our investment is in good hands.” P&B Roberts, Hollywell Qld “We were most impressed with the professional way the visit was handled and the modern facilities and forward thinking of your management.” N&G Iveson, Beaumaris Vic “We never thought we would learn so much.” LG Campbell, Malvern Vic “We came away with good emories and a better understanding of our shareholding.” D&A Buchanan, EW East Vic “Finally, congratulations on being ‘innovators’ and perhaps some larger companies will follow your lead and encourage shareholders to participate in the understanding of their companies.” D&L Kelly, Bendigo Vic “Please express our thanks to Max [Fremder] and the Directors for their magnificent hospitality.” R. Barber, West Heidelberg Vic Photos courtesy of Mr Robert Barber, Shareholder Select Harvests 20 Select Harvests Annual Report 2006 Our people “ We understand that as our business grows, so too does the skillset required to manage it. We have commissioned consultants to comprehensively reassess our needs, and have employed specialist expertise to meet the challenges ahead.” Annabel Galea: Group OH&S Manager We continue to experience significant change and new challenges as we rapidly expand our business. In consultation with HR specialists, both Select Harvests divisions have undergone significant restructures. In almond operations, we have a new divisional structure and have hired extensively in the technical area to assist us to cater for our ambitious future planting plans. In food products, the substantial challenges of knitting a number of recent acquisitions (Munch Nuts, Meriram, Renshaw, and Chiquita Nibbles) into a single group has been achieved with the addition of a Group Marketing Manager and a Group Sales Manager which, together with the Group Operations Manager, has resulted in all sales, marketing, and operations management now being run nationally. The addition of brand management and other sales and marketing support staff will assist us greatly in continuing to build our brands’ market position in supermarkets and healthfood outlets nationwide. Flexibility is the order of the day during changing times, and we recognise that our ability to manage changes while also delivering improved results to shareholders is a direct result of the patience, skill, energy, effort and dedication of both our existing and new staff at all operating locations. · Jane Finch (Degree in Horticulture Management) joins us as Irrigation and Nutrition Manager. New Appointments Key appointments made in the past year include: Food Products Division · Joseph Ebbage was appointed to the role of Group Marketing Manager across all our brands. · Natalie Wood joined us as Brand Manager for Lucky, with Giri Yelburga as our retail shelf space analyst. · Michael Kinneavy was appointed as National Business Manager for cooking, cereal and snack products. · Kevin Bush has been appointed to the position of Group Sales Manager, and Anton Lesar as our sales business analyst. Almond Operations · Research & Development Manager Dr. Narendera Singh Pathania (B.Sc Ag, M.Sc Hort and PhD Hort) and Dr. Nandita Pathania (B.Sc Ag, M.Sc and PhD–Plant Pathology) add two science doctorates to our technical team. · Tim Kennedy (B.App Sc. Vit) is the almond division’s new Technical Program Manager and Purchasing Officer. Employment and Personal Development Select Harvests Ltd is the largest employer of both full-time and casual personnel in the Robinvale district. Select values the personal growth of employees and the development of their skills. · Being an employer of a large workforce in the area, the Company is making a significant contribution to the community’s financial infrastructure. · Full-time staffing levels at 30th June ‘06 were approximately 150 employees. · Casual employee numbers vary, peaking seasonally at around 200. · Select employees are currently undertaking a range of training courses at providers including Robinvale and Sunraysia TAFEs and Latrobe University, working on horticulture certificates and diplomas; administration certificates; engineering and fabrication certificates; and irrigation courses. · Select Harvests’ first apprentice engineer completed his certificate this year, with two further young staff currently completing their apprenticeships. Select Harvests Annual Report 2006 21 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. 22 Select Harvests Annual Report 2006 G F Dan O’Brien, B.Sc, B.VMS, MBA (Non-Executive Director) Joined the Board on 29 March 2004. Dan is the principal of Dromoland Capital, a private equity group, non-executive director of Thomas & Coffey Limited, and Coates Hire Limited, and is also an executive director of 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. R M Herron, FCA & FAICD (Non-Executive Director) Joined the Board on 27 January 2005. A Chartered Accountant, Mr Herron retired as a Senior Partner of PricewaterhouseCoopers in December 2002. He was a member of the Coopers & Lybrand (now PricewaterhouseCoopers) Board of Partners where he was National 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 organisation CEO John Bird Group Marketing Manager Group Sales Manager Group Horticultural Manager Group Operations Manager Joseph Ebbage Kevin Bush Tim Millen TBA National OH&S Manager Group Trading Manager CFO & Company Secretary Annabel Galea Laurence Van Driel Marcello Mattia Select Harvests Annual Report 2006 23 Statistical summary select harvests consolidated results for years ended 30 June Total sales Earnings before interest and tax Operating profit before tax Net profit after tax Earnings per share (Basic) Return on shareholders’ equity Dividend per ordinary share Special 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 Balance sheet data as at 30 June (cents) (% pa) (cents) (cents) (% pa) (%) ($) (times) (%) (times) Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Shareholders’ equity Share capital Reserves Retained profits (accumulated losses) Total shareholders’ equity Other data as at 30 June Fully paid shares (000) Number of shareholders Select Harvest’s share price: – year’s high – year’s low – close Market capitalisation ($) ($) ($) 2006 217,866 38,369 37,903 26,492 2005 173,864 33,069 31,802 22,104 2004 127,381 23,836 22,587 15,225 2003 80,994 17,421 16,110 10,962 2002 78,327 14,749 12,803 8,554 2001 64,996 12,196 10,260 6,564 67.1 26.1 53.0 10.0 100 80.0 1.83 82.3 1.3 1.82 56.9 25.1 42.0 - 100 75.4 1.52 26.2 1.0 1.52 40.0 19.2 26.0 - 100 65.7 1.35 19.1 10.2 1.70 72,455 79,421 58,832 78,676 32,486 74,469 151,876 137,508 106,955 39,905 10,490 50,395 101,481 52,665 12,691 36,125 101,481 39,708 3,369 15.01 9.50 13.02 38,757 10,656 49,413 88,095 46,925 13,766 27,404 88,095 39,069 2,999 10.20 6.47 9.70 19,077 8,610 27,687 79,268 43,940 14,191 21,137 79,268 38,525 2,413 7.00 4.44 6.67 31.3 18.3 18.5 - 100 62.8 1.08 13.3 15.4 1.61 25,077 60,672 85,749 15,581 10,162 25,743 60,006 36,206 9,458 14,342 60,006 35,455 2,054 4.95 2.60 4.80 25.4 17.3 13.5 - 100 54.5 0.77 7.6 38.9 1.30 22,599 63,090 85,689 17,381 18,971 36,352 49,337 20.0 15.5 10.0 - 100 50.0 0.56 6.3 70.2 1.31 23,584 66,405 89,989 18,048 29,568 47,616 42,373 34,199 31,124 9,458 5,680 9,458 1,791 49,337 42,373 34,585 1,610 32,841 1,286 3.25 1.49 3.10 1.70 1.18 1.68 516,998 378,970 256,965 170,184 107,214 55,173 $000 (except where indicated) Notes: 1. FY05 and subsequent years are based on AIFRS. 2. FY05 and FY06 exclude discontinued operations 24 Select Harvests Annual Report 2006 Financial contents Directors’ Report Auditor’s Independence Declaration Corporate Governance Statement Income Statements Balance Sheets Statement of Changes in Equity Cash Flow Statements Notes to the Financial Statements 1. Summary of significant accounting policies 2. Financial risk management 3. Critical accounting estimates and judgements 4. Revenue 5. Expenses and losses/(gains) 6. Income tax 7. Discontinued operation 8. Dividends paid or provided for on ordinary shares 9. Cash and cash equivalents 10. Receivables (current) 11. Inventories (current) 12. Derivative financial instruments (current) 13. Receivables (non-current) 14. Other financial assets (non-current) 15. Property, plant and equipment 16. Deferred tax assets 17. Biological assets – almond trees 18. Intangibles 19. Payables (current) 20. Interest-bearing liabilities (current) 21. Provisions (current) 22. Payables (non-current) 23. Interest-bearing liabilities (non-current) 24. Deferred tax liabilities (non-current) 25. Provisions (non-current) 26. Contributed equity 27. Reserves and retained profits 28. Cash flow statement 29. Expenditure commitments 30. Subsequent events 31. Earnings per share 32. Remuneration of directors and key management personnel 33. Remuneration of auditors 34. Related party disclosures 35. Segment information 36. Interest rate risk 37. Controlled entities 38. Employee benefits 39. Contingent liabilities 40. Explanation of transition to Australian equivalents to IFRSs Directors’ Declaration Independent Audit Report ASX Additional Information 26 37 38 44 45 46 47 48 48 57 58 58 59 59 60 62 62 63 63 64 65 65 66 68 69 70 70 70 71 71 71 73 73 74 75 77 78 79 80 80 84 85 86 89 90 91 93 94 100 101 103 Select Harvests Annual Report 2006 25 Directors’ Report The directors present their report together with the financial report of Select Harvests Limited and controlled entities (referred to hereafter as the “consolidated entity”) for the year ended 30 June 2006 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: 5,662,365 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: 426,522 fully paid shares, 58,400 options expiring 1 November 2006 exercisable at $5.60 each, and 33,800 options expiring 20 October 2007 exercisable at $7.78 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: 23,892 fully paid shares. G F Dan O’Brien, B Sc, B VMS, MBA (Non-Executive Director) Joined the Board on 29 March 2004. Dan is the principal of Dromoland Capital, a private equity group, non-executive director of Thomas & Coffey Limited, and Coates Hire Limited, and is also an executive director of 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: 455,932 fully paid shares. 26 Select Harvests Annual Report 2006 R M Herron, FCA & FAICD (Non-Executive Director) Joined the Board on 27 January 2005. A Chartered Accountant, Mr Herron retired as a Senior Partner of PricewaterhouseCoopers in December 2002. He was a member of the Coopers & Lybrand (now PricewaterhouseCoopers) Board of Partners where he was National 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: 30,300 fully paid shares. 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, and • The growing, processing and sale of almonds to the food industry from company owned almond orchards, the provision of management services to external owners of almond orchards, including orchard development, tree supply, farm management, land rental and irrigation infrastructure, and the marketing and selling of almonds on behalf of external investors. Effective 1 October 2005, Select Harvests Limited sold all of its shares in Riverina Pelletising Services Pty Ltd and ceased its involvement in the production of pelletised snail, slug and rodent baits for third party brand owners. There were no other significant changes in the nature of the activities of the consolidated entity during the year. Employees The consolidated entity employed 297 full time employees as at 30 June 2006 (2005: 276 employees). Review and Results of Operations Refer to Chairman’s report 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 consolidated entity occurred during the financial year. Significant Events after the Balance Date On 28 August 2006, the Directors declared a fully franked final dividend of 33 cents per ordinary share to be paid on Monday 2 October 2006 to shareholders registered at 5.00 pm on Friday 8 September 2006. 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 consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in future financial years. Likely Developments and Expected Results Refer to Chairman’s report and Managing Director’s report in the front section of the Annual Report. Select Harvests Annual Report 2006 27 Directors’ Report Environmental Regulation and Performance The consolidated entity’s operations are subject to environmental regulations under laws of the Commonwealth or of a State or Territory. Details of the consolidated entity’s performance in relation to such environmental regulations follows: The consolidated entity holds licences issued by the Environmental Protection Authority which specify limits for discharges to the environment which are the result of the consolidated 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 consolidated entity’s licence conditions. Remuneration Report Principles used to determine the Nature and Amount of Remuneration (Audited) 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. Non-executive directors receive fees and do not receive options or bonus payments. Further details regarding components of directors’ and executive remuneration are provided in the notes to the financial statements. (i) Short-term incentives 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 consolidated entity level, divisional level, or functional level, as applicable, for the financial year. The Remuneration Committee is responsible for assessing whether the KPIs are met based on detailed reports on performance prepared by management. (ii) Long-term incentives In addition, the consolidated 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 upon achievement of a 10% increase in EPS. The Remuneration Committee is responsible for assessing whether the targets are met based on reports prepared by management. Details of Remuneration (Audited) Details of the remuneration of the directors and the key management personnel (as defined in AASB 124 Related Party Disclosures) of Select Harvests Limited and the consolidated entity are set out in the following tables. The key management personnel of the consolidated entity includes the directors as listed above and the following executive officers, which also includes the 5 highest paid executives of the consolidated entity: Name M Mattia M Ciobo R Tanti D Jones W Turner T Millen L Van Driel Position Chief Financial Officer & Company Secretary Employer Select Harvests Limited General Manager – Meriram Kibley Pty Ltd National Sales Manager Select Harvests Marketing Pty Ltd General Manager – Operations – Food Products Division (from 25 July 2005 to 31 May 2006) Select Harvests Limited General Manager – Almond Division Kyndalyn Park Pty Ltd Horticultural Manager Trading Manager Kyndalyn Park Pty Ltd Select Harvests Marketing Pty Ltd 28 Select Harvests Annual Report 2006 The nature and amount of each major element of the remuneration of each director of the Company and each of the key management personnel of the company and the consolidated entity for the financial year is detailed below. Remuneration of Directors of Select Harvests Limited 2006 Non Executive M A Fremder C G Clark G F Dan O’Brien J C Leonard R M Herron Executive J Bird 2005 Non Executive M A Fremder C G Clark G F Dan O’Brien J C Leonard R M Herron Executive J Bird ANNUAL REMUNERATION BASE FEE $ SHORT TERM INCENTIVES $ NON CASH SUPERANNUATION CONTRIBUTIONS $ BENEFITS $ LONG TERM REMUNERATION OPTIONS GRANTED NUMBER VALUE $ 84,000 42,000 42,000 42,000 42,000 - - - - - - - - - - 7,560 3,780 3,780 3,780 3,780 - - - - - - - - - - TOTAL $ 91,560 45,780 45,780 45,780 45,780 422,614 177,512 34,484 37,049 114,800 87,499 759,157 ANNUAL REMUNERATION BASE FEE $ SHORT TERM INCENTIVES $ NON CASH SUPERANNUATION CONTRIBUTIONS $ BENEFITS $ LONG TERM REMUNERATION OPTIONS GRANTED NUMBER VALUE $ 84,000 42,000 42,000 39,773 18,025 - - - - - - - - - - 7,560 3,780 3,780 3,580 1,622 - - - - - - - - - - TOTAL $ 91,560 45,780 45,780 43,353 19,647 332,823 155,041 32,766 29,478 136,400 77,089 627,197 Remuneration of the Key Management Personnel of the Company and the Consolidated Entity BASE FEE $ 176,664 210,000 2006 M Mattia M Ciobo R Tanti D Jones (Commenced 25/7/05 Terminated 31/5/06) L Van Driel W Turner T Millen 105,256 116,307 128,624 187,388 167,495 ANNUAL REMUNERATION SHORT TERM INCENTIVES $ 71,661 NON CASH SUPERANNUATION CONTRIBUTIONS $ 15,857 BENEFITS $ 38,238 - 21,500 - 25,000 30,246 15,026 30,251 23,816 25,381 20,923 18,519 24,187 39,670 11,002 14,047 11,920 17,512 10,243 LONG TERM REMUNERATION OPTIONS GRANTED NUMBER 19,500 - 7,400 - 15,300 14,400 7,500 VALUE $ 19,286 - 7,252 - 11,466 14,252 5,558 TOTAL $ 321,706 279,921 250,958 206,923 197,933 196,836 160,270 Select Harvests Annual Report 2006 29 Directors’ Report Remuneration of the Key Management Personnel of the Company and the Consolidated Entity BASE FEE $ 159,332 210,000 91,477 99,163 115,705 96,195 ANNUAL REMUNERATION SHORT TERM INCENTIVES $ 57,168 NON CASH SUPERANNUATION CONTRIBUTIONS $ 14,149 BENEFITS $ 37,984 - - 17,487 27,067 13,930 30,530 17,862 14,821 19,000 5,000 18,900 6,060 9,625 12,759 9,826 LONG TERM REMUNERATION OPTIONS GRANTED NUMBER 8,800 - - 19,800 7,000 9,300 VALUE $ 8,800 - - 10,974 7,000 5,156 TOTAL $ 277,433 259,430 115,399 152,070 181,531 130,107 2005 M Mattia M Ciobo R Tanti (Commenced 29/9/04) L Van Driel W Turner T Millen 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. Key management personnel 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. Service Arrangements (Audited) Service arrangements between the consolidated entity and executive directors and key management personnel are on a continuing basis and include, in certain cases, relevant notice periods. There are no specific termination benefits applicable to the service arrangements. Share Based Compensation (Audited) (i) 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. Individual parcels of options offered to participating employees are based on a percentage of fixed remuneration. The options are granted annually in three tranches on achievement of a 10% increase in EPS. Options granted as remuneration are subject to continuing service with the consolidated 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. The assessed fair value at offer date is determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at offer date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option. The model inputs for options offered during the year ended 30 June 2006 included: a) options are granted for no consideration, have a three year life, and one third of the options offered vest in each year and are exercisable from the date of vesting to the expiry date b) exercise price: $11.05 (2005 - $7.78) c) offer date: 22 September 2005 (2005 – 17 September 2004) d) expiry date: 31 October 2008 (2005 – 20 October 2007) 30 Select Harvests Annual Report 2006 e) share price at offer date: $11.03 (2005 – $7.53) f) expected price volatility of the company’s shares: 27.10% (2005 – 23.30%) g) expected dividend yield: 3.81% (2005 – 3.38%) h) risk free interest rate: 5.10% (2005 – 5.25%) The following table is a summary of the Executive Share Option Schemes currently in place. PARTICIPATING EMPLOYEES 6 7 7 OPTION VALUATION $ 1.00 0.98 1.72 2003 Offer 2004 Offer 2005 Offer Total (ii) Options Granted EXERCISE EXPIRY DATE $ 5.60 NUMBER PRICE OF OPTIONS OFFERED 193,200 1 November 2006 234,300 20 October 2007 153,300 31 October 2008 580,800 7.78 GRANTED SEPTEMBER 04 GRANTED AUGUST 05 BALANCE 64,400 66,400 52,600 - - 86,100 134,800 - 153,300 64,400 152,500 340,700 11.05 During or since the end of the financial year, the Company granted options over unissued ordinary shares to the executive director and the following key management personnel of the Company as part of their remuneration. Director J Bird Key management personnel M Mattia W Turner L Van Driel T Millen R Tanti NUMBER OF OPTIONS GRANTED 2006 NUMBER OF OPTIONS GRANTED 2005 114,800 136,400 19,500 14,400 15,300 7,500 7,400 8,800 7,000 19,800 9,300 - (iii) Shares Issued on Exercise of Options Details of ordinary shares in the company provided as a result of the exercise of remuneration options to each director of the consolidated entity and other key management personnel are set out below. Director J Bird Key management personnel M Mattia W Turner L Van Driel T Millen NUMBER OF SHARES ISSUED ON EXERCISE OF OPTIONS 2006 NUMBER OF SHARES ISSUED ON EXERCISE OF OPTIONS 2005 155,400 166,200 28,300 21,400 22,400 11,100 - - 15,900 11,400 Select Harvests Annual Report 2006 31 Directors’ Report (iii) Shares Issued on Exercise of Options (continued) The amounts paid per ordinary share by each director and other key management personnel on the exercise of options at the date of exercise were as follows. NUMBER OF SHARES 217,100 60,700 38,800 AMOUNT PAID ON EACH SHARE $3.31 $5.60 $7.78 There were no amounts unpaid on the shares issued. Additional Information (Unaudited) (i) Principles used to determine the nature and amount of remuneration: relationship between remuneration and company performance The overall level of executive reward takes into account the performance of the consolidated entity over a number of years, with greater emphasis given to the current year. Over the past 5 years, the consolidated entity’s profit from ordinary activities after income tax has grown at an average rate of 32% per annum, and total shareholder return has grown at an average rate of 58% per annum. (ii) Details of remuneration: cash bonuses and options For each cash bonus and grant of options included above, the percentage of the available bonus or grant that was paid, or that vested, in the financial year, and the percentage that was forfeited because the person did not meet the service and performance criteria is set out below. No part of the bonuses is payable in future years. No options will vest if the conditions are not satisfied hence the minimum value of the option yet to vest is nil. The maximum value of the options yet to vest has been calculated based on the option price. NAME J Bird CASH BONUS PAID % FORFEITED % 100 - M Mattia 100 - YEAR GRANTED VESTED % FORFEITED % OPTIONS 2003 2004 2005 2003 2004 2005 66 33 - 66 33 - 33 - - - - - - - - - FINANCIAL YEARS IN WHICH OPTIONS MAY VEST 2007 MINIMUM TOTAL VALUE OF GRANT YET TO VEST ($) - 2007 2008 2007 2008 2009 2007 2007 2008 2007 2008 2009 2007 2008 2007 2008 2009 - - - - - - - - - - - - - - - - MAXIMUM TOTAL VALUE OF GRANT YET TO VEST ($) 29,200 – 66,248 – – 119,024 8,800 – 20,972 – – 34,572 – 14,504 – – 33,368 R Tanti - - 2004 2005 32 Select Harvests Annual Report 2006 L Van Driel 100 - W Turner 100 - T Millen 100 - 2003 2004 2005 2003 2004 2005 2003 2004 2005 66 33 - 66 33 - 66 33 - - - - - - - - - - 2007 2007 2008 2007 2008 2009 2007 2007 2008 2007 2008 2009 2007 2007 2008 2007 2008 2009 - - - - - - - - - - - - - - - - - - 3,900 - 8,036 - - 24,080 7,000 - 14,504 - - 21,672 1,800 - 3,920 - - 18,232 M Ciobo did not participate in the short term or long term incentive scheme for the 2005 financial year, hence no incentive earnings were payable during the 2006 financial year. D Jones commenced employment with the consolidated entity on 25 July 2005 and ceased employment on 31 May 2006. (iii) Share based compensation: options NAME Directors J Bird Key Management Personnel M Mattia L Van Driel W Turner T Millen REMUNERATION CONSISTING OF OPTIONS (%) A VALUE GRANTED $ B VALUE EXERCISED $ C VALUE LAPSED $ D 25 87,499 75,524 15 15 15 15 19,286 11,466 14,252 5,588 28,086 14,896 21,252 5,395 - - - - - TOTAL VALUE $ 91,524 - 4,018 - 5,560 A The percentage of the value of remuneration consisting of options, based on the value at grant date set out in column B B The value at grant date calculated in accordance with AASB2 Share-based payments of options granted during the year as part of remuneration. C The value at exercise date of options that were granted as part of remuneration and were exercised during the year. D The value at lapsed date of options that were granted as part of remuneration and that lapsed during the year. (iv) Loans to directors and executives Information on loans to directors and executives (if any), are set out in note 34. Select Harvests Annual Report 2006 33 Directors’ Report (v) Share options granted to directors and the most highly remunerated officers Options over unissued ordinary shares of Select Harvests Limited granted and not exercised during or since the end of the financial year to the five most highly remunerated officers of the company as part of their remuneration were as follows: NAME J Bird M Mattia M Ciobo R Tanti L Van Driel OPTIONS GRANTED & NOT EXERCISED 92,200 - - 7,400 4,100 The options were granted under the consolidated entity’s executive share option scheme on 24 August 2005. Details of options granted to the directors and the five most highly remunerated officers of the consolidated entity can be found above. No options have been granted since the end of the financial year. (vi) Unissued Ordinary shares Under Option At the date of this report unissued ordinary shares of the company under option are: OFFER 2003 2004 NUMBER OF SHARES 62,000 EXERCISE PRICE ($) 5.60 47,300 7.78 EXPIRY DATE 1 November 2006 20 October 2007 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. Dividends 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 Special for the year • on ordinary shares Final for 2005 shown as recommended in the 2005 report • on ordinary shares CENTS 33.0 20.0 10.0 $ 13,103,560 7,912,371 3,956,185 24,972,116 26.0 10,209,752 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. 34 Select Harvests Annual Report 2006 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: MEETINGS OF COMMITTEES DIRECTORS’ MEETINGS AUDIT AND RISK REMUNERATION NOMINATION NUMBER ELIGIBLE TO ATTEND 12 12 12 12 12 12 NUMBER ATTENDED 12 12 12 11 11 12 NUMBER ELIGIBLE TO ATTEND - - 4 4 4 4 NUMBER ATTENDED - - 4 4 3 4 NUMBER ELIGIBLE TO ATTEND 1 - 1 1 - - NUMBER ATTENDED 1 - 1 1 - - NUMBER ELIGIBLE TO ATTEND 1 1 1 1 1 1 NUMBER ATTENDED 1 1 1 1 1 1 M A Fremder J Bird C G Clark G F Dan O’Brien J C Leonard R M Herron 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 R M Herron (Chairman) C G Clark G F Dan O’Brien J C Leonard REMUNERATION C G Clark (Chairman) M A Fremder G F Dan O’Brien NOMINATION M A Fremder (Chairman) J Bird C G Clark G F Dan O’Brien J C Leonard R M Herron Directors’ Interests in Contracts Directors’ interest in contracts are disclosed in note 34 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, PricewaterhouseCoopers, are detailed in note 33. 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 as non-audit services are reviewed by the Audit & Risk Committee to ensure they do not impact the impartiality and objectivity of the auditor. Select Harvests Annual Report 2006 35 Directors’ Report 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, 28 August 2006 36 Select Harvests Annual Report 2006 Select Harvests Annual Report 2006 37 Governance Corporate Governance Statement This statement outlines the key corporate governance practices of the consolidated 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 consolidated 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 consolidated 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 consolidated entity has a process to educate new Directors about the nature of the business, current issues, the corporate strategy, and the expectations of the consolidated entity concerning performance of Directors. Directors also have the opportunity to visit the facilities of the consolidated 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 consolidated entity’s expense. 38 Select Harvests Annual Report 2006 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 2006. • The Chairman of the Company, Mr M A Fremder, owns (directly or indirectly) almond orchards totalling 1,341 acres in respect to which the consolidated entity provides orchard management services under contract at market rates. • A non-executive Director of the Company, Mr J C Leonard, owns (directly or indirectly) almond orchards totalling 1,041 acres in respect to which the consolidated 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 consolidated 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. Select Harvests Annual Report 2006 39 Governance The members of the Remuneration Committee are disclosed in the Directors’ Report. 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 consolidated entity level, divisional level, or functional level, as applicable, for the financial year. In addition, the consolidated 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 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 consolidated entity’s financial reports for the year ended 30 June 2006 present a true and fair view, in all material respects, of the consolidated 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; 40 Select Harvests Annual Report 2006 • 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 reviews 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 consolidated entity. The consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated 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. 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 consolidated entity. The consolidated 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. Select Harvests Annual Report 2006 41 Governance Details of Director related entity transactions with the Company and consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated entity has nominated the Company Secretary to ensure compliance with the consolidated entity’s continuous disclosure requirements, and overseeing and co-ordinating disclosure of information to the ASX; • Information is posted on the consolidated 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 consolidated 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 consolidated entity’s strategy and goals. It is the policy of the consolidated 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. 42 Select Harvests Annual Report 2006 This financial report covers both Select Harvests Limited as an individual entity and the consolidated entity consisting of Select Harvests Limited and its subsidiaries. The financial report is presented in the Australian currency. Select Harvests Limited is a company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Select Harvests Limited 360 Settlement Road Thomastown Vic 3074 A description of the nature of the consolidated entity’s operations and its principal activities is included in the review of operations and activities and in the directors’ report, both of which are not part of this financial report. The financial report was authorised for issue by the directors on 28 August 2006. The company has the power to amend and reissue the financial report. Through the use of the internet, we have ensured that our corporate reporting is timely, complete, and available globally at minimum cost to the company. All financial reports and other information are available on our website: www.selectharvests.com.au Select Harvests Annual Report 2006 43 Income Statements for the year ended 30 June 2006 Revenue Sales of goods and services Other revenue Total revenue Other income (expenses) Almond stock fair value adjustment Almond tree fair value adjustment Total other income (expenses) Expenses Cost of sales Distribution expenses Marketing expenses Occupancy expenses Administrative expenses Finance costs Other expenses Profit before income tax Income tax expense Profit from continuing operations Profit from discontinued operations Profit for the year Profit Attributable to Members of Select Harvests Limited 27(c) Earnings per share for profit from continuing operations attributable to the ordinary equity holders of the company: Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Earnings per share for profit attributable to the ordinary equity holders of the company: Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 31 31 31 31 The above income statements should be read in conjunction with the accompanying notes. 44 Select Harvests Annual Report 2006 NOTES CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 4 4 217,866 173,864 162 95 218,028 173,959 2006 $’000 - 29,694 29,694 2005 $’000 - 19,549 19,549 - - - - - - - (2,665) (903) (494) 25,632 (201) 25,431 4,033 29,464 29,464 - - - - - - - (2,115) (2,074) (426) 14,934 (359) 14,575 - 14,575 14,575 467 85 552 787 (229) 558 5(a) (165,546) (127,973) 5 6 7 (4,021) (622) (2,052) (3,094) (628) (4,714) 37,903 (11,411) 26,492 4,309 30,801 30,801 67.1 67.0 78.1 77.9 (3,286) (659) (1,863) (2,916) (1,361) (4,657) 31,802 (9,698) 22,104 801 22,905 22,905 56.9 56.7 58.9 58.8 Balance Sheets for the year ended 30 June 2006 Current assets Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Total current assets Non-current assets Receivables Other financial assets Property, plant and equipment Deferred tax assets Biological assets – almond trees Intangible assets Total non-current assets Total assets Current liabilities Payables Interest-bearing liabilities Derivative financial instruments 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 CONSOLIDATED PARENT ENTITY 2006 $’000 22,557 24,442 24,682 774 72,455 - - 44,382 345 5,799 28,895 79,421 2005 $’000 4,588 25,687 24,796 3,761 58,832 - 21 43,991 267 5,516 28,881 78,676 151,876 137,508 34,407 32,822 953 44 2,294 2,207 39,905 - 350 9,718 422 10,490 50,395 101,481 52,665 12,691 36,125 101,481 535 22 3,239 2,139 38,757 - 376 9,920 360 10,656 49,413 88,095 46,925 13,766 27,404 88,095 9 10 11 12 13 14 15 16 17 18 19 20 12 21 22 23 24 25 26 27 27 2006 $’000 21,775 728 - 774 23,277 36,256 9,607 464 223 - - 2005 $’000 4,280 780 - 3,761 8,821 44,126 12,195 523 - - - 46,550 69,827 56,844 65,665 408 852 44 2,294 199 3,797 1,370 49 22 3,239 191 4,871 7,964 13,423 75 - 71 8,110 11,907 57,920 52,665 4,300 955 57,920 - 709 48 14,180 19,051 46,614 46,925 6,121 (6,432) 46,614 The above balance sheets should be read in conjunction with the accompanying notes. Select Harvests Annual Report 2006 45 Statements of changes in equity for the year ended 30 June 2006 NOTES CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 Total equity at the beginning of the financial year 88,095 74,451 46,614 41,301 Changes in fair value of cash flow hedges and interest rate swaps, net of tax Net income (expense) recognised directly in equity Profit for the year Total recognised income and expense for the year Transactions with equity holders in their capacity as equity holders: – Contributions of equity, net of transaction costs – Employee share options – Dividends provided for or paid Total equity at the end of the financial year 27(a) 27(c) 26(a) 27(a) (1,360) (1,360) 30,801 29,441 (15) (15) 22,905 22,890 (2,105) (2,105) 29,464 27,359 (15) (15) 14,575 14,560 5,740 285 2,985 193 5,740 287 2,985 192 8 (22,080) (12,424) (22,080) (12,424) (16,055) (9,246) (16,053) (9,247) 101,481 88,095 57,920 46,614 The above statements of changes in equity should be read in conjunction with the accompanying notes 46 Select Harvests Annual Report 2006 Cash flow statements for the year ended 30 June 2006 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Interest paid Income tax paid NOTES CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 236,975 180,687 - - (189,982) (137,414) (3,636) (1,328) 46,993 43,273 (3,636) (1,328) 162 (628) (12,145) 94 (1,361) (8,478) 128 (462) (12,145) 69 (1,219) (382) Net cash inflow/(outflow) from operating activities 28(a) 34,382 33,528 (16,115) (2,860) 7 28(d) Cash flows from investing activities Proceeds from sale of property, plant and equipment Proceeds from sale of pesticide products division Payment for property, plant and equipment Payment for other non-current assets Net cash inflow/(outflow) from investing activities Cash flows from financing activities Proceeds from issues of ordinary shares Repayments of borrowings Payment of dividends on ordinary shares Net cash inflow/(outflow) from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year 28(b) 208 5,645 (5,646) (500) (293) 1,360 (494) (17,773) 774 - (6,155) (6,933) 43 5,646 (90) - (12,314) 5,599 134 - (133) - 1 515 (7,597) (9,955) 1,362 43,635 515 16,657 (17,773) (9,955) (16,907) (17,037) 17,182 4,177 4,539 21,721 362 4,539 27,224 16,708 4,231 20,939 7,217 4,358 (127) 4,231 The above cash flow statements should be read in conjunction with the accompanying notes. Select Harvests Annual Report 2006 47 Notes to the financial statements as at 30 June 2006 1. Summary of significant accounting policies The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial report includes separate financial statements for Select Harvests Limited as an individual entity and the consolidated entity consisting of Select Harvests Limited and its subsidiaries. (a) Basis of preparation This general purpose financial report has been prepared in accordance with Australian equivalents to International Financial Reporting Standards (AIFRSs), other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001. Compliance with IFRSs Australian Accounting Standards include AIFRSs. Compliance with AIFRSs ensures that the consolidated financial statements and notes of Select Harvests Limited comply with International Financial Reporting Standards (IFRSs). The parent entity financial statements and notes also comply with IFRSs except that it has elected to apply the relief provided to parent entities in respect of certain disclosure requirements contained in AASB 132 Financial Instruments: Presentation and Disclosure. Application of AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards These financial statements are the first Select Harvests Limited financial statements to be prepared in accordance with AIFRSs. AASB 1 First time Adoption of Australian Equivalents to International Financial Reporting Standards has been applied in preparing these financial statements. Financial statements of Select Harvests Limited until 30 June 2005 had been prepared in accordance with previous Australian Generally Accepted Accounting Principles (AGAAP). AGAAP differs in certain respects from AIFRS. When preparing the Select Harvests Limited 2006 financial statements, management has amended certain accounting, valuation and consolidation methods applied in the AGAAP financial statements to comply with AIFRS. The comparative figures in respect of 2005 were restated to reflect these adjustments. Reconciliations and descriptions of the effect of transition from previous AGAAP to AIFRSs on the consolidated and parent entity’s equity and its net income are given in note 40. Historical cost convention These financial statements have been prepared under historical cost convention, as modified by the revaluation of available- for-sale financial assets, financial assets and liabilities (including derivative instruments) at fair value through profit and loss, and certain classes of property, plant and equipment. (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 at any point during the year and at balance date. Subsidiaries are fully consolidated from the date at which control is transferred to the group. They are deconsolidated from the date that control ceases. 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. Investments in subsidiaries are accounted for at cost in the individual financial statements of Select Harvests Limited. 48 Select Harvests Annual Report 2006 (c) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of each entity comprising the consolidated entity are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Australian dollars, which is the functional and presentation currency of Select Harvests Limited. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges. (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 cash flow statement, 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 fair value less estimated point of sale costs in accordance with AASB 141: ‘Agriculture’ – 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 141 ‘Agriculture’ 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) Biological Assets Almond trees Almond trees are classified as a biological asset and valued in accordance with AASB 141 ‘Agriculture’. Developing almond trees are valued at their growing cost until the year they bear their first commercial crop. The value of crop bearing almond trees is measured at fair value 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 (eg: land, buildings, water licenses, etc) 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. Select Harvests Annual Report 2006 49 Notes to the financial statements as at 30 June 2006 Nursery trees are grown by the consolidated entity for sale to external almond orchard owners and for use in almond orchards owned by the consolidated entity. Nursery trees are carried at fair value. Growing almond crop The growing almond crop is valued in accordance with AASB 141 ‘Agriculture’. 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. Almond trees are valued as described above once they commence bearing a commercial crop. (g) Derivatives Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The consolidated entity designates derivatives as either; (1) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); or (2) hedges of highly probable forecast transactions (cash flow hedges). The consolidated entity documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The consolidated entity also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. (i) Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. (ii) Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profit or loss (for instance when the forecast sale that is hedged takes place). However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the measurement of the initial cost or carrying amount of the asset or liability. When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. 50 Select Harvests Annual Report 2006 (h) Property, plant and equipment Cost and valuation All classes of property, plant and equipment are measured at cost less accumulated depreciation. The carrying amount of property, 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 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, irrigation systems: 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 owned orchards and other assets under development. (i) 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 over the term of the lease. Finance leases Leases which effectively transfer substantially all the risks and benefits incidental to ownership of the leased item to the consolidated entity 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 income statement. 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 2006 51 Notes to the financial statements as at 30 June 2006 ( j) Intangibles Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the consolidated entity’s share of the net identifiable assets of the acquired subsidiary/business at the date of acquisition. Goodwill is not amortised. Instead, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less any accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. 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. Instead, brand names are tested for impairment annually, or more frequently if events or changes in circumstances indicate that they might be impaired, and are carried at cost less any accumulated impairment losses. (k) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances, and amounts collected on behalf of third parties. Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity, the revenue can be reliably measured, and the risks and rewards have passed to the buyer. 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 Dividends are recognised as revenue when the right to receive payment is established. 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 4 and are not recognised as revenue. As at 30 June 2006 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). 52 Select Harvests Annual Report 2006 (l) Other income Almond Stocks Increments or decrements in the net market value of almond stocks are recognised as income or expenses in the income statement 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. (m) Income tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted for each jurisdiction. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. An exception is made for certain temporary differences arising from the initial recognition of an asset or a liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. 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 its wholly owned Australian subsidiaries in the tax-consolidated group continue to account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand alone taxpayer in its own right. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the group. Details of tax funding agreements are outlined in note 6. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. 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. Select Harvests Annual Report 2006 53 Notes to the financial statements as at 30 June 2006 The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet. Cash flows are included in the cash flow statement 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. (n) Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). (o) 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 consolidated entity to an employee superannuation fund and are charged as expenses when incurred. Share-based payments Share-based compensation benefits are provided to employees via the Select Harvests Limited Executive Share Option Scheme. Share options granted before 7 November 2002 and/or vested before 1 January 2005: No expense is recognised in respect of these options. The shares are recognised when the options are exercised and the proceeds received allocated to share capital. Share options granted after 7 November 2002 and vested after 1 January 2005: The fair value of options granted under the Select Harvests Limited Executive Share Option Scheme is recognised as an employee benefit expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the period during which the employees become unconditionally entitled to the options. The fair value at grant date is determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. 54 Select Harvests Annual Report 2006 The fair value of the options granted excludes the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each balance sheet date, the entity revises its estimate of the number of options that are expected to become exercisable. The employee benefit expense recognised each period takes into account the most recent estimate. Upon the exercise of options, the balance of the share-based payments reserve relating to those options is transferred to share capital and proceeds received are credited to share capital. (p) Financial instruments 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 34. Financial Liabilities The bank overdraft is carried at the principal amount. Interest is charged as an expense as it accrues. Liabilities are recognised for amounts to be paid in the future for goods and services received, whether or not billed to the consolidated entity. Finance lease liability is accounted for in accordance with AASB 117 ‘Leases’. (q) Fair value estimation The fair value of certain financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The fair value of financial instruments traded in active markets (such as foreign exchange hedge contracts) is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the consolidated entity is the current bid price; the appropriate quoted market price for financial liabilities is the current ask price. The nominal value less estimated credit adjustments of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the consolidated entity for similar instruments. (r) Borrowing costs Borrowing costs, inclusive of all facility fees, bank charges, and interest, are expensed as incurred. (s) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the company by the weighted average number of ordinary shares outstanding during the financial year (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares. Select Harvests Annual Report 2006 55 Notes to the financial statements as at 30 June 2006 (t) Discontinued operations A discontinued operation is a component of the consolidated entity that has been disposed of or is classified as held for sale and that represents a separate major line of business and is part of a single co-ordinated plan to dispose of such a line of business. The results of discontinued operations are presented separately on the face of the income statement. (u) New accounting standards and UIG interpretations Certain new accounting standards and UIG interpretations have been published that are not mandatory for 30 June 2006 reporting periods. These are as follows: (a) AASB 119 Employee Benefits: Accounting for actuarial gains and losses and group plans (b) AASB 2005-1 Amendments to Australian Accounting Standard [AASB 139]: Cash flow hedge accounting of forecast intra-group transactions (c) AASB 2005-4 Amendments to Accounting Standards [AASB 139, AASB 132, AASB 1, AASB 1023 & AASB 1038]: Fair value option (d) UIG 4 Determining whether an Asset Contains a Lease (e) UIG 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds (f) AASB 2005-6 Amendments to Australian Accounting Standards [AASB 3]: Business combinations involving entities under common control (g) AASB 2005-9 Amendments to Australian Accounting Standards [AASB 4, AASB 1023, AASB 139 & AASB 132]: Financial guarantee contracts (h) AASB 7 Financial instruments: Disclosures (i) AASB 2005-10 Amendments to Australian Accounting Standards [AASB 132, AASB 101, AASB 114, AASB 117, AASB 133, AASB 139, AASB 1, AASB 4, AASB 1023 & AASB 1038]: consequential amendments arising from the issue of AASB 7 ( j) UIG 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment (k) AASB 2006-1 Amendments to Australian Accounting Standards [AASB 121]: Clarification regarding monetary items forming part of the net investment in a foreign operation (l) UIG 7 Applying the Restatement Approach under [AASB 129]: Financial Reporting in Hyperinflationary Economies (m) UIG 8 Scope of AASB 2 (n) UIG 9 Reassessment of Embedded Derivatives. The consolidated entity has commenced but has not completed its review of the impact (if any) of the new accounting standards and UIG interpretations. (v) Provisions Provisions are recognised when the consolidated entity has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated. (w) Contributed equity Ordinary shares are classified as equity. The value of new shares or options issued is shown in equity. (x) Comparatives Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosures. (y) 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. 56 Select Harvests Annual Report 2006 2. Financial risk management The Consolidated entity’s activities expose it to a variety of financial risks. Risk management procedures focus on the unpredictability of financial markets and seek to minimise potential adverse effects on the financial performance of the consolidated entity. Risk management is carried out by management pursuant to policies approved by the Board of Directors. (a) Market risk (i) Foreign exchange risk Foreign exchange risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the consolidated entity’s functional currency. The consolidated entity sells both almonds harvested from owned orchards through the almond pool and processed products internationally in United States dollars, and purchases raw materials and other inputs to the manufacturing and almond growing process from overseas suppliers predominantly in United States dollars. Management and the Board review the foreign exchange position of the consolidated entity and, where appropriate, take out forward exchange contracts, transacted with the consolidated entity’s banker, to manage foreign exchange risk. (ii) Price risk The consolidated entity is exposed to commodity price risk. The consolidated entity sells almonds harvested from owned orchards domestically and overseas throughout the year based on an almond price which will fluctuate from time to time due to changes in international market conditions. The consolidated entity has an active and ongoing almond marketing and selling program in place which is continually monitored and adapted for changes in almond prices. The consolidated entity also purchases raw materials and other inputs to the manufacturing and almond growing process domestically and overseas. The price of such inputs will also fluctuate from time to time based on market forces. Where practical, the consolidated entity, through its procurement programs, contracts from time to time to acquire such quantity of inputs as is projected to be required at fixed prices. (b) Credit risk The consolidated entity has no significant concentrations of credit risk. The consolidated entity has policies in place to ensure that sales of products and services are made to customers with an appropriate credit history. Derivative counterparties and cash transactions are limited to high credit quality financial institutions. (c) Liquidity risk The consolidated entity maintains committed credit facilities in place with financial institutions for the ongoing funding of its activities. (d) Cash flow interest rate risk As the consolidated entity has no significant interest-bearing assets, income and operating cash flows are not materially exposed to changes in market interest rates. The consolidated entity’s interest rate risk arises from borrowings. Borrowings issued at variable rates expose the consolidated entity to cash flow interest rate risk. Select Harvests Annual Report 2006 57 Notes to the financial statements as at 30 June 2006 3. Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors. Critical accounting estimates and assumptions The consolidated entity makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Almond trees Almond trees are classified as a biological asset and valued in accordance with AASB 141 ‘Agriculture’. The consolidated entity’s accounting policies in relation to almond trees are detailed in note 1(f). In applying this policy, the consolidated entity has made various assumptions. These are detailed in note 17 of the financial statements. As at 30 June 2006, the value of almond trees carried in the financial statements of the consolidated entity is $5.8 million (2005:$5.5 million). NOTES CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 4. Revenue Revenue from continuing operations Total revenue from operating activities Other revenue from continuing operations Management fees Dividends and distributions – Controlled entities – Other corporations Total dividends and distributions Interest – Wholly owned entities – Other persons/corporations Total interest Total other revenue from continuing operations Total revenue Revenue from discontinued operations Revenue/Cost of goods sold from external almond pool sales Revenue from external almond pool sales Cost of goods sold from external almond pool sales 217,866 173,864 - - - - - - - 162 162 162 - - 1 1 - 94 94 95 218,028 173,959 6,637 4,166 17,444 (17,444) - 12,632 (12,632) - 3,398 3,010 25,212 13,907 - - 28,610 13,907 956 128 1,084 29,694 29,694 5,700 - - - 2,563 69 2,632 19,549 19,549 - - - - Revenue from external almond pool sales includes sales of almonds for externally owned almond orchards, which are sold by the consolidated entity on a pooled basis, the proceeds from which are distributed to the pool participants. 58 Select Harvests Annual Report 2006 NOTES CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 5. 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 leased plant and equipment plant and equipment Total depreciation of non-current assets Finance costs wholly owned entities other persons Total finance costs Movement in provisions for doubtful debts Movement in provision for employee entitlements Movement in provision for stock diminution Operating lease rental minimum lease payments Total operating lease rental 165,546 127,973 1 68 336 217 2,927 3,549 - 628 628 (14) 1,143 (199) 5,403 5,403 5 55 342 323 2,453 3,178 - 1,361 1,361 24 1,166 (105) 3,713 3,713 (b) Losses/(gains) Net loss on disposal of property, plant and equipment 6 78 6. Income tax (a) Income tax expense Current tax Deferred tax Under/(over) provided in prior years Income tax expense is attributable to: profit from continuing operations profit from discontinued operations Aggregate income tax expense Deferred income tax (revenue) expense included in income tax expense comprises: decrease/(increase) in deferred tax assets (decrease)/increase in deferred tax liabilities 16 24 11,287 258 (87) 9,458 667 32 11,458 10,157 11,411 47 11,458 9,698 459 10,157 (341) 599 258 (1) 668 667 - - - - 12 208 220 440 463 903 - 31 - - 10 222 (29) 8 201 201 - 201 (442) 413 (29) - 1 - - 8 166 175 855 1,219 2,074 - 117 - - 44 315 34 10 359 359 - 359 - 34 34 Select Harvests Annual Report 2006 59 Notes to the financial statements as at 30 June 2006 (b) Numerical reconciliation of income tax expense to prima facie tax payable Profit from continuing operations before income tax expense Profit from discontinued operations before income tax expense Tax at the Australian tax rate of 30% (2005 – 30%) Tax effect of amounts that are not deductible (taxable) in calculating taxable income rebateable dividends amortisation of intangible assets other non allowable items other non assessable items under/(over) provision of previous year Income tax expense NOTES CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 37,903 31,802 25,632 14,934 4,356 42,259 12,678 - - 109 (1,242) (87) 11,458 1,260 33,062 9,919 - - 206 - 32 10,157 4,033 29,665 8,899 - 14,934 4,480 (7,564) - 68 (1,210) 8 201 (4,172) - 41 - 10 359 (c) Tax consolidation legislation Select Harvests Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation as of 1 July 2003. The accounting policy in relation to this legislation is set out in note 1(m). On adoption of the tax consolidation legislation, the entities in the tax consolidated group entered into a tax sharing agreement which limits the joint and several liability of the wholly-owned entities in the case of a default by the head entity, Select Harvests Limited. The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate Select Harvests Limited for any current tax payable assumed and are compensated by Select Harvests Limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to Select Harvests Limited under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities’ financial statements. The amounts receivable/payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. The funding amounts are recognised as current intercompany receivables or payables. 7. Discontinued operation (a) Description On 23 August 2005 Select Harvests Ltd 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. The transaction was completed on 15 October 2005 with effect from 1 October 2005, and the entity disposed of is reported in this financial report as a discontinued operation. Financial information relating to the discontinued operation for the period to the date of disposal is set out below. Further information is set out in the segment information. 60 Select Harvests Annual Report 2006 (b) Financial performance and cash flow information The financial performance and cash flow information presented are for the three months ended 30 September 2005 (2006 column) and the year ended 30 June 2005. CONSOLIDATED PARENT ENTITY Revenue Expenses Profit before income tax Income tax expense Profit after income tax of discontinued operations Gain on sale of the division before income tax Income tax expense Gain on sale of the division after income tax Profit from discontinued operations Net cash inflow/(outflow)from operating activities Net cash inflow/(outflow) from investing activities (2005 includes an inflow of $5,644,650 from the sale of the division) Net cash inflow/(outflow) from financing activities Net increase in cash generated by the division 2006 $’000 937 (720) 217 (47) 170 4,139 - 4,139 4,309 (595) 5,645 595 5,645 2005 $’000 4,166 (2,906) 1,260 (459) 801 - - - 801 1,096 - (1,096) - (c) Carrying amounts of assets and liabilities The carrying amounts of assets and liabilities as at 30 September 2005 (2006 column) and 30 June 2005. Cash Property, plant and equipment Investments Trade receivables Inventories Other Total assets Trade creditors Provision for tax Provision for employee benefits Total liabilities Net assets (d) Details of the sale of the division Consideration received or receivable: Cash Total disposal consideration Carrying amount of net assets sold Gain on sale before income tax Income tax expense Gain on sale after income tax 1 685 20 600 485 4 1,795 (179) 43 (153) (289) 1,506 5,645 5,645 (1,506) 4,139 - 4,139 1 707 20 1,021 600 56 2,405 (269) (275) (142) (686) 1,719 2006 $’000 - - - - - 4,033 - 4,033 4,033 - 5,645 - 5,645 - - 1,612 - - - 1,612 - - - - 1,612 - - - - - - 5,645 5,645 (1,612) 4,033 - 4,033 2005 $’000 - - - - - - - - - - - - - - - 2,588 - - - 2,588 (764) - - (764) 1,824 - - - - - - Select Harvests Annual Report 2006 61 Notes to the financial statements as at 30 June 2006 8. Dividends paid or provided for on ordinary shares CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 (a) Dividends paid during the year (i) Interim – paid 3 April 2006 (2005: 1 April 2005) Fully franked dividend (20.0c per share) (2005:16.0c per share) (ii) Special dividend– paid 3 April 2006 (2005: Nil) Fully franked dividend (10.0c per share) (2005: Nil) (iii) Final – paid 3rd October 2005 (2005:1 October 2004) Fully franked dividend (26.0c per share) (2005:16.0c per share) (b) Dividends proposed and not recognised as a liability Fully franked dividend payable on 2 October 2006 (33.0c per share, $13,103,560) (c) Franking credit balance Franking credits available for the subsequent financial year arising from: Franking account balance as at the beginning of the financial year Current year tax payment instalments and adjustments Interim dividends paid Franking account balance at end of financial year Current year income tax payable Dividend declared Franking account balance after payment of current year tax and dividends 9. Cash and cash equivalents Cash at bank and in hand Deposits at call (a) Reconciliation to cash at the end of the year The above figures are reconciled to cash at the end of the financial year as shown in the statement of cash flow as follows: Balances as above Bank overdrafts (note 20) Balances per statement of cash flows 7,913 3,956 11,869 10,211 22,080 6,225 - 6,225 6,199 12,424 7,913 3,956 11,869 10,211 22,080 6,225 - 6,225 6,199 12,424 16,733 29,526 (11,869) 34,390 5,353 (13,104) 20,872 19,782 (12,425) 28,229 (1,286) (10,210) 26,639 16,733 16,057 6,500 22,557 588 4,000 4,588 15,275 6,500 21,775 280 4,000 4,280 22,557 (836) 21,721 4,588 (49) 4,539 21,775 (836) 20,939 4,280 (49) 4,231 (b) Cash at bank and on hand Details of the interest rates applicable to cash at bank and on hand are detailed in note 36. (c) Deposits at call The deposits are bearing a floating interest rate at 30 June 2006. Details of the interest rates applicable to deposits at call are detailed in note 36. 62 Select Harvests Annual Report 2006 10. Receivables (current) Trade debtors Provision for doubtful debts Prepayments Other receivables CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 23,602 (10) 23,592 825 25 24,442 24,829 (24) 24,805 825 57 25,687 2006 $’000 - - - 703 25 728 2005 $’000 - - - 770 10 780 (a) Bad and doubtful trade receivables The consolidated entity has recognised a profit/(loss) of $14,332 (2005: ($24,000)) in respect of bad and doubtful trade receivables during the year ended 30 June 2006. This loss has been included in ‘other expenses’ in the income statement. (b) Other receivables These amounts generally arise from transactions outside the usual operating activities of the group. (c) Effective interest rates and credit risk All receivables are non-interest bearing. 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 consolidated entity operates. Refer to note 2 for more information on the risk management policy of the consolidated entity. Information concerning the effective interest rate and credit risk of both current and non-current receivables is set out in note 36. 11. 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 Almond stocks at cost (refer to note 1(f)) Total inventories (a) Movements in provision for diminution in value Beginning of the financial year Movement during the year End of the financial year 11(a) 11(a) 6,793 - 6,793 6,060 (267) 5,793 5,763 5,763 6,333 6,333 24,682 (517) 250 (267) 7,234 (51) 7,183 7,649 (466) 7,183 5,318 5,318 5,112 5,112 24,796 (412) (105) (517) - - - - - - - - - - - - - - - - - - - - - - - - - - - - Select Harvests Annual Report 2006 63 Notes to the financial statements as at 30 June 2006 12. Derivative financial instruments (current) Current assets Forward exchange contracts – cash flow hedges Total current derivative financial instrument assets Forward exchange contracts – cash flow hedges Interest rate swap contracts – cash flow hedge Total current derivative financial instrument liabilities (i) Forward exchange contracts – cash flow hedges CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 774 774 44 - 44 3,761 3,761 - 22 22 774 774 44 - 44 3,761 3,761 - 22 22 The consolidated 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 consolidated entity against unfavourable exchange rate movements for highly probable contracted and forecasted sales and purchases undertaken in foreign currencies. The net amount of the foreign currency the consolidated 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 was $777,000 (2005: $10,295,000). 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 SELL AUSTRALIAN DOLLARS AVERAGE EXCHANGE RATE SETTLEMENT Less than 6 months 6 months to 1 year Greater than 1 year 2006 $’000 5,304 - - 5,304 2005 $’000 10,994 1,080 248 12,322 2006 $ 0.74 - - 2005 $ 0.76 0.76 0.77 SELL UNITED STATES DOLLARS BUY AUSTRALIAN DOLLARS AVERAGE EXCHANGE RATE SETTLEMENT Less than 6 months 6 months to 1 year 1 year to 2 years 2006 $’000 4,457 70 - 4,527 2005 $’000 15,796 1,770 5,051 22,617 2006 $ 0.61 0.76 - 2005 $ 0.64 0.49 0.59 64 Select Harvests Annual Report 2006 (ii) 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 balance sheet 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 at maturity. The credit risk exposure to forward exchange contracts is the net fair value of these contracts. The consolidated entity does not have any material credit risk exposure to any single debtor or group of debtors under financial instruments entered into by the consolidated entity. (iii) Interest rate risk exposures Refer to note 36 for the consolidated entity’s exposure to interest rate risk on derivative financial instruments. NOTES CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 13. Receivables (non-current) Related party receivables Wholly-owned group – controlled entities – provision for impairment 34 34 14. Other financial assets (non-current) Investments at cost comprise: Shares Other Corporations Controlled entities – unlisted - - - - - - - - - 21 - 21 37,355 (1,099) 36,256 45,225 (1,099) 44,126 - 9,607 9,607 - 12,195 12,195 Select Harvests Annual Report 2006 65 Notes to the financial statements as at 30 June 2006 15. Property, plant and equipment Freehold land and buildings At cost Accumulated depreciation Buildings At cost Accumulated depreciation Plantation land and irrigation systems At cost 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: Cost Accumulated depreciation and amortisation Total written down amount NOTES CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 15(b) 15(a) 15(b) 15(a) 15(b) 15(b) 15(b) 15(b) - - - 2,840 (329) 2,511 24,934 (1,497) 23,437 25,948 1,657 (956) 701 33,242 (16,977) 16,265 1,468 1,468 18,434 64,141 (19,759) 44,382 315 (83) 232 2,792 (261) 2,531 24,147 (1,162) 22,985 25,748 2,771 (1,457) 1,314 31,165 (15,424) 15,741 1,188 1,188 18,243 62,378 (18,387) 43,991 - - - - - - - - - - 103 (12) 91 869 (496) 373 - - 464 972 (508) 464 - - - - - - - - - - - - - 1,198 (689) 509 14 14 523 1,212 (689) 523 (a) Valuations The consolidated entity has elected to measure items of property, plant and equipment at the date of transition to Australian equivalents to IFRSs at fair value and to use fair value as the deemed cost at that date. The consolidated entity has chosen to apply this transitional provision adopting the directors valuation on 30 June 2004 as deemed cost. 66 Select Harvests Annual Report 2006 (b) Reconciliations Reconciliations of the carrying amounts of property, plant and equipment at the beginning and end of the current financial year. Freehold land and buildings Carrying amount at beginning Additions Depreciation expense Disposal through sale of entity Disposals Buildings Carrying amount at beginning Additions 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 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 Disposal through sale of entity Transfers between classes Transfers between entities Depreciation expense NOTES CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 232 - (1) (231) - - 2,531 48 (68) 2,511 22,985 787 - - (335) 23,437 1,314 103 - (467) (249) 701 15,741 3,400 (214) - (453) 724 - (2,933) 16,265 384 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 - - - - - - - - - - - - - - - - - 103 - - (12) 91 509 90 (53) - - 14 22 (209) 373 149 24 (1) - (172) - - - - - - - - - - - 75 - - (67) (8) - 523 95 (6) - - 67 (4) (166) 509 Select Harvests Annual Report 2006 67 Notes to the financial statements as at 30 June 2006 NOTES CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 Capital works in progress Carrying amount at beginning Additions Transfers between classes Reclassification to other accounts Total written down value 16. Deferred tax assets The balance comprises temporary differences attributable to: Amounts recognised in profit and loss Inventories Assets at cost Employee benefits Accruals Provisions Doubtful debts Amounts recognised directly in equity Cash flow hedges Movements: Opening balance 1 July Credited/(charged) to income statement Credited/(charged) to equity Transfer on sale of discontinued operation Closing balance at 30 June Deferred tax assets to be recovered after more than 12 months Deferred tax assets to be recovered within 12 months 1,188 951 (257) (414) 1,468 44,382 1,437 1,048 (539) (758) 1,188 43,991 - (180) 312 100 329 3 564 (219) 345 267 341 (219) (44) 345 (69) 414 345 30 (209) 241 198 - 7 267 - 267 266 1 - - 267 (209) 476 267 14 - (14) - 464 - - 81 32 329 - 442 (219) 223 - 442 (219) - 223 111 112 223 2005 $’000 - 14 - 14 523 - - - - - - - - - - - - - - - - - 68 Select Harvests Annual Report 2006 17. Biological assets – almond trees The consolidated entity, as part of its operations, grows, harvests, and sells almonds. Harvesting of almonds occurs from February through to April each year. The almond orchards are located in the Robinvale area of North West Victoria. As at 30 June 2006 the consolidated entity owned and managed a total of 1,863 acres of almond orchards (2005: 1,863 acres) and leased and managed a total of 505 acres of almond orchards (2005: 505 acres). During the year ended 30 June 2006, 1,624 metric tonnes of almonds were harvested from these orchards (2005: 2,419 metric tonnes). These almonds had a fair value less estimated point of sale costs of $12.5 million (2005: $17.1 million). Carrying amount at 1 July Additions Almond tree fair value adjustment Carrying amount at 30 June CONSOLIDATED 2006 $ ‘000 5,516 198 85 5,799 2005 $ ‘000 4,986 759 (229) 5,516 Developing almond trees are valued at their growing cost until the year they bear their first commercial crop. The value of crop bearing almond trees is 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. Asset values include growing costs capitalised proportionately between the year of planting and the year in which the almond trees achieve full maturation. (a) Financial risk management strategies The consolidated entity is exposed to financial risks arising from changes in the price of almonds. The consolidated entity reviews its outlook for almond prices regularly in considering the need for active financial risk management. (b) Non-current assets pledged as security Refer to note 23 for information on biological assets whose title is restricted and the carrying amounts of any biological assets pledged as security by the parent entity or its subsidiaries. Select Harvests Annual Report 2006 69 Notes to the financial statements as at 30 June 2006 18. Intangibles At 1 July 2004 Cost Accumulated amortisation Net book amount Year ended 30 June 2005 Opening net book amount Additions/acquisition of business Closing net book amount Year ended 30 June 2006 Opening net book amount Additions Closing net book amount CONSOLIDATED GOODWILL BRAND NAMES* $’000 $’000 TOTAL $’000 29,396 (5,051) 24,345 24,345 1,636 25,981 25,981 14 25,995 2,900 - 2,900 2,900 - 2,900 2,900 - 2,900 32,296 (5,051) 27,245 27,245 1,636 28,881 28,881 14 28,895 * Brand name assets relate to the ‘Lucky’ brand, which has been assessed as having an indefinite useful life. (a) Impairment tests for goodwill Goodwill is allocated to the consolidated entity’s cash-generating units (CGU) identified according to business segment. The total value of goodwill relates to the Food Products CGU. The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use cash flow projections based on financial projections covering a five-year period assuming a growth rate of 2% per annum. Cash flows beyond the five-year period are extrapolated using estimated growth rates that do not exceed the long-term average growth rate for the business in which the CGU operates. A weighted average cost of capital (11.8%) has been used to discount the cash flow projections. NOTES CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 19. Payables (current) Trade creditors Other creditors 8,668 25,739 34,407 7,042 25,780 32,822 20. Interest-bearing liabilities (current) Secured Bank overdraft Lease liability Total secured current borrowings 20(a) 29 836 117 953 49 486 535 2 406 408 836 16 852 97 1,273 1,370 49 - 49 70 Select Harvests Annual Report 2006 (a) Security Details of the security relating to each of the secured liabilities and further information on the bank overdrafts and bank loans are set out in note 23. (b) Interest rate risk exposures Details of the consolidated entity’s exposure to interest rate changes on borrowings are set out in note 36. (c) Fair value disclosures Details of the fair value of borrowings for the consolidated entity are set out in note 23. 21. Provisions (current) Employee benefits Other 22. Payables (non-current) Aggregate amounts payable to related parties – wholly owned companies 23. Interest-bearing liabilities (non-current) Secured Lease liability Total secured non-current borrowings 29 (a) Total secured liabilities The total secured liabilities (current and non-current) are as follows: Bank overdraft Lease liability Total secured liabilities (b) Assets pledged as security: NOTES CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 25(a) 2,207 - 2,207 2,059 80 2,139 199 - 199 191 - 191 - - 350 350 836 467 1,303 - - 7,964 7,964 13,423 13,423 376 376 49 862 911 75 75 836 91 927 - - 49 - 49 The bank overdraft and bills of exchange of the parent entity and subsidiaries are secured by the following: (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. Lease liabilities are effectively secured as the rights to the leased assets recognised in the financial statements revert to the lessor in the event of a default. Select Harvests Annual Report 2006 71 Notes to the financial statements as at 30 June 2006 The carrying amounts of assets pledged as security for current and non-current borrowings are: Current Floating charge Cash and cash equivalents Receivables Inventories Derivative financial instruments Total current assets pledged as security Non-current Floating charge Receivables Other financial assets Property, plant and equipment Biological assets – almond trees Total non-current assets pledged as security Total assets pledged as security (c) Financing arrangements NOTES CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 22,557 24,442 24,682 774 72,455 - - 44,382 5,799 50,181 4,588 25,687 24,796 3,761 58,832 - 21 43,991 5,516 49,528 122,636 108,360 21,775 728 - 774 23,277 36,256 9,607 464 - 46,327 69,604 4,280 780 - 3,761 8,821 41,205 12,195 523 - 53,923 62,744 The consolidated entity and the Company have bank overdraft facilities available to the extent of 2,000,000 Australian dollars and 3,000,000 United States dollars (2005: AUD2,000,000 and USD Nil). As at 30 June 2006 the consolidated entity and company have used AUD Nil and USD 578,503 (2005: AUD Nil and USD Nil) of the facility. The consolidated entity and the Company have a commercial bill facility available to the extent of $28,000,000 (2005: $28,000,000). As at 30 June 2006 the consolidated entity and Company have used $Nil (2005: $Nil). The current interest rates are 5.78% on the commercial bill facility, 9.60% on the Australian dollar bank overdraft facility, and 6.72% on the United States dollar bank overdraft facility. (d) Interest rate risk exposures Details of the consolidated entity’s exposure to interest rate risk are set out in note 36. (e) Fair value The fair value of borrowings at balance date is equal to the carrying amounts set out in part (a) above. 72 Select Harvests Annual Report 2006 NOTES CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 24. Deferred tax liabilities (non-current) The balance comprises temporary differences attributable to: Amounts recognised in profit and loss Inventory Assets at cost Employee benefits Accruals Provisions Intangibles Operating leases Amounts recognised directly in equity Cash flow hedges Movements: Opening balance 1 July Credited/(charged) to income statement Credited/(charged) to equity Closing balance at 30 June Deferred tax liabilities to be settled after more than 12 months Deferred tax liabilities to be settled within 12 months 25. Provisions (non-current) Employee entitlements (a) Aggregate employee entitlements liability (b) Number of full time employees at year end 25(a) 1,233 8,487 (508) (396) - 870 (289) 9,397 321 9,718 9,920 599 (801) 9,718 9,068 650 9,718 422 2,629 297 940 8,147 (525) (70) (330) 870 (233) 8,799 1,121 9,920 9,260 668 (8) 9,920 9,575 345 9,920 360 2,419 276 - - - - - - - - - - 709 413 (1,122) - - - - 71 270 11 - - (76) (7) (329) - - (412) 1,121 709 681 34 (6) 709 791 (82) 709 48 239 11 Select Harvests Annual Report 2006 73 Notes to the financial statements as at 30 June 2006 NOTES CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 26. 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 End of the financial year (c) Share options Options over ordinary shares: Employee share scheme 52,665 52,665 46,925 46,925 52,665 52,665 2005 2006 NUMBER OF SHARES $’000 NUMBER OF SHARES 39,069,120 46,925 38,525,552 322,037 316,600 39,707,757 4,305 1,435 52,665 287,268 256,300 39,069,120 46,925 46,925 $’000 43,940 2,470 515 46,925 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, 237,700 options (2005: 228,700 options) have been granted under this scheme (refer note 38 and Directors’ Report for further details). The market value of ordinary Select Harvests Limited shares closed at $13.02 on 30 June 2006 ($9.70 on 30 June 2005). (d) Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. 74 Select Harvests Annual Report 2006 NOTES CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 27(a) 27(a) 27(a) 27(a) 27(a) 27(c) 27. Reserves and retained profits Capital reserve Cash flow hedge reserve Interest rate swap reserve Asset revaluation reserve Options reserve Retained profits (a) Movements Capital reserve Balance at beginning of year Surplus on revaluation Balance at end of year Cash flow hedge reserve Balance at beginning of year Adjustment on adoption of AASB 132 and AASB 139 net of tax Currency translation differences arising during the year Balance at end of year Interest rate swap reserve Balance at beginning of year Adjustment on adoption of AASB 132 and AASB 139 net of tax Swap translation differences arising during the year Balance at end of year Asset revaluation reserve Balance at beginning of year Adjustment on adoption of AASB 132 and AASB 139 net of tax Surplus on revaluation Balance at end of year Options reserve Balance at beginning of year Adjustment on adoption of AASB 132 and AASB 139 net of tax Option expense Transfer to share capital (options exercised) Balance at end of year 3,270 1,258 - 7,645 518 12,691 36,125 3,270 - 3,270 2,633 - (1,375) 1,258 (15) - 15 - 7,645 - - 7,645 233 358 (73) 518 3,270 2,633 (15) 7,645 233 13,766 27,404 3,270 - 3,270 - 2,674 (41) 2,633 - (42) 27 (15) 10,920 (3,275) - 7,645 - 41 192 - 233 3,270 512 - - 518 4,300 955 3,270 - 3,270 2,633 - (2,121) 512 (15) - 15 - - - - - 233 358 (73) 518 3,270 2,633 (15) - 233 6,121 (6,432) 3,270 - 3,270 - 2,674 (41) 2,633 - (42) 27 (15) - - - - - 41 192 - 233 Select Harvests Annual Report 2006 75 Notes to the financial statements as at 30 June 2006 (b) Nature and purpose of reserves (i) Capital reserve The capital reserve is used to isolate realised capital profits from disposal of non-current assets. (ii) Asset revaluation 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. (iii) Share based payments reserve The share based payments reserve is used to recognise the fair value of options issued but not exercised. (iv) Cash flow hedge reserve The cash flow hedge reserve is used to record gains or losses on foreign exchange contracts in a cash flow hedge that are recognised directly in equity. (c) Retained profits Balance at the beginning of year Adjustment on adoption of AASB 132 and AASB 139, net of tax Profit attributable to members of Select Harvests Limited Total available for appropriation Dividends paid Balance at end of year CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 27,404 - 30,801 58,205 (22,080) 36,125 21,137 (4,213) 22,905 39,829 (12,425) 27,404 (6,432) 3 29,464 23,035 (22,080) 955 (8,874) 292 14,575 5,993 (12,425) (6,432) 76 Select Harvests Annual Report 2006 28. Cash flow statement (a) Reconciliation of the net profit after tax to the net cash flows from operations Net profit Non-cash Items Depreciation and amortisation Almond stock fair value adjustment Almond trees fair value adjustment Net (profit)/loss on disposal of property, plant and equipment Net (profit) on disposal of discontinued operation Dividends received from controlled entities Interest received Management fees received Changes in assets and liabilities (Increase)/decrease in trade receivables (Increase)/decrease in inventory (Increase)/decrease in receivables and other assets (Decrease)/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 (c) Acquisition of entities and businesses There were no acquisitions of entities during the year. CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 30,801 22,905 29,464 14,575 3,571 467 85 6 (4,139) - - - 1,244 114 2,150 1,420 (945) (601) 209 34,382 3,178 787 (229) (78) - - - - (9,143) (5,685) 341 19,111 1,010 833 498 33,528 230 - - 10 (4,033) (25,212) (516) (3,398) - - (4,831) (5,983) (945) (932) 31 (16,115) 175 - - 44 - (13,907) (1,708) (3,011) - - 23 915 (60) 42 52 (2,860) 22,557 (836) 21,721 4,588 (49) 4,539 21,775 (836) 20,939 4,280 (49) 4,231 During the 2006 financial year the consolidated entity paid $500,000 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 2005. During the 2005 financial year the consolidated entity paid $1,500,000 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. In the 2005 financial year the consolidated entity acquired the Chiquita Nibbles business from Chiquita Brands South Pacific Limited for a total consideration of $5.4 million. Select Harvests Annual Report 2006 77 Notes to the financial statements as at 30 June 2006 Details of these transactions 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 29. Expenditure commitments Lease commitments – Group company as lessee Commitments in relation to leases contracted for at the reporting date but not recognised as liabilities, payable: Within one year Later than one year but not later than five years Later than five years (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 CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 500 500 - - - - - - - - - - - 500 500 6,202 23,130 14,917 44,249 5,577 19,857 12,129 37,563 6,933 6,933 - - 4,225 647 - 81 - (505) (150) - 4,298 2,635 6,933 4,304 16,602 17,126 38,032 3,860 13,599 13,442 30,901 37,563 30,901 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 78 Select Harvests Annual Report 2006 CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 Operating lease payments are for rental of premises, farming and factory equipment. (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 Finance leases are for various items of plant and equipment (iii) Almond orchard lease: 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 149 384 533 (66) 467 117 350 467 536 426 962 (100) 862 486 376 862 20 23 625 3,273 2,788 6,686 444 3,003 3,684 7,131 6,686 7,131 24 83 107 (15) 92 16 76 92 - - - - - - - - - - - - - - - - - The almond orchard lease comprise the lease of a 505 acre almond orchard from Sandhurst Trustees Limited in which the consolidated entity has the right to harvest the almonds from the trees owned by the lessor for the term of the agreement. 30. Subsequent events On 28 August 2006, the Directors declared a fully franked final dividend of 33 cents per ordinary share to be paid on Monday 2 October 2006 to shareholders registered at 5.00 pm on Friday 8 September 2006. There has been no other matter or circumstance, which has arisen since 30 June 2006 that has significantly affected or may significantly affect: a) the operations, in financial years subsequent to 30 June 2006, of the consolidated entity, or b) the results of those operations, or c) the state of affairs, in financial years subsequent to 30 June 2006, of the consolidated entity. Select Harvests Annual Report 2006 79 Notes to the financial statements as at 30 June 2006 31. Earnings per share The following reflects the income and share data used in the calculations of basic and diluted earnings per share: Profit from continuing operations Profit from discontinued operation Profit attributable to equity holders of the company used in calculating basic earnings per share Diluted earnings per share: Profit from continuing operations Profit from discontinued operation Profit attributable to equity holders of the company used in calculating 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 CONSOLIDATED 2006 $’000 2005 $’000 26,492 4,309 22,104 801 30,801 22,905 26,520 4,309 22,122 801 30,829 22,923 NUMBER OF SHARES 2006 2005 39,458,133 38,864,450 126,363 153,518 39,584,496 39,017,968 32. Remuneration of directors and key management personnel Principles used to determine the nature and amount of remuneration Remuneration levels are set to attract and retain appropriately qualified and experienced directors and key management personnel. 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 key management personnel 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 consolidated entity level, divisional level, or functional level, as applicable, for the financial year. In addition, the consolidated entity offers executive directors and key management personnel 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. 80 Select Harvests Annual Report 2006 (a) Directors The following persons were directors of Select Harvests Limited during the financial year: (i) Chairman – non-executive M A Fremder (ii) Executive director J Bird, Managing Director (iii) Non-executive directors C G Clark G F Dan O’Brien J C Leonard R M Herron (b) Other key management personnel The following persons also had authority and responsibility for planning, directing, and controlling the continuing activities of the consolidated entity, directly or indirectly, during the financial year: Name M Mattia M Ciobo R Tanti D Jones L Van Driel W Turner T Millen Position Employer Chief financial officer & company secretary General manager – Meriram National sales manager General manager – operations – food products division (from 25 July 2005 to 31 May 2006) Trading manager General manager – almond division Horticultural manager Select Harvests Limited Kibley Pty Ltd Select Harvests Marketing Pty Ltd Select Harvests Limited Select Harvests Marketing Pty Ltd Kyndalyn Park Pty Ltd Kyndalyn Park Pty Ltd All of the above persons were also key management persons during the year ended 30 June 2005, except for D Jones who commenced employment with the consolidated entity on 25 July 2005. V Cavanagh (General manager – pesticide products division) was a key management person in the year ended 30 June 2005 and ceased employment with the consolidated entity pursuant to the sale of the Pesticide Products business on 1 October 2005. (c) Key management personnel compensation Short term employment benefits Post employment benefits Share based payments CONSOLIDATED PARENT ENTITY 2006 $ 2,323,092 179,980 145,313 2,648,385 2005 $ 1,759,149 121,119 109,019 1,989,287 2006 $ 1,366,049 89,633 106,785 1,562,467 2005 $ 1,000,912 63,949 85,889 1,150,750 Select Harvests Annual Report 2006 81 Notes to the financial statements as at 30 June 2006 32. Remuneration of directors and key management personnel (cont'd) Number of options held by directors and key management personnel The movement during the financial year in the number of options over ordinary shares in the company held, directly or indirectly, by each director and key management personnel is as follows: 2006 Directors J Bird Key Management Personnel M Mattia (Chief financial officer and company secretary) R. Tanti (Sales manager – food products) T Millen (Horticultural manager) W Turner (General manager – almond division) L Van Driel (Trading manager) 2005 Directors J Bird HELD AT 1 JULY 2005 GRANTED AS REMUNERATION EXERCISED HELD AT 30 JUNE 2006 VESTED AND EXERCISABLE AT 30 JUNE 2006 132,800 114,800 (155,400) 92,200 92,200 8,800 - 9,200 7,000 11,200 19,500 7,400 7,500 14,400 15,300 (28,300) - (11,100) (21,400) (22,400) - 7,400 5,600 - 4,100 - 7,400 5,600 - 4,100 HELD AT 1 JULY 2004 GRANTED AS REMUNERATION EXERCISED HELD AT 30 JUNE 2005 VESTED AND EXERCISABLE AT 30 JUNE 2005 162,600 136,400 (166,200) 132,800 132,800 Key Management Personnel M Mattia (Chief financial officer and company secretary) T Millen (Horticultural manager) W Turner (General manager – almond division) L Van Driel (Trading manager) - 11,300 - 7,300 8,800 9,300 7,000 19,800 - (11,400) - (15,900) 8,800 9,200 7,000 11,200 8,800 9,200 7,000 11,200 No options held by directors or key management personnel are vested but not exercisable 82 Select Harvests Annual Report 2006 Number of shares held by directors and key management personnel The movement during the financial year in the number of ordinary shares of the company held, directly or indirectly, by each director and key management personnel, including their personally related entities, is as follows: 2006 Directors - Non Executive M A Fremder J C Leonard C G Clark R M Herron G F Dan O’Brien Directors – Executive J Bird Key Management Personnel M Mattia (Chief financial officer and company secretary) M Ciobo (General manager - Meriram) W Turner (General manager – almond division) L Van Driel (Trading manager) T Millen (Horticultural manager) 2005 Directors - Non Executive M A Fremder J C Leonard (appointed 21/7/2004) C G Clark R M Herron (appointed 27/01/05) G F Dan O’Brien Directors – Executive J Bird Key Management Personnel M Mattia (Chief financial officer and company secretary) M Ciobo (General manager - Meriram) L Van Driel (Trading manager) T Millen (Horticultural manager) HELD AT 1 JULY 2005 RECEIVED AS REMUNERATION RECEIVED ON EXERCISE OF OPTIONS OTHER – DRP, SALES & PURCHASES TOTAL 5,598,352 413,091 22,927 5,000 50,000 271,122 2,000 35,728 - 20,500 22,944 - - - - - - - - - - - - - - - - 155,400 28,300 - 21,400 22,400 11,100 64,013 42,841 965 - - - - - - (4,200) - HELD AT 1 JULY 2004 RECEIVED AS REMUNERATION RECEIVED ON EXERCISE OF OPTIONS OTHER – DRP, SALES & PURCHASES 5,662,365 455,932 23,892 5,000 50,000 426,522 30,300 35,728 21,400 38,700 34,044 TOTAL 5,548,911 - 22,079 - 20,000 266,107 - 35,728 8,600 11,544 - - - - - - - - - - - - - - - 49,441 413,091 848 5,000 30,000 5,598,352 413,091 22,927 5,000 50,000 166,200 (161,185) 271,122 - 2,000 2,000 - 15,900 11,400 - (4,000) - 35,728 20,500 22,944 Other transactions with directors and key management personnel Transactions with directors and key management personnel that require disclosure in accordance with AASB 124 for the year ended 30 June 2005 are detailed in note 34. Select Harvests Annual Report 2006 83 Notes to the financial statements as at 30 June 2006 33. Remuneration of auditors 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 Amounts received or due and receivable by PricewaterhouseCoopers for: • An audit or review of the financial report of the entity and any other entity in the consolidated entity • Other financial services NOTES CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 33(a) - 35,500 35,500 118,800 80,987 199,787 - 35,500 35,500 118,800 80,987 199,787 33(a) 110,000 29,225 139,225 - - - 110,000 29,225 139,225 - - - (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: Pitcher Partners: Taxation compliance and advice Tax consolidation advice IFRS advice Sale of pesticide products Other PricewaterhouseCoopers: Taxation compliance and advice Tax consolidation advice IFRS advice Sale of pesticide products 15,160 - 2,936 12,828 4,576 35,500 6,855 - 10,000 12,370 29,225 17,858 24,892 29,505 - 8,732 80,987 - - - - - 84 Select Harvests Annual Report 2006 34. Related party disclosures (a) Parent entity The parent entity within the consolidated entity is Select Harvests Limited. (b) Subsidiaries Interests in subsidiaries are set out in note 37. (c) Key management personnel Disclosures relating to key management personnel are set out in note 32. (d) Transactions with related parties (i) Wholly-owned group transactions Dividend revenue Subsidiaries Interest income Subsidiaries Tax consolidation legislation Current tax payable assumed from wholly-owned tax consolidated entities Other transactions Management fees CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 - - - - - - - - 25,212 13,908 956 2,563 2,090 3,021 3,398 3,011 Management fees are received by Select Harvests Limited from controlled entities under normal terms and conditions. There have been no transactions with Riverina Pelletising Services Pty Ltd subsequent to the disposal of Select Harvests Limited’s shares in this entity on 1 October 2005. (ii) 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 a 25 year period. The consolidated entity received an amount of $996,691 (2005: $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 2006 85 Notes to the financial statements as at 30 June 2006 34. Related party disclosures (cont'd) Select Harvests Limited also has an Almond Orchard Management Agreement with Almas Almonds Pty Ltd, a company which manages the Almas Almonds Partnership in which both Mr M A Fremder and Mr J C Leonard have an indirect interest. Under the terms of the agreement, Select Harvests Limited is developing and shall manage 1,041 acres of almond orchard on a fee basis for Almas Almonds Pty Ltd. In addition, Select Harvests Limited will process and sell the entire production of the orchard for the entire 30-year life of the orchard. The consolidated entity received an amount of $187,380 (2005: Nil) 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. (e) Outstanding balances The following balances are outstanding at the reporting date in relation to transactions with related parties: Non current receivables Subsidiaries Non current payables Subsidiaries (f) Loans to/from related parties Loans to/from subsidiaries Beginning of the year Loans advanced Loan repayments received Interest charged Interest received End of year CONSOLIDATED PARENT ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 - - - - - - - - - - - - - - - - 36,256 44,126 7,964 13,423 30,703 253,223 (256,590) 956 - 28,292 32,533 381,917 (386,310) 2,563 - 30,703 Loans are made by Select Harvests Limited to controlled entities under normal terms and conditions. Loans are made to Select Harvests Limited by controlled entities under normal terms and conditions. 35. Segment information Segment products and locations The consolidated 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 orchard development, tree supply, farm management, land rental and, irrigation infrastructure; and the sale of almonds on behalf of external investors. The consolidated entity operates predominantly within the geographical area of Australia. 86 Select Harvests Annual Report 2006 35. Segment information (cont’d) ALMOND OPERATIONS FOOD PRODUCTS TOTAL CONTINUING OPERATIONS DISCONTINUED OPERATIONS ELIMINATIONS AND CORPORATE CONSOLIDATED ENTITY BUSINESS SEGMENTS Revenue and other income Sales to customers outside the consolidated entity Intersegment revenues Sale of almonds to customers outside the consolidated entity on behalf of managed orchard owners† Less Cost of almonds sold by the consolidated entity on behalf of managed orchard owners† Other revenue and other income Total segment revenue and other income Unallocated revenue Total consolidated revenue and other income Results Segment result Unallocated expenses Consolidated entity profit before income tax expense Income tax expense Consolidated entity profit after income tax expense Net profit 2006 $’000 2005 $’000 2006 $’000 2005 $’000 2006 $’000 2005 $’000 2006 $’000 2005 $’000 2006 $’000 2005 $’000 2006 $’000 2005 $’000 152,549 131,381 65,317 42,483 217,866 173,864 936 4,165 - - 218,802 178,029 1,145 721 24,605 19,075 25,750 19,796 16 509 (25,766) (20,305) - - - - 17,444 12,632 17,444 12,632 - - - - 17,444 12,632 - - (33,843) (23,508) (33,843) (23,508) 32 24 552 787 584 812 - 1 - 16,399 10,876 (17,444) (12,632) 1 - - 585 812 153,726 132,126 74,075 51,469 227,801 183,596 953 4,676 (9,367) (9,429) 219,387 178,842 129 69 219,516 178,911 9,212 9,341 32,075 26,270 41,287 35,611 4,356 1,260 (2,918) (2,540) 42,725 34,331 (466) (1,268) 42,259 33,063 (11,458) (10,158) 30,801 22,905 30,801 22,905 Select Harvests Annual Report 2006 87 Notes to the financial statements as at 30 June 2006 35. Segment information (cont’d) BUSINESS SEGMENTS FOOD PRODUCTS ALMOND OPERATIONS TOTAL CONTINUING OPERATIONS DISCONTINUED OPERATIONS ELIMINATIONS AND CORPORATE CONSOLIDATED ENTITY 2006 $’000 2005 $’000 2006 $’000 2005 $’000 2006 $’000 2005 $’000 2006 $’000 2005 $’000 2006 $’000 2005 $’000 2006 $’000 2005 $’000 Assets Segment assets 71,324 72,352 64,230 60,877 135,554 133,229 Liabilities Segment liabilities 13,478 12,091 35,385 36,490 48,863 48,581 - - 2,404 16,322 1,825 151,876 137,458 686 1,211 97 50,074 49,364 Other segment information: Acquisition of non-current segment assets Depreciation and amortisation of segment assets Profit on sale of discontinued operations before tax 923 1,548 4,633 4,457 5,556 6,005 - 17 90 133 5,646 6,155 1,586 1,457 1,743 1,446 3,329 2,903 22 100 220 175 3,571 3,178 - - - - - - 4,139 - - - 4,139 - † The consolidated entity provides a range of management and other services to externally owned or third party orchards. In addition to these services, the consolidated entity sells the crop of almonds harvested from the orchards of the external owners. These almonds are sold by the consolidated entity on a pooled basis, the proceeds from which are distributed to the pool participants. The consolidated entity earns a marketing fee for providing this service. Segment revenues, expenses and results include transfers between segments. Such transfers are priced on an ‘arms-length’ basis and are eliminated on consolidation. 88 Select Harvests Annual Report 2006 36. Interest rate risk 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 1 YEAR OR LESS OVER 1 TO 5 YEARS MORE THAN 5 YEARS INTEREST RATE MATURING IN: NON-INTEREST BEARING TOTAL CARRYING AMOUNT AS PER THE BALANCE SHEET WEIGHTED AVERAGE EFFECTIVE INTEREST RATE 2006 $’000 2005 $’000 2006 $’000 2005 $’000 2006 $’000 2005 $’000 2006 $’000 2005 $’000 2006 $’000 2005 $’000 2006 $’000 2005 $’000 2006 % 2005 % (i) Financial assets Cash Trade and other receivables Total financial assets (ii) Financial liabilities Bank overdraft – USD Bank overdraft - AUD Trade creditors Other creditors Finance lease liability Bills of exchange and promissory notes Foreign exchange contracts Total financial liabilities 16,055 586 6,500 4,000 - - - - 16,057 586 6,500 4,000 - - - - - - - - - - - - - - 784 - 52 49 - - - - - - - - (777) 10,295 - - - - - - - - 117 486 350 376 - - - - - - - - 59 10,344 117 486 350 376 - - - - - - - - - - - - 2 2 22,557 4,588 4.0 3.0 - 24,442 25,687 24,442 25,687 - - - 24,444 25,689 46,999 30,275 - - - - - - 784 52 - 49 - 8,668 7,042 8,668 7,042 - 25,739 25,780 25,739 25,780 6.7 9.6 - - 6.2 9.1 - - - - - - - - - 467 862 7.0 7.0 - - - - - - - - - - - 34,407 32,822 35,710 33,733 Select Harvests Annual Report 2006 89 Notes to the financial statements as at 30 June 2006 37. Controlled entities COUNTRY OF INCORPORATION PERCENTAGE OWNED (%) 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 Australia Australia Australia Australia Australia Australia Australia Australia No controlled entities were acquired during the financial year ended 30 June 2006. 2006 100 100 100 0 100 100 100 100 2005 100 100 100 100 100 100 100 100 90 Select Harvests Annual Report 2006 38. Employee benefits Executive share option scheme The consolidated entity has in place an executive share option 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 consolidated entity achieving growth of at least 10% in EPS 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. The assessed fair value at offer date is determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at offer date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option. The model inputs for options offered during the year ended 30 June 2006 included: a) options are granted for no consideration, have a three year life, and one third of the options offered vest in each year and are exercisable from the date of vesting to the expiry date b) exercise price: $11.05 (2005 – $7.78) c) offer date: 22 September 2005 (2005 – 17 September 2004) d) expiry date: 31 October 2008 (2005 – 20 October 2007) e) share price at offer date: $11.03 (2005 – $7.53) f) expected price volatility of the company’s shares: 27.10% (2005 – 23.30%) g) expected dividend yield: 3.81% (2005 – 3.38%) h) risk free interest rate: 5.10% (2005 – 5.25%) Select Harvests Annual Report 2006 91 E U L A V R A F I E T A G E R G G A $ R E P E U L A V R A F I E R A H S $ R E B M U N S E R A H S F O D E U S S I S D E E C O R P D E V I E C E R $ T A S N O I T P O F O R E B M U N R A E Y F O D N E D E T S E V E U S S I N O S N O I T P O D E S I C R E X E S N O I T P O D E S P A L S N O I T P O D E T N A R G F O R E B M U N T A S N O I T P O I G N N N G E B I I E C R P $ R E T F A R O N O E S I C R E X E E T A D Y R I P X E E T A D E S I C R E X E E T A D T N A R G 6 0 0 2 0 8 8 8 4 3 , 2 7 2 4 4 5 , 0 4 8 6 9 9 , 6 4 8 7 9 1 , 0 8 1 4 1 4 , 0 6 9 3 5 4 , 0 6 5 . 2 8 7 . 0 7 1 1 . 2 8 7 . 0 7 1 1 . 0 7 1 1 . 0 0 3 2 6 , 0 0 6 9 6 , 0 0 2 5 8 , 0 0 3 5 2 , 0 0 4 5 3 , 0 0 8 8 3 , 3 1 2 6 0 2 , 6 7 3 0 3 2 , 2 1 0 2 8 2 , 0 8 6 1 4 1 , 0 4 2 8 9 1 , 4 6 8 1 0 3 , - - - 0 0 0 1 3 , 0 0 0 1 3 , 0 0 3 7 4 , - - - 0 0 0 1 3 , 0 0 0 1 3 , 0 0 3 7 4 , 0 0 3 2 6 , 0 0 6 9 6 , 0 0 2 5 8 , 0 0 3 5 2 , 0 0 4 5 3 , 0 0 8 8 3 , - - - - - - - - 0 0 3 2 6 , 0 0 6 9 6 , R A E Y F O 0 0 2 5 8 , - - 0 0 4 6 6 , 0 0 1 6 8 , - - 0 0 3 6 5 , 1 3 3 . 1 3 3 . 1 3 3 . 0 6 5 . 0 6 5 . 8 7 7 . 5 0 0 2 / 0 1 / 0 2 5 0 0 2 / 0 1 / 0 2 5 0 0 2 / 0 1 / 0 2 6 0 0 2 / 1 1 / 1 0 6 0 0 2 / 1 1 / 1 0 7 0 0 2 / 0 1 / 0 2 3 0 0 2 / 9 0 / 1 0 3 0 0 2 / 9 0 / 1 0 4 0 0 2 / 8 0 / 7 2 4 0 0 2 / 8 0 / 7 2 5 0 0 2 / 8 0 / 4 2 5 0 0 2 / 8 0 / 4 2 4 0 0 2 / 8 0 / 7 2 4 0 0 2 / 8 0 / 7 2 5 0 0 2 / 8 0 / 4 2 5 0 0 2 / 8 0 / 4 2 5 0 0 2 / 8 0 / 4 2 5 0 0 2 / 8 0 / 4 2 : w o l e b t u o t e s e r a r a e y e h t g n i r u d s t n e m e v o m d n a e t a d g n i t r o p e r e h t i f o g n d n e d n a g n n n g e b e h t i i i s e r a h s y r a n d r o d e u s s i n u r e v o s n o i t p o f o y r a m m u S t a s e r a h s i y r a n d r o d e u s s i n u r e v o s n o i t p o f o s l i a t e D ) d ’ t n o c ( s t i f e n e b e e y o p m E l . 8 3 92 Select Harvests Annual Report 2006 E U L A V R A F I E T A G E R G G A $ R E P E U L A V R A F I E R A H S $ R E B M U N S E R A H S F O D E U S S I S D E E C O R P D E V I E C E R $ T A S N O I T P O F O R E B M U N R A E Y F O D N E D E T S E V E U S S I N O S N O I T P O D E S I C R E X E S N O I T P O D E S P A L S N O I T P O D E T N A R G F O R E B M U N T A S N O I T P O I G N N N G E B I I E C R P $ R E T F A R O N O E S I C R E X E E T A D Y R I P X E E T A D E S I C R E X E E T A D T N A R G 5 0 0 2 5 3 7 0 1 2 , 0 4 6 4 7 3 , 2 6 5 8 1 6 , 0 2 3 0 1 1 , 2 9 9 1 2 1 , 2 4 3 3 6 , 5 1 3 . 0 6 5 . 2 8 7 . 0 6 5 . 2 8 7 . 2 8 7 . 0 0 9 6 6 , 0 0 9 6 6 , 0 0 1 9 7 , 0 0 7 9 1 , 0 0 6 5 1 , 0 0 1 8 , 4 5 0 1 1 1 , 4 5 0 1 1 1 , 6 0 3 1 3 1 , 7 0 2 5 6 , 6 3 6 1 5 , 0 6 3 5 4 , - - - 0 0 3 2 6 , 0 0 6 9 6 , 0 0 3 6 5 , - - - 0 0 3 2 6 , 0 0 6 9 6 , 0 0 3 6 5 , 0 0 9 6 6 , 0 0 9 6 6 , 0 0 1 9 7 , 0 0 7 9 1 , 0 0 6 5 1 , 0 0 1 8 , - - - - - - - - 0 0 9 6 6 , 0 0 9 6 6 , R A E Y F O 0 0 1 9 7 , - - 0 0 2 5 8 , 0 0 4 4 6 , - - 0 0 0 2 8 , 6 6 1 . 6 6 1 . 6 6 1 . 1 3 3 . 1 3 3 . 0 6 5 . 4 0 0 2 / 0 1 / 0 2 4 0 0 2 / 0 1 / 0 2 4 0 0 2 / 0 1 / 0 2 5 0 0 2 / 0 1 / 0 2 5 0 0 2 / 0 1 / 0 2 6 0 0 2 / 1 1 / 1 0 2 0 0 2 / 8 0 / 8 2 2 0 0 2 / 8 0 / 8 2 3 0 0 2 / 9 0 / 1 0 3 0 0 2 / 9 0 / 1 0 4 0 0 2 / 8 0 / 7 2 4 0 0 2 / 8 0 / 7 2 3 0 0 2 / 9 0 / 1 0 3 0 0 2 / 9 0 / 1 0 4 0 0 2 / 8 0 / 7 2 4 0 0 2 / 8 0 / 7 2 4 0 0 2 / 8 0 / 7 2 4 0 0 2 / 8 0 / 7 2 . e t a d e s i c r e x e e h t n o g n d a r t i f o e s o l c e h t t a s a X S A e h t n o s e r a h s s ’ y n a p m o c e h t f o e c i r p t e k r a m e h t s i d o i r e p g n i t r o p e r e h t g n i r u d s n o i t p o e h t g n i s i c r e x e f o t l u s e r a s a d e u s s i s e r a h s l f o e u a v r i a f e h T Notes to the financial statements as at 30 June 2006 38. Employee benefits (cont’d) The amounts recognised in the financial statements of the consolidated entity in relation to executive share options exercised during the financial year were: Issued and paid up capital 2006 $’000 1,360 2005 $’000 515 Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were as follows: Options issued under employee option plan CONSOLIDATED PARENT ENTITY 2006 $’000 358 358 2005 $’000 192 192 2006 $’000 109 109 2005 $’000 132 132 39. Contingent liabilities Upon achieving an EBIT target of $2.5 million in the financial year ending 30 June 2005, a further payment to a maximum of $500,000 was to be made in respect of the acquisition of Meriram Pty Ltd and Kibley Pty Ltd. During the year the consolidated entity paid $500,000 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 2005. Cross guarantees given by the entities comprising the consolidated entity are detailed in note 23. Select Harvests Annual Report 2006 93 Notes to the financial statements as at 30 June 2006 40. Explanation of transition to Australian equivalents to IFRSs (1) Reconciliation of equity reported under previous Australian Generally Accepted Accounting Principles (AGAAP) to equity under Australian equivalents to IFRSs (AIFRS) (a) At the date of transition to AIFRS: 1 July 2004 PREVIOUS AGAAP NOTES $’000 CONSOLIDATED EFFECT OF TRANSITION TO AIFRS $’000 AIFRS PREVIOUS AGAAP $’000 $’000 PARENT ENTITY EFFECT OF TRANSITION TO AIFRS $’000 ASSETS Current assets Cash and cash equivalents Receivables Inventories Prepayments Derivative financial instruments Total current assets Non-current assets Other financial assets Property, plant and equipment Deferred tax assets Receivables Biological assets – almond trees Intangible assets Total non-current assets Total assets LIABILITIES Current liabilities Payables Interest bearing liabilities Derivative financial instruments Current tax liabilities Provisions Total current liabilities Non-current liabilities Interest bearing liabilities Deferred tax liabilities Payables Provisions Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained earnings Total equity 40(a) 40(b) 40(c) 40(e) 40(d) 40(b) 40(h) 40(i) 94 Select Harvests Annual Report 2006 94 Select Harvests Annual Report 2006 489 15,702 15,444 956 - 32,591 19 41,792 322 - 4,986 27,245 74,364 106,955 14,344 957 - 2,229 1,547 19,077 7,123 1,263 - 224 8,610 27,687 79,268 43,940 14,191 21,137 79,268 - - - - 3,820 3,820 - - (56) - - - (56) 3,764 523 - 60 - - 583 - 7,998 - - 7,998 8,581 (4,817) - (603) (4,214) (4,817) 489 15,702 15,444 956 3,820 36,411 19 41,792 266 - 4,986 27,245 74,308 110,719 14,867 957 60 1,547 2,229 19,660 7,123 9,261 - 224 16,608 36,268 74,451 43,940 13,588 16,923 74,451 - 19 - 784 - 803 12,195 747 124 41,673 - - 54,739 55,542 587 205 - 378 150 1,320 6,700 - 9,150 36 15,886 17,206 38,336 43,940 3,270 (8,874) 38,336 - - - - 3,820 3,820 - - (124) - - - (124) 3,696 - - 60 - - 60 - 681 (10) - 671 731 2,965 - 2,673 292 2,965 AIFRS $’000 - 19 - 784 3,820 4,623 12,195 747 - 41,673 - - 54,615 59,238 587 205 60 378 150 1,380 6,700 681 9,140 36 16,557 17,937 41,301 43,940 5,943 (8,582) 41,301 (b) At the end of the last reporting period under previous AGAAP: 30 June 2005 CONSOLIDATED PARENT ENTITY PREVIOUS AGAAP NOTES $’000 EFFECT OF TRANSITION TO AIFRS $’000 AIFRS PREVIOUS AGAAP $’000 $’000 EFFECT OF TRANSITION TO AIFRS $’000 AIFRS $’000 ASSETS Current assets Cash and cash equivalents Receivables Inventories Prepayments Derivative financial instruments Total current assets Non-current assets Other financial assets Property, plant and equipment Deferred tax assets Receivables Biological assets – almond trees Intangible assets Total non-current assets Total assets LIABILITIES Current liabilities Payables Interest bearing liabilities Derivative financial instruments Current tax liabilities Provisions Total current liabilities Non-current liabilities Interest bearing liabilities Deferred tax liabilities Payables Provisions Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained earnings Total equity 40(a) 40(b) 40(c) 40(e) 40(d) 40(b) 40(h) 40(i) 4,539 24,862 24,796 825 - 55,022 21 43,991 395 - 5,516 27,367 77,290 132,312 32,044 486 - 3,239 2,139 37,908 376 2,123 - 360 2,859 40,767 91,545 46,925 14,191 30,429 91,545 - - - - 3,761 3,761 - - (128) - - 1,514 1,386 5,147 778 - 22 - - 800 - 7,797 - - 7,797 8,597 (3,450) 4,539 24,862 24,796 825 3,761 58,783 21 43,991 267 - 5,516 28,881 78,676 137,459 32,822 486 22 3,239 2,139 38,708 376 9,920 - 360 10,656 49,364 88,095 4,231 10 - 770 - 5,011 12,195 523 83 41,205 - - 54,006 59,017 1,370 - - 318 191 1,879 - - 13,490 48 13,538 15,417 43,600 - (425) (3,025) 46,925 13,766 27,404 46,925 3,270 (6,595) (3,450) 88,095 43,600 - - - - 3,761 3,761 - - (83) - - - (83) 3,678 - - 22 - - 22 - 709 (67) - 642 664 3,014 - 2,851 163 3,014 4,231 10 - 770 3,761 8,772 12,195 523 - 41,205 - - 53,923 62,695 1,370 - 22 318 191 1,901 - 709 13,423 48 14,180 16,081 46,614 46,925 6,121 (6,432) 46,614 Select Harvests Annual Report 2006 95 Notes to the financial statements as at 30 June 2006 (2) Reconciliation of profit for the year ended 30 June 2005 CONSOLIDATED PARENT ENTITY PREVIOUS AGAAP NOTES $’000 EFFECT OF TRANSITION TO AIFRS $’000 AIFRS PREVIOUS AGAAP $’000 $’000 EFFECT OF TRANSITION TO AIFRS $’000 Sales revenue Cost of sales Gross profit Other revenues from ordinary activities Other revenues from almond stock fair value adjustment Distribution expenses Marketing expenses Occupancy expenses Administrative expenses Borrowing costs expensed Other expenses from ordinary activities Other expenses from almond tree fair value adjustment Profit before income tax Income tax expense Profit from continuing operations Profit from discontinued operations Profit for the year 40(f) 40(e) 40(g) 40(f),(c) 40(b) 173,864 (127,973) 45,891 870 787 (3,286) (659) (1,608) (2,724) (1,361) - - - 173,864 (127,973) 45,891 - - - - - - (775) - - - (255) (192) - 95 18,829 (135) 18,694 787 (3,286) (659) (1,863) (2,916) (1,361) - - - - (1,980) (1,219) - - - - (135) - - - - - (2,115) (1,219) (6,946) 2,289 (4,657) (561) 135 (426) (229) 30,735 (9,820) 20,915 801 21,716 - 1,067 122 1,189 - 1,189 (229) 31,802 (9,698) 22,104 801 22,905 - 15,069 (366) 14,703 - 14,703 - (135) 7 (128) - (128) - 14,934 (359) 14,575 - 14,575 AIFRS $’000 - - - (3) Reconciliation of cash flow statement for the year ended 30 June 2005 The adoption of AIFRSs has not resulted in any material adjustments to the cash flow statement. (4) Notes to the reconciliations (a) Foreign currency transactions The impact of applying AASB 132 and AASB 139 and recognising qualifying forward exchange contracts as cash flow hedges is as follows: (i) At 1 July 2004 For the consolidated entity and parent entity a derivative financial instrument receivable of $3,819,852 is recognised. A foreign exchange reserve is recognised for $2,673,896 and deferred tax liability is increased by $1,145,956. (ii) At 30 June 2005 For the consolidated entity and parent entity the balance of the derivative financial instrument receivable is increased by $3,760,623. The foreign exchange reserve is increased by $2,632,436 and deferred tax liability is increased by $1,128,187. (iii) For the year ended 30 June 2005 There was no effect for the consolidated and parent entity. 96 Select Harvests Annual Report 2006 (b) Deferred tax liability Under previous AGAAP income tax expense was calculated by reference to the accounting profit after allowing for permanent differences. Deferred tax was not recognised in relation to amounts recognised directly in equity. The adoption of AIFRS has resulted in a change in accounting policy. The application of AASB 112 Income Taxes has resulted in the recognition of deferred tax liabilities on revaluations of non-current assets. The effects are as follows: (i) At 1 July 2004 and at 30 June 2005 The effects on the deferred tax liability of the adoption of AIFRS are as follows (tax rate of 30%): Adjustments arising from adoption of AASB 112 Increase (decrease) in deferred tax liability 1 JULY 2004 30 JUNE 2005 CONSOLIDATED PARENT ENTITY CONSOLIDATED PARENT ENTITY $’000 8,054 8,054 $’000 805 805 $’000 7,925 7,925 $’000 792 792 Upon transition, $3,276,004 was allocated to the asset revaluation reserve, $1,145,956 was allocated to foreign exchange reserve, ($18,113) to interest rate swap reserve and the balance allocated to retained earnings for the consolidated entity. (ii) For the year ended 30 June 2005 For the consolidated entity this has decreased income tax expense by $121,845. For the parent entity this has decreased income tax expense by $7,233. (c) Goodwill Goodwill is not amortised. Instead, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired. (i) At 1 July 2004 There is no effect on the consolidated entity or parent entity. (ii) At 30 June 2005 For the consolidated entity the balance of intangible assets is increased by $1,513,782. Retained earnings is increased by this amount. There was no effect on the parent entity. (iii) For the year ended 30 June 2005 For the consolidated entity amortisation expense is decreased by $1,513,782. There was no effect on the parent entity. (d) Interest rate swaps The impact of applying AASB 132 and AASB 139 and recognising a derivative financial instrument payable in relation to interest rate swap contracts which qualify as cash flow hedges is as follows: (i) At 1 July 2004 For the consolidated entity and parent entity a derivative financial instrument payable of $60,375 is recognised. The interest rate swap reserve is decreased by $42,263 and deferred tax liability is decreased by $18,113. (ii) At 30 June 2005 For the consolidated entity and parent entity the balance of the derivative financial instrument payable is increased by $22,458. The interest rate swap reserve is decreased by $15,721 and deferred tax liability is decreased by $6,738. Select Harvests Annual Report 2006 97 Notes to the financial statements as at 30 June 2006 (iii) For the year ended 30 June 2005 There was no effect for the consolidated and parent entity. (e) Operating Leases Lease payments in respect of operating leases are recognised as an expense on a straight line basis over the term of the lease. The impact of adjustments made to recognise operating lease payments pursuant to AASB 117 is as follows: (i) At 1 July 2004 For the consolidated entity the balance of payables is increased by $523,018. Retained earnings are decreased by this amount. There was no effect on the parent entity. (ii) At 30 June 2005 For the consolidated entity the balance of payables is increased by $777,880. Retained earnings are decreased by this amount. There was no effect on the parent entity. (iii) For the year ended 30 June 2005 For the consolidated entity rental expense is increased by $254,862. There was no effect on the parent entity. (f) Revenue The impact of adjustments made to eliminate proceeds from the sale of fixed assets from revenue is as follows: (i) At 1 July 2004 There is no effect on the consolidated entity or the parent entity. (ii) At 30 June 2005 There is no effect on the consolidated entity or the parent entity. (iii) For the year ended 30 June 2005 For the consolidated entity revenue is decreased by $774,665 and expenses are decreased by $774,665. For the parent entity revenue is decreased by $133,618 and expenses are decreased by $133,618. (g) Share-based payments Under AASB 2 Share-based Payments, from 1 July 2004, the consolidated entity is required to recognise an expense for those options that were issued to employees under the Select Harvests Limited Executive Share Option Scheme after 7 November 2002 but that had not vested by 1 January 2005. The effect of this is: (i) At July 2004 For the consolidated entity there has been a decrease in retained earnings of $40,886 and a corresponding increase in the options reserve. For the parent entity there has been a decrease in retained earnings of $31,245, an increase in the options reserve of $40,886 and a decrease in non-current payables of $9,641. (ii) At 30 June 2005 For the consolidated entity there has been a decrease in retained earnings of $232,597 and a corresponding increase in reserves. For the parent entity there has been a decrease in retained earnings of $163,644, an increase in the options reserve of $232,597 and a decrease in non-current payables of $68,953. (iii) For the year ended 30 June 2005 For the consolidated entity there has been an increase in employee benefits expense of $191,711. For the parent entity there has been an increase in employee benefits expense of $161,201. 98 Select Harvests Annual Report 2006 (h) Reserves The effect on reserves of the changes set out above are as follows: Foreign exchange reserve Interest rate swap reserve Option reserve Asset revaluation reserve Total adjustment (i) Retained earnings 1 JULY 2004 30 JUNE 2005 CONSOLIDATED PARENT ENTITY CONSOLIDATED PARENT ENTITY NOTES $’000 $’000 $’000 $’000 (a) (d) (g) (b) 2,674 (42) 41 (3,276) (603) 2,674 (42) 41 - 2,673 2,632 (16) 233 (3,276) (427) 2,632 (16) 233 - 2,849 The effect on retained earnings of the changes set out above are as follows: Deferred tax liability Operating leases Share-based payments Goodwill Total adjustment 1 JULY 2004 30 JUNE 2005 CONSOLIDATED PARENT ENTITY CONSOLIDATED PARENT ENTITY NOTES $’000 $’000 $’000 (b) (e) (g) (c) (3,650) (523) (41) - (4,214) 323 - (31) - 292 (3,528) (778) (233) 1,514 (3,025) $’000 327 - (164) - 163 Select Harvests Annual Report 2006 99 Directors' Declaration In the directors’ opinion: (a) the financial statements and notes set out on pages 44 to 99 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of the company’s and consolidated entity’s financial position as at 30 June 2006 and of its performance, as represented by the results of their operations, changes in equity, and their cash flows, for the financial year ended on that date; and (b) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and (c) the audited remuneration disclosures set out in the directors’ report comply with Accounting Standards AASB 124 Related Party Disclosures and the Corporations Regulations 2001; and The directors have been given the declarations required under section 295A of the Corporations Act 2001 from the Managing Director and Chief Financial Officer. This declaration is made in accordance with a resolution of the directors. M A Fremder Chairman Melbourne, 28 August 2006 100 Select Harvests Annual Report 2006 Audit Report Independent audit report to the members of Select Harvests Limited Audit opinion In our opinion: 1. the financial report of Select Harvests Limited: • gives a true and fair view, as required by the Corporations Act 2001 in Australia, of the financial position of Select Harvests Limited and the Select Harvests Group (defined below) as at 30 June 2006, and of their performance for the year ended on that date, and • is presented in accordance with the Corporations Act 2001, Accounting Standards and other mandatory financial reporting requirements in Australia, and the Corporations Regulations 2001, and 2. the remuneration disclosures that are contained on pages 28 to 32 of the directors’ report comply with Accounting Standard AASB 124 Related Party Disclosures (AASB 124) and the Corporations Regulations 2001. This opinion must be read in conjunction with the rest of our audit report. Scope The financial report, remunerations disclosures and directors’ responsibility The financial report comprises the balance sheet, income statement, cash flow statements, statement of changes in equity, accompanying notes to the financial statements, and the directors’ declaration for both Select Harvests Limited (the company) and the Select Harvests Group (the consolidated entity), for the year ended 30 June 2006. The consolidated entity comprises both the company and the entities it controlled during that year. The company has disclosed information about the remuneration of directors and executives (remuneration disclosures) as required by AASB 124, under the heading 'remuneration report' on pages 28 to 32 of the directors’ report, as permitted by the Corporations Regulations 2001. The directors of the company are responsible for the preparation and true and fair presentation of the financial report in accordance with the Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report. The directors are also responsible for the remuneration disclosures contained in the directors’ report. Audit approach We conducted an independent audit in order to express an opinion to the members of the company. Our audit was conducted in accordance with Australian Auditing Standards, in order to provide reasonable assurance as to whether the financial report is free of material misstatement and the remuneration disclosures comply with AASB 124 and the Corporations Regulations 2001. The nature of an audit is influenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected. For further explanation of an audit, visit our website: http://www.pwc.com/au/financialstatementaudit We performed procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001, Accounting Standards and other mandatory financial reporting requirements in Australia, a view which is consistent with our understanding of the company’s and the consolidated entity’s financial position, and of their performance as represented by the results of their operations, changes in equity and cash flows. We also performed procedures to assess whether the remuneration disclosures comply with AASB 124 and the Corporations Regulations 2001. Select Harvests Annual Report 2006 101 Audit Report Independent audit report to the members of Select Harvests Limited (continued) We formed our audit opinion on the basis of these procedures, which included: • examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial report and remuneration disclosures, and • assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made by the directors. Our procedures include reading the other information in the Annual Report to determine whether it contains any material inconsistencies with the financial report. While we considered the effectiveness of management’s internal controls over financial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls. Our audit did not involve an analysis of the prudence of business decisions made by directors or management. Independence In conducting our audit, we followed applicable independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001. Melbourne 28 August 2006 102 Select Harvests Annual Report 2006 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 31 July 2006. (a) Distribution of equity securities The number of shareholders, by size of holding, in each class of share are: NUMBER OF ORDINARY SHARES 1 t0 1000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over NUMBER OF SHAREHOLDERS 1,359 1,342 329 296 43 NUMBER OF SHAREHOLDERS NUMBER OF ORDINARY SHARES The number of shareholders holding less than a marketable parcel of shares are: 59 771 (b) Twenty largest shareholders The names of the twenty largest holders of quoted shares are: Maxdy Nominees Pty Ltd Almonds Australia Pty Ltd Invia Custodian Pty Limited Thurston Investments Pty Ltd Le Grand Pty Ltd National Nominees Limited AMP Life Limited Ellise Investments Pty Ltd 1 2 3 Westpac Custodian Nominees Limited 4 M F Custodians Ltd 5 6 7 8 9 10 11 Mr Peter Charles Nicholas Middendorp 12 13 14 Mr Rodney Milton Fitzroy 15 Mid Manhattan Pty Ltd 16 17 Mirrabooka Investments Limited 18 Mutual Trust Pty Ltd 19 20 Dr John Carey John Bird Longo Pty Ltd J P Morgan Nominees Australia Limited Est Mr James Ronald Mackinnon c/o Mr Bourne and Mr Macauley LISTED ORDINARY SHARES NUMBER OF SHARES 5,662,365 4,500,000 2,142,934 1,906,334 1,389,288 938,000 745,000 614,943 515,614 455,932 436,767 426,522 410,575 345,295 322,596 317,003 300,000 300,000 241,280 230,181 PERCENTAGE OF ORDINARY 14.3 11.3 5.4 4.8 3.5 2.4 1.9 1.5 1.3 1.1 1.1 1.1 1.0 0.9 0.8 0.8 0.8 0.8 0.6 0.6 Select Harvests Annual Report 2006 103 ASX Information ASX additional information (continued) (c) Substantial shareholders The names of substantial shareholders are: Maxdy Nominees Pty Ltd Almonds Australia Pty Ltd Westpac Custodian Nominees Limited (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 5,662,365 4,500,000 2,142,934 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) Registered Office Select Harvests Limited 360 Settlement Road Thomastown Vic 3074 Postal address PO Box 5 Thomastown Vic 3074 Telephone (03) 9474 3544 Facsimile (03) 9474 3588 Email info@selectharvests.com.au Company Secretary M Mattia Solicitors Gadens Lawyers Bankers Australia and New Zealand Banking Group Limited Auditors PricewaterhouseCoopers Share Register Computershare Investor Services Pty Limited Yarra Falls 452 Johnston Street Abbotsford VIC 3067 Telephone (03) 9415 5040 Facsimile (03) 9473 2562 Internet www.selectharvests.com.au 104 Select Harvests Annual Report 2006 Contents pg04 Select Harvests – A Snapshot pg09 Our almond operations pg14 Our food products pg18 Our environment Our mission, strategy, 1 activities and outlook 2 Our year in brief 3 Our business at a glance Select Harvests: A snapshot 4 Owned and managed orchards From the Chairman and Managing Director Our almond operations Our food products Our environment 6 9 14 18 5 19 Our community 20 Shareholder open day 21 Our people 22 Our board 23 Our organisation 24 Statistical summary 25 Financial contents 26 Financial reports 37 Auditor’s declaration 100 Director’s declaration Independent audit report 101 ASX additional information 103 With new acreage coming into production, ambitious expansion plans and a planned upgrade in processing capacity, Select Harvests is poised to succeed in an environment of growing global almond demand and strong market fundamentals. Shareholder Information Annual General Meeting 2006/2007 Calendar The annual general meeting will be Feb Announcement of interim results pg20 held on Monday, 30 October, 2006, Apr Payment of interim dividend at the ASX Theatrette, 530 Collins St, Aug Announcement of preliminary Melbourne Victoria, commencing full year results at 2:00 pm. A separate notice of Sept Annual report to shareholders meeting has been posted to all Oct Payment of fi nal dividend shareholders. Oct Annual general meeting Inaugural shareholder open day Almond Vegetable Tagine Description A simple one pot meal (Serves 4) Ingredients 2 tablespoons vegetable oil 75g pkt (X cup) blanched almonds 1 red onion, chopped 2 cloves garlic, crushed 1 teaspoon ground coriander V teaspoon ground cumin 2 X cups sweet potato, peeled and cut into chunks 415g or similar weight can chopped tomatoes 2 cups vegetable stock 3 V cups green beans, trimmed, cut in half 10-15 spinach leaves rinsed Salt, freshly ground pepper or chilli flakes Instructions Almonds at their best, a delicious addition to any dish Heat 1 tablespoon oil in a large pan, stir fry almonds until golden. Remove, drain on paper towel. Add remaining oil to pan, add next 5 ingredients, fry over moderate heat, stirring occasionally for 5 minutes. Add tomatoes, stock and beans. Bring to the boil, reduce heat, cover, simmer 10-15 minutes until vegetables are tender. Stir through spinach, cook until just wilted. Add almonds. Season to taste. Serve with couscous or rice, tossed with chopped coriander and whole pitted black olives. Handy Tips Alternate the vegetables, eg diced eggplant, pumpkin, zucchini or capsicum. Nutrition Information* 1294kJ Energy Protein Fat, total - saturated - monounsaturated - polyunsaturated Carbohydrates, total - sugars Sodium Dietary fibre 9.6g 20.2g 2.00g 13.4g 3.3g 22.8g 12.4g 558mg 10.8g *Source: Nuts for Life Newsletter 1 July 2003 issue (cid:51)(cid:69)(cid:76)(cid:69)(cid:67)(cid:84)(cid:223)(cid:40)(cid:65)(cid:82)(cid:86)(cid:69)(cid:83)(cid:84)(cid:83)(cid:223)(cid:44)(cid:73)(cid:77)(cid:73)(cid:84)(cid:69)(cid:68) (cid:33)(cid:34)(cid:46)(cid:223)(cid:223)(cid:24)(cid:23)(cid:223)(cid:16)(cid:16)(cid:16)(cid:223)(cid:23)(cid:18)(cid:17)(cid:223)(cid:19)(cid:24)(cid:16) (cid:19)(cid:22)(cid:16)(cid:223)(cid:51)(cid:69)(cid:84)(cid:84)(cid:76)(cid:69)(cid:77)(cid:69)(cid:78)(cid:84)(cid:223)(cid:50)(cid:79)(cid:65)(cid:68) (cid:223) (cid:52)(cid:72)(cid:79)(cid:77)(cid:65)(cid:83)(cid:84)(cid:79)(cid:87)(cid:78)(cid:223)(cid:223)(cid:54)(cid:41)(cid:35)(cid:223)(cid:19)(cid:16)(cid:23)(cid:20) (cid:33)(cid:85)(cid:83)(cid:84)(cid:82)(cid:65)(cid:76)(cid:73)(cid:65) (cid:52)(cid:69)(cid:76)(cid:69)(cid:80)(cid:72)(cid:79)(cid:78)(cid:69)(cid:223) (cid:38)(cid:65)(cid:67)(cid:83)(cid:73)(cid:77)(cid:73)(cid:76)(cid:69)(cid:223) (cid:37)(cid:77)(cid:65)(cid:73)(cid:76)(cid:223)(cid:73)(cid:78)(cid:70)(cid:79)(cid:32)(cid:83)(cid:69)(cid:76)(cid:69)(cid:67)(cid:84)(cid:72)(cid:65)(cid:82)(cid:86)(cid:69)(cid:83)(cid:84)(cid:83)(cid:14)(cid:67)(cid:79)(cid:77)(cid:14)(cid:65)(cid:85) (cid:8)(cid:16)(cid:19)(cid:9)(cid:223)(cid:25)(cid:20)(cid:23)(cid:20)(cid:223)(cid:19)(cid:21)(cid:20)(cid:20)(cid:223) (cid:8)(cid:16)(cid:19)(cid:9)(cid:223)(cid:25)(cid:20)(cid:23)(cid:20)(cid:223)(cid:19)(cid:21)(cid:24)(cid:24) (cid:223) (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:50)(cid:79)(cid:66)(cid:73)(cid:78)(cid:86)(cid:65)(cid:76)(cid:69) (cid:33)(cid:35)(cid:52) (cid:54)(cid:41)(cid:35) (cid:34)(cid:82)(cid:73)(cid:83)(cid:66)(cid:65)(cid:78)(cid:69) (cid:47)(cid:85)(cid:82)(cid:223)(cid:76)(cid:79)(cid:67)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:83) (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) (cid:87)(cid:87)(cid:87)(cid:14)(cid:83)(cid:69)(cid:76)(cid:69)(cid:67)(cid:84)(cid:72)(cid:65)(cid:82)(cid:86)(cid:69)(cid:83)(cid:84)(cid:83)(cid:14)(cid:67)(cid:79)(cid:77)(cid:14)(cid:65)(cid:85) S e l e c t H a r v e s t s L i m i t e d A n n u a l R e p o r t 2 0 0 6 (cid:69)(cid:88)(cid:80)(cid:65)(cid:78)(cid:83)(cid:73)(cid:79)(cid:78)(cid:223) (cid:223)(cid:67)(cid:79)(cid:76)(cid:76)(cid:65)(cid:66)(cid:79)(cid:82)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:223) (cid:72)(cid:69)(cid:65)(cid:76)(cid:84)(cid:72)(cid:89)(cid:223)(cid:71)(cid:82)(cid:79)(cid:87)(cid:84)(cid:72)(cid:223) (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:16)(cid:22)

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