A N N U A L R E P O R T 2 0 0 8 FY 2008 GROUP HIGHLIGHTS +36% Growth in EBITDA * +68% Growth in NPAT† +16% Dividend Yield ** +318% Growth in EPS +7% Growth in Total Revenue +7% Growth in Gross Margin *before IPO and U.S. operating costs ** 12 month dividend yield based on 30 day volume weighted average price to 31 March 2009 of $0.22. †before IPO, amortisation and U.S. operating costs Table of contents 1. THINKSMART’S GLOBAL OPPORTUNITY 2. FY 2008 GROUP HIGHLIGHTS 3. CHAIRMAN & CHIEF EXECUTIVE’S REPORT 4. A COMPELLING PROPOSITION & RESILIENT BUSINESS PLATFORM 5. TRADING UPDATE 6. GROWTH OUTLOOK 7. CORPORATE AND SOCIAL RESPONSIBILITY 8. FINANCIAL REPORT Annual general meeting 1 2 4 6 8 10 12 13 2009 Annual General Meeting of ThinkSmart Limited (the “Company”) will be held at Level 36, 250 St Georges Tce, Perth, Western Australia on Friday 22nd May at 2.00pm. 1. THINKSMART’S GLOBAL OPPORTUNITY 17.1 million small businesses 6 Countries across Europe & Australaisa 53,000 credit applications ThinkSmart Limited is a leading international financial need effective cash flow funding solutions in these services company that is focused on the provision of B2B challenging economic times. finance solutions for small businesses shopping in electrical retailing stores. Our business model has proven to be highly resilient in the current economic conditions. EBITDA excluding IPO costs Our products fill the gap for these customers between a and U.S. costs grew by 36% in FY 2008, driven by improved credit card and bank loan, enabling them to get on-the-spot upfront margins and growth from our insurance and inertia approval for the technology they need via a tax and cash lines which deliver recurring income from contracts written flow friendly operating lease. It’s a niche that we believe we are leading globally. We have exclusive distribution agreements with some of the world’s leading electrical retailers and banking institutions in six countries across Europe and Australasia. This exposes our products to a combined market of over 17.1 million small business, purchasing an estimated $70bn in off-the-shelf technology per annum. In 2008 we experienced record levels of product demand, processing more than 53,000 credit applications, a growth of 11% on 2007; evidence that small businesses worldwide in prior years. This recurring income sees the business well positioned to ride out current global economic conditions. While we have not scheduled to expand into any new Territories this year, our operational focus is to capitalise on this period by growing market share within all existing Territories. This will be achieved through both the expansion of our distribution channels in key European markets and the deployment of new products to meet the changing dynamics of the retail market place. The opportunities we take during 2009 will position us strongly for accelerated growth on the improvement of global economic conditions. 1 2. FY 2008 GROUP HIGHLIGHTS For the financial year ended 31st December 2008, ThinkSmart delivered a record full-year EBITDA (Pre IPO & U.S. costs) of $11.3m, a growth of 36% on the previous corresponding period. Normalised NPAT 1 2 +68% NPAT grew 68% to $8.4m EBITDA 6 +36% EBITDA grew 36% to $11.3m 9 8 7 6 5 4 3 2 1 0 2005 2006 2007 2008 Audited NPAT Amortisation Tax on US loan impairment US Costs 12 10 8 6 4 2 0 2005 2006 H1 2007 H2 2008 Application Volume Settled Volume3 Total Revenue Gross Margin EBITDA (pre IPO and U.S. costs) EBITDA Margin (pre Corp dev costs) NPAT Earnings Per Share Dividend - Franked4 FY 2008 FY 2007 %change 53,225 27,234 $38.9m 66% $11.3m 32% $3.2m 3.3 ¢ 3.5 cps 48,111 28,584 $36.3m 61% $8.3m 28% $0.7m 0.8 ¢ 0 cps +11% -5% +7% +7% +36% +14% +335% +318% 1 100% of UK pre-acquisition. 2 Pre-IPO, amortisation and U.S. costs. 3 Impact of credit environment with 8% drop in approval rate. 4 2 Cents paid in October 2008. Final Dividend of 1.5 cents paid on 14 April 2009. 6 Pre-IPO and U.S. costs. 2 Revenue1 +7% Revenue grew 7% to $38.9m CAGR 2005-2008 Revenue 16%; EBITDA 150%; NPAT 150 % 45 40 35 30 25 20 15 10 5 0 Revenue EBITDA NPAT 2005 2006 2007 2008 Revenue 0% 20% 40% 60% 80% 100% 120% 140% 160% CAGR 2005-2008 Financial Highlights n Customer demand increased 11% with 53,225 Operational Highlights n Extended contracts with PC World and PC City (umbrella applications assessed. agreement) through to 2013. n Total Revenue up 7% to $38.9m n Launched Warranty Services product with The Warranty n Earnings before interest, tax, depreciation and Group in Australia through Dick Smith stores. amortisation up 36% to $11.3m pre IPO and US costs. n Launched trial in France with Media-Saturn, Europe’s n Net Profit After Tax of $8.4m pre amortisation and largest electrical retailer US costs. n Launched in Italy with DSG International’s PC City chain. n Solid second half performance relative to first half n Extended Next Byte contract in Australia through new (EBITDA $5.7m H1: $5.6m H2) three year agreement. n ThinkSmart declared a fully-franked final dividend of 1.5 n Expanded into all 65 Dick Smith stores in New Zealand. cents per share, representing a 16% dividend yield5 for the full year. n Earnings per share of 8.7 cents before amortisation and US costs. 5 12 month dividend yield based on a 30 day volume weighted average price to 31 March 2009 of $0.22. 3 3. CHAIRMAN & CHIEF EXECUTIVE’S REPORT Dear Shareholders We are pleased to be able to report that, for the Financial Locally, in Australia, we have benefited with both JB Hi-Fi Year ended 31st December 2008, ThinkSmart delivered a and Dick Smith continuing to perform well and experiencing record full-year EBITDA (pre IPO and U.S. costs) of $11.3 strong growth across the year in spite of the challenging million, a growth of 36% on the previous corresponding retail conditions. period. In contrast, customer credit quality declined notably in all Total revenue rose 7% to $38.9 million with gross margin markets during the year, but our responsible credit criteria increasing 7%. We paid an interim dividend of 2.0 cents and processes held up well. This saw approval rates decline per share franked at 40% in October, and declared a fully- by 8% across the group as we proactively managed our franked final dividend of 1.5 cents per share which was paid criteria to ensure our credit standards and those of on 14th April 2009. This represented a 16% dividend yield our banking partners were not compromised in the drive for the full year.5 for growth. This is a pleasing and solid result given the current global This decline was offset across the business through a growth economic climate. Strong Demand. Resilient Model Our business has proven exceedingly resilient and continues to trade well through these challenging times. Customer demand for our products has never been stronger, with 53,225 contracts processed in 2008, a growth of 11% on 2007. in margin at the front end, recurring inertia income which is received on the expiry of customer contracts continuing to exceed forecasts, and warranty services income which commenced in March 2008. It is important for shareholders to understand the underlying value of our funding model, which sees us receive income not only at the commencement of a customers’ contract, but on a monthly basis through its life thanks to the attachment of insurance to customer contracts, and at the This demand was evidenced in markets like the UK where, end of term through our inertia strategies. We have 75,000 despite our retail partner’s sales being in double digit live contracts at 31st December 2008 which alone should decline, we experienced a 10% like-for-like (LFL) increase contribute around $60m in revenue from these sources over in demand as small businesses increasingly looked to the next 4 years. solutions, such as ours, to help them sustain their cash flow. 4 Peter Mansell Chairman Ned Montarello Founder & Chief Executive Officer Pace Of Expansion To Be Governed By Performance: Growth Through Cash Flow Not Debt. Strong Start to the Year ThinkSmart achieved a 33% growth in EBITDA for the last six months of 2008 over the same time in the previous Operationally, we have positioned the business to be net year, finishing off 2008 strongly. This momentum has been debt free and geared to grow cash reserves during 2009. sustained into 2009 and although we expect 2009 to be flat In late 2008, continued uncertainty about the length and depth of the U.S. downturn, restrictive credit conditions and for customer acquisition, performance to date has been in line with expectations and we maintain a positive outlook the continuing volatility of currency exchange rates led us to for EBITDA. the decision to cease to write any new business in the U.S. We thank all our staff for their continued hard work and This decision was taken in line with our aim to continue to enthusiasm and, notwithstanding the challenging global grow business through cash flow, not debt. To this end the conditions, we remain confident that our products are U.S. operations are suspended and will not incur any costs designed to prosper in this environment and that we will in 2009. Importantly, our relationships remain open in the continue to deliver improved performance. U.S. with a view to re-engaging when trading conditions improve. Alignment With Market Leading Retailers: Market Share Growth This action in the U.S. has enabled us to focus our resources on our more profitable, accessible territories and partnerships in Europe and Australasia where we see opportunities to gain market share through this downturn. Peter Mansell Ned Montarello Our strategy is to align with market leading international Chairman Founder & Chief Executive Officer retailers to meet the finance needs of small businesses shopping for technology in their stores. It’s a niche that we believe we are leading globally. While we have not scheduled to expand into any new territories during 2009, our clear strategy is to continue to grow our market share in all of our existing territories, both organically and through the establishment of new retail partnerships. In Europe we have significant opportunities in France and Spain where we are pursuing multi-channel distribution strategies akin to Australia. Our opportunity is to add key, market leading partners in each territory to position us with a dominant portfolio of retailers as we have in Australia. 5 12 month dividend yield based on a 30 day volume weighted average price to 31 March 2009 of $0.22. 5 4. A COMPELLING PROPOSITION & RESILIENT BUSINESS PLATFORM ThinkSmart earns income at all stages of its customers’ lifecycle, meaning that it has a natural in-built tolerance to the fluctuations of retail market conditions. A Product That’s Right for the Times Income Channels Through-Life ThinkSmart’s core product model has strong appeal for all ThinkSmart’s core revenue model, also provides the parties to the transaction, especially under these current business a significant buffer to the current economic market conditions: environment with income derived from three main sources: n The customer gets a convenient cash flow and tax friendly way to access the technology they need, whilst keeping their cash in their business. n The retailer is able to realise a greater gross profit on its sales which is a key focus in these tight economic times; and 1 Brokerage income - This is received and recognised up front at the commencement of each new contract. 2 Insurance income - ThinkSmart receives a commission on sale of insurance to the customer for their leased n The funder is able to gain an attractive margin relative to equipment but takes no underwriting risk. In most the risk taken. territories this commission is received and recognised on a monthly basis across the term of the customers’ contract. All three parties derive strong benefits. Customers Retailers Funders 4 On-the-spot approval 4 Gross profit vehicle 4 Access to niche market 4 No requirement for detailed financials 4 Bigger sales 4 Attractive margin 4 Payments up to 100% tax 4 Higher profit margin products 4 ThinkSmart responsible for deductible (best brands plus warranty etc.) processing 4 Upgrade path to new technology 4 ThinkSmart sales management 4 Affordable monthly payments 4 Attractive rebate 4 Good for cash flow 4 Reduces need to discount 4 Off balance sheet 4 Fast in store approval 4 Bundle add-ons and services into same contract 6 1. Brokerage Income Earned upfront at start of contract 2. Insurance Income Earned every month through life of contract 3. Inertia Income Earned at the end of life of a contract 3 Inertia income - At the conclusion of the initial rental Key point: ThinkSmart currently has 75,000 contracts on contract, ThinkSmart has a contractual right to purchase the books at 31st December 2008 which alone should the goods from the funders for a nominal sum. From this contribute around $60m in revenue over the next 4 years. point all income from continuing rentals or sale of goods is paid to ThinkSmart. Inertia income is received and recognised at the end of the initial contract term. New Warranty Services Revenue Line From March 2008 ThinkSmart has provided warranty services to Dick Smith stores in Australia and New Zealand, receiving a fee from the warranty provider. The business will increase the material contribution of this complementary revenue stream in 2009 and is exploring opportunities to extend this service offering into other markets. 7 5. TRADING UPDATE In 2008 ThinkSmart saw record levels of product demand, processing more than 53,000 credit applications, a growth of 11% on 2007, as small businesses in Europe and Australia increasingly turned to cash flow management solutions. Australia Total sales in the Australian business grew by 10% in 2008, with revenue increasing 13% to $18.4m and EBITDA growing 29% to $4.7m. Key drivers have been the continued stability of volume with key retail partners JB Hi-Fi and Dick Smith notably continuing to outperform market expectation; margin improvements from customer repricing and increased insurance attachment; and the recognition of a new line of revenue through the Warranty Services Product delivered in the Dick Smith stores, which sees ThinkSmart earn a commission on the premium. Inertia performance in Australia has continued to increase, further contributing to a strong EBITDA performance. During the period, ThinkSmart extended its contract with Next Byte, Australia’s largest independent Apple reseller, for a further three years. Volume Volume Contribution Contribution 42% 42% 42% Volume Contribution Other Other Inertia Inertia Insurance Insurance Brokerage Brokerage 0% 0% 20% 40% 60% 80% 20% 40% 60% 80% Income Mix Income Mix ▲ Revenue up 13% to $18.4m ▲ Revenue up 13% to $18.4m ▲ EBITDA up 29% to $4.7m ▲ EBITDA up 29% to $4.7m ▲ EBITDA margin up 4% to 27% ▲ EBITDA margin up 4% to 27% ▲ Gross margin up 4% to 62% ▲ Gross margin up 4% to 62% ▲ Volumes up by 10% ▲ Volumes up by 10% ▼ Average Deal Value down $159 ▼ Average Deal Value down $159 United Kingdom The UK business has continued to post solid growth despite the softer retail trading environment with total sales increasing by 10%, revenue up by 15%, margin increasing 4% and an EBITDA growth of 44%. Insurance and inertia revenues continue to deliver strong growth with a low cost 46% Volume Contribution Other Inertia Insurance Brokerage 0% 20% 40% 60% 80% Income Mix ▲ Revenue up 15% to £8.1m ▲ EBITDA up 44% to £3.6m ▲ EBITDA margin up from 9% to 44% ▲ Gross margin up from 4% to 76% ▲ Volumes up by 10% ▼ Average Deal Value down £97 of delivery. Despite a very challenging economic environment, our partner, PC World, continues to be the clear computer retail market leader and is gearing for significant future growth as it is now nearly a year in to a comprehensive Business Renewal and Transformation Plan which is seeing improved new store formats, product range and customer service. In April 2008, we extended our contract with PC World to 31 December 2013, effectively extending the existing five-year contract by more than two years. This extension, our third, is a strong endorsement of the synergies between our two businesses, effectively extending our relationship over a ten- year period. 8 8% Volume Contribution Other Inertia Insurance Brokerage 0% 20% 40% 60% 80% Income Mix ▼ Revenue down 35% to €1.5m ▼ EBITDA down 10% to €0.4m ▲ EBITDA margin up 7% to 27% ▲ Gross margin up 9% to 40% ▼ Volumes down by 19% ▼ Average Deal Value down €199 Spain The Spanish economy has been one of the worst hit of all Western European economies. Despite this, and a corresponding decline we have seen in front end volume into our business, the maturity of our product in the Spanish market has seen us benefit from a solid contribution from Inertia and Insurance channels which commenced in 2008 as the business reached its third anniversary. Despite revenue being severely impacted at the front end of the business, EBITDA margin grew 7% to 27%. Notwithstanding the challenging retail market conditions, we remain highly optimistic about the opportunities we are presented with in Spain to expand our distribution channels significantly so that we can capitalise on the market when trading conditions improve. Other ThinkSmart’s new start operations in New Zealand and Italy, plus a number of months trading in two States in the U.S. contributed the remaining 4% of volume into the business. Both the New Zealand and Italian businesses enter their first full year of trading in 2009. The U.S. business will not trade through 2009. 9 6. GROWTH OUTLOOK We have a solid outlook for EBITDA growth, and the opportunity to grow market share in our European territories which will position us strongly for accelerated growth on the improvement of global economic conditions. Pursuing Market Share Gains in Europe n Pursuing Market Gains in Europe n Move to multi-channel environments 160 Stores in both Spain and France n Running trial with Media-Saturn in France, Europe’s largest electrical retailer n Growth in recurring income lines for all markets 29 Stores 39 Stores 23 Stores During 2009, ThinkSmart has a significant opportunity to grow those of the PC World operation in the UK. In addition to its distribution channels in Europe to set the business up well its relationship with PC City in Spain, ThinkSmart is now for strong market share gains through 2010 and beyond. in active dialogue with a number of key providers in the France In France we have recently commenced a four store trial with the German group Media-Saturn, the largest electrical retailer in Europe with 750 stores across 16 countries. Success in the trial would see ThinkSmart extend its offering into all 29 stores across France. Importantly, the French market from the outset will adopt a multi-channel approach seeing ThinkSmart able to distribute its products through multiple retail channel outlets. Spain & Italy Despite the economic challenges being experienced in the Spanish market, our core business in Spain remains profitable, and will derive increasing income from its Insurance and inertia streams. DSG International has signalled its commitment to Spain, and has structured its business to ride out current market conditions, whilst introducing a number of new format stores to emulate Spanish computer retailing market seeking to extend its distribution channels in this profitable market. In Italy, PC City has also undergone a significant restructuring programme which will complete through early 2009. This has seen the business move to implant its stores as the computer zone within the larger UniEuro mixed electrical stores. There are 96 UniEuro stores across Italy, 14 of which now have PC City implant stores. It is forecast that as many as 40 new implants may be created over the next 18 months which provides significant scope for increasing ThinkSmart’s footprint in that market. Stabilisation in the UK The UK business has been structured appropriately to weather the full impact of the recessionary environment and is expected to deliver a sustained EBITDA performance through 2009. Customer demand remained strong through 2008 with ThinkSmart achieving a 10% growth 10 Operational Excellence Drives Australian Growth n Strong partner performance n Increasing contribution from separate Warranty Services Product n New QuickSmart in store processing system improves customer experience and operational efficiency 105 Stores +15 in NZ 24 Stores 350 Stores +65 in NZ 125 Stores in applications from PC World stores, despite a drop of Across the Tasman, growth in the New Zealand business will approximately 10% in sales on a like for like period. The UK come through the extended store network with ThinkSmart business is expected to trade stably through 2009, with a having recently rolled out across all 65 Dick Smith stores in continued growth from Inertia and Insurance income lines. New Zealand. Australasia Guiding Principles for Growth Within the Australasian region, the ThinkSmart business In order to position its business for strong, accelerated has achieved sustained growth with its partners during growth on improvement of global economic conditions, 2008 with JB Hi-Fi and Dick Smith both notably proving very ThinkSmart has aligned its business to three governing resilient in the marketplace. principles during this period. Through 2009, the Australasian business expects to build 1) Growth through cash flow not debt – The business on this base and has a significant focus with its partners on has no net debt and organic growth will be funded by driving operational efficiencies and an improved customer cash flow from operations. experience through the launch of its new QuickSmart online 2) Pace of expansion to be governed by performance application system. The QuickSmart system will remove the need for manual identity checks and improve the accuracy and banding of approval limits that are set through the use of strong predictive scorecards. These scorecards are in turn, expected to see an increase in customer approval rates whilst also seeing a reduction in future arrears. 3) Alignment with marketing leading partners – In every market in which it operates, ThinkSmart partners with market leading retailers and funders. During 2009, the business is focused on extending these partnerships in the European market place specifically with a view to gearing the business for market share growth. 11 7. CORPORATE AND SOCIAL RESPONSIBILITY Environment ThinkSmart is pleased to be working with Officeworks, part of the Wesfarmers group, to launch a new green trade-in programme for technology products. Under the programme, ThinkSmart will incentivise new customers to trade in their old equipment through a recycling programme, in receipt for a $100 voucher when taking out a new RentSmart contract. People ThinkSmart’s goal as an employer is to create and maintain an open and energetic culture, where staff can grow and develop. By providing the right training, tools, leadership and professional support, we aspire to enable our employees to develop into highly productive, knowledgeable, and loyal individuals. These goals are primarily fostered through our “PeopleSmart” programme which aims to build a great place to work and cultivate the values of “people, performance, and culture”. PeopleSmart is made up of a committee of employees from various departments to organise activities that align employees to the PeopleSmart values. PeopleSmart also acts as a forum for the discussion of workplace issues, in order to improve the work environment for ThinkSmart’s employees. Community At a corporate level, and through its PeopleSmart initiative, ThinkSmart looks to give back to the community both financially and by donating time. At a corporate level ThinkSmart is a contributor to the St John of God Cancer Centre for the treatment of cancer patients, as well as the provision of hospitality to their families. At a team level, employees in the business have given generously and participated actively in a range of community based initiatives including: Quarterly blood donation to the Red Cross; Australia’s Biggest Morning Tea (the Cancer Council); Daffodil Day (the Cancer Council); National Ride to Work Day; Make a Wish Foundation; Sids and Kids; and Movember (Prostate Cancer Foundation of Australia). 12 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 13 A N N U A L R E P O R T 2 0 0 8 FINANCIAL REPORT FINANCIAL YEAR ENDED 31 DECEMBER 2008 Corporate Information Directors’ Report Auditor’s Independence Declaration Directors’ Declaration Income Statements Balance Sheets Statements of Changes in Equity Cash Flow Statements Notes to the Financial Statements Independent Audit Report 14 15 30 31 32 33 34 35 36 78 13 Share Register Computershare Investor Services Pty Limited Level 2, 45 St Georges Terrace Perth, WA 6000 Australia Phone: 1300 850 505 ThinkSmart Limited shares are listed on the Australian Securities Exchange (ASX code: TSM). Solicitors Freehills 250 St Georges Terrace Perth, WA 6000 Australia Bankers ANZ West Perth Australia Auditors KPMG Australia TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 14 CORPORATE INFORMATION 8 0 0 2 t r o p e R l a u n n A ABN 24 092 319 698 Directors P Mansell (Chairman) N R Montarello (Managing Director) D Griffiths S Penglis Company Secretary N Barker Registered Office Level 1, The West Centre 1260 Hay Street West Perth, WA 6005 Australia Principal place of business Level 1, The West Centre 1260 Hay Street West Perth, WA 6005 Australia Phone: 61 8 9463 7500 14 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 15 DIRECTORS’ REPORT The Directors of ThinkSmart Limited (the “Company”) submit Mr Griffiths is currently non-executive Chairman of Great herewith the annual financial report of the Company and the Southern Limited; deputy chairman of Automotive Holdings Group for the financial year ended 31 December 2008. In Group Limited and a non-executive director of Northern Iron order to comply with the provisions of the Corporations Act Limited. Mr Griffiths served as non-executive Chairman of 2001, the directors report as follows: ARC Energy Limited until its merger with Australia Wide Directors The names and details of the Company’s directors in office during the financial year and until the date of this report are as follows. Directors were in office for this entire period unless otherwise stated. Names, qualifications, experience and special responsibilities PETER MANSELL (Age 62) B.Com, LLB, H. Dip Tax, FAICD Non-Executive Chairman Exploration in August this year and a non-executive director of Antaria Limited until November 2008 and has not been a director of any other listed company, other than those noted here, as at the reporting date or in the past three years. Mr Griffiths is also a director of the Perth International Arts Festival. NED MONTARELLO (Age 47) Managing Director and Chief Executive Officer Ned Montarello has over 20 years experience in the finance industry and joined the board on 7 April 2000. Mr Montarello founded ThinkSmart over 10 years ago and through this Peter Mansell joined the board on 12 April 2007 and was vehicle has been credited with elevating the Nano-Ticket appointed Chairman on the 7 May 2007. Mr Mansell rental market sector in Australia, receiving the Telstra and practiced as a business lawyer for 35 years and has a wide Australian Government’s Entrepreneur of the Year Award in range of experience in corporate matters. He was at various 1998. He steered the expansion of the business into Europe times the Freehills National Chairman (1995-2000), in 2002/2003, establishing agreements with the UK’s largest Managing Partner of the Perth office (1992-2002) and a electrical retailer, DSG International and the Halifax Bank of member of the firm’s National Board (1989-2002). Mr Scotland. Following the establishment of a beachhead Mansell is a Fellow of the Australian Institute of Company European operations centre in Manchester, England, Mr Directors, having been President of the Western Australian Montarello has driven its growth across Europe where it now division and having sat on its National Board from 2001 to also operates in Spain, France and Italy. 2003. He is currently a director of Great Southern Limited, Oz Minerals Limited, and Bunnings Property Management Limited (responsible entity for the Bunnings Warehouse Property Trust). In the past three years Mr Mansell has been STEVEN PENGLIS (Age 48) B. Juris and B. Law Non-Executive Director a director of the following listed companies: Hardman Steven Penglis joined the board on 1 July 2000 and stepped Resources Ltd, JDV Ltd, and Tethyan Copper Company Ltd, down as Chairman on the 6 May 2007. Mr Penglis is a West Australian Newspaper Holdings Ltd and Zinifex Ltd. Partner at Freehills since 1987 and former Chairman of the DAVID GRIFFITHS (Age 58) B. Ec (Hons), M. Ec, FAICD Non-Executive Director Legal Practice Board of Western Australia. Mr Penglis specialises in the area of Corporate and Corporations Law Litigation, advising many public companies, including ThinkSmart, before his appointment to the Board. He is a David Griffiths joined the board on 28 November 2000 and part-time Senior Member of the Commonwealth has over fourteen years experience in investment banking, Administrative Appeals Tribunal; an elected member of the most recently as Division Director of Macquarie Bank Limited Legal Practice Board of Western Australia and former and previously as Executive Chairman of Porter Western chairman; and an elected member of the Council of the Law Limited. Society of Western Australia. 15 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 16 DIRECTORS’ REPORT 8 0 0 2 t r o p e R l a u n n A Company Secretary NEIL BARKER B.Bus, FCPA Neil Barker is a Certified Practicing Accountant (Fellow) with over 24 years experience in banking and finance. Prior to joining ThinkSmart, Mr Barker was the Group Financial Controller of Alinta Limited, an Australian public listed company. Prior to joining Alinta, he was employed with the NAB Group in senior finance roles based in the UK and Australia. Directors’ Meetings The following table sets out the number of directors’ BOARD OF DIRECTORS Role of the Board The board’s primary role is the protection and enhancement of long-term shareholder value. To fulfil this role, the Board has adopted a charter which establishes the relationship between the Board and management and describes their functions and responsibilities. The Board’s responsibilities, as set out in the Board Charter, include: n working with management to establish ThinkSmart’s strategic direction; n monitoring management and financial performance; meetings held during the financial year. During the financial n monitoring compliance and risk management; year 8 board meetings were held. Director Audit and Risk Committee Meetings B A Nomination and Remuneration Committee Meeting B A Board Meetings B A Peter Mansell David Griffiths Ned Montarello Steven Penglis 8 8 8 7 8 8 8 8 2 2 - - 2 2 - - 1 1 1 1 1 1 1 1 A – Number of meetings attended B – Number of meetings held during the time the director held office during the year n reviewing procedures in place for appointment of senior management and monitoring of its performance and for succession planning; and n ensuring effective disclosure policies and procedures. Matters which are specifically reserved for the Board or its committees under the Board Charter include: n appointment of a chair; n appointment and removal of the CEO; n appointment of directors to fill a vacancy or as additional directors; n establishment of Board committees, their membership Corporate Governance Statement and delegated authorities; This statement outlines the main corporate governance n approval of dividends; practices in place throughout the financial year, which comply with the ASX Corporate Governance Council recommendations, unless otherwise stated. n development and review of corporate governance principles and policies; n approval of major capital expenditure, acquisitions and divestitures in excess of authority levels delegated to management; n calling of meetings of shareholders; and n any other specific matters nominated by the Board from time to time. It is also responsible for approving and monitoring financial and other reporting. Detail of the board’s charter is located in the Company’s website (www.thinksmartworld.com). The board, together with the Nomination and Remuneration Committee, determines the size and composition of the Board, subject to the terms of the constitution. 16 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 17 The board has delegated responsibility for operations and NOMINATION AND REMUNERATION COMMITTEE administration of the Company to the chief executive officer The objective of the Nomination and Remuneration and executive management. Responsibilities are delineated Committee is to help the Board ensure that ThinkSmart has a by formal authority delegations. Board process To assist in the execution of its responsibilities, the board has established a Nomination and Remuneration Committee, as well as an Audit and Risk Committee. These committees have written mandates and operating procedures, which are board of an effective composition, size and the commitment to adequately discharge its responsibilities and duties, and to determine and review the compensation arrangements for the Directors and senior management team. The Nomination and Remuneration Committee is responsible for reviewing the Board’s and its Committees’ performance. reviewed on a regular basis. The board has also established On an annual basis: framework for management of the Group including a system n Directors will provide written feedback in relation to the of internal control, a business risk management process and Board and its Committees against an agreed set of the establishment of appropriate ethical standards. criteria and each Committee will do the same regarding Independent professional advice and access to company its own performance; information Following consultation with the chairperson, directors may seek independent professional advice at the Company’s expense. Generally, this advice will be available to all directors. Composition of the board The names of the directors of the Company in the office at the date of this report are set out in the Directors’ report on page 15 and 16 of this report. The composition of the board is determined using the following principles: n The Board does not believe that it should establish a limit on tenure. While tenure limits can help to ensure that there are fresh ideas and viewpoints available to the n Feedback will be collected by the chair of the Board, or an external facilitator, and discussed by the Board, with consideration being given as to whether any steps should be taken to improve performance of the Board or its Committees; n The CEO will also provide feedback from senior management in connection with any issues that may be relevant in the context of the Board performance review; and n Where appropriate to facilitate the review process, assistance may be obtained from third party advisers. The current members of the Committee are P Mansell (Chair), N Montarello, S Penglis and D Griffiths. Board, they hold the disadvantage of losing the The Committee will meet as often as the Committee contribution of directors who have been able to develop, members deem necessary in order to fulfil their role. over a period of time, increasing insight in the Company However, it is intended that the Committee will normally meet and its operation and, therefore, an increasing at least annually. contribution to the Board as a whole. The Committee consists of a minimum of 3 members, n It is intended that the Board should comprise a majority majority being non-executive directors, and independent of independent non executive directors and comprise director as chair. The nomination and remuneration directors with a broad range of skills, expertise and experience from a diverse range of backgrounds. n It is also intended that the chair should be an independent non-executive director. n The Board regularly reviews the independence of each director in light of the interests disclosed to the Board. committee has a documented charter, approved by the board, which is available on the website (www.thinksmartworld.com). 17 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 18 DIRECTORS’ REPORT 8 0 0 2 t r o p e R l a u n n A REMUNERATION REPORT - AUDITED The compensation structures explained below are designed to The remuneration report for 2008, as presented below, has attract suitably qualified candidates, reward the achievement been prepared for consideration by shareholders. The of strategic objectives, and achieve the broader outcome of remuneration report is set out under the following main creation of value for shareholders. The compensation headings: A: Principles of compensation structures take into account: n the capability and experience of the key management B: Directors’ and executive officers’ remuneration personnel C: Service agreements D: Share-based compensation E: Bonus remuneration n the key management personnel’s ability to control the relevant segment/s’ performance n the Group’s performance Compensation packages include a mix of fixed and variable A. PRINCIPLES OF COMPENSATION - AUDITED compensation and short- and long-term performance-based Remuneration is referred to as compensation throughout this incentives. report. Key management personnel have authority and responsibility for planning, directing and controlling the activities of the Company and the Group, including directors of the Company and other executives. Key management personnel comprise the directors of the Company and executives for the Company and the Group including the five most highly remunerated s300A executives. Compensation levels for key management personnel and secretaries of the Company, and key management personnel of the Group are competitively set with a view to: n Maintain alignment with shareholders’ interests; and n Ensure remuneration remains competitive to retain and attract talented people who are key to delivering sustained profitable growth of the Company The Nomination and Remuneration Committee obtains independent advice on the appropriateness of compensation packages of both the Company and the Group given trends in comparative companies both locally and internationally and the objectives of the Company’s compensation strategy. Linking Executive Remuneration to Group Performance The Directors of ThinkSmart Limited understand that linking executive remuneration to Group performance is a driver of performance. Since the Company raised equity and listed in 2007, it has delivered consistent growth in EBITDA before listing costs and basic EPS. The Group’s results for the 2008 financial year show growth in profitability. 9 8 7 6 5 4 3 2 1 0 NPAT A$m 8.4 5.0 0.2 2005 0.1 2006 2007 2008 Audited NPAT Amortization Tax on U.S. loan impairment U.S. Costs In addition, the following partly franked dividends have been or will be paid: n 2 cents per share paid on 13 October 2008 n 1.5 cents per share will be paid on 14 April 2009 Consistent with the steady growth in performance, the level of Executives’ (including the Managing Director) remuneration has increased over this period. 18 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 19 The Directors of ThinkSmart Limited consider that a variety of The purpose of STIs is to make a significant contribution to factors, including the broad economic environment, market the total reward package subject to meeting various targets sentiment and financial performance, contribute to the linked to the Company’s business objectives. An incentivised Company’s share price. In addition, there are no closely reward structure is necessary as a competitive package in comparable companies that would provide a meaningful Australian and global marketplace for executives. Incentives relative share price measure. As a result, the Executive are designed to focus and motivate employees to achieve remuneration, excluding the long term incentive, is linked to outcomes beyond the expectation of normal professional the Group’s financial performance, rather than the competence. Company’s share price which has been: Date Per Ordinary Share 30 June 2007 31 December 2007 30 June 2008 31 December 2008 Non-Executive Directors $2.22 $1.92 $0.82 $0.19 Fees and payments to Non-Executive Directors reflect the demands which are made on and the responsibilities of the Non-Executive Directors. Non-Executive Directors’ fees and payments are reviewed annually by the Board. Non-Executive Directors do not receive Share Options. Non-Executive Director’s fees The non-executive directors shall be paid by way of fees for services the maximum aggregate sum as may be approved from time to time by ThinkSmart in general meeting. The current maximum aggregate annual sum approved by shareholders at a previous general meeting is $600,000 (2007: $600,000). Any change to that aggregate annual sum needs to be approved by the shareholders. The Remuneration is reviewed annually. In reviewing each Executives’ salary, consideration is given to external competitiveness, position responsibilities and individual skills and experience. For 2008, the STI component of Executive remuneration is based on annual performance targets and delivered in the form of cash. For the 2009 financial year, the Company is proposing to introduce a new Long Term Incentive Plan subject to shareholder approval. Base pay Executives are offered a competitive salary that comprises the components of base pay and benefits that reflects the applied professional competence of each Executive according to his/her knowledge, experience and accountabilities. Base pay for Senior Executives is reviewed annually by the Remuneration Committee to ensure the executive’s pay is competitive with the market. An executive’s pay is also reviewed on promotion. Short-term performance incentive Short-term performance incentives (STIs) vary according to individual contracts, however, for Executives they are broadly constitution also makes provision for ThinkSmart to pay all based as follows: reasonable expenses of directors in attending meetings and n a component of the STI is linked to the individual carrying out their duties. Executive pay The Company’s remuneration is market competitive and aims to attract, retain and motivate high calibre employees who contribute to the sustained growth of the ThinkSmart business with a mix of the following four components: n base pay and benefits n short-term performance incentives (STIs) n long-term incentives through participation in the ThinkSmart Long Term Incentive Plan (currently suspended) n other remuneration such as superannuation. performance of the executive (this is based on a number of factors, including performance against budgets, achievement of key performance indicators (KPIs) and other personal objectives) n a component of the STI is linked to the financial performance of the business or measured against budgets determined at the beginning of each financial year. Using various profit performance targets and personal performance objectives assessed against KPIs which are aligned with achievement of the Board’s strategic objectives, the Company ensures variable reward is only paid when value has been created for shareholders. For middle and lower level management, total STIs are linked to individual performance measures and also to the financial performance of the business. The STI is delivered in the form of cash. 19 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 20 DIRECTORS’ REPORT 8 0 0 2 t r o p e R l a u n n A For the 2008 financial year, STI performance targets for Executives were based on the respective territories’ targets of Earnings before Interest, Tax, Depreciation and Amortisation (“EBITDA”), penetration rate, application volumes, settlement volumes, Average Transaction Value (“ATV”) and territory expansion targets. These targets were selected on the basis that the Group has, and is likely to have for sometime, a small number of experienced executives and ensuring that employment practices support and encourage continuity of team engagement with sustained and profitable growth of the Company. The short-term bonus payments may be adjusted up or down in line with under or over achievement against the target performance levels. This is at the discretion of the Senior Executives. The STI target annual payment is reviewed annually. Information on the STI is detailed on section E of the Remuneration Report. Long term incentive Long-term incentives to the Chief Executive Officer and certain senior employees were historically provided via the ThinkSmart Limited Employee Share Option Plan (“ESOP”) as a retention based reward. The Company has a pre-existing ESOP, as an equity- based long-term incentive, which was initiated before the Company was listed. Given the retention focus of these grants, vesting of the options is subject to service conditions and not linked to satisfaction of performance targets. There has been no retention based options granted since the Company’s listing in June 2007. The Board will be considering a new structure of performance based long term incentives for the Chief Executive Officer and certain senior employees of the Group, which will be subject to shareholder approval in 2009. Information on the pre-existing plan is detailed on section D of the Remuneration Report. B. DIRECTORS’ AND EXECUTIVE OFFICERS’ REMUNERATION - AUDITED Amount of remuneration Details of the remuneration of the Directors and the Key Management Personnel (as defined in AASB 124 Related Party Disclosures) of ThinkSmart Limited and its subsidiaries are set out in the following tables. The cash bonuses are dependent on the satisfaction of performance conditions as set out in the section headed Short-term performance incentives above. The Key Management Personnel of ThinkSmart Limited are the Directors and certain executives that report directly to the Chief Executive Officer. This includes the five Group executives who received the highest remuneration for the year ended 31 December 2008. 20 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 21 Key management personnel and other executives of the Group Details of the nature and amount of each major element of remuneration of each director of the Company, each of the five named Company executives and relevant Group executives who receive the highest remuneration and other key management personnel are: Short Term Post employment Share- based payments Proportion Value of of options as remuneration proportion performance of Non- Salary & fee $ STI cash monetary benefits bonus $ $ Total $ Super annuation benefits $ Term- ination benefits $ Options and rights $ Total $ % % related remuneration Consolidated Directors Non-Executive Directors - - - - - - - - - - - - - 70,000 - 48,112 - 50,000 - 57,850 - 50,000 - 50,000 6,300 4,330 4,500 5,206 4,500 4,500 - - - - 14,038 1,263 - - - - - - - - - 76,300 - 52,442 - 54,500 - 63,056 - 54,500 - 54,500 - - - 15,301 - - - - - - - - - 537,545 48,379 - 8,775 594,699 - 530,721 47,765 - 10,019 588,505 - 277,294 24,956 - 7,354 309,604 - 251,411 22,627 - 6,997 281,035 P Mansell S Penglis D Griffiths 2008 2007 2008 2007 2008 2007 70,000 48,112 50,000 57,850 50,000 50,000 C McDonald* 2008 - 2007 14,038 Executive Director N Montarello 2008 537,545 2007 530,721 277,294 251,411 Executives N Barker M Radotic 2008 2007 2008 2007 G Varma G Parry 2007 2008 2007 2008 2007 277,093 20,000 3,068 300,160 13,853 - 2,812 316,826 140,000 11,000 - 151,000 13,590 - 2,468 167,058 S McDonagh** 2008 112,500 - - - 112,500 10,039 - - - - - - 122,539 - - - 231,826 18,000 - 249,826 22,484 - 9,974 282,284 169,266 - - 169,266 15,385 - 9,947 194,598 259,962 32,723 12,099 304,783 12,998 - 2,812 320,594 11% 262,616 23,979 10,639 297,234 13,678 - 2,468 313,379 J Rozenbroek 2008 228,065 26,014 25,696 279,775 17,452 - 2,812 300,040 2007 241,437 134,450 27,214 403,101 19,315 - 2,468 424,884 Total Total 2008 2007 2,094,284 96,737 40,862 2,231,883 165,462 - 34,541 2,431,886 1,765,451 169,429 37,853 1,972,733 147,659 - 34,367 2,154,758 * Mr C McDonald resigned on 11 April 2007. ** Mr S McDonagh is appointed on 10 July 2008. The Company has no employees. - - - - - - - - 1% 2% 2% 2% 1% 1% 0% 0% 4% 5% 1% 1% 1% 1% 1% 2% 21 1% 2% 2% 2% 7% 8% 0% 0% 4% 5% 8% 10% 32% 5% 9% TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 22 DIRECTORS’ REPORT 8 0 0 2 t r o p e R l a u n n A C. SERVICE AGREEMENTS - AUDITED D. SHARE BASED COMPENSATION - AUDITED Service agreements can provide for the provision of short- All options refer to options over ordinary shares of ThinkSmart term performance incentives, eligibility for the ThinkSmart Limited, which are exercisable on a one-for-one basis under ESOP, other benefits including the use of a Company motor the Employee Share Options Plan (“ESOP”). vehicle, tax advisory fees, payment of benefits forgone at a previous employer, relocation, living, tax equalisation, travel and accommodation expenses whilst an executive is required to live away from their normal place of residence. Only remuneration and other terms of employment for the Managing Director are formalised in a service agreement. The Managing Director’s employment agreement has a fixed term Options and rights over equity instruments granted as compensation - audited No options are granted in 2008 or since the end of the financial year. Modification of terms of equity-settled share-based payment transactions - audited of 3 years to 28 August 2009 with provision to extend the In 2007, the board made a resolution and authorised the agreement for a further period. All other employment subdivision of the shares from 22,245,913 fully paid ordinary agreements are unlimited in term but capable of termination shares in the Company to 88,983,652 fully paid ordinary on up to three months’ notice by either the Company or the shares. The share split was to ensure an appropriate capital executive. The Company can make a payment in lieu of structure at the time of the IPO. notice. Consequently, the options were split 1:4. The option split has In the event of retrenchment, the executives listed in the been applied retrospectively in this report. table on page 21 are entitled to the payment provided for in the service agreement, where applicable. The employment of the executives may be terminated by the Company without notice by payment in lieu of notice. The service agreements also contain confidentiality and restraint of trade clauses. Exercise of options granted as compensation - audited During the reporting period, the following shares were issued on the exercise of options previously granted as compensation: No of shares Amount paid $/share 805,893 280,000 $1.125 $0.4375 93,333 $0.625 2008 N Montarello G Varma G Varma 2007 No options were exercised in 2007. There are no amounts unpaid on the shares issued as a result of the exercise of the options in the 2008 financial year. 22 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 23 Analysis of options and rights over equity instruments granted as compensation - audited Details of vesting profiles of the options granted as remuneration to each director of the Company and each of the five named Company executives and relevant Group executives and other key management personnel are detailed below. Options granted Number before Share Split Number after Share Split Grant Date % vested in year % forfeited in year Value yet to vest 31 December 2008 ($) Financial year in which grant vest Min Max Granted in 2008 No options are issued in 2008. Granted in 2007 Executives N Barker M Radotic G Parry J Rozenbroek 40,000 30,000 40,000 30,000 40,000 30,000 40,000 30,000 160,000 17/04/07 120,000 17/04/07 160,000 17/04/07 120,000 17/04/07 160,000 17/04/07 120,000 17/04/07 160,000 17/04/07 120,000 17/04/07 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 1/01/2009 1/01/2009 1/01/2009 1/01/2009 1/01/2009 1/01/2009 1/01/2009 1/01/2009 - - - - - - - - - - - - - - - - (a) The % forfeited in the year represents the reduction from the maximum number of options available to vest due to the highest level performance criteria not being achieved. (b) The minimum value of options yet to vest is $nil as the service criteria may not be met and consequently the option may not vest. (c) The maximum value of options yet to vest is not determinable as it depends on the market price of shares of the Company on the Australian Securities Exchange at the date the option is exercised. The maximum values presented above are based on share price as at 31 December 2008. As at 31 December 2008, the maximum value is nil as the options are out of the money. Analysis of movement of options - audited The movement during the reporting period, by value of options over ordinary shares in the Company held by each Company director and each of the five named Company executives and relevant Group executives and other key management personnel is detailed below. Directors N Montarello Executives G Varma Granted in year $ (a) Exercised in year $ (b) Lapsed in year $ (c) - - - (60,442) 535,966 475,524 - - - (a) The value of options granted in the year is the fair value of the options calculated at grant date using a binominal option-pricing model. The total value of the options granted is included in the table above. This amount is allocated to remuneration over the vesting period. (b) The value of options exercised during the year is calculated as the market price of shares of the Company on the Australian Securities Exchange as at close of trading on the date the options were exercised after deducting the price paid to exercise the option. (c) The value of the options that lapsed during the year represents the benefit forgone and is calculated at the date the option lapsed using a binominal option-pricing model with no adjustments for whether the performance criteria had been achieved. In 2008, lapsed options have nil value as they were out of the money when they expired. 23 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 24 DIRECTORS’ REPORT 8 0 0 2 t r o p e R l a u n n A E. BONUS REMUNERATION - AUDITED Details of the vesting profile of the short-term incentive cash bonuses awarded as remuneration to each director of the Company, each of the five named Company executives and relevant Group executives and other key management personnel are detailed below: Short term incentive bonus % vested in year Included in remuneration $ (a) % forfeited in year (b) 2008 Directors N Montarello Executives N Barker S McDonagh M Radotic G Varma G Parry J Rozenbroek 2007 Directors N Montarello Executives N Barker M Radotic G Varma G Parry J Rozenbroek - - - 20,000 18,000 32,723 26,014 - - 11,000 - 23,979 134,450 - - - 100% 100% 75% 27% - - 100% - 100% 100% - - - - - 25% 73% - - - - - - (a) Amounts included in remuneration for the financial year represent the amount that vested in the financial year based on achievement of personal goals and satisfaction of specified performance criteria. No amounts vest in future financial years in respect of the bonus schemes for the 2008 financial year. (b) The amounts forfeited are due to the performance or service criteria not being met in relation to the current financial year. AUDIT AND RISK COMMITTEE The audit and risk committee has a documented charter, approved by the Board, which is available on the website (www.thinksmartworld.com). All members must be non-executive directors with a majority being independent. The Chairperson may not be the Chairperson of the Board. The committee advises on the establishment and maintenance of a framework of internal control and appropriate ethical standards for the management of the Group. The members of the audit committee during the year were non-executive directors, and are D Griffiths (Chair) and P Mansell. The Committee’s primary roles are: n to assist the Board in relation to the reporting of financial information; n the appropriate application and amendment of accounting policies; n the appointment, independence and remuneration of the external auditor; and n to provide a link between the external auditors, the Board and management of the Company. The Committee will meet as often as the Committee members deem necessary in order to fulfil their role. However, it is intended that the Committee will normally meet half yearly. 24 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 25 RISK MANAGEMENT Code of conduct The Committee’s specific function with respect to risk management is to review and report to the Board that: ThinkSmart has developed a Code of Conduct which states ThinkSmart’s and its employees’ commitment to the conduct n the Company’s ongoing risk management program of its business with employees, customers, funders, retailers effectively identifies all areas of potential risk; and other external parties. n adequate policies and procedures have been designed The Code is directed at maintaining high ethical standards and implemented to manage identified risks; and integrity. Employees are expected to adhere to n a regular program of audits is undertaken to test the adequacy of and compliance with prescribed policies; and n proper remedial action is undertaken to redress areas of weakness. The risk management policy can be found on the Company’s website (www.thinksmartworld.com). Financial reporting ThinkSmart’s policies, perform their duties diligently, properly use company resources, protect confidential information and avoid conflicts of interest. The Code sets out the reporting lines where there is a potential breach of the Code, ThinkSmart’s commitment to the Code and the consequences of breaching the Code. The Code is acknowledged by all employees. TRADING IN GENERAL COMPANY SECURITIES BY The chief executive officer and the chief financial officer have DIRECTORS AND EMPLOYEES declared in writing to the board that the Company’s financial reports are founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the board, and is operating efficiently and effectively in all material aspects. Environmental regulation The Group’s operations are not subject to any significant environmental regulation under both Commonwealth and State legislation in relation to its activities. ThinkSmart’s Guidelines for Dealing in Securities explain and reinforce the Corporations Act 2001 requirements relating to insider trading. The Guidelines are summarised below. The Guidelines apply to all directors and employees of the ThinkSmart group, and their associates (“Relevant Persons”). The Guidelines expressly prohibit Relevant Persons buying or selling ThinkSmart securities where the Relevant Person or ThinkSmart is in possession of price sensitive or ‘inside’ information. ETHICAL STANDARDS The Guidelines establish a ‘window period’, where, generally, All directors, managers and employees are expected to act Relevant Persons may buy or sell ThinkSmart’s securities on with the utmost integrity and objectivity, striving at all times to ASX in the period from 31 days from the day following: enhance the reputation and performance of the Group. Every employee has a nominated supervisor to whom they may refer any issues arising from their employment. 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. The board has developed procedures to assist directors to disclose potential conflicts of interest. Where the board believes that a significant conflict exists for a director on a board matter, the director concerned does not n the announcement of half-yearly results; n the announcement of annual results; or n the holding of the annual general meeting, provided they are not in possession of inside information. Outside the window period, Relevant Persons must receive clearance for any proposed dealing in ThinkSmart’s securities on ASX as follows: n a director must receive approval from the Chair of the Board; receive the relevant board papers and is not present at the n the Chair must receive approval from the Board or the meeting whilst the item is considered. Details of director most senior director; related entity transactions with the Company and the Group are set out in note 34 to the financial statements. n executives and senior management must receive approval from the CEO; and n all other Relevant persons must receive approval from the Company Secretary. 25 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 26 DIRECTORS’ REPORT 8 0 0 2 t r o p e R l a u n n A The Guidelines also prohibit short term dealing (buying and In summary, the Continuous Disclosure Policy operates as selling within 3 months) in ThinkSmart securities by Relevant follows: Persons. DISCLOSURE POLICY ThinkSmart understands its obligations under the ASX Listing Rules and Corporations Act 2001 to keep the market fully n Information is communicated to shareholders through ASX announcements, the annual report, annual general meeting and half year and full year results announcements. informed of information which may have a material effect on n Shareholders are able to access information, including the price or value of ThinkSmart’s securities. ThinkSmart has media releases, key policies and the terms of reference adopted a Disclosure Policy which sets out its policy to strictly of the Board Committees through ThinkSmart’s website. comply with the continuous disclosure requirements. All relevant ASX announcements will be posted on ThinkSmart’s Disclosure Policy is summarised below. n The Company Secretary has the primary responsibility for all communication with the ASX in relation to Listing Rule matters including lodging announcements with ASX. The Company Secretary is also responsible for ensuring senior management is aware of the Disclosure Policy and that the Disclosure Policy is updated. n If management becomes aware of any information at any ThinkSmart’s website as soon as they have been released to ASX. n ThinkSmart encourages participation of shareholders at its annual general meeting. The external auditor will attend the annual general meeting and be available to answer shareholder questions about the conduct of the audit and the preparation and content of the auditor’s report. time that should be considered for release to the market, PRINCIPAL ACTIVITIES it must be reported immediately to the CEO, or the Group CFO / Company Secretary. The Group’s principal activity in the course of the financial year was to arrange finance for the renting of equipment in n Operating and divisional heads and group functional Australia and Europe. heads must ensure they have appropriate procedures in place within their areas of responsibility to ensure that all relevant information is reported to them so it can be dealt with in accordance with the Disclosure Policy. COMMUNICATION WITH SHAREHOLDERS The board provides shareholders with information using a comprehensive Continuous Disclosure Policy which includes identifying matters that may have a material effect on the price of the Company’s securities, notifying them to the ASX, posting them on the Company’s website, and issuing media releases. There have been no significant changes in the nature of these activities during the year. OPERATING AND FINANCIAL REVIEW The after tax net profit of the consolidated entity, being ThinkSmart Limited and its controlled entities (the “Group” or “consolidated entity”), for the year was $3,210,752 (2007: $738,066 which includes $3,352,489 net of income tax of listing costs). The period has seen the Group expand its revenue base through the partnership with The Warranty Group to deliver warranty products and services in Australia and New Zealand through the Dick Smith Electronics, Powerhouse and Tandy chains. European operations expanded in March 2008 with the launch into the Italian market through an agreement with PC City, the computer retailing arm of electrical retailing giant DSG International. In addition, agreements with PC World and PC City were extended through to 31 December 2012, effectively extending the existing 5 year contracts by more than 2 years. 26 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 27 In April 2008 ThinkSmart commenced trading in United States with Office Depot, a leading provider of office products and services. Over the course of 2008 the SmartWay Leasing product was introduced to all Office Depot stores in Florida, Texas and California. In December 2008 ThinkSmart postponed writing of new business in United States due to the uncertainty about the length and depth of the economic downturn, restrictive credit conditions and continuing volatility of currency exchange rates. The Group is not expected to incur costs in relation to the US operations in 2009. The Group continues to consolidate its position in Australia, UK and Spain with post-rental revenue streams (“inertia”) increasing European profitability. Against soft retail trading conditions in all countries UK and Australia have increased application volumes by 11% year on year as a result of improved penetration through existing retail relationships. The deteriorating credit environment has seen conversion rates fall with contract volumes reducing by 3% and 1% in UK and Australia. Spain has seen a reduction in application and contract volumes of 19% and 38% respectively reflecting the dramatic deterioration in the Spanish economy in 2008. SIGNIFICANT CHANGES IN STATE OF AFFAIRS During the financial year there were no significant changes in the state of affairs of the company other than that referred to in the financial statements or notes thereto. DIVIDEND Dividend paid or declared by the Company to members since the end of the previous financial year were: Declared and paid during the year 2008 Interim 2008 ordinary Declared after year end Cents per share Total amount Franked/ unfranked Date of payment 2 1,933,788 Franked 13 October 2008 After the balance sheet date, the following dividends were proposed by the directors. The dividends have not been provided and there are no income tax consequences. Final 2008 ordinary 1.5 1,450,340 Franked 14 April 2009 The financial effect of these dividends has not been brought to account in the financial statements for the year ended 31 December 2008 and will be recognised in subsequent financial reports. Dividends have been dealt within the financial report as: Declared and paid during the year 2008 Interim 2008 ordinary SIGNIFICANT EVENTS AFTER THE BALANCE DATE Note Total amount ($) 22(c) 1,933,788 There has not been any matter or circumstance that has arisen since the end of the financial year that has 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 periods. LIKELY DEVELOPMENTS AND EXPECTED RESULTS The Group will continue to execute its strategic plan to grow revenue by increasing business volumes through existing retail partnerships in UK, Spain, Italy, France Australia and New Zealand. In mainland Europe the Group will pursue a multi-channel retailer model akin to the Australian business which should deliver market share gains in selected territories. Operations commenced in France in January 2009. Further information about likely developments in the operations of the Group and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the Group. 27 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 28 DIRECTORS’ REPORT 8 0 0 2 t r o p e R l a u n n A DIRECTORS’ INTERESTS The relevant interests of each director in the shares and options over such instruments issued by the companies within the Group and other related bodies corporate, as notified by the directors to the Australian Stock Exchange in accordance with s205G(1) of the Corporations Act 2001, at the date of this report is as follows: ThinkSmart Limited Number of ordinary shares Number of options granted over ordinary shares These options do not entitle the holder to participate in any share issue of the Company or any other body corporate. INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS During the financial year, the company paid a premium in respect of a contract insuring the directors of the company (as named above), the company secretary and all executive officers of the company and of any related body corporate against a liability incurred as such a director, secretary or executive officer to the extent permitted by the Corporations N Montarello 17,253,192 2,800,000 Act 2001. The contract of insurance prohibits disclosure of P Mansell S Penglis D Griffiths 1,300,000 1,610,500 1,613,360 - - - SHARE OPTIONS OPTIONS GRANTED TO DIRECTORS AND OFFICERS OF THE COMPANY During or since the end of the financial year, the Company granted no options to the directors and officers of the Company as part of their remuneration. SHARES ISSUED AS A RESULT OF THE EXERCISE OF OPTIONS During or since the end of the year, the Company has issued ordinary shares as a result of the exercise of options: Number of shares 760,000 93,333 805,893 Amount paid on each share $0.4375 $0.6250 $1.1250 the nature of the liability and the amount of the premium. The company has not otherwise, during or since the financial year, indemnified or agreed to indemnify an officer or auditor of the company or of any related body corporate against a liability incurred by such an officer or director. NON-AUDIT SERVICES During the year KPMG, the Company auditor, has performed certain other services in addition to their statutory duties. The board has considered the non-audit services provided during the year by the auditor and in accordance with written advice provided by resolution of the audit committee, is satisfied that the provision of those non-audit services during the year by the auditors is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: n All non-audit services are subject to the corporate governance procedures adopted by the Company and have been reviewed by the audit committee to ensure they do not impact the integrity and objectivity of the UNISSUED SHARES UNDER OPTIONS auditor; and At the date of this report, unissued ordinary shares of the n The non-audit services provided do not undermine the Company under option are: Number of shares under option Exercise price of options Expiry date of options 1,400,000 1,400,000 1,026,667 640,000 720,000 $1.38 $1.63 $0.63 $1.38 $3.00 27 August 2009 27 August 2010 31 December 2010 31 December 2011 31 December 2011 All options expire on the earlier of their expiry date or termination of the employee’s employment. Further details are included in the remuneration report on page 20 to 24. general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards. Details of the amounts paid to the auditor of the Group, KPMG, and its related practices for audit and non-audit services provided during the year are set out in note 27. 28 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 29 AUDITOR’S INDEPENDENCE DECLARATION The auditor’s independence declaration which forms part of this report, is included in page 30 of the financial report. Signed in accordance with a resolution of the directors made pursuant to s.298 (2) of the Corporations Act 2001. On behalf of the Directors P Mansell Director Perth, 20 February 2009 29 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 30 AUDITOR’S INDEPENDENCE DECLARATION 8 0 0 2 t r o p e R l a u n n A 30 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 31 DIRECTORS’ DECLARATION 1. In the opinion of the Directors of ThinkSmart Limited (the “Company”): a) The financial statements and notes and the remuneration disclosures that are designated as audited in the Remuneration report of the Directors’ report, set out on pages 15 to 77, are in accordance with the Corporations Act 2001, including: I. Giving a true and fair view of the Company’s and the Group’s financial position as at 31 December 2008 and of their performance, for the financial year ended on that date; and II. Complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; b) The financial report also complies with International Financial Reporting Standards as disclosed in note 2; c) The remuneration disclosures that are designated as audited in the Remuneration report of the Director’s report comply with the Australian Accounting Standard AASB 124 Related Party Disclosures, Corporations Act 2001 and the Corporations Regulations 2001, and d) There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the chief executive officer and chief financial officer for the financial year ended 31 December 2008. Signed in accordance with a resolution of the directors: P Mansell Director Perth, 20 February 2009 31 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 32 INCOME STATEMENTS F O R T H E F I N A N C I A L Y E A R E N D E D 3 1 D E C E M B E R 2 0 0 8 8 0 0 2 t r o p e R l a u n n A Revenue Employee benefits expense Sales and marketing costs Occupancy costs Communication costs Doubtful and bad debts Legal and consulting costs Credit bureau costs Corporate development costs Impairment costs Insurance costs Other expenses Notes 6(a) 6(b) Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ 38,898,513 36,354,265 3,300,000 1,500,000 (12,713,514) (10,057,089) - - (8,857,676) (10,098,403) (8,218) (19,661) (1,144,374) (843,651) - (737,612) (541,199) (1,157) (233,259) (247,467) - - - - (1,753,997) (507,112) (220,425) (107,040) (480,204) (502,554) - - (1,816,118) (1,971,953) (78,671) (1,348) 6(f) - (91,092) - - 6(g) (2,258,737) (3,326,225) - 5,259,676 (13,148) (51,057) - (22,411) EBITDA before capital listing costs and restructuring costs 8,811,930 8,258,611 2,927,324 6,609,216 Finance (costs)/benefits Depreciation expense EBTA before capital listing costs and restructuring costs Amortisation of intangibles Listing costs Restructuring costs Profit before Tax Income tax (expense)/benefit Profit from continuing operations Earnings per share Basic (cents per share) Diluted (cents per share) 6(e) 6(c) 6(d) 6(h) 6(i) (475,354) (570,225) 1,731,091 34,141 (409,686) (439,002) - - 7,926,890 7,249,384 4,658,415 6,643,357 (1,809,768) (1,132,307) - (4,195,856) (416,184) - - - - - (4,195,856) - 5,700,938 1,921,221 4,658,415 2,447,501 7 (2,490,186) (1,183,155) (1,246,757) 450,150 3,210,752 738,066 3,411,658 2,897,651 33 33 3.34 3.22 0.80 0.73 The attached notes form an integral part of these Income Statements 32 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 33 BALANCE SHEETS A S AT 3 1 D E C E M B E R 2 0 0 8 Current Assets Cash and cash equivalents Trade and other receivables Inventories Prepayment Other Total Current Assets Non-Current Assets Trade and other receivables Prepayment Plant and equipment Other financial assets Intangibles Goodwill Deferred tax assets Total Non-Current Assets Total Assets Current Liabilities Trade and other payables Borrowings Tax payable Total Current Liabilities Non-Current Liabilities Borrowings Deferred tax liability Other Total Non-Current Liabilities Total Liabilities Net (Liabilities)/Assets Equity/(Deficiency) Issued Capital Reserves Accumulated losses Total Equity Notes Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ 24(a) 4,547,371 5,059,229 596,205 525,962 8 9 10 11 8 12 13 14 15 16 7 18 19 20 7 21 22 23 1,624,270 1,721,456 65,520 63,433 4,509,891 4,035,396 193,370 171,487 - - 14,164 1,417 - - 15,128 10,111 10,940,422 11,051,001 611,786 551,201 210,384 - 3,648,041 2,346,693 1,260,955 554,775 - - - - - - - - 23,913,494 18,166,772 4,552,680 5,488,262 4,861,551 5,284,678 - - - - 965,568 2,037,291 1,079,252 2,157,616 15,499,179 15,711,699 24,992,746 20,324,388 26,439,601 26,762,700 25,604,532 20,875,589 4,791,522 5,635,677 42,229 2,575,440 2,106,572 2,459,304 5,213 - 1,465,564 2,130,577 884,425 1,556,563 8,832,526 9,872,826 3,385,958 1,561,776 - 33,040 662,343 1,144,475 38,648 104,975 700,991 1,282,490 - - - - - - - - 9,533,517 11,155,316 3,385,958 1,561,776 16,906,084 15,607,384 22,218,574 19,313,813 23,614,091 22,242,200 23,614,091 22,242,200 (1,821,312) (471,157) 147,142 92,142 (4,886,695) (6,163,659) (1,542,659) (3,020,529) 16,906,084 15,607,384 22,218,574 19,313,813 The attached notes form an integral part of these Balance Sheets 33 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 34 STATEMENTS OF CHANGES IN EQUITY F O R T H E F I N A N C I A L Y E A R E N D E D 3 1 D E C E M B E R 2 0 0 8 8 0 0 2 t r o p e R l a u n n A CONSOLIDATED Balance at 1 January 2007 Exchange differences arising on translation of foreign operations Net income recognised directly in equity Profit for the period Total recognised income and expense Recognition of share-based payments Issue of shares Balance at 31 December 2007 Balance at 1 January 2008 Exchange differences arising on translation of foreign operations Net income recognised directly in equity Profit for the period Total recognised income and expense Dividend paid Recognition of share-based payments Adjustment for tax on capitalised IPO cost Issue of shares under share option plan Fully paid ordinary shares Equity settled employee benefits reserve $ Foreign currency translation reserve $ Accumulated Losses $ Attributable to equity holders of the parent $ $ 9,842,393 37,434 (227,847) (6,901,724) 2,750,256 - - - - - 12,399,807 22,242,200 22,242,200 - - - - - - 74,428 1,297,463 - - - - 54,708 - 92,142 92,142 - - - - - 55,000 - - (335,452) (335,452) - (335,452) - - - - 738,066 738,066 - - (335,452) (335,452) 738,066 402,614 54,708 12,399,807 (563,299) (6,163,659) 15,607,384 (563,299) (6,163,659) 15,607,384 (1,405,155) (1,405,155) - - (1,405,155) (1,405,155) - 3,210,752 3,210,752 (1,405,155) 3,210,752 1,805,597 - - - - (1,933,788) (1,933,788) - - - 55,000 72,428 1,297,463 Balance at 31 December 2008 23,614,091 147,142 (1,968,454) (4,886,695) 16,906,084 COMPANY Balance at 1 January 2007 Profit for the period Fully paid ordinary shares $ Equity settled employee benefits reserve $ Accumulated Losses $ Total $ 9,842,393 37,434 (5,918,180) 3,961,647 - - 2,897,651 2,897,651 Total recognised income and expense 9,842,393 37,434 (3,020,529) 6,859,298 Recognition of share-based payments - 54,708 Issue of new shares Balance at 31 December 2007 Balance at 1 January 2008 Profit for the period - - 54,708 12,399,807 12,399,807 22,242,200 - 92,142 (3,020,529) 19,313,813 22,242,200 92,142 (3,020,529) 19,313,813 - - 3,411,658 3,411,658 Total recognised income and expense 22,242,200 92,142 391,129 22,725,471 Dividend payment Recognition of share-based payments Adjustment for tax on capitalised IPO cost Issue of shares under share option plan - - 74,428 1,297,463 - (1,933,788) (1,933,788) 55,000 - - - - - 55,000 74,428 1,297,463 Balance at 31 December 2008 23,614,091 147,142 (1,542,659) 22,218,574 The attached notes form an integral part of these Statements of Changes in Equity. 34 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 35 CASH FLOW STATEMENTS F O R T H E F I N A N C I A L Y E A R E N D E D 3 1 D E C E M B E R 2 0 0 8 Notes Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ Cash Flows from Operating Activities Receipts from customers 37,009,472 35,832,241 - 174,103 Payments to suppliers and employees (31,947,826) (30,888,194) (293,441) - Interest received Interest and other costs of finance paid Income tax paid 161,787 173,126 24,191 32,050 (646,931) (214,502) (85,022) (2,298,105) - (766,106) - - Net cash from operating activities 24(b) 2,278,397 4,902,671 (1,120,378) 206,153 Cash Flows from Investing Activities Payments for plant and equipment Payment for intangible assets Payment for acquisition of RentSmart Limited Acquisition of RentSmart Limited’s cash balance (1,209,852) (136,556) (1,379,907) (456,063) - - (7,882,851) - Net cash from (used in) investing activities (2,589,760) (8,475,470) 16,416 2,772 - - (632,357) (7,733,466) 1,297,463 13,000,001 1,297,463 13,000,001 - (4,946,950) - (4,946,613) 2,459,304 - 2,459,304 (2,039,891) (1,424,173) - (1,933,788) - (1,933,788) - - - - - - - - - (113) (113) - - - - 319,922 525,962 - Cash Flows from Financing Activities Hire purchase and lease finance repaid Borrowings to subsidiary Proceeds from issue of shares Payment of IPO costs Proceeds of borrowings Repayment of borrowings Dividend paid Net cash from (used in) financing activities (200,497) 6,631,650 1,190,622 Net (decrease)/increase in cash and cash equivalents (511,859) 3,058,851 70,244 Cash and cash equivalents at beginning of the financial year 5,059,230 2,000,378 525,961 Net cash and cash equivalents at the end of the financial year 24(a) 4,547,371 5,059,229 596,205 525,962 The attached notes form an integral part of these Cash Flow Statements 35 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 36 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A 1. General Information ThinkSmart Limited (the “Company”) is a publicly listed company, incorporated and domiciled in Australia. The consolidated financial statements of the Company as at and for the year ended 31 December 2008 comprise of the Company and its subsidiaries that operate in subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. Australia, United Kingdom, New Zealand, Spain, France, Where necessary, adjustments are made to the financial Italy and USA. The Group’s principal activity is to arrange statements of subsidiaries to bring their accounting finance for renting of equipment in Australia, New policies in line with those by other members of the Group. Zealand, Europe and USA. 2. Basis of Preparation STATEMENT OF COMPLIANCE The financial report is a general purpose financial report which has been prepared in accordance with the Australian Accounting Standards (AASBs) (including Australian Interpretations) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial report of the Group and the financial report of the Company comply with International Financial Reporting Standards (IFRSs) and interpretations adopted by the Internal Accounting Standards Board (IASB). The financial statements were authorised for issue by the Directors on 20 February 2009. BASIS OF MEASUREMENT The financial report has been prepared on the basis of historical cost, except for the revaluation of certain non- current assets and financial instruments. Cost is based All intra-group balances, transactions, income and expenses are eliminated in full on consolidation. b) BUSINESS COMBINATIONS Acquisitions of subsidiaries and business are accounted for using the purchase method. The cost of the business combination is measured as the aggregate of the fair values (at the date of the exchange) of assets, liabilities incurred or assumed, and equity instruments issued by the group in exchange for control of the acquiree, plus any costs attributable to the business combination. The acquiree’s identifiable assets liabilities and contingent liabilities that meet the conditions of recognition under AASB 3 ‘Business Combinations’ are recognised at their fair values at the acquisition date. Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the company’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Any excess is measured in the profit and loss. on the fair values of the consideration given in exchange c) CASH AND CASH EQUIVALENTS for assets. All amounts are presented in Australian Dollars unless otherwise noted. 3. Significant Accounting Policies The following significant policies have been consistently applied to all periods presented in these consolidated financial statements, and have been consistently applied by group entities. a) BASIS OF CONSOLIDATION The consolidated financial statements incorporate the Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily converted to known amounts of cash and which are subject to an insignificant risk of change in value. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet. d) PLANT AND EQUIPMENT Acquisition of Assets financial statements of the company and entities Items of plant and equipment acquired are recorded at controlled by the company (its subsidiaries). Control is the cost of acquisition, being the purchase consideration achieved when the company has the power to govern the determined as at the date of acquisition plus costs financial and operating policies of an entity so as to incidental to the acquisition. obtain the benefits from its activities. The results of 36 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 37 Depreciation Depreciation is provided on plant and equipment. Depreciation is calculated on a reducing balance basis so as to write off the net cost or other revalued amount of each asset over its expected useful life. Leasehold improvements are depreciated over the period of the lease or estimated useful life, whichever is the shorter. The following estimated useful lives are used in the calculation of depreciation: Capitalised lease 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 profit and loss. f) TRADE AND OTHER ACCOUNTS PAYABLES Trade payables are recognised when the consolidated n Office furniture, fittings, equipment and computers entity becomes obliged to make future payments 2.5 to 5 years resulting from the purchase of goods and services. n Leasehold improvements the lease term g) INVESTMENTS n Self-funded rental assets 2.5 to 5 years Investments in controlled entities are recorded at the n Motor vehicles 5 years n Leased computer equipment and software 2.5 to 5 years Depreciation method, useful lives and residual values are reviewed at each reporting date. Gains and losses on disposal Gains and losses on disposal of an item of plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of plant and equipment and are recognised net within “other income” in profit and loss. When revalued assets are sold, the amounts included in the revaluation reserve are transferred to retained earnings. e) LEASED ASSETS Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement so as to reflect the risks and benefits incidental to ownership. Operating leases The minimum lease payments of operating leases, where the lessor effectively retains substantially all of the risks and benefits of ownership of the leased item, are recognised as an expense on a straight line basis. Finance leases Leases which effectively transfer substantially all of the risks and benefits incidental to ownership of the leased item to the 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. lower of cost and recoverable amount. Investments in associates are accounted for under the equity method in the consolidated financial statements and the cost method in the company financial statements. Other investments are recorded at the lower of cost and recoverable amount. h) FINANCIAL ASSETS Investments are recognised and derecognised on trade date where purchase or sale of an investment is under contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measures at fair value net of transaction costs. Subsequent to initial recognition, investments in subsidiaries are measured at cost in the company financial statements. Subsequent to initial recognition, investments in associates are accounted for under the equity method in the consolidated financial statements and the cost method in the company. Other financial assets are classified into the following specified categories: financial assets at ‘fair value through profit and loss’, ‘held-to-maturity’ investments, ‘available-for- sale’ financial assets and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Effective interest method The effective interest method is a method of calculating the amortised cost of a financial asset and allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset or, where appropriate, a shorter period. 37 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 38 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A Loans and receivables financial assets that are equity securities, the reversal is Trade receivables, loans, and other receivables are recognised directly in equity. recorded at amortised cost less impairment. Non-financial assets Insurance prepayment The carrying amounts of the Group’s non-financial assets, In respect to the UK operations, when an equipment insurance policy is issued by Allianz to RentSmart Limited’s customers, RentSmart Limited pays the customer’s insurance premium to Allianz. RentSmart Limited subsequently collects the insurance premium from the customer on a monthly basis over the life of the rental agreement. The rate of the collection of the other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, the recoverable amount is estimated at each reporting date. insurance premium is applied to recover the prepayment The recoverable amount of an asset or cash-generating to Allianz and to provide a service fee to RentSmart unit is the greater of its value in use and its fair value less Limited. Where a policy is cancelled, the unexpired costs to sell. In assessing value in use, the estimated premiums are refunded to RentSmart Limited. future cash flows are discounted to their present value i) IMPAIRMENT OF ASSETS Financial assets using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment A financial asset is assessed at each reporting date to testing, assets are grouped together into the smallest determine whether there is any objective evidence that it group of assets that generates cash inflows from is impaired. A financial asset is considered to be impaired continuing use that are largely independent of the cash if objective evidence indicates that one or more events inflows of other assets or groups of assets (the “cash- have had a negative effect on the estimated future cash generating unit”). The goodwill acquired in a business flows of that asset. An impairment loss in respect of a financial asset measures at amortised cost is calculated as the combination, for the purpose of impairment testing, is allocated to cash-generating units that are expected to benefit from the synergies of the combination. difference between its carrying amount, and the present An impairment loss is recognised if the carrying amount value of the estimated future cash flows discounted at of an asset or its cash-generating unit exceeds its the original effective interest rate. An impairment loss in recoverable amount. Impairment losses are recognised in respect of an available-for sale financial asset is calculated by reference to its fair value. Individually significant financial assets are tested for impairment on an individual basis. The remaining profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of the other assets in the unit (groups of units) on a pro rata basis. financial assets are assessed collectively in groups that An impairment loss in respect of goodwill is not reversed. share similar credit risk characteristics. All impairment losses are recognised in profit and loss. Any cumulative loss in respect of an available-for-sale financial asset recognised previously in equity is transferred to profit and loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost and available-for-sale financial assets that are debt securities, the reversal is recognised in profit and loss. For available-for-sale In respect of other assets, impairment losses recognised in the prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 38 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 39 j) INTANGIBLE ASSETS Intellectual Property has been tested and is ready for use in the manner intended by management. Intellectual property is recorded at cost of acquisition over Software development expenditure is capitalised only if the fair value of the identifiable net assets acquired, is the development costs can be measured reliably, the amortised on a straight line basis over 20 years. product process is technically and commercially feasible, Inertia Assets and Distribution Network Assets Intangible assets acquired in a business combination are identified and recognised separately from goodwill where they satisfy the definition of an intangible asset and their fair values can be measured reliably. Intangible assets recognised are “inertia” and “distribution networks” acquired on the acquisition of RentSmart Limited on 1 December 2006. n Inertia Assets future economic benefits are probable, and the Group intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalised includes the cost of direct labour and overhead costs that are directly attributable to preparing the asset for its intended use. The intangible asset is amortised on a straight line basis over its estimated useful life, which is 4 years. Capitalised software development expenditure is measured at cost less accumulated amortisation and accumulated At the conclusion of the initial rental period, the impairment losses. Group is entitled to acquire the equipment from the funders at a nominal value. Inertia represents the expected income streams from the unguaranteed residual interest in equipment on unexpired rental contracts in existence at 1 December 2006. The maximum term of unexpired interest at 1 December 2006 is four years and the intangible asset is amortised over the expected income profile of this revenue stream. n Distribution Network Assets Distribution networks represent the value attributable to the retailer network from which rental contracts are originated. The intangible asset is amortised on a straight line basis until the expected expiry of the contract, which is 4.5 years. Funding Agreements k) GOODWILL Goodwill acquired in a business combination is initially measured at its cost, being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. Goodwill is subsequently measured at its cost less any impairment losses. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash generating units (CGUs) or groups of CGUs, expected to benefit from the synergies of the business combination. CGUs (or groups of CGUs) to which goodwill has been allocated are tested for impairment annually, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. If the recoverable amount of the CGU (or group of CGUs) The contractual rights obtained by the Group under is less than the carrying amount of the CGU (or group of financing agreements entered into with its funding CGUs), the impairment loss is allocated first to reduce partners constitute intangible assets with finite useful the carrying amount of any goodwill allocated to the CGU lives. These contract rights are recognised initially at cost (or group of CGUs) and then to the other assets of the and amortised over their expected useful lives (initially CGU (or group of CGUs) pro-rata on the basis of the contract term or expected period until facility limit is carrying amount of each asset in the CGU (or CGUs). The reached – between 5 and 7 years). At each reporting impairment loss recognised for goodwill is recognised date a review for indicators of impairment is conducted. immediately in the profit or loss and is not reversed in the Software Development subsequent period. Software development relates to the development of the Group’s proprietary SmartCheck credit application processing software system. Software development costs are capitalised only up to the point when the software On disposal of an operation within a CGU, the attributable goodwill is included in the determination of the profit or loss of disposal on the operation. 39 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 40 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A l) GOVERNMENT GRANTS line basis over the vesting period, based on the Group’s Government grants are assistance by the Government in estimate of shares that will eventually vest. the form of transfer of resources to the company in return for past or future compliance with certain conditions to the operating activities of the company. Government grants are not recognised until there is reasonable assurance that the company will or has complied with the conditions attaching to them and the grants will be received. Government grants are recognised as income over the periods necessary to match them with the related costs which they are intended to compensate. Government grants that are receivable as compensation for expenses or losses already incurred are recognised as income of the period in which it becomes receivable. m) EMPLOYEE BENEFITS A liability is recognised for benefits accruing to employees in respect of wages and salaries and annual leave when it is probable that settlement will be required and they are capable of being measured reliably. The group’s net obligation in respect of long service leave is the amount of future benefit that employees earned in return for their service in the current and prior periods plus related on-costs; that benefit is discounted to determine its present value, and the fair value of any related assets is deducted. Liabilities recognised in respect of employee benefits, which are expected to be settled within 12 months, are measured at their nominal values, using the remuneration rate expected to apply at the time of settlement. Liabilities recognised in respect of employee benefits, which are not expected to be settled within 12 months, are measured at their present value of the estimated future cash flows to be made by the group. Share–based payments Equity-settled share-based payments with employees and others providing similar services are measured at the fair value of the equity instrument at the grant date. Fair value is measured by use of a binomial model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non- transferability, exercise restrictions, and behavioural Equity-settled share-based payment transactions with other parties are measured at the fair value of the goods and services received, except where the fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service. For cash-settled share-based payments, a liability equal to the portion of the goods or services received is recognised at the current fair value determined at each reporting date. n) INVENTORIES Inventories are valued at the lower of cost and net realisable value. Net realisable value represents the estimated selling price less all estimated costs of completion and costs necessary to make use for sale. o) REVENUE RECOGNITION Revenue is measured at the fair value of the consideration received or receivable and is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Funder Income Commissions receivable from funders is recognised at the time finance approval is given, adjusted for an allowance for loans not expected to proceed to a contract. A component of the income where material is deferred and recognised in line with the services provided. As at 31 December 2008 and 2007, this deferred revenue was not considered material. Unguaranteed Residual Interest in Equipment (inertia income) At the conclusion of the initial rental period the consolidated entity is entitled to acquire the equipment from the funders at a nominal value. All risks and rewards of ownership pass to the Group at that point and it has the option to either immediately dispose of the equipment or continue to rent the asset to third parties. considerations. n Ongoing rental income The fair value determined at the grant date of the equity- settled share-based payments is expensed on a straight- Where the asset acquired from the funder is rented to third parties the income from that rental is brought to 40 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 41 account when the control of the right to receive this cash equivalents for the purpose of the statement of cash income is attained and can be reliably measured, flows. usually on a monthly basis. Accounting for finance income and expense is discussed No ongoing rental income is brought to account in in note 3(x). respect of the unexpired rental contracts. n Income earned from sale of equipment Held-to-maturity investments If the Group has the positive intent and ability to hold Where the asset acquired is sold the net sale debt securities to maturity, then they are classified as proceeds are brought to account at the time of the held-to-maturity. Held-to-maturity investments are sale. Insurance Income measured at amortised cost using the effective interest rate method, less any impairment losses. Funder income includes commissions received on Available-for-sale financial assets insurance policies issued by third party insurers to cover The Group’s investments in equity and certain debt theft and damage of rental equipment. In UK this revenue securities are classified as available-for-sale financial does not form part of funder income and is recognised assets. Subsequent to initial recognition, they are over the life of the rental contract. The revenue measured at fair value and changes therein, other than recognition policy for the Australian insurance income is impairment losses, and foreign exchange gains and consistent with the treatment of funder income. losses on available-for-sale monetary items, are p) FINANCIAL INSTRUMENTS Non-derivative financial instruments Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transaction costs. Subsequent to initial recognition non-derivative financial instruments are measured as described below. recognised directly in a separate component of equity. When an investment is derecognised, the cumulative gain or loss in equity is transferred to profit or loss. Financial asset at fair value through profit or loss An instrument is classified as at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Financial instruments are designated at fair value through profit or loss if the Group manages such investments and makes purchase and sale decisions based on their fair value on accordance with the Group’s documented risk management or investment strategy. Upon initial recognition attributable A financial instrument is recognised if the Group becomes transaction costs are recognised in profit or loss when a party to the contractual provisions of the instruments. incurred. Financial instruments at fair value through profit Financial assets are derecognised if the Group’s or loss are measured at fair value, and changes therein contractual rights to the cash flows from the financial are recognised in profit or loss. assets expire or if the Group transfers the financial asset to another party without retaining control or substantially all risks and rewards of the assets. Regular purchases and sales of financial assets are accounted for at trade date, i.e. the date that the Group commits itself to Other Other non-derivative financial instruments are measured at amortised cost using the effective interest method, less any impairment losses. purchase or sell the asset. Financial liabilities are Share capital recognised if the Group’s obligations specified in the contract expire or are discharged or cancelled. Ordinary shares are classified as equity. Incremental costs directly attributable to issue of ordinary shares and share Cash and cash equivalents comprise cash balances and options are recognised as a deduction from equity, net of call deposits. Bank overdrafts that are repayable on any tax effects. demand and form an integral part of the Group’s cash management are included as a component of cash and 41 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 42 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A q) INCOME TAX Current tax Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date. Current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable). Deferred tax Deferred tax is accounted for using the comprehensive balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items. In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Consolidated Entity expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company/Consolidated Entity intends to settle its current tax assets and liabilities on a net basis. Current and deferred tax for the period Current and deferred tax is recognised as an expense or income in the income statement, except when it relates to items credited or debited directly to equity, in which case the deferred tax is also recognised directly in equity, or where it arises from the initial accounting for a business combination, in which case it is taken into account in the determination of goodwill or excess purchase consideration. and tax offsets can be utilised. However, deferred tax Tax consolidation assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of a business combination) which affects neither taxable income nor accounting profit. Furthermore, a deferred tax liability is not recognised in relation to taxable temporary differences arising from goodwill. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and joint ventures except where the Consolidated Entity is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. The Company and its wholly-owned Australian resident entities formed a tax-consolidated group during 2008. As a consequence, all members of the tax-consolidated group are taxed as a single entity from 1 January 2008. The head entity within the tax-consolidated group is ThinkSmart Ltd. Current tax expense/ income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are recognised in the separate financial statements of the members of the tax-consolidated group using the ‘group allocation approach’ by reference to the carrying amounts of assets and liabilities in separate financial statements of each entity and the tax values applying under tax Deferred tax assets arising from deductible temporary consolidation. differences associated with these investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries are assumed by the head entity in the tax-consolidated group and are recognised by the Company as amounts payable/ (receivable) to/ (from) other entities in the tax- consolidated group in conjunction with any tax funding Deferred tax assets and liabilities are measured at the tax arrangement amounts (refer below). Any difference rates that are expected to apply to the period(s) when the between these amounts is recognised by the Company as an equity contribution or distribution. 42 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 43 The Company recognises deferred tax assets arising from The net amount of GST recoverable from, or payable to, unused tax losses of the tax-consolidated group to the the taxation authority is included as part of receivables or extent that it is probable that future taxable profits of the payables. tax-consolidated group will be available against which the ass et can be utilised. Cash flows are included in the statement of cash flows on a gross basis. The GST component of cash flows arising Any subsequent period adjustments to deferred tax from investing and financing activities which is assets arising from unused tax losses as a result of recoverable from, or payable to, the taxation authority is revised assessments of the probability of recoverability is classified as operating cash flows. recognised by the head entity only. Nature of tax funding arrangement and tax sharing agreement The head entity, in conjunction with other members of the tax-consolidated group, has entered into a tax funding arrangement which sets out the funding obligations of members of the tax-consolidated group in respect of tax amounts. The tax funding arrangements require payments to/from the Company equal to the current tax liability/(asset) assumed by the Comany and any tax-loss s) FOREIGN CURRENCY TRANSACTIONS Functional and presentation currency Items included in the financial statements of each of the Group’s entities 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 ThinkSmart Limited’s functional and presentation currency. deferred tax asset assumed by the Company, resulting in Transactions and balances the Company recognising an inter-entity receivable/(payable) equal in amount to the tax liability/(asset) assumed. The inter-entity receivables/(payables) are at call. Contributions to fund the current tax liabilities will be 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 documented in the tax funding arrangement and reflect exchange rates of monetary assets and liabilities the timing of the Company’s obligation to make payments denominated in foreign currencies are recognised in the for tax liabilities to the relevant tax authorities. income statement. The head entity in conjunction with the other members of Group companies and foreign operations the tax-consolidated group, will also be required to enter into a tax sharing agreement. The tax sharing agreement provides for the determination of the allocation of income tax liabilities between the entities should the Company default on its tax payment obligations. No amounts will be recognised in the financial statements in respect of this agreement as payment of any amounts under the tax sharing agreement is considered remote. r) GOODS AND SERVICES TAX Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST) except: The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: n Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet. n Income and expenses for each income statement are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative i) where the amount of GST incurred is not recoverable effect of the rates prevailing on the transaction dates, from the taxation authority, it is recognised as part of in which case income and expenses are translated at the cost of acquisition of an asset or as part of an the dates of the transactions); and item of expense; or n All resulting exchange differences are recognised as a ii) receivables and payables which are recognised separate component of equity. inclusive of GST. 43 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 44 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A On consolidation, exchange differences arising from the outflow of economic benefits will be required to settle the translation of any net investment in foreign entities, and obligations. Provisions are determined by discounting the of borrowings and other currency instruments designated expected future cash flows at a pre-tax rate that reflects as hedges of such investments, are taken to current market assessments of the time value of money shareholders’ equity. When a foreign operation is sold or and the risks specific to the liability. borrowings repaid a proportionate share of such exchange differences are recognised in the income statement as part of the gain or loss on sale. Foreign exchange gains and losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised directly in equity in foreign currency translation reserve. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at exchange rates prevailing at the reporting date. t) EARNINGS PER SHARE Basic earnings per share W) LEASE PAYMENTS Payments made under operating leases are recognised in profit or loss on a straight line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant period rate of interest on the remaining balance of the liability. Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the contingency no longer exists and the lease adjustments is known. Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the year, adjusted for bonus elements in ordinary shares issued during the year. 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 x) FINANCE INCOME AND EXPENSES Finance income comprises interest income on funds invested (included available-for-sale financial assets), dividend income, gains on disposal of available-for-sale financial assets and changes in fair value of financial assets at fair value through profit or loss. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Dividend income is recognised in profit or loss on the date the Group’s right to receive payment is established, which in the case of quoted securities is the ex-dividend date. shares and the weighted average number of shares Finance expenses comprise interest expense on assumed to have been issued for no consideration in borrowings, unwinding of the discount on provisions, relation to dilutive potential ordinary shares. dividends on preference shares classified as liabilities, u) CORPORATE DEVELOPMENT COSTS Corporate developments costs are expensed as incurred in investing in new markets and primarily comprise of salaried costs, travel, consultancy and trademark protection. v) PROVISIONS changes in the fair value of financial assets at fair value through profit or loss, impairment losses recognised on financial assets, and losses on hedging instruments that are recognised in profit or loss. All borrowings costs are recognised in profit or loss using the effective interest method. Foreign currency gains and losses are reported on a net A provision is recognised if, as a result of a past event, basis. the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an 44 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 45 y) SEGMENT REPORTING Trade and other receivables A segment is a distinguishable component of the Group that is engaged either in providing related products or services (business segment), or in providing products and services within a particular economic environment (geographical segment) which is subject to risks and returns that are different from those of other segments. Segment information is presented in respect of the Group’s geographical segments. The Group’s primary format for segment reporting is based on geographical segments. The business segments are determined based on the Group’s management and internal reporting structure. Segment results, assets and liabilities include items attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items compromise mainly investments and related revenue, loans and borrowings and related expenses, and head office expenses, and income tax assets and liabilities. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill. z) DETERMINATION OF FAIR VALUE A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset and liability. Intangible assets The fair value of intangible assets as a result of business combination is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets (refer to note 3(j)). Investment in equity and debt securities The fair value of financial assets at fair value through profit or loss, held-to-maturity investments and available- for-sale financial assets is determined by reference to The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. Non-derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. For finance leases, the market rate of interest is determined by reference to similar lease agreements. Share-based payment transactions The fair value of employee stock options is measured using a binomial model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general option holder behaviour), expected dividends, and the risk-free interest rate (based on government bonds). Services and non-market performance conditions attached to the transactions are not taken into account in determining fair value. Financial guarantees For financial guarantee contract liabilities, the fair value at initial recognition is determined using a probability weighted discounted cash flow approach. This method takes into account the probability of default by the guaranteed party over the term of the contract, the loss given default (being the proportion of the exposure that is not expected to be recovered in the event of default) and exposure at default (being the maximum loss at the time of default). aa) ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS At the date of authorisation of the financial report, the following are Standards and Interpretations were in issue but not yet effective, that may be applicable to the Group. The Group has not early adopted any of these their quoted bid price at the reporting date. The fair value standards: of held-to-maturity investments is determined for disclosure purposes only. n AASB 8 Operating Segments introduces the “management approach” to segment reporting. AASB 8, which becomes mandatory for the Group’s 31 45 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 46 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A December 2009 financial statements, will require the which form the basis of making the judgments. Actual disclosure of segment information based on the results may differ from these estimates. internal reports regularly reviewed by the Group’s Chief Operating Officer in order to assess each segment’s performance and to allocate resources to them. Currently the Group presents segment information in respect of its geographical segments. The Group has not yet determined the potential effect of the revised standard on the Group’s disclosures. n Revised 101 Presentation of Financial Statements introduces the term total comprehensive income, which represents changes in equity during a period other than those changes resulting from transactions with owners in their capacity as owners. Total comprehensive income may be presented in either a single statement of comprehensive income (effectively combining both the income statement and all non-owner changes in equity in a single statement) or, in an income statement and a separate statement of comprehensive income. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Except as described below, in preparing this consolidated financial report, the significant judgements made by management in applying the consolidated entity’s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial report as at and for the year ended 31 December 2007. a) CRITICAL JUDGEMENTS IN APPLYING THE ENTITY’S ACCOUNTING POLICIES The following are the critical judgements including those involving estimations, that management has made in the Revised AASB 101, which becomes mandatory for process of applying the Group’s accounting policies and the Group’s 31 December 2009 financial statements, that have a significant effect on the amounts recognised is expected to have a significant impact on the in the financial statements: presentation of the consolidated financial statements. The Group plans to provide total comprehensive income in single statement of comprehensive income for its 2009 consolidated financial statements. i) The factors used to determine the company provisions for employee entitlements. ii) The valuation of options issued by the company in the absence of a liquid market and volatility factors used n AASB 2008-7 Amendments to Accounting Standards in binomial pricing models. – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate changes the recognition and measurement dividend receipts as income and addresses the accounting of a newly formed parent entity in the separate financial statements. The Group has not yet determined the potential effect of the amendment. 4. Critical accounting judgements and key sources of estimation uncertainty b) KEY SOURCES OF ESTIMATION UNCERTAINTY. The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in In the application of the Group’s accounting policies, which the estimate is revised and in any future periods which are described in note 3, management is required affected. to make judgments, estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstance, the results of In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant affect on the amount recognised in the financial statements are described in the following notes: n Note 16 – measurement of the recoverable amounts of cash-generating units containing goodwill 46 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 47 n Note 15 – recoverable amount of intangible and reviews the adequacy of the risk management assets framework in relation to the risks faced by the Company n Note 7 – utilisation of tax losses n Note 22 – measurement of share based payments n Note 28 and 29 – contingent assets and liabilities Certain comparative amounts have been reclassified to conform with the current year’s presentation. 5. Financial Risk Management OVERVIEW The Company and the group have exposure to the following risks from their use of financial instruments: n Credit risk n Liquidity risk n Market risk This note presents information about the Company’s and group’s exposure to each of the above risks, their objectives, policies and processes for measuring and and the Group. Credit Risk Credit risk refers to the risk that a counterparty or customer will default on its contractual obligations resulting in financial loss to the Group and arise principally from the Group’s assessment of recoverability from debtors. The Group has adopted a policy of only dealing with credit worthy counterparties as a means of mitigating the risk of financial loss from defaults. The Group has minimal concentrations of credit risk in relation to trade receivables. Credit risk arising from customer rental contracts are not borne by the Group but by the funding institutions. The day to day management of credit risk is undertaken by ensuring counterparties fall within specific risk criteria prepared by our financiers and the Board. The Company and Group assess impairment of receivables on an individual basis. managing risks, and the management of capital. Further The carrying amount of financial assets recorded in the quantitative disclosures are included throughout this financial statements, net of any allowances for losses, financial report. represents the Group’s maximum exposure to credit risk. The Board of Directors has overall responsibility for the Guarantees establishment and oversight of the risk management framework. The Board has established the Audit and Risk Management Committee, which is responsible for developing and monitoring risk management policies. The committee reports to the Board of Directors on its activities. Risk management policies are established to identify and analyse the risks faced by the Company and the Group, to set appropriate limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect the changes in market conditions and the Company’s and Group’s activities. The Company and Group, through their training and management standards and procedures, aim to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Audit and Risk Committee oversees how management monitors compliance with the Company’s and Group’s risk management policies and procedures Group policy is to provide financial guarantees only to wholly-owned subsidiaries. Details of outstanding guarantees are provided in note 18. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The consolidated entity manages liquidity risk by maintaining adequate reserve banking facilities and reserve borrowing facilities by continuously reviewing its facilities and cash flows. The Group ensures that it has sufficient cash on demand to meet expected operational expenses. In addition, the Group maintains the following lines of credit: n Secured bank overdraft facility of $250,000. Interest 47 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 48 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A would be payable at ANZ’s reference rate plus a In respect of other monetary assets and liabilities margin of 0.175%. n Secured bill acceptance facility of $5,000,000, in which $2,500,000 was drawn down during 2008. Interest would be payable at prevailing bank rate. n Other operational facilities are set out in note 24 (c). Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising return. Currency risk The Group is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than the respective functional currencies of the Group entities, primarily the Australian dollar (AUD), but also the Euro (EUR), Sterling (GBP) and US dollars (USD). The currencies in which these transactions primarily are denominated are AUD, EUR, GBP and USD. denominated in foreign currencies, the management ensures that the Group’s net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary to address the short term imbalances. Interest rate risk The Group has no significant non current borrowings. The terms and conditions of current borrowings are set out above. Exposure to interest rate risk on any future borrowings will be assessed by the Board and where appropriate, the exposure to movement in interest rates may be hedged by entering into interest rate swaps, when considered appropriate by the management and the Board. Capital management The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. Management aims to maintain a capital structure that ensures the lowest cost of capital available to the group. Management constantly reviews the capital structure to ensure an increasing return on assets. As the market is Interest on borrowings is denominated in currencies that constantly changing, management may change the match the cash flows generated by the underlying amount of dividends to be paid to shareholders, return of operations of the Group, primarily AUD, but also GBP and capital to shareholders, issue new shares or sell assets to EUR. This provides an economic hedge and no derivatives reduce debt. are entered into. The Board encourages employees to hold shares in the Liabilities incurred in each respective geographical Company. At present employees hold 23.7% (2007: territory are paid for by the cash flows of the functional 14.8%) of ordinary shares. Currently management is currency of that territory. Exposures for singular discussing alternatives for extending the Group’s share transactions greater than $50,000 are considered for option programme beyond key management and other hedging by management, with forward exchange contracts to mitigate exchange rate risk and are considered separately as they arise. The consolidated entity has no forward exchange contracts as at reporting date (2007: nil) Intercompany borrowings are denominated in the currency of the lender. Transaction recharges between the companies provides an economic hedge and timing of payments are within the control of the Group to ensure economic viability, as a result no derivatives are entered senior employees, which is anticipated to be implemented in 2009. Neither the Company not any of its subsidiaries are subject to externally imposed capital requirements. Refer to note 22 for items comprising capital. into. 48 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 49 Notes Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ 6. Profit Profit is arrived at after crediting/(charging) the following items: a) REVENUE Distribution income Funder income Revenue received on sale of equipment Rental income Insurance brokerage income Government grant Other revenue b) EMPLOYEE BENEFITS EXPENSE Payments to employees Share options cost Provision for employee entitlements c) DEPRECIATION EXPENSE Depreciation of plant and equipment Depreciation of leasehold improvements Depreciation of self funded rentals Depreciation of web sites Depreciation of lease equipment & software d) AMORTISATION EXPENSE Amortisation of software Amortisation of funding agreement Amortisation of distribution network Amortisation of inertia contracts Amortisation of intellectual property - - 3,300,000 1,500,000 23,223,026 23,488,399 4,479,536 3,420,294 5,968,474 4,321,571 4,396,117 4,058,586 - 831,360 149,000 916,414 - - - - - - - - - - - - 38,898,513 36,354,265 3,300,000 1,500,000 11,973,216 9,571,770 55,000 54,709 685,298 430,610 12,713,514 10,057,089 216,853 22,847 6,053 1,023 162,909 409,686 210,389 173,012 131,082 1,263,194 32,091 165,732 138,715 11,496 1,949 121,110 439,002 109,319 22,039 142,928 825,930 32,091 1,809,768 1,132,307 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 49 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 50 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A Notes Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ 6. Profit (continued) e) FINANCE (COSTS)/BENEFITS Interest revenue Total finance benefits Interest expense – other entities – related parties – other entities – related parties Total interest costs Finance charges Total finance benefit/(cost) f) REVERSAL OF IMPAIRMENT/ (IMPAIRMENT COSTS) Reversal of impairment/ (impairment) of intercompany receivable g) OTHER EXPENSES Loss on sale of property and equipment Other expenses 163,724 - 163,724 38,723 29,405 68,128 24,191 34,382 1,759,365 1,783,556 - 34,382 (50,752) (236,858) (8,139) - (285,055) - (50,752) (521,913) (8,139) - - - (588,326) (116,440) (44,326) (241) (475,354) (570,225) 1,731,091 34,141 - - 26,845 - - - - - - 2,231,892 3,326,225 2,258,737 3,326,225 51,057 51,057 5,259,676 5,259,676 - 22,411 22,411 Other expenses comprise of other administrative expenses including postage, travel and training. h) LISTING COST Listing cost - 4,195,856 - 4,195,856 Costs comprising underwriting fees and other professional costs arising on the listing of the company’s shares have been expensed. Costs directly attributable to the issue of new equity have been deducted from the capital raised. i) RESTRUCTURING COST Impairment of plant and equipment Impairment of intangible assets Other 40,278 197,398 178,508 416,184 - - - - - - - - - - - - Restructuring costs relate to expenses incurred in exiting the USA market. Other restructuring costs mainly comprise redundancy costs. 50 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 51 Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ 7. Income Tax The major components of income tax expense for the year ended 31 December are: Current income tax Current income tax charge Adjustment for prior period Deferred income tax 2,435,166 2,410,009 884,425 1,586,746 (711,493) (30,025) (711,493) (141,028) Origination and reversal of temporary differences 248,940 (1,196,829) 675,564 (1,895,868) Adjustment for prior period Change in unrecognised temporary differences 398,260 119,313 - - 398,260 - - - Income tax expense/ (benefit) reported in income statement 2,490,186 1,183,155 1,246,757 (450,150) A reconciliation between tax expense and the product of accounting profit/(loss) before income tax multiplied by the applicable income tax rate is as follows: Accounting profit/(loss) before tax At the statutory income tax rate of 30% Effect of tax rates in foreign jurisdictions Non deductible expenses: – corporate development – impairment gain/(losses) – listing cost – other Exempt income Adjustment on entry into tax consolidation group Overseas tax losses not recognised/ (recognised) Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ 5,700,938 1,921,221 4,658,415 2,447,501 1,710,281 576,366 1,397,525 734,250 (56,563) 27,740 - - 53,791 88,986 14,524 89,390 - - (105,697) - 335,970 865,639 - 415,390 154,760 - - - - 69,790 (257,817) 335,970 (50,062) - (1,577,903) 415,390 29,751 - - - Adjustments in respect of prior periods (313,235) (30,025) (313,235) (141,028) Income tax expense/(benefit) reported in the income statement 2,490,186 1,183,155 1,246,757 (450,150) Income tax recognised directly in equity Listing cost 74,428 150,902 74,428 150,902 51 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 52 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A 7. Income Tax (continued) DEFERRED TAX ASSET Trade debtors Accruals Tax losses Corporate development cost Sinking fund Employee entitlements Listing cost Consulting cost Plant & equipment Other Total DEFERRED TAX LIABILITY Prepayments Deals awaiting settlement Intangible assets Government grant Plant & equipment ABL servicer fee Other debtors Total Net deferred tax asset Net deferred tax liability Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ - - - 398,939 - 159,434 890,451 6,079 945,020 59,864 37,478 39,000 - 451,056 802,768 143,857 795,415 - - 35,131 - - - 398,939 - 159,434 890,451 6,079 945,020 30,188 - - - 451,056 802,756 181,335 795,415 - - 39,000 2,459,787 2,304,705 2,430,110 2,269,562 4,249 35,470 6,285 46,632 796,080 1,300,398 19,993 40,230 4,249 35,470 - - 1,190,494 98,510 11,766 - - 18,344 1,190,494 98,510 22,135 4,539 46,632 - - - - 60,775 2,156,562 1,411,889 1,350,858 111,946 965,568 2,037,291 1,079,252 2,157,616 662,343 1,144,475 - - - - - - UNRECOGNISED DEFERRED TAX ASSETS Deferred tax assets have not been recognised in respect of the following items: Tax losses 865,639 865,639 - - The deductible temporary differences and tax losses do not expire under current tax legislation. Deferred tax assets have not been recognised in respect of these items because it is not probable that future taxable profit will be available against which the group can utilise the benefits therefrom. TAX CONSOLIDATION ThinkSmart Ltd and its 100% owned Australian resident subsidiaries have formed a tax consolidated group during the 2008 financial year. 52 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 53 Note Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ 8. Trade and other receivables Current Trade receivables (i) Allowance for doubtful debts Sundry debtors Non-current Trade receivables (i) 1,882,885 1,843,253 (258,615) (265,704) - 143,907 1,624,270 1,721,456 210,384 210,384 - - - - - - - - (i) No interest is charged on trade receivables. The Group’s exposure to credit and currency risks and impairment losses related to trade and other receivables are disclosed in note 30. 9. Inventories Promotional stock on hand Rental asset inventory 10.Prepayment - current Insurance prepayment Retailer marketing prepayment Other prepayment 11.Other current assets Deals awaiting settlement Other 12.Prepayment – non current - 65,520 65,520 31,701 31,732 63,433 3(h) 3,037,015 2,638,579 714,226 758,650 670,651 726,166 4,509,891 4,035,396 118,233 155,441 75,137 16,046 193,370 171,487 Insurance prepayment 3(h) 3,648,041 2,346,693 3,648,041 2,346,693 - - - - - 14,164 14,164 - 1,417 1,417 - - - - - - - - - - - - - 15,128 15,128 - 10,111 10,111 - - 53 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 54 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A 13.Plant & Equipment CONSOLIDATED Gross Carrying Amount Cost or deemed cost Balance at 1 Jan 2007 Plant & Equipment $ Leasehold improvements $ Self funded rentals $ Web Sites $ Lease equipment & software $ Total $ 1,122,639 520,487 149,958 76,450 1,854,354 3,723,888 Net foreign currency translation differences (18,062) (19,974) Additions Disposals 33,347 11,800 - - - - - - - - - (38,036) 91,409 136,556 - - Balance at 31 Dec 2007 1,137,924 512,313 149,958 76,450 1,945,763 3,822,408 Additions Disposals Balance at 31 Dec 2008 Accumulated Depreciation Balance at 1 Jan 2007 757,878 125,117 - (298,631) - - - - 326,857 1,209,852 - (298,631) 1,895,802 338,799 149,958 76,450 2,272,620 4,733,629 (767,423) (255,598) (122,462) (72,185) (1,620,597) (2,838,265) Net foreign currency translation differences 5,145 4,490 - - - - - - - - 9,634 - Disposals Depreciation expense Balance at 31 Dec 2007 Disposals Depreciation expense Impairment loss Effect of movement in exchange rate (8,262) - (165,732) (138,715) (11,496) (1,949) (121,111) (439,003) (928,011) (389,823) (133,958) (74,134) (1,741,708) (3,267,634) - 271,786 - - - - (18,600) (26,862) - 271,786 (216,853) (22,847) (6,053) (1,023) (162,909) (409,686) - - - - (40,278) (40,278) Balance at 31 Dec 2008 (1,153,126) (140,884) (140,011) (75,157) (1,963,495) (3,472,674) Net Book Value At 31 Dec 2007 At 31 Dec 2008 209,913 122,490 742,676 197,915 16,000 9,947 2,316 1,293 204,055 554,775 309,125 1,260,955 ThinkSmart Limited, the parent company holds no plant & equipment. 54 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 55 % of Equity Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ 2008 $ 2007 $ 14.Other Financial Assets Interest in Subsidiaries Country of Incorporation RentSmart Unit Trust RentSmart Pty Ltd RentSmart Limited SmartCheck Ltd RentSmart Pty Ltd RentSmart Pte Ltd ThinkSmart Europe Ltd ThinkSmart Financial Services Ltd SmartCheck Ltd ThinkSmart Insurance Administration Ltd SmartCheck Finance Spain SL(iii) SmartPlan Spain SL ThinkSmart France SARL ThinkSmart Sweden AB ThinkSmart Italy Srl (i) Australia Australia UK Australia New Zealand Singapore UK UK UK UK Spain Spain France Sweden Italy ThinkSmart Inc USA Investment in controlled entities Loan to ThinkSmart Europe Ltd (ii) Loan to RentSmart Unit Trust (ii) Loan to RentSmart Ltd (iii) 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 23,526 109,720 23,526 54,720 - - - - - - - - - - - - - - - - - - - - - - - - - - 113 113 133,359 78,359 8,493,800 7,733,466 - 12,805,950 10,354,947 - 2,480,385 - - 23,913,494 18,166,772 Investments in subsidiaries are measured at cost. The ultimate controlling entity in Australia is ThinkSmart Ltd. (i) On the 9 January 2008, ThinkSmart Italy Srl has changed its name to SmartCheck Italy Srl. (ii) The receivables are unsecured, payable on demand and attract an interest rate of RBA rate plus a margin of 2.55% per annum (2007: nil percent). (iii) The receivable is unsecured, payable on demand and attracts no interest (2007: nil percent). 55 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 56 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A Consolidated Funding Agreements $ Software $ Distribution network $ Intellectual Property $ Inertia Contracts $ Total $ 15.Intangible Assets Gross carrying amount At cost Balance at 1 January 2007 - 482,358 667,637 641,816 4,732,977 6,524,788 Additions 393,979 456,063 - Effect of movement in exchange rate - - (54,779) - - - 850,041 (388,786) (443,565) Balance at 31 December 2007 393,979 938,421 612,858 641,816 4,344,191 6,931,264 Additions 503,527 876,380 - Effect of movement in exchange rate - - (49,069) - - - 1,379,907 (347,825) (396,895) Balance at 31 December 2008 897,506 1,814,801 563,789 641,816 3,996,366 7,914,277 Accumulated amortisation and impairment Balance at 1 January 2007 Amortisation expense - (45,928) (38,011) (208,592) (98,604) (391,135) (22,039) (109,319) (142,928) (32,091) (825,930) (1,132,307) Effect of movement in exchange rate - - 33,401 - 47,039 80,439 Balance at 31 December 2007 (22,039) (155,247) (147,539) (240,683) (877,495) (1,443,002) Amortisation expense Impairment loss Effect of movement in exchange rate (173,012) (210,389) (131,082) (32,091) (1,263,194) (1,809,768) (197,398) (55,128) - - - 17,608 - - - (197,398) 126,095 88,571 Balance at 31 December 2008 (447,578) (365,636) (261,013) (272,774) (2,014,593) (3,361,597) Net book value At 31 December 2007 At 31 December 2008 371,940 783,174 465,320 401,133 3,466,695 5,488,262 449,928 1,449,165 302,775 369,042 1,981,772 4,552,680 The Company did not hold any intangible assets during the current or comparative reporting period. 16. Goodwill Balance at beginning of financial year Effect of movement in exchange rate Balance at end of financial year Notes Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ 5,284,678 5,955,823 (423,127) (671,145) 4,861,551 5,284,678 - - - - - - IMPAIRMENT TESTING FOR CASH-GENERATING UNITS CONTAINING GOODWILL For the purpose of impairment testing, goodwill is allocated to the UK operations, RentSmart Limited and ThinkSmart Insurance and Administration Ltd, which represents the lowest level within the Group at which goodwill is monitored for internal management purposes. The goodwill arose on the acquisition of RentSmart Limited. The recoverable amount of the RentSmart Limited and ThinkSmart Insurance and Administration Ltd cash-generating unit were based on its value in use, and was determined by using future cash flows generated from the continuing use of the unit. The recoverable amount of the unit was determined to be significantly higher than the carrying amount, therefore no impairment of goodwill is required, and no further sensitivity analysis is considered necessary. 56 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 57 Value in use is determined by discounting the future cash flows generated from the continuing use of the unit and was based on the following key assumptions: n Cash flows were projected based on the forecast operating results for 2009, and conservative estimates of future growth at 2.5%. n A pre tax discount rate of 17.9% was applied in determining the recoverable amount of the unit. The discount rate was based on the weighted average cost of capital (WACC) for the Group. The WACC is predominantly a factor of the cost of equity which has been set at 15% consistent with independent determinations of the Group’s cost of equity. 17.Assets Pledged as Security UK subsidiaries no longer have any assets pledged as security following the repayment of the term loan during 2008 (2007: $8,067,446). RentSmart Unit Trust and ThinkSmart Ltd have pledged all its present and future assets to ANZ as security for the used financing facilities ANZ has provided, as disclosed in note 24(c). Notes Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ 18.Trade and other payables Trade and other payables (i) Product plan GST Payable Provision for employee entitlement: Annual leave Long service leave (ii) Other 3,448,588 3,270,443 42,229 5,213 326,971 1,209,475 483,140 676,237 325,342 192,638 14,843 304,909 171,321 3,294 - - - - - - - - - - - - 4,791,522 5,635,677 42,229 5,213 Trade liabilities are normally settled on 30 day terms. (i) (ii) The pro rate entitlement of long service leave is provided for after 7 years of service. The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 30. The Company has guaranteed the lease, performance and bank loans of its subsidiaries. Under the terms of the financial guarantee contracts, the Company will make payments to reimburse the lenders upon failure of the guaranteed entity to make payments when fall due. The Company does not expect the financial guarantees to be called on. Refer to note 28 for contingent liabilities which includes the parental guarantees provided to subsidiaries. Terms and face values of the liabilities guaranteed were as follows: Bank loan of a subsidiary IBM equipment lease Performance guarantee of a subsidiary Fair value of guarantee Year of Maturity 2008 2009 - - 2008 Face Value $ 2007 Face Value $ - 2,039,891 85,696 - 5,200,000 3,200,000 - - The method used in determining fair value of these guarantees has been disclosed in note 3(z) determination of fair values. 57 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 58 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ 19.Current Borrowings This note provides information about the contractual terms of the Company’s and Group’s interest-bearing loans and borrowings, which are measured at amortised cost. For more information about the Company’s and Group’s exposure to interest rate, foreign currency and liquidity risk, see note 30. Term loans (ii) Hire purchase and lease liabilities (i) 2,459,304 2,039,891 2,459,304 116,136 66,681 - 2,575,440 2,106,572 2,459,304 - - - The hire purchase and lease liabilities are secured by a charge over the respective assets (refer note 25). (i) (ii) The $2,459,304 fixed term loan relates to a $2,500,000 180-day commercial bill denominated in Australian Dollar with a fixed interest of 4.04% pa. The loan is payable on the 25 May 2009. In the prior year, a $2,039,891 fixed term loan was denominated in Sterling and charged with interest in arrears at a margin of 2.5% over the Halifax Bank of Scotland base rate. The loan was secured over the assets of RentSmart Limited and was repaid in 2008. Refer to note 24(c) for security of the loan. 20.Non- Current Borrowings Hire purchase and lease liabilities (i) - - 33,040 33,040 - - The carrying amount of the borrowings recorded in the financial statements approximate their aggregate fair values. (i) The hire purchase and lease liabilities are secured by a charge over the respective assets (refer note 25). 21.Other – non current payable Product Plan (i) 38,648 38,648 104,975 104,975 - - (i) Premiums for insurance and warranty are funded in advance and remitted to the underwriter at each anniversary date. - - - - 22.Issued Capital (a) ISSUED AND PAID UP CAPITAL 96,689,390 Ordinary Shares fully paid (2007: 95,030,164) 23,614,091 22,242,200 23,614,091 22,242,200 In 2007, the board authorised the subdivision of the shares with the ratio of 1:4. Consequently, fully paid ordinary shares in the Company as at 31 December 2006 of 22,245,913 were converted to 88,983,652 fully paid ordinary shares. The share split was to ensure an appropriate capital structure at the time of the IPO. 58 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 59 Fully Paid Ordinary Shares Balance at beginning of the financial year 95,030,164 22,242,200 22,245,913 9,842,393 Restated opening balance as a result of share split in 2007 95,030,164 22,242,200 88,983,652 9,842,393 Company 2008 Company 2007 Number $ Number $ Issue of new shares following exercise of options 1,659,226 1,297,463 Adjustment for tax on capitalised IPO cost Issue of new shares in ThinkSmart Ltd Balance at end of the financial year 74,428 - - - 6,046,512 12,399,807 - - - - 96,689,390 23,614,391 95,030,164 22,242,200 During the year, a total of 1,659,226 employee share options were exercised for total proceeds of $1,297,463 (2007: nil). A total of 6,046,512 additional shares were issued on 1 June 2007 for a total consideration of $13,000,001 resulting in a net increase in the value of share capital of $12,399,807 after capital raising costs, net of tax benefit. Ordinary Shares entitle the holder to participate in dividends and the proceeds on winding up the Company in proportion to the number of and amount paid on the Shares held. On a show of hands, every holder of Ordinary Shares present in the meeting in person or by proxy, is entitled to one vote, and upon a poll Share is entitled to one vote. The Company does not have authorised capital or par value in respect to its issued shares. (b) SHARE OPTIONS – EMPLOYEE OPTIONS In 2007, the board made a resolution and authorised the subdivision of the shares from 22,245,913 fully paid ordinary shares in the Company to 88,983,652 fully paid ordinary shares. The share split (1:4) was to ensure an appropriate capital structure at the time of the IPO. Consequently, the options were split in accordance with the share split. The following options were issued over ordinary fully paid shares: After the 1:4 share split n 840,000 options over ordinary shares were issued 5 January 2006 and exercisable at $0.4375, vesting and exercisable on 1 January 2008 exercisable until 31 December 2008. n 1,400,000 options over ordinary shares were issued 5 January 2006 and exercisable at $0.625, vesting and exercisable on 1 January 2008 exercisable until 31 December 2010. n 4,000,000 options over ordinary shares were issued 28 August 2006 and exercisable at $1.125, vesting and exercisable on 28 August 2007 exercisable until 27 August 2008 n 1,400,000 options over ordinary shares were issued 28 August 2006 and exercisable at $1.375, vesting and exercisable on 28 August 2008 exercisable until 27 August 2009. n 1,400,000 options over ordinary shares were issued 28 August 2006 and exercisable at $1.625, vesting and exercisable on 28 August 2009 exercisable until 27 August 2010. n 640,000 options over ordinary shares were issued 17 April 2007 and exercisable at $1.38, vesting and exercisable on 1January 2009 exercisable until 31 December 2011. n 720,000 options over ordinary shares were issued 17 April 2007 and exercisable at $3.00, vesting and exercisable on 1January 2009 exercisable until 31 December 2011. 59 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 60 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A 22.Issued Capital (continued) Before the share split n 210,000 options over ordinary shares were issued 5 January 2006 and exercisable at $1.75, vesting and exercisable on 1 January 2008 exercisable until 31 December 2008. n 350,000 options over ordinary shares were issued 5 January 2006 and exercisable at $2.50, vesting and exercisable on 1 January 2008 exercisable until 31 December 2010. n 1,000,000 options over ordinary shares were issued 28 August 2006 and exercisable at $4.50, vesting and exercisable on 28 August 2007 exercisable until 27 August 2008 n 350,000 options over ordinary shares were issued 28 August 2006 and exercisable at $5.50, vesting and exercisable on 28 August 2008 exercisable until 27 August 2009. n 350,000 options over ordinary shares were issued 28 August 2006 and exercisable at $6.50, vesting and exercisable on 28 August 2009 exercisable until 27 August 2010. n 160,000 options over ordinary shares were issued 17 April 2007 and exercisable at $5.50, vesting and exercisable on 1 January 2009 exercisable until 31 December 2011. n 180,000 options over ordinary shares were issued 17 April 2007 and exercisable at $12.00, vesting and exercisable on 1 January 2009 exercisable until 31 December 2011. The value of these options will be expensed over the vesting period in accordance with AASB 2. The Company has an ownership-based compensation scheme for executives and senior employees. Each employee share option converts to one ordinary share of ThinkSmart Limited on exercise and payment of the exercise price. The options carry neither rights or dividends nor voting rights. Options may be exercised at any time within the specified exercise period to the date of their expiry. (b) SHARE OPTIONS – EMPLOYEE OPTIONS There are no options issued in 2008. Below are options that were issued in 2007: Options series issued in 2007 Number Grant date Vesting date Expiry date Exercise price $ Fair value at grant date After the split (1) Employee options (2) Employee options Before the split (1) Employee options (2) Employee options 640,000 17/04/2007 1/01/2009 31/12/2011 720,000 17/04/2007 1/01/2009 31/12/2011 160,000 17/04/2007 1/01/2009 31/12/2011 180,000 17/04/2007 1/01/2009 31/12/2011 $1.38 $3.00 $5.50 $12.00 $0.03 $0.004 $0.12 $0.016 The weighted average fair value of the share options granted in 2007 is $0.0162. Options were priced using a binomial option pricing model. Where relevant, the expected useful life used in the model has been adjusted based on management’s best estimate for the effects of non-transferability, exercise restrictions (including the probability of meeting market conditions attached to the option, where applicable), and behavioural considerations. Expected volatility is based on that observed for comparable listed companies over the time period appropriate to the option grant in question. 60 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 61 Below are the input used to measure the fair value of the options: Issued in 2007 Fair value at grant date Grant date share price Exercise price Expected volatility Option life (days) Dividend yield Risk-free interest rate After Split Before Split (1) Employee options (2) Employee options (1) Employee options (2) Employee options $0.03 $0.44 $1.38 43.0% 1,237 0% 5.95% $0.004 $0.44 $3.00 43.0% 1,237 0% 5.95% $0.12 $1.75 $5.50 43.0% 1,237 0% 5.95% $0.016 $1.75 $12.00 43.0% 1,237 0% 5.95% (b) SHARE OPTIONS – EMPLOYEE OPTIONS The following reconciles the outstanding share options granted under the employee share option plan and the beginning and end of the financial year: Balance at beginning of the financial year Restated opening balance as a result of share split Granted during the financial year Forfeited during the financial year Exercised during the financial year Expired during the financial year Balance at the end of financial year Exercisable at end of the financial year 2008 2007 Number of options Weighted average exercise price Number of options Weighted average exercise price 10,120,000 10,120,000 - - (1,659,226) (3,274,107) 5,186,667 1,773,334 $1.27 $1.27 - - $0.78 $1.13 2,260,000 9,040,000 1,360,000 (280,000) - - $1.52 10,120,000 $1.22 4,000,000 $4.40 $1.10 $2.24 $0.63 - - $1.27 $1.13 The options outstanding at 31 December 2008 have an exercise price in the range of $0.6250 to $3.00 and a weighted average contractual life of 1.81 years. The weighted average share price at the date of exercise for share options exercised during the year ended 31 December 2008 was $1.39 (2007: nil as no options were exercised). The following is the total expense recognised for the period arising from share-based payment transactions. Share options granted in 2006 – equity settled Share option granted in 2007 – equity settled Total expense recognised as employee costs Consolidated Company 2008 $ 43,240 11,760 55,000 2007 $ 44,389 10,320 54,709 2008 $ 2007 $ - - - - - - 61 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 62 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A 22.Issued Capital (continued) (c) DIVIDENDS Dividends recognised in the current year by the Group are: 2008 Interim 2008 ordinary 2007 No dividend was declared in 2007. Cents per share Total amount Franked/ unfranked Date of payment 2 1,933,788 40% franked 13 October 2008 Franked dividend declared or paid during the year was 40% franked at the tax rate of 30%. After 31 December 2008, the following dividends were proposed by the directors for 2008. The dividends have not been provided for. The declaration and subsequent payment of dividends has no income tax consequences. Final ordinary 2008 Cents per share Total amount Franked/ unfranked Date of payment 1.5 $1,450,341 100% franked 14 April 2009 The financial effect of these dividends has not been brought to account in the financial statements for the year ended 31 December 2008, and will be recognised in subsequent financial reports. (d) FRANKING CREDITS Franking credit account balance as at the end of the financial year at a tax rate of 30% (2007: 30%) Franking credits from the payment of income tax paid and payable as at the end of the financial year Franking debits from the payment of dividends in the financial year Franking credits available for subsequent financial years based on a tax rate of 30% (2007: 30%) Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ - 766,106 (331,506) 434,600 - - - - - 766,106 (331,506) 434,600 - - - - The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends. The impact on the dividend franking account of dividends proposed after the balance sheet date but not recognised as a liability is to reduce it by $621,575 (2007: nil). A tax instalment will be paid in March 2009 which will provide sufficient franking credit for the payment of fully franked dividend on 14 April 2009. In accordance with the tax consolidation legislation, the Company as the head entity in the tax-consolidated group is allowed to assume the relevant subsidiaries’ franking credits. As at 31 December 2008, the subsidiaries have no franking credits for the benefit for the Company (2007: nil). 23. Reserves Equity settled employee benefits reserve (i) Foreign currency translation reserve (ii) Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ 147,142 92,142 147,142 92,142 (1,968,454) (563,299) - - (1,821,312) (471,157) 147,142 92,142 (i) The share-based compensation reserve arises on the grant of share options to executives under the employee share option plan. Amounts are transferred out of the reserves and into issued capital when the options are exercised. Further information about the share-based payments is made in note 22(b) to the financial statements. (ii) The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations as well as from the translation of liabilities that hedge the Company’s net investment in a foreign subsidiary. 62 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 63 24.Notes to the Cash Flow Statement (a) For the purposes of the cash flow statement, cash and cash equivalents includes cash on hand and in banks and investments in money market instruments, net of outstanding bank overdrafts. Cash and cash equivalents at the end of the financial year as shown in the cash flow statement is reconciled to the related items in the balance sheet as follows: Reconciliation of cash and cash equivalents Cash balance comprises: - cash and cash equivalents Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ 4,547,371 5,059,229 596,205 525,962 The Group’s exposure to interest rate and sensitivity analysis of the financial assets and liabilities are discussed in note 30. (b) Reconciliation of the profit /(loss) for the year to net cash flows from operating activities: Profit after tax Depreciation Amortisation Loss on disposal of plant and equipment Impairment costs Provision for doubtful debts Provision for employee entitlements Equity settled share based payment Distribution income IPO cost recognised as financing activity Unrealised foreign exchange (gain)/loss Reversal of impairment (Increase) / decrease in assets: Trade receivables Prepayments Deferred tax asset Other assets Rental asset inventory Increase / (decrease) in liabilities: Trade and other creditors Provision for income tax Deferred tax liability Other payable Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ 3,210,752 738,066 3,411,658 2,897,651 409,686 439,003 1,809,768 1,132,307 - - - - - - - - - - - - - - - - 265,704 130,296 54,708 26,845 237,676 233,259 53,300 55,000 - - - - - (3,300,000) (1,500,000) 4,195,856 91,671 - - - - 4,195,856 - (5,259,676) (562,073) (787,728) (1,991,457) (2,255,914) 8,697 965 (10,114) (15,128) 1,146,153 (935,579) 1,152,792 (2,118,662) (237,497) (123,576) (1,759,365) 342,512 (2,087) (36,248) - - (897,455) 221,743 37,016 5,202 (665,013) 2,070,123 (672,140) 1,556,566 (482,132) (231,069) (66,328) (66,692) - - 111,946 - Net cash from/(used in) operating activities 2,278,397 4,902,671 (1,120,378) 206,153 63 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 64 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A 24.Notes to the Cash Flow Statement (continued) (c) Financing facilities Secured bank overdraft facility reviewed annually and payable at call: - amount used - amount unused Hire purchase and/or leasing facilities: - amount used - amount unused Secured bill acceptance facility: - amount used -amount unused Interest rate swap facility: - amount used -amount unused Other finance facilities (business credit card, payroll facility, term loan, multi-option facility): - amount used - amount unused Total Financing Facility Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ - - 250,000 1,383,273 250,000 1,383,273 - 250,000 250,000 116,136 10,000 126,136 99,720 242,098 341,818 - - - 2,500,000 - 2,500,000 2,500,000 950,000 2,500,000 5,000,000 950,000 5,000,000 - - - - 200,000 200,000 86,000 2,131,891 - - - - 6,259,000 853,000 6,345,000 2,984,891 500,000 500,000 11,721,136 5,859,982 5,750,000 - - - - - - - - - - - - - - - - The total financing facility of $11,721,136 (2007: $5,859,982) identified above is reviewed annually and secured over the assets of the group. (d) NON-CASH FINANCING TRANSACTIONS The consolidated entity entered into no non-cash finance transactions during the period (2007: Nil). 64 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 65 25.Leases and Hire Purchase Obligations FINANCE LEASES – LEASING ARRANGEMENTS Finance leases relate to computer equipment with lease terms of between 3 to 5 years. The consolidated entity has options to purchase the equipment for a nominal amount at the conclusion of the lease agreements. Finance lease liabilities 31 December 2008 No later than 1 year 31 December 2007 No later than 1 year Later than 1 year and not later than 5 years Note Future minimum lease payments $ 119,836 119,836 74,185 37,060 Consolidated Interest $ 3,700 3,700 7,504 4,021 111,245 11,525 Present value of minimum lease payments $ 116,136 116,136 66,681 33,039 99,720 The carrying amounts recorded in the financial statements approximate their aggregate net fair values. The Company has no finance lease liabilities. OPERATING LEASES – LEASING ARRANGEMENTS Operating leases relate to office facilities with lease terms of between 1 and 6 years. All operating lease contracts contain market review clauses in the event that the consolidated entity exercises its option to renew. The consolidated entity does not have an option to purchase the leased asset at the expiry of the lease period. Non-cancellable operating lease payments: No later than 1 year Later than 1 year and not later than 5 years Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ 816,380 771,353 3,563,997 4,059,887 4,380,377 4,831,240 - - - - - - No provisions have been recognised in respect of non-cancellable operating leases. 65 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 66 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A 26.Segment Information The consolidated entity operates predominantly in one industry being the arranging of rental finance for office equipment, and in three geographical areas, Australasia, Europe and USA. Primary Segment Reporting Geographical segments Total external revenues Intersegment revenue Total segment revenue Europe Australasia 2008 2007 2008 2007 20,157,084 20,108,230 18,648,361 16,246,035 - - 2,615,158 48,311 20,157,084 20,108,230 21,263,519 16,294,346 Segment results before restructuring costs 4,899,901 4,802,664 7,189,225 8,648,903 Restructuring costs Segment results Unallocated expenses Capital raising cost Income tax expense Profit for the period Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Capital expenditure Depreciation Amortisation of intangible assets Impairment losses on intangible assets and PPE Impairment losses reversed on intangible assets and PPE - - - - 4,899,901 4,802,664 7,189,225 8,648,903 17,532,962 17,617,608 8,480,497 6,478,407 4,217,258 6,159,946 5,070,402 1,227,993 836,511 208,565 1,394,276 - - 41,140 263,605 968,858 - - 271,621 158,734 373,737 - - 95,417 175,397 163,448 - - The secondary segment reporting is business segment. As the Group only operates in one business segment, the Group’s consolidated primary segment report reflects the business segment report. 66 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 67 2008 93,069 - 93,069 (2,076,868) (416,184) (2,493,053) 61,110 245,857 101,721 42,387 41,755 237,676 - USA 2007 - - - - - - - - - - - - - 2008 - (2,615,158) (2,615,158) Elimination Consolidated 2007 2008 2007 - 38,898,513 36,354,265 (48,311) (48,311) - - 38,898,513 36,354,265 (2,023,938) (5,307,827) 7,988,320 8,143,740 - - (416,184) - (2,023,938) (5,307,827) 7,572,135 8,143,740 (1,871,197) (2,026,663) 5,700,938 6,117,077 - (4,195,856) (2,490,186) (1,183,155) 3,210,752 738,066 26,074,569 24,096,015 365,032 2,666,685 26,439,601 26,762,700 9,533,517 - 7,387,939 3,767,377 9,533,517 11,155,316 1,209,852 409,686 136,557 439,002 1,809,768 1,132,307 237,676 - - - 67 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 68 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A 27.Remuneration of auditors Audit services: Audit and review of financial reports (Australia) Audit and review of financial reports (Overseas) Services other than statutory audit: Other assurance services Tax Investigating Accountants Report for IPO (Australia) Other services The Group’s auditors are KPMG in 2008 and 2007. 28.Commitments and Contingent Liabilities Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ 276,312 102,312 378,624 195,189 146,728 56,469 80,462 - - 275,651 146,728 56,469 77,385 - - 18,132 577,402 3,527 34,150 - - - 577,402 1,425 77,385 599,061 34,150 578,827 The parent Company has provided guarantees to its subsidiaries, which are contingent liabilities. Refer to note 18 for the guarantees provided. 29.Contingent Inertia Assets Under the Group’s accounting policy (note 3(o)), inertia revenue is not recognised until the conclusion of the initial rental period. At this point, the Group is entitled to acquire the equipment from the funders at a nominal value, and the equipment can be disposed of, or continue to be rented to third parties. The Group does not have control over these future revenue streams and accordingly the revenue is not brought to account until it is received. A conservative estimate of its realisable value has been made by estimating expected sales proceeds through the least profitable sales channel and public auction. The after-tax cash flows, calculated from rental contracts in existence at 31 December 2008, are discounted using appropriate risk factors. The estimated value of future cash flows is $10,932,373 (2007: $10,047,975), representing the discounted after tax value of assets as determined by reference to auction sales history. At 1 December 2006, the Group acquired RentSmart Limited. Inertia income of $4,803,652 was recognised as an intangible asset as part of the business combination. At 31 December 2008, this asset is carried at amortised cost of $1,981,772. This inertia intangible is not included in the contingent asset disclosed above. 68 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 69 30.Financial Instruments (a) INTEREST RATE RISK Profile At the reporting date, the interest rate profile of the Company’s and the Group’s interest-bearing financial instrument were: Note Consolidated Carrying amount 2008 $ 2007 $ Company Carrying amount 2008 $ 2007 $ Fixed rate instruments Cash and cash equivalent Financial asset Term loan Hire purchase and finance lease liability Financial liability Variable rate instruments Cash and cash equivalent Financial asset Term loan Financial liability Sensitivity analysis Fixed rate instruments - - 1,086,778 1,086,778 - - 2,459,304 116,136 2,575,440 - 2,459,304 99,720 99,720 - 2,459,304 - - - - - 4,547,371 3,972,451 4,547,371 3,972,451 596,205 596,205 525,962 525,962 - - 2,039,891 2,039,891 - - - - The Group has drawn a $2,500,000 180-day commercial bill payable on 25 May 2009 at a fixed rate of 4.04% per annum (2007: nil). Variable rate instruments The movements in profit are due to higher/lower interest costs from variable rate debt and cash balances. The Group does not have derivative instruments, therefore a change in interest rates at the reporting date would not affect equity. A change in 1% in interest rates would have increased or decreased the Group’s profit by $196,303 (2007: $10,871) and the Company’s profit by $179,471 (2007: $1,787). (b) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of financial assets and financial liabilities recorded in the financial statements approximate their aggregate net fair values. 69 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 70 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A 30.Financial Instruments (continued) (c) CREDIT RISK MANAGEMENT Exposure to credit risk The carrying amount of the Group’s financial assets represents the maximum credit exposure. The Group’s maximum credit exposure to credit risk at reporting date was: Cash and cash equivalent Trade receivables (current) Trade receivables (non-current) Sundry debtors Deals awaiting settlement Prepayment (current) Prepayment (non-current) Loan receivables from related parties Impairment losses Note 8 8 8 11 10 12 14 Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ 4,547,371 5,059,229 596,205 525,962 1,882,885 1,843,253 210,384 - 118,233 - 143,907 155,441 - - - - - - - - 4,509,891 4,035,396 14,164 15,128 3,648,041 2,346,693 - - - - 23,913,494 18,166,772 14,916,805 13,583,919 24,523,863 18,707,862 None of the Company’s receivables are past due (2007: nil). The ageing of the Group’s trade receivables at the reporting date was: Not past due Past due 0-30 days Past due 31-120 days Past due 120-365 days More than 1 year Gross 2008 $ Impairment 2008 $ Gross 2007 $ Impairment 2007 $ 1,131,155 - 1,086,982 404,643 313,964 140,477 103,030 107,575 63,899 87,140 - 153,857 238,606 289,522 74,287 - 42,074 98,704 52,464 72,463 2,093,269 258,615 1,843,253 265,704 The movement in the allowance for impairment in respect of trade receivables during the year was as follows: Balance at 1 January Impairment loss recognised Write back for the year Bad debt written off Effect of exchange rate Balance at 31 December 2008 $ 265,704 258,616 (21,839) (232,596) (11,270) 2007 $ - 265,704 - - - 258,615 265,704 Trade receivables are reviewed and considered for impairment on a periodical basis, based on the number of days outstanding and number of payments in arrears. 66% (2007:74%) of the balance, which includes amounts owed by the Company’s most significant customer, relates to customers that have a good credit history with the Company. In 2008, 82% (2007: 78%) of the total prepayment relates to RentSmart Limited’s upfront insurance premiums payment to Allianz on behalf of the rental customer. The premiums are recovered from the customer on a monthly basis. In the event the customer defaults, the policy is cancelled and Allianz refunds the unexpired premium. 70 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 71 (d) CURRENCY RISK MANAGEMENT Exposure to currency risk The Group’s exposure to foreign currency risk at balance date was as follows, based on notional amounts: In AUD Cash and cash equivalent Trade and other receivables Trade and other payables Gross exposure In AUD Cash and cash equivalent Trade and other receivables Trade and other payables Term loans Gross exposure 31 December 2008 GBP EUR NZD 1,567,454 378,717 239,583 110,251 102,122 198,402 USD 53,994 - (2,432,023) (415,987) (92,959) (245,857) (485,852) (66,153) 207,565 (191,863) 31 December 2007 GBP EUR 790,853 442,343 747,708 493,804 NZD 65,278 53,132 (2,196,874) (807,672) (45,976) (2,039,891) - - (3,003,569) 433,840 72,434 USD - - - - - The Company’s foreign currency risk is nil as it is only exposed to the Australian dollar. The following significant exchange rates applied during the year: AUD EUR GBP USD Sensitivity analysis Average rate 2008 0.5772 0.4584 0.8525 2007 0.6113 0.4204 - Reporting date spot rate 2007 2008 0.4919 0.4796 0.6928 0.5980 0.4412 - A 10% strengthening of the Australian dollar against the following currencies at 31 December would have increased (decreased) equity and profit and loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2007: 31 December 2008 EUR GBP USD 31 December 2007 EUR GBP USD Consolidated Company Equity $ Profit or loss $ Equity $ Profit or loss $ (35,938) (40,969) (1,210,519) (271,569) 16,795 221,783 (10,128) (42,605) (154,241) (403,252) - - - - - - - - - - - - - A 10% weakening of the Australian dollar against the above currencies at 31 December would have had equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant. 71 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 72 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A 30.Financial Instruments (continued) (e) LIQUIDITY RISK MANAGEMENT The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the Carrying Amount Contractual cash flow Less than 1 year 1-2 years 2-5 years impact of netting agreements: CONSOLIDATED 31 December 2008 Trade and other payables Term loans 4,258,699 (4,258,699) (4,258,699) 2,459,304 (2,500,000) (2,500,000) Hire purchase and lease liabilities 116,136 (119,836) (119,836) Product plan (non-current) 38,648 (38,648) - 6,872,787 (6,917,183) (6,878,535) 31 December 2007 Trade and other payables Term loans 5,156,154 (5,156,154) (5,156,154) 2,039,891 (2,039,891) (2,039,891) - - - - - (38,648) (38,648) - - - - - - - Hire purchase and lease liabilities 99,720 (99,720) (66,681) (28,558) (4,481) Product plan (non-current) 104,976 (104,976) - (104,976) - 7,400,741 (7,400,741) (7,262,726) (133,534) (4,481) COMPANY 31 December 2008 Trade and other payables Term loans 31 December 2007 Trade and other payables 42,229 (42,229) (42,229) 2,459,304 (2,500,000) (2,500,000) 2,501,533 (2,542,229) (2,542,229) 5,213 (5,213) (5,213) - - - - - - - - 72 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 73 31.Related party disclosures The following were key management personnel (“KMP”) of the group are any time during the reporting period and unless otherwise indicated were key management personnel for the entire period: Non-Executive Directors P Mansell (Chairman) S Penglis D Griffiths C McDonald - resigned on 11 April 2007 Executive Directors N Montarello (Managing Director and Chief Executive Officer) Executives N Barker (Group Chief Financial Officer, ThinkSmart Ltd) S McDonagh (Executive General Manager, RentSmart Unit Trust) – Appointed on the 10 July 2008 M Radotic (Managing Director - Continental Europe, ThinkSmart Europe Ltd) G Varma (Group Chief Information Officer, ThinkSmart Ltd) G Parry (Managing Director - UK, RentSmart Limited) J Rozenbroek (Group Commercial Director, ThinkSmart Europe Ltd) The KMP compensation included in ‘employee benefits expense’ in note 6(b) is as follows: Short-term employee benefits Post-employment benefits Other long-term employee benefits Termination benefits Share-based payment Consolidated Company 2008 $ 2007 $ 2008 $ 2007 $ 2,231,883 1,972,733 165,462 147,659 - - - - 34,541 34,367 2,431,886 2,154,758 - - - - - - - - - - - - The KMP receive no compensation in relation to management of the Company (2007: nil). The compensation disclosed above represents an allocation of the KMP’s estimated compensation from the Group in relation to their services rendered by the Company. INDIVIDUAL DIRECTORS AND EXECUTIVES COMPENSATION DISCLOSURES Information regarding individual directors and executives compensation and some equity instruments disclosures as permitted by Corporations Regulations 2M.3.03 is provided in the Remuneration Report section of the Directors’ report. Apart from the details disclosed in this note, no director has entered into a material contract with the Group since the end of the previous financial year and there were no material contracts involving directors’ interests existing at year-end. LOANS TO KMP AND THEIR RELATED PARTIES There has been no loan provided to KMP and their related parties as at 31 December 2008 (2007: nil). OTHER KMP TRANSACTIONS During the year and previous year, there has been no transaction with entities in which the KMP has significant influence over those entities’ financial or operating policies. 73 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 74 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A 31.Related party disclosures (continued) OPTIONS AND RIGHTS OVER EQUITY INSTRUMENTS The movement during the reporting period in the number of options over ordinary shares in ThinkSmart Ltd held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: EMPLOYEE OPTIONS MOVEMENT Held at 1 January 2008 Granted as compensation Exercised Lapsed Held at 31 December 2008 Vested during the year Vested and exercisable at 31 December 2008 Directors P Mansell S Penglis D Griffiths N Montarello Executives N Barker S McDonagh M Radotic G Varma G Parry J Rozenbroek Directors P Mansell S Penglis D Griffiths - - - 6,800,000 560,000 - 280,000 560,000 280,000 280,000 - - - - - - - - - - - - - - - - - - - - - - - - - (805,893) (3,194,107) 2,800,000 1,400,000 1,400,000 - - - (373,333) - - - - - - - - 280,000 280,000 560,000 280,000 280,000 - 280,000 - - - - 186,667 560,000 186,667 - - - - - - - Vested and exercisable at 31 December 2007 - - - Held at 1 January 2007 Granted as compensation Exercised Held before share split on 10/7/07* Held after share split on 10/7/07* Held at 31 December 2007 Vested during the year - - - - - - - - - - - - - - - - - - - N Montarello 1,700,000 - 1,700,000 6,800,000 6,800,000 4,000,000 4,000,000 Executives N Barker M Radotic G Varma G Parry J Rozenbroek 70,000 70,000 - 70,000 140,000 - - - 70,000 70,000 - - - - - 140,000 560,000 560,000 70,000 280,000 280,000 140,000 560,000 560,000 70,000 280,000 280,000 70,000 280,000 280,000 - - - - - - - - - - EMPLOYEE OPTIONS * In 2007, the board passed a resolution and authorised the subdivision of the shares from 22,245,913 fully paid ordinary shares in the Company to 88,983,652 fully paid ordinary shares. The share split was to ensure an appropriate capital structure at the time of the IPO. Consequently, the options are split in accordance to the share split. Refer to note 22(b) for further explanation. No options were held by key management person related parties. 74 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 75 MOVEMENT IN SHARES The movement during the reporting period in the number of ordinary shares in ThinkSmart Ltd held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: Held at 1 January 2008 Purchases Sales Received on exercise of options Held at 31 December 2008* 2008 Directors P Mansell S Penglis D Griffiths N Montarello Executives N Barker S McDonagh M Radotic G Varma G Parry J Rozenbroek 2007 After share split Directors P Mansell S Penglis D Griffiths N Montarello C MacDonald Executives N Barker M Radotic G Varma G Parry J Rozenbroek 2007 Before share split Directors P Mansell S Penglis D Griffiths N Montarello C MacDonald 1,288,192 1,360,500 1,463,360 11,808 250,000 150,000 13,742,732 2,704,567 22,999 150,000 - 51,000 - - - - - - - - - - - - - - - - Purchases Sales - - - - - 22,999 35,000 25,000 25,357 26,400 487,788 21,000,000 - - - - - - Purchases Sales 250,000 11,625 461,762 250,000 - - - - - - 35,000 25,000 25,357 26,400 Held at 10 July 2007 1,288,192 1,360,500 1,951,148 34,742,732 - - - - - - Held at 1 January 2007 533,810 578,500 487,787 8,685,683 - - - - 1,300,000 1,610,500 1,613,360 805,893 17,253,192 - - - 172,999 51,000 35,000 373,333 398,333 - - 25,357 26,400 Received on exercise of options Held at 31 December 2007* - - - - - - - - - - Received on exercise of options 1,288,192 1,360,500 1,463,360 13,742,732 - 22,999 35,000 25,000 25,357 26,400 Held at 9 July 2007 - - - - - 322,048 340,125 487,787 8,685,683 - 75 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 76 NOTES TO THE FINANCIAL STATEMENTS 8 0 0 2 t r o p e R l a u n n A 31.Related party disclosures (continued) * The following shares are subject to voluntary escrow until release of ThinkSmart Limited financial results for the year ended 31 December 2008: Directors P Mansell S Penglis D Griffiths N Montarello Held at 31 December 2008 1,000,000 657,000 975,572 13,742,732 No shares were granted to key management personnel during the reporting period as compensation in 2008 or 2007. No shares were held by related parties of key management personnel. PARENT The parent entity of the Group is ThinkSmart Limited. SUBSIDIARIES Transactions between ThinkSmart Limited and its subsidiaries, and amongst the various subsidiaries, consists of the payment and receipt of royalty fee, investment in subsidiaries, interest on intercompany loans, dividend distribution, management fee and transfer of funds amongst the companies for day to day financing and intercompany loans. Details of related party transactions, balances and amounts are set out below: Investments in controlled entities Amount owed by ThinkSmart Europe Ltd (i) Amount owed by RentSmart Unit Trust (i) Amount owed by RentSmart Ltd (ii) Company 2008 $ 2007 $ 133,359 78,359 8,493,800 7,733,466 12,805,950 9,854,946 2,480,385 - 23,913,494 17,666,771 (i) Amounts receivable by the parent entity from and to subsidiaries are unsecured, repayable on demand in cash and at an interest rate of RBA rate plus a margin of 2.55% per annum. The amount of interest revenue recognised from subsidiaries is $1,759,365 for the year ended 31 December 2008. (ii) Amounts receivable by the parent entity from and to subsidiaries are unsecured, repayable on demand in cash and interest free. The receivable from ThinkSmart Europe Ltd relates to funding for the acquisition of the remaining interest of RentSmart Ltd in UK in 2006. The receivable from RentSmart Unit Trust relates to the funding to repay external borrowings. The receivable from RentSmart Ltd relates to the funding of the US operation during the year. OTHER RELATED PARTIES KMP related parties For details of these transactions, refer to KMP related disclosures. 76 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 77 32.Subsequent events There has not been any matter or circumstance, other than that referred to in the financial statements or notes thereto, that has arisen since the end of the financial year, that has 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. 33.Earnings per share Basic earnings per share From continuing operations From continuing operations before listing cost Diluted earnings per share From continuing operations From continuing operations before listing cost BASIC EARNINGS PER SHARE 2008 Cents per share 2007 Cents per share 3.34 3.34 3.22 3.22 0.80 4.42 0.73 4.02 The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows: Profit after tax from continuing operations Earnings used in the calculation of basic EPS from continuing operations Tax effected listing cost 2008 $ 3,210,752 3,210,752 2007 $ 738,066 738,066 - 3,352,489 Earnings used in the calculation of basic EPS from continuing operations before listing cost 3,210,752 4,090,555 Weighted average number of ordinary shares for the purposes of basic earnings per share 96,028,963 92,472,024 DILUTED EARNINGS PER SHARE The earnings and weighted average number of ordinary shares used in the calculation of diluted earnings per share are as follows: 2008 No. 2007 No. Profit after tax from continuing operations Earnings used in the calculation of diluted EPS from continuing operations Tax effected listing cost 2008 $ 3,210,752 3,210,752 2007 $ 738,066 738,066 - 3,352,489 Earnings used in the calculation of basic EPS from continuing operations before listing cost 3,210,752 4,090,555 Weighted average number of ordinary shares for the purposes of diluted earnings per share are as follows: Weighted average number of ordinary shares used in the calculation of basic EPS 96,028,963 92,472,024 Shares deemed to be issued for no consideration in respect of: Employee options 3,635,142 9,237,473 Weighted average number of ordinary shares used in the calculation of diluted EPS 99,664,105 101,709,497 2008 No. 2007 No. 77 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 78 INDEPENDENT AUDIT REPORT 8 0 0 2 t r o p e R l a u n n A 78 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 79 79 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 80 ASX ADDITIONAL INFORMATION 8 0 0 2 t r o p e R l a u n n A SHAREHOLDER INFORMATION The shareholder information set out below was applicable as at 31 March 2009. SUBSTANTIAL SHAREHOLDER The number of shares held by substantial shareholders and their associates are set out below: Include those above 5% UBS Wealth Management Australia Nominees Pty Ltd HSBC Custody Nominees (Australia) Limited JP Morgan Nominees Australia Limited ANZ Nominees Limited VOTING RIGHTS Ordinary shares Refer to note 22 of the financial statements. Options There are no voting rights attached to the options. DISTRIBUTION OF EQUITY SECURITY SHAREHOLDERS 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over No. of ordinary shares Percentage % 17,654,565 8,663,660 8,577,478 5,593,122 18.26 8.96 8.87 5.78 Class of equity security Ordinary Shares Options No. of holders No. of shares No. of holders No. of shares 33 140 102 162 21,916 461,337 864,157 5,462,018 46 89,879,962 - - - - 9 - - - - 4,906,667 The number of shareholders holding less than a marketable parcel of ordinary shares is 74. UNQUOTED EQUITY SECURITIES Options issued under the ESOP to take up ordinary shares The Company has no other unquoted equity securities. ON-MARKET BUY-BACK There is no current on-market buy-back. No. on issue No. of holders 4,906,667 9 80 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 81 Twenty largest shareholders Name No. of ordinary shares held Percentage of capital held (%) UBS Wealth Management Australia Nominees Pty Ltd 17,654,565 18.26 HSBC Custody Nominees (Australia) Limited JP Morgan Nominees Australia Limited ANZ Nominees Limited Wroxby Pty Ltd JAWP Pty Ltd Cogent Nominees Pty Ltd National Nominees Limited Kemast Investments Pty Ltd Phoenix Properties International Pty Ltd Citicorp Nominees Pty Limited Bond Street Custodians Limited Aileendonan Investments Pty Ltd Egmont Pty Ltd Darju Pty Ltd Kelyna Margaret Penglis Moat Investments Pty Ltd Citicorp Nominees pty Limited Hotlake Pty Ltd RBC Dxia Investor Services Australia Nominees Pty Limited 8,663,660 8,577,478 5,593,122 4,717,364 4,291,162 3,850,618 3,772,974 3,357,740 3,000,000 2,782,181 2,473,779 1,970,140 1,685,093 1,463,360 1,314,000 1,226,732 1,190,577 1,178,760 1,151,303 8.96 8.87 5.78 4.88 4.44 3.98 3.90 3.47 3.10 2.88 2.56 2.04 1.74 1.51 1.36 1.27 1.23 1.22 1.19 81 TS AR 2009 Fins:Layout 1 17/04/09 12:25 PM Page 82 8 0 0 2 t r o p e R l a u n n A 82