Tree Island Steel Ltd.
Annual Report 2010

Plain-text annual report

ANNUAL REPORT 2010 DIRECTORS’ REPORT ANNUAL REPORT 2010 Table of Contents A FOCUSED, GLOBAL BUSINESS AN INNOVATIVE GROWTH COMPANY GROWTH OPPORTUNITIES FOR THE FUTURE EXECUTIVE CHAIRMAN & CEO REPORT TRADING RESULTS UPDATE CORPORATE & SOCIAL RESPONSIBILITY DELIVERING VALUE THROUGH..... FINANCIAL REPORT 2 4 6 10 12 15 16 17 ANNUAL GENERAL MEETING 2010 Annual General Meeting of ThinkSmart Limited will be held at Level 36, 250 St George’s Tce, Perth, Western Australia on Monday 16th May at 3.30 pm. ANNUAL REPORT 2011 ThinkSmart Limited is a leading international financial services company in the provision of finance to small businesses and consumers shopping in electrical retailing stores. ThinkSmart’s products fill the gap between a credit card and a bank loan, enabling its customers to get on-the-spot approval for the technology they need via a tax and cash flow friendly operating lease. It’s a niche in which ThinkSmart has a leading international footprint. 1 ANNUAL REPORT 2011DIRECTORS’ REPORT ANNUAL REPORT 2010 A Focused, Global Business Directors’ Meetings Matters which are specifically reserved for the Board or its The following table sets out the number of directors’ meetings held during the financial year. During the financial year 7 Board meetings were held. Committees under the Board Charter include: (cid:31) (cid:31) (cid:31) appointment of a chair; appointment and removal of the CEO; appointment of directors to fill a vacancy or as additional Audit and Risk Committee Meetings B A Nomination and Remuneration Committee Meeting B A directors; Director Peter Mansell Board Meetings B A ThinkSmart has long term distribution agreements with some of the world’s leading electrical retailers and banking institutions across Europe and Australasia. establishment of Board Committees, their membership development and review of corporate governance approval of operational budgets, major capital and delegated authorities; principles and policies; approval of dividends; 2* 1 1 6 7 1 2 2 7 7 2 2 1 7 1 7 1 (cid:31) (cid:31) (cid:31) (cid:31) - Ned Montarello David Griffiths Steven Penglis 7 7 1* - 1 1 A – Number of meetings attended B – Number of meetings held during the time the director held office during the year * – Attendance by invitation from the Committee Corporate Governance Statement expenditure, acquisitions and divestitures in excess of authority levels delegated to management; calling of meetings of shareholders; and any other specific matters nominated by the Board from (cid:31) (cid:31) time to time. It is also responsible for approving and monitoring financial This statement outlines the main corporate governance and other reporting. Detail of the Board’s charter is located in practices in place throughout the financial year, which comply the Company’s website (www.thinksmartworld.com). with the ASX Corporate Governance Council recommendations, unless otherwise stated. BOARD OF DIRECTORS Role of the Board The Board’s primary role is the protection and enhancement of long-term shareholder value. The Board, together with the Nomination and Remuneration Committee, determines the size and composition of the Board, subject to the terms of the constitution. The Board has delegated responsibility for operations and administration of the Company to the Chief Executive Officer and executive management. Responsibilities are delineated by formal authority delegations. ThinkSmart’s funding agreements are contracted to dates between 2011 and 2014 2 ANNUAL REPORT 2011 Product and technology innovation delivers growth, profit and new opportunities. Product innovation delivers services based rental product PRODUCT FUNDING CAPACITY New funding platforms significantly increase growth opportunities Australian Patented QuickSmart technology platform facilitates fast and efficient instore and online approval process DELIVERY SYSTEMS • Volume growth • Access to new markets • Efficiency • Customer satisfaction • Shareholder Value 3 ANNUAL REPORT 2011DIRECTORS’ REPORT ANNUAL REPORT 2010 An Innovative Growth Company In FY 2010, ThinkSmart increased net profit after tax by 31% to a record result of $6.8m Recent Achievements • Completed a $16m equity raising, providing capital to support $160m of new funding lines in UK and Australia. • Executed funding agreement with Secure Trust Bank in UK to provide GBP40m revolving facility for Business and Consumer customers. In Australia, $200m Multi Funder Securitisation platform on track for completion in first half of 2011. • Implemented “Infinity” services based rental product for Consumers in UK market. • Enhanced the online application and approval web portal leading to the grant of an Australian Innovation Patent on the online rental process and creating a technological competitive advantage in ThinkSmart’s chosen markets. • Extended key retail agreements in UK and Australia. • Delivered sustainable operating efficiencies through systems capabilities resulting in the cost of doing business reducing by 17%. • Integrated ThinkSmart’s application and approval system into Dixons retail point of sale system across all UK retail franchises. 2010 Financial Highlights • Grew NPAT 31% to $6.8m to deliver a record profit at the top end of market EBITDA guidance. • Delivered EBITDA CAGR of 17% from 2007 to 2010. • Achieved 34% growth in EBITDA from our Australian business with a 45% uplift in new business volumes. • Grew EBITDA Margins by 5% delivered by reducing the cost of doing business by 17%. • Grew Earnings Per Share by 23%. • Paid shareholders 3.5 cents total dividend for the 2010 year. 4 }}ANNUAL REPORT 2011 Revenue +14% $42.1m NPAT +31% $6.8m 9000 8000 7000 6000 5000 4000 3000 2000 1000 $0 2007 2008 2009 2010 2007 2008 2009 2010 Cost of Doing Business -17% CAGR (2007 - 2010) Cost of Doing Business NPAT Revenue $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 2007 2008 2009 2010 -40.0% -20.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% The Cost of Doing Business is the difference between the gross margin and EBITDA margin. NPAT Total Revenue Earnings Per Share EBITDA EBITDA Margin (pre Corp Dev costs) Cost of Doing Business Final Dividend - partly franked FY2010 $6.8m $42.1m 6.5¢ $13.3m 42% 22% 3.5cps FY2009 $5.2m $36.8m 5.3¢ $11.9m 40% 27% 3.5cps % change +31% +14% +23% +12% +5% -17% no change 5 ANNUAL REPORT 2011DIRECTORS’ REPORT ANNUAL REPORT 2010 Growth Opportunities For The Future Execution of complimentary strategic projects in 2011 for product, funding and delivery systems creates further significant growth opportunities. ThinkSmart has successfully positioned its business through the challenging global economic environment by staying true to three guiding principles for growth: Governing Principles 1. Growth Through Cash Flow Not Debt 2. Pace of Expansion Governed by Performance 3. Alignment with Market Leading Retailers Strategic Focus Expand Accessible Market through Consumer Rental Grow Distribution in New and Existing Territories Grow Revenue Lines and Continue to Diversify Income Improve Delivery and Customer Experience • Significantly • Targeting • Follow • QuickSmart & expands total available market in UK new Retail partnerships • Grow the • Potential to introduce to other existing territories internet acquisition channel in all markets Australian mature territory model • Repeat customer strategy Eclipse systems automate process at stores and significantly reduce costs of doing business ThinkSmart adopted a strategic plan in 2009 with the aim of cementing its position as the leading international provider of point-of-sale finance in its chosen markets. The plan involved innovative product design to provide a compelling value proposition to customers, enhancing web based application and approval systems to deliver a simple, fast and efficient platform for retail staff and customers, and finally to create funding capacity to support future growth arising from these leading edge developments. Elements of the plan have been implemented and have contributed to the Group’s 37% growth in new business volumes in 2010. 6 ANNUAL REPORT 2011 Expand Accessible Market through Consumer Rental ThinkSmart launched consumer rental in to the UK market in November 2010 with the Infinity product. This services based product is a compelling value proposition for customers. A similar move into Consumer in Australia over 5 years ago has seen consumer volumes increase at a compound annual growth rate of around 50% and this segment of the market now accounts for 70%+ of new business volumes in Australia. Consumer rentals in the UK represent a material growth opportunity for 2011 and beyond, evidenced by the relative size of the currently available Business segment across Dixons and the Consumer segment which is 4 times larger. Outside of the UK, ThinkSmart is exploring the appetite from existing and potential retail partners to expand ThinkSmart’s operations to include Consumer. Grow Distribution in New and Existing Territories ThinkSmart currently originates 32% of new business volumes in Australia online where the customer applies through ThinkSmart’s website and once approval is notified the customer can execute the rental agreement and collect the rental equipment instore. In addition to expanding distribution through traditional channels, ThinkSmart is looking to increase its customer acquisition through Internet sales. Recent technology developments in the UK market have seen ThinkSmart’s systems integrated with its retail partner Dixons point of sale systems. When a customer is approved for rental finance at home they can print out an approval confirmation that carries a unique barcode. This document can be scanned by any Dixons point of sale terminal to authenticate the approved application and allow the customer to select equipment up to the pre-approved limit. Equipment details are automatically captured by Dixons point of sale process and added to the rental contract prior to execution by the customer. The next phase of this evolution will deliver electronic signature technology to the application and approval process creating the opportunity for ThinkSmart to offer rental finance to customers choosing to purchase technology products through the Internet without visiting a traditional retail store. This innovative and leading edge development will allow ThinkSmart to expand the distribution reach with existing retail partners in addition to creating new relationship opportunities with participants in the online retail space. ThinkSmart’s opportunity to expand distribution into new territories using online capability will reduce the establishment costs and operating risks of expanding the Group’s international footprint. 7 ANNUAL REPORT 2011DIRECTORS’ REPORT ANNUAL REPORT 2010 Growth Opportunities For The Future (continued) Grow Revenue Lines and Continue to Diversify Income ThinkSmart’s existing territories create opportunities to diversify the revenue base and grow total income. The RentSmart business in Australia was established in 1996 and generates income from brokerage (Commercial and Consumer rental finance), insurance, inertia and warranty services. In contrast, Italy operations were established in 2007 and generate income from Commercial rental finance only. As each territory matures the opportunity to grow revenue lines increases as demonstrated by the UK business which has recently introduced the Consumer product. Australia (est 1996) United Kingdom (est 2003) Spain (est 2005) Italy (est 2007) 13% 19% 11% 20% 37% 35% 41% 5% 19% 49% 51% 100% Commercial Consumer Insurance Warranty Inertia Maturity Of Business Model Improve Delivery and Customer Experience ThinkSmart has transitioned from a telephone based applications and approval process to a web portal that allows the customer to apply for rental finance from instore or from the comfort of their home or office. This innovative approach has seen the time to complete the end to end process reduced to a few minutes thereby delivering a significantly improved experience for customers and retailers alike. In addition, ThinkSmart has achieved operating efficiencies that has led to a 17% reduction in the cost of doing business in 2010. The QuickSmart system has been developed inhouse and has recently been awarded an Australian Innovation Patent. Further developments including e-signature technology will further improve efficiency and the overall experience for customers and retailers. The process establishes ThinkSmart as a global leader in this niche and strengthens its competitive advantage in the markets it chooses to operate in. 8 ANNUAL REPORT 2011 To effectively capture the growth opportunities it has created, ThinkSmart has negotiated material increases in funding capacity. Delivering increased funding facilities at a lower overall cost was achieved by ThinkSmart developing in conjunction with banks an alternate funding model that can co-exist with the traditional funding structures. In Australia, ThinkSmart is well advanced in the implementation of a Master Trust Multi Funder Securitisation Program that doubles existing capacity. Key elements of the transformation plan are: • Leases are written “on balance sheet” rather than initiated under a brokerage model on behalf of funding banks. • Master Trust structure is non-recourse to ThinkSmart. • Platform supports additional funders on as needs basis and provides access to securitization markets to further increase future capacity. • Improved margins delivered through a transition to an annuity revenue stream and lower funding costs. • No refinancing risk – all facilities pay down in line with repayments from customers. • $160m in additional funding capacity initially created across UK and Australia. • New and existing funding sufficient to settle 3x 2010 business volumes in all territories going forward. UK Funding Capacity (GBPm) Australian Funding Capacity ($Am) 80 70 60 50 40 40 30 20 10 - 225 200 175 150 125 100 75 50 25 - 2009 2010 2009 2010 Drawn Undrawn Cash Drawn Undrawn Cash 9 ANNUAL REPORT 2011DIRECTORS’ REPORT ANNUAL REPORT 2010 Executive Chairman & CEO Report Dear Shareholders I am pleased to be able to report that, for the Financial Year ended 31st December 2010, ThinkSmart delivered a record full-year Net Profit after Tax of $6.8 million, up 31% on the previous year and delivering to the top end of the full year EBITDA target. This result was achieved through increased revenue of 14% and a 17% reduction in the cost of doing business. Not only have we continued to prove our model’s resilience through the challenges of the global economic downturn evidenced by 4 consecutive years of record profit growth since listing on the ASX in 2007, but we have also reinforced with investors that ThinkSmart continues to be a growth company with a 37% uplift in new business volumes in the year. A Growth Company To support the growth momentum ThinkSmart has successfully accessed increased global funding capacity to support significant levels of future growth. In recent months ThinkSmart has captured $160 million in additional funding capacity across Australia and UK which together with pre-existing capacity is sufficient to settle 3 times 2010 business volumes. The new funding arrangements provide flexibility and the structure supports additional funders when growth in demand requires increased capacity, and overall lower funding costs will grow margins over time. Access to global funding lines requires a level of capital support and given the magnitude of additional funding this lead to ThinkSmart raising $16m of additional equity in October 2010. It is expected that any future capital requirements to support organic growth will be satisfied by internally generated capital. Systems The Australian deployment of our new “QuickSmart” online application portal in 2009 has been followed by deployment to the UK in October 2010. The recently patented QuickSmart system makes the application experience easier and faster for store sales people; delivering notable efficiency gains for our call centre teams; and reduced our overall cost of doing business by 17%. The instore experience for the sales person and the customer is vastly improved leading to increased penetration rates on computer sales. QuickSmart also creates the opportunity to expand our distribution channels significantly through the growth of our Internet business. Through a set of improvements to our online process and marketing, we have grown the Internet channel in Australia to account for up to 32% of all volume in a month, up from 27% a year earlier. Product The introduction of services to the rental product in Australia has contributed to increases in volumes of 45% in 2010, far in excess of the computer sales growth of our retail partners. Following the success of the Australian product initiatives, a more comprehensive services based consumer rental product was introduced to the UK market in November 2010 though our long term retail partner Dixons. Together with the integration of 10 ANNUAL REPORT 2011 ThinkSmart’s systems into Dixons point of sale system, the Company is optimistic that the new Infinity consumer product will drive growth and increased profitability in our UK operations in 2011 and beyond. Markets Retailing in Europe continues to be challenging however there are opportunities to grow the UK operations leveraging the Infinity consumer product delivered through more efficient online systems and stable funding capacity at an appropriate pricing structure. In Australia, the retailing outlook is stable however ThinkSmart sees opportunities to leverage online capability together with lower delivery costs and increased funding capacity to further grow future new business volumes. ThinkSmart will continue to work towards leveraging and adapting its existing business model to capitalise on opportunities in new territories. Further development of expansion opportunities will occur in 2011 with a view to target new markets in 2012. Growth Opportunities ThinkSmart has successfully delivered the key elements of a successful growth strategy being: • • • • • distribution through leading international retailers across global markets; capital to support growth expectations; product innovation recognised by retail partners as contributing value to their businesses; funding capacity to adequately support growth expectations; delivery systems that are leading edge and provide competitive advantage. These elements have global application and support ThinkSmart’s growth ambitions in selected markets. In 2011 and beyond we seek to successfully leverage these strategic elements and profitably grow the international businesses thereby delivering enhanced shareholder value. Final Dividend Finally, on 29 April 2011 we paid a final dividend of 3.5 cents per share partly franked, representing the full dividend entitlement for the year. We thank all our staff for their continued hard work and enthusiasm and look forward to continuing to grow together in 2011 and beyond. Sincerely NED MONTARELLO Executive Chairman & CEO 11 ANNUAL REPORT 2011DIRECTORS’ REPORT ANNUAL REPORT 2010 Trading Results Update Australia – Continued Strong Growth & Sustainable Cost Efficiencies ThinkSmart’s 15 year old Australian business continues to deliver exceptional year on year performance growing EBITDA by 34% from revenue growth of 30%. Over the last 4 years, the Australian business has delivered a Compound Annual Growth Rate (CAGR) of 43% on EBITDA, with the businesses’ move into consumer rental five years ago seeing consumer volumes grow by c50% on a CAGR basis. New business volumes increased 45% for the year with settled value growth of 29% impacted by lower average transaction values. Income Mix Results Highlights Revenue up 30% to $27.4m EBITDA up 34% to $11.3m EBITDA margin up 3% to 41% Gross margin down 3% to 60% Volumes up by 45% ATV down 11% to $1,780 Other Inertia & Warranty Brokerage & Insurance 0% 10% 20% 30% 40% 50% 60% 70% 80% 2009 2010 ThinkSmart has increased its share of retail computer sales with its key retail partners in Australia during a difficult trading period. Agreements with DickSmith and JB Hi-Fi have also been extended well in advance of the contracted maturity dates. The key growth initiatives that have been successful throughout 2010 will be further developed to ensure the momentum of growth and profitability is maintained. Improved delivery - The launch of the new “QuickSmart” processing platform in April 2009 delivered significant improvements in the customer experience in store, reducing processing times and increasing salesperson efficiency. This system has been awarded an Australian Innovation Patent in 2010. In addition, the automation of the QuickSmart system has enabled the business to significantly reduce its costs of doing business by over 20%. Growth of the Internet - Alongside solid growth from the store network, the business also saw a significant increase in applications through its online channel. With customers able to get automatically pre-approved for finance via its website, ThinkSmart grew its online business to now account for up to 32% of total volume. 12 ANNUAL REPORT 2011 The growth of the online channel has helped reduce customer acquisition costs, and attracts a higher average spend. However, this is partially offset by a 20 percentage point lower conversion rate. This experience in online initiated business is transportable to other existing and future territories. Product improvements – With the goal of improving customer acquisition and retention, in January 2010, ThinkSmart rolled out a major new enhancement to its core rental product in Australia to include a suite of added value service offerings that the customer benefits from over the life of their contract. This provides more than $500 worth of added value on an average $2,000 deal. Based on the successful launch of the UK Infinity consumer product, ThinkSmart is looking to further refine the Australian product offering to provide broader appeal to customers and grow market share further. The business is strongly positioned for 2011 and beyond with strong and committed retail relationships, significant growth in funding capacity to support growth ambitions, and consistent and increasing revenue from inertia and warranty. United Kingdom - Stable EBITDA with Consumer creating growth opportunities The focus of 2010 was to maintain the existing B2B product and at the same time develop an exciting and compelling proposition for the Consumer customer. The Infinity product for Consumers was introduced in early November and has been positively accepted by Dixons, our retail partner in the UK. The product is expected to make a positive EBITDA contribution in 2011. Income Mix Results Highlights Revenue unchanged at £7.3m EBITDA down 5% to £3.5m EBITDA margin down 9% to 47% Other Gross margin down 4% to 79% Inertia Volumes (B2B) down by 12% ATV up 12% to £881 Brokerage & Insurance 0% 10% 20% 30% 40% 50% 60% 70% 80% 2009 2010 13 ANNUAL REPORT 2011DIRECTORS’ REPORT ANNUAL REPORT 2010 Trading Results Update (continued) Against a backdrop of a challenging retail trading environment the business has maintained its position and at the same time created opportunities in the Consumer segment that is expected to deliver significant future value. ThinkSmart has secured a strong funding proposition in the UK through the execution of a new GBP40m revolving facility with Secure Trust Bank which initially runs to 2014. Negotiations with other potential funders in this market continue as ThinkSmart seeks to move towards a multi funder platform in its key territories. The Infinity product is available in all Curry’s outlets providing greater market share opportunity. ThinkSmart’s QuickSmart application and approval system is integrated into Curry’s retail point of sales system thereby delivering the most advanced and efficient in store process offered by ThinkSmart. This market leading process provides a competitive advantage and achieves a high level of scaleability as volumes begin to grow as retail markets improve. In 2011, ThinkSmart plans to adopt e-signature technology to further enhance the experience for customers and retail staff whilst further reducing ThinkSmart’s cost of delivery and broadening the appeal of the product to online purchasers of technology. Encouragingly, the UK businesses second half 2010 application volumes and EBITDA (over the first half) returned to growth providing a level of expectation for growth in 2011. Mainland Europe – Stable performance during difficult trading Spain - ThinkSmart’s Spanish business maintained positive EBITDA in FY 2010, growing its contribution off a low base. New business volumes grew by over 60% for the year. Inertia revenues from business written in 2006 and 2007 continue to underpin profit performance ThinkSmart continues to pursue opportunities to develop Spain into a multi-channel territory. Italy - In Italy, ThinkSmart currently is reviewing its market strategy to incorporate an online approach. France - France currently remains a challenging market for ThinkSmart, and its success is dependent upon aligning with the right retail partners in the territory and our ability to secure a supportive funding partner. There are no immediate plans to commence trading in this territory. 14 ANNUAL REPORT 2011 Corporate & Social Responsibility People ThinkSmart recognises the value of its staff in delivering on its corporate goals. Accordingly, ThinkSmart is committed to providing the right training, tools, leadership and professional support, required to enable its employees to develop into highly productive, knowledgeable, and loyal individuals. ThinkSmart also seeks to create a values based culture, providing the guiding principles within which our employees can develop and excel. These goals are primarily fostered through our “PeopleSmart” programme in Australia and the “Investor in People” accreditation of our UK business. The PeopleSmart programme 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 organize activities that align employees to the ThinkSmart 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. ThinkSmart has donated a number of computers and other equipment to a Queensland primary school which had lost all its technology equipment in the 2010 floods. At a team level, ThinkSmart supports employee driven charitable initiatives both by making the time available and in most cases, matching employee donations. Employees in the business have given generously and participated actively in a range of community based initiatives including: the Premiers Disaster Relief Appeal for the recent Queensland floods; blood and financial donations to the Red Cross; Make a Wish Foundation; and Movember (Prostate Cancer Foundation and Beyond Blue). Responsible Lending ThinkSmart has been a practitioner of responsible lending practices for a number of years. Primarily these practices are reflected within its lending criteria; however ThinkSmart is also a member of an approved external dispute resolution scheme and regularly reviews the competence of its lending staff and its end to end processes as it strives to achieve best practice. ThinkSmart regularly undertakes research and elicits customer feedback to ensure that its product offering is aligned to community needs and that its customer service is the best it can be. 15 ANNUAL REPORT 2011DIRECTORS’ REPORT ANNUAL REPORT 2010 Delivering Value Through... 1. Proven track record of growth - ThinkSmart has delivered a 17% CAGR in underlying EBITDA over the last four years (2007-2010) since listing on ASX, delivering a very strong EBITDA and Margin performance during a tough global trading period. 2. Leading International Footprint - ThinkSmart has exclusive and entrenched partnerships with market leading retailers and funders in Australia and Europe, providing it with a diverse platform for growth. 3. Strong Customer Value Proposition - ThinkSmart’s products provide a compelling and highly profitable value proposition for retail partners, customers and funders. 4. Capacity for Continued Profitable Strong Growth - ThinkSmart has secured the funding capacity, the distribution relationships and the compelling product offerings to deliver future growth in its chosen markets. 5. Predictable recurring income lines - The timing of ThinkSmart’s income model provides predictable, recurring income lines across the life of each customer contract, thereby managing ThinkSmart’s exposure to demand fluctuations in any one year. 6. Shrinking cost of doing business - The delivery of ThinkSmart’s products through in store portals is significantly reducing its cost of doing business and thereby improving EBITDA margins. Online capability provides broader market access and potentially lowers the cost of establishing a new territory. 7. Highly scalable model - ThinkSmart operates a simple, highly scalable model with processing centres in Europe and Australasia which can be leveraged to enable it to enter new markets at a very low cost. 8. Significant Growth Opportunities - ThinkSmart’s entry into Consumer Rental in the UK has the opportunity to significantly grow the UK market with immediate profit contribution. 16 FINANCIAL REPORT FINANCIAL YEAR ENDED 31 DECEMBER 2010 Corporate Information Directors’ Report Auditor’s Independence Declaration Directors’ Declaration Statement of Comprehensive Income Statement of Financial Position Statements of Changes in Equity Statement of Cash Flow Notes to the Financial Statements Independent Audit Report Shareholder Information 18 19 42 43 44 45 46 47 48 95 97 17 ANNUAL REPORT 2011CORPORATE INFORMATION ABN 24 092 319 698 SHARE REGISTER Computershare Investor Services Pty Limited Level 2, 45 St Georges Terrace DIRECTORS N R Montarello (Chairman and Chief Executive Officer) Perth, WA 6000 Australia D Griffiths (Deputy Chairman) Phone: 1300 850 505 S Penglis F de Vicente 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 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 18 DIRECTORS’ REPORT The Directors of ThinkSmart Limited (the “Company”) submit of the Australian Institute of Company Directors. David also herewith the annual financial report of the Company and the sits on the Board of the Perth International Arts Festival. Group for the financial year ended 31 December 2010 and Mr Griffiths is currently a chairman of Automotive Holdings the auditor’s report thereon. In order to comply with the Group Limited and Northern Iron Limited. In the past three provisions of the Corporations Act 2001, the directors report years Mr Griffiths has been a director of the following listed as follows: companies: ARC Energy Limited, Great Southern Limited and Antaria Limited. DIRECTORS The names and details of the Company’s directors in office PETER MANSELL (AGE 64) during the financial year and until the date of this report B.Com, LLB, H. Dip Tax, FAICD are as follows. Directors were in office for this entire period Non-Executive Director unless otherwise stated. Names, qualifications, experience and special appointed Chairman on the 7 May 2007. Mr Mansell has Peter Mansell joined the Board on 12 April 2007 and was responsibilities subsequently resigned from the Board on 22 May 2010. Mr Mansell practiced as a business lawyer for over 40 years and NED MONTARELLO (AGE 49) has a wide range of experience in corporate matters. He was Executive Chairman and Chief Executive Officer at various times the Freehills National Chairman (1995- 2000), Managing Partner of the Perth office (1992-2002) Ned Montarello has over 20 years experience in the finance and a member of the firm’s National Board (1989-2002). industry and joined the Board on 7 April 2000 and was Mr Mansell is a Fellow of the Australian Institute of Company appointed Chairman on 22 May 2010. Mr Montarello Directors, having been President of the Western Australian founded ThinkSmart over 14 years ago and through this division and having sat on its National Board from 2002 to vehicle has been credited with elevating the nano-ticket 2003. He is currently a director of the following Australian rental market sector in Australia, receiving the Telstra and listed companies: Ampella Mining Ltd (Chairman) and Australian Government’s Entrepreneur of the Year Award in Bunnings Property Management Limited (responsible entity 1998. He steered the expansion of the business into Europe for the Bunnings Warehouse Property Trust). In the past in 2002/2003, establishing agreements with the UK’s largest three years Mr Mansell has been a director of the following electrical retailer, DSG International and the Halifax Bank listed companies: Great Southern Limited, West Australian of Scotland. Following the establishment of a beachhead Newspaper Holdings Ltd, Oz Minerals Limited, Zinifex Ltd and European operations centre in Manchester, England, Mr Western Power Corporation. Montarello has driven its growth across Europe where it now also operates in Spain and Italy. DAVID GRIFFITHS (AGE 60) B. Ec (Hons), M. Ec, D. Ec (Hon), FAICD STEVEN PENGLIS (AGE 50) B. Juris and B. Law Non-Executive Director Non-Executive Director, Deputy Chairman Steven Penglis joined the Board on 1 July 2000 and stepped down as Chairman on the 6 May 2007. Mr Penglis is a David Griffiths joined the Board on 28 November 2000 Partner at Freehills since 1987 and former Chairman of and was appointed Deputy Chairman on 22 May 2010. Mr the Legal Practice Board of Western Australia. Mr Penglis Griffiths has served in a wide range of senior finance roles, specialises in the area of Corporate and Corporations most recently as Division Director of Macquarie Bank Limited Law Litigation, advising many public companies, including and previously as Executive Chairman of Porter Western ThinkSmart, before his appointment to the Board. He Limited. is a part-time Senior Member of the Commonwealth Administrative Appeals Tribunal; an elected member of Mr Griffiths holds an Honours Degree in Economics from the Legal Practice Board of Western Australia and former The University of Western Australia, a Masters Degree in chairman; and an elected member of the Council of the Law Economics from Australian National University and is a Fellow Society of Western Australia. 19 ANNUAL REPORT 2011DIRECTORS’ REPORT FERNANDO DE VICENTE (AGE 43) B. Econ, MBA Bus Non-Executive Director Fernando de Vicente is a citizen of Spain whom has joined the Board on 7 April 2010. Mr de Vicente has a Degree in Economics (International Development) from the University Complutense in Madrid, and an Executive MBA DIRECTORS’ MEETINGS The following table sets out the number of directors’ meetings held during the financial year. During the financial year 10 Board meetings were held. Audit Nomination and and Risk Remuneration Board Committee Committee from IESE Business School in Madrid. Mr de Vicente spent Director Meetings Meetings Meetings nine years at DSG International, one of Europe’s largest A B electrical retailers, where he most recently held the role of N Montarello** 9 9^ International Managing Director, with responsibility for DSG’s D Griffiths 10 10 Central & Southern European operations, a A$3 billion business with 350 stores across six countries. S Penglis P Mansell*** F de Vicente 9 3 6 10 3 7 A 2* 2 1 1 - B - 2 1 1 - A 1 1 1 1 - B 1 1 1 1 - Mr de Vicente started his career with DSG as Finance A Number of meetings attended. Director for PC City Spain, and became the MD for Spain B Number of meetings held during the time the director held office during in 2003. In 2006 he was promoted to Regional Managing the year. Director for South-East Europe based in Greece, before * Attendance by invitation from the Committee. assuming the role of International Managing Director in ** Mr Montarello resigned from the Nomination and Remuneration 2008. In March 2010, Mr de Vicente left DSG to become Committee on 21 May 2010. the Executive Chairman of BodyBell Group, one of Spain’s *** Mr Mansell resigned from the Board on 22 May 2010. ^ Mr Montarello was not eligible to attend a board meeting as the meeting was in relation to a matter in which Mr Montarello held an interest. largest speciality retailers. COMPANY SECRETARY NEIL BARKER B.Bus, FCPA Neil Barker is a Certified Practicing Accountant (Fellow) with over 27 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. 20 CORPORATE GOVERNANCE STATEMENT This statement outlines the main corporate governance The Board, together with the Nomination and Remuneration Committee, determines the size and composition of the practices in place throughout the financial year, which comply Board, subject to the terms of the constitution. with the ASX Corporate Governance Council recommendations, unless otherwise stated. BOARD OF DIRECTORS Role of the Board The Board has delegated responsibility for operations and administration of the Company to the Chief Executive Officer and executive management. Responsibilities are delineated by formal authority delegations. The Board’s primary role is the protection and enhancement of long-term shareholder value. Board process To assist in the execution of its responsibilities, the Board To fulfil this role, the Board has adopted a charter has established a Nomination and Remuneration Committee, which establishes the relationship between the Board as well as an Audit and Risk Committee. These Committees and management and describes their functions and have written mandates and operating procedures, which are responsibilities. The Board’s responsibilities, as set out in the reviewed on a regular basis. The Board has also established Board Charter, include: n working with management to establish ThinkSmart’s framework for management of the Group including a system of internal control, a business risk management process and strategic direction; the establishment of appropriate ethical standards. n monitoring management and financial performance; n monitoring compliance and risk management; n reviewing procedures in place for appointment of senior Independent professional advice and access to company information management and monitoring of its performance and for Following consultation with the chairperson, directors may succession planning; and seek independent professional advice at the Company’s n ensuring effective disclosure policies and procedures. expense. Generally, this advice will be available to all Matters which are specifically reserved for the Board or its directors. appointment of a chair; Committees under the Board Charter include: n n n appointment and removal of the CEO; appointment of directors to fill a vacancy or as additional directors; establishment of Board Committees, their membership and delegated authorities; approval of dividends; 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 19 and 20 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 development and review of corporate governance the Board, they hold the disadvantage of losing the principles and policies; approval of operational budgets, major capital contribution of directors who have been able to develop, over a period of time, increasing insight in the Company expenditure, acquisitions and divestitures in excess of and its operation and, therefore, an increasing authority levels delegated to management; calling of meetings of shareholders; and contribution to the Board as a whole. n It is intended that the Board should comprise a majority any other specific matters nominated by the Board from of independent Non-Executive Directors and comprise time to time. directors with a broad range of skills, expertise and experience from a diverse range of backgrounds. n n n n n n It is also responsible for approving and monitoring financial n The Board regularly reviews the independence of each and other reporting. Detail of the Board’s charter is located director in light of the interests disclosed to the Board. in the Company’s website (www.thinksmartworld.com). 21 ANNUAL REPORT 2011DIRECTORS’ REPORT On 22 May 2010, Mr Mansell retired from his role n The CEO will also provide feedback from senior as Chairman of the Board after leading the Company management in connection with any issues that may through a successful transition to being a publicly listed be relevant in the context of the Board performance company, and Mr Montarello was subsequently appointed review; and Executive Chairman. The Board acknowledges the ASX n Where appropriate to facilitate the review process, Recommendation that the Chairman be an Independent assistance may be obtained from third party advisers. Director, however, the Board views the appointment of Mr Montarello as an advantage given his history of leadership The current members of the Committee are S Penglis (Chair), in the Company and finance industry, and his clear incentive D Griffiths, and F De Vicente. to maximize the interests of the Company. Mr Montarello founded the Company over 14 years ago, and has been The Committee will meet as often as the Committee involved in expanding the business through Australia and members deem necessary in order to fulfil their role. overseas. His experience and insights continue to be However, it is intended that the Committee will normally invaluable to the Group. meet at least annually. The Board is conscious of the ASX Corporate Governance The Committee consists of a minimum of 3 members, Recommendation stipulates that the roles of Chair and majority being Non-Executive Directors, and an independent Chief Executive Officer should not be exercised by the same director as chair. The Nomination and Remuneration individual. Given the breadth of the Group’s operations and Committee has a documented charter, approved by the Executive Chairman’s extensive business experience, the the Board, which is available on the website (www. Board considers it appropriate that the Executive Chairman thinksmartworld.com). be considered the most senior executive overseeing and supervising the Group as well as managing the Group’s small REMUNERATION REPORT - AUDITED executive team in regard to this. The remuneration report for 2010, as presented below, NOMINATION AND REMUNERATION COMMITTEE remuneration report is set out under the following main has been prepared for consideration by shareholders. The The objective of the Nomination and Remuneration headings: Committee is to help the Board ensure that ThinkSmart has a Board of an effective composition, size and the commitment A: Principles of compensation to adequately discharge its responsibilities and duties, and B: Directors’ and executive officers’ remuneration to determine and review the compensation arrangements for C: Service agreements the Directors and senior management team. D: Share-based compensation (options) E: Share-based compensation (shares) The Nomination and Remuneration Committee reviews and F: Bonus remuneration makes recommendations to the Board on remuneration packages and policies applicable to the executives and A. PRINCIPLES OF COMPENSATION - AUDITED directors of the Company as well as the Group. On an annual Remuneration is referred to as compensation throughout basis: n Directors will provide written feedback in relation to this report. Key management personnel have authority and responsibility for planning, directing and controlling the the Board and its Committees against an agreed set of activities of the Company and the Group, including directors criteria and each Committee will do the same regarding of the Company and other executives. Key management its own performance; personnel comprise the directors of the Company and n Feedback will be collected by the chair of the Board, executives for the Company and the Group including the five or an external facilitator, and discussed by the Board, most highly remunerated executives. with consideration being given as to whether any steps should be taken to improve performance of the Board or its Committees; 22 Cash NPAT $’000s 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. 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 The compensation structures explained below are designed to attract suitably qualified candidates, reward 2007 2008 2009 2010 Cash NPAT Non recurring items the achievement of strategic objectives, and achieve the In considering the Group’s performance and benefits for broader outcome of creation of value for shareholders. The shareholder wealth, the Executive Chairman and Nomination compensation structures take into account: n the capability and experience of the key management and Remuneration Committee have regard to the following indices of the current financial year and the previous four personnel; financial years. the key management personnel’s ability to control the n n relevant segment/s’ performance; and the Group’s performance. Compensation packages include a mix of fixed and variable compensation and short-term and long-term performance- based incentives. 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 graph below demonstrates the Group’s consistent growth in cash net profit after taxation measured on a like for like basis since the Company listed on the ASX in 2007. The Cash NPAT calculations for each year exclude from NPAT, on a net of tax basis, amortisation costs, depreciation costs, and unrealised foreign exchange costs. In addition, non recurring items net of any applicable taxation are excluded being redundancy costs in 2009, US operating costs in 2008 and IPO costs in 2007. 2010 2009 2008 2007 Profit attributable to owners of the company $6,773,013 $5,171,776 $3,210,752 $738,066 Basic EPS 6.52 cents 5.35 cents 3.34 cents 0.80 cents Dividends paid $1,937,788 $2,900,682 $1,933,788 Dividend paid per share 2 cents 3 cents 2 cents - - Share price at year end $0.73 $0.90 $0.17 $1.92 Change in share price ($0.17) $0.71 ($1.73) ($0.23)^ Return on capital employed 36% 34% 22% 6% ^Initial listing price of $2.15 is used as opening share price. Profit is considered as one of the financial performance target setting of the short term incentive. Profit amounts for 2007 to 2010 have been calculated in accordance with Australia Accounting Standards (AASBs). The overall level of key management personnel compensation takes into account the performance of the Group over a number of years. Over the past four years, the group’s profit from ordinary activities after income tax has grown at an average rate per annum of over 109%. During the same period, average key management personnel compensation has grown by approximately 5.7% per annum. 23 ANNUAL REPORT 2011 DIRECTORS’ REPORT The Directors of ThinkSmart Limited consider that a variety Remuneration is reviewed annually. In reviewing each of factors, including the broad economic environment, Executives’ salary, consideration is given to external market sentiment and financial performance, contribute to competitiveness, position responsibilities and individual the Company’s share price. In addition, there are no closely skills and experience. The STI component of Executive comparable companies that would provide a meaningful remuneration is based on annual performance targets relative share price measure. As a result, the Executive and delivered in the form of cash. In 2010, the Company remuneration is linked to the Group’s financial performance. has also introduced a new Long Term Incentive Plan Non-Executive Directors which recognises performance and behaviour that delivers sustainable long term shareholder value and seeks to align Fees and payments to non-executive directors reflect the the interests of management with those of the shareholders. demands which are made on and the responsibilities of the Non-Executive Directors. Non-executive directors’ fees and Base pay payments are reviewed annually by the Board. Non-Executive Executives are offered a competitive salary that comprises Directors do not receive Share Options. the components of base pay and benefits that reflects the applied professional competence of each Executive according Non-Executive Director’s fees to his/her knowledge, experience and accountabilities. Base The Non-Executive Directors shall be paid by way of fees for pay for Executives is reviewed annually by Executive Director services the maximum aggregate sum as may be approved to ensure the executive’s pay is competitive with the market. from time to time by ThinkSmart in general meeting. The An executive’s pay is also reviewed on promotion. Base pay fees include Director’s fee as well as Board Committee for Executive Chairman in reviewed annually by Nomination membership fee. The current maximum aggregate annual and Remuneration Committee. sum approved by shareholders at a previous general meeting is $600,000 (2009: $600,000). Any change to Short-term performance incentive that aggregate annual sum needs to be approved by the Short-term performance incentives (STIs) vary according to shareholders. The constitution also makes provision for individual contracts, however, for Executives they are broadly ThinkSmart to pay all reasonable expenses of directors in attending meetings and carrying out their duties. based as follows: n a component of the STI is linked to the individual Executive pay performance of the executive (this is based on a number of factors, including performance against The Company’s remuneration is market competitive and budgets, achievement of key performance indicators aims to attract, retain and motivate high calibre employees (KPIs) and other personal objectives). who contribute to the sustained growth of the ThinkSmart n a component of the STI is linked to the financial base pay and benefits; business with a mix of the following four components: n n n long-term incentives through participation in the short-term performance incentives (STIs); performance of the business or measured against budgets determined at the beginning of each financial year. ThinkSmart Long Term Incentive Plan; and Using various profit performance targets and personal n other remuneration such as superannuation. performance objectives assessed against KPIs which are aligned with achievement of the Board’s strategic objectives, The purpose of STIs is to make a significant contribution to the Company ensures variable reward is only paid when the total reward package subject to meeting various targets value has been created for shareholders. For middle and linked to the Company’s business objectives. An incentivised lower level management, total STIs are linked to individual reward structure is necessary to ensure a competitive performance measures and also to the financial performance package in Australian and global marketplace for executives. of the business. The STI bonus is delivered in the form of Incentives are designed to focus and motivate employees cash. to achieve outcomes beyond the expectation of normal professional competence. 24 For the 2010 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 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 F 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 Executive 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 have been no retention based options granted since the Company’s listing in June 2007. The table below sets out the details of the currently existing retention options issued to Key Management Personnel that were issued in 2006 and 2007 before the Company’s listing: Instrument Exercise price Each option represents an entitlement to one ordinary share. Retention Options Tranche 5: $1.375 Retention Options Tranche 6: $3.00 Vesting conditions Subject to the executive remaining an employee of the Group. If the executive ceases to be an employee of the Group before the option is exercised, all options held by the executive will automatically lapse one month after the date of cessation of employment. There are no performance hurdles applicable to the retention options. Why vesting conditions are chosen The vesting conditions are designed to ensure retention of key executives. Vesting date Exercise period Expiry date Retention Options Tranche 5 & 6: 1 January 2009 Retention Options Tranche 5 & 6: From vesting date to expiry date Retention Options Tranche 5 & 6: 31 December 2011 Disposal restriction No disposal restriction imposed at the time of this grant. During 2010, the Company completed a comprehensive review of current remuneration arrangements for senior executives to determine an appropriate structure to support the Company’s short term and long term business strategies and be aligned to corporate governance principles. The review included input from external consultants on comparative remuneration levels, trends and practices. As part of the review, the Board has agreed to reactivate the ESOP which recognises performance and behaviour that delivers sustainable long term shareholder value and seeks to align the interests of management with those of the shareholders. Consequently, options are issued to executives, and the ability to exercise the options is conditional on the Group achieving the pre-determined performance criteria. 25 ANNUAL REPORT 2011DIRECTORS’ REPORT The table below sets out the details of the performance options issued to Key Management Personnel: Instrument Exercise price Each option represents an entitlement to one ordinary share. Performance Options Tranche 1 - $0.62 Performance Options Tranche 2 - $1.11 Vesting conditions Performance options will vest on, and become exercisable on or after, the Vesting Date to the extent that certain performance conditions that are based on the achievement of pre- determined financial performance of the Group over the performance measurement period, as follows: - 50% of performance options are subject to achievement of Earnings Per Share (EPS) performance condition; and - 50% of performance options are subject to achievement of Total Shareholder Return (TSR) performance condition. Subject to the executive remaining an employee of the Group. If the executive ceases to be an employee of the Group before the option is exercised, all options held by the executive will automatically lapse one month after the date of cessation of employment. EPS performance target The Company’s EPS growth will be measured relative to a target of more than 7.5% per annum compound growth. The proportion of the EPS award that vests will be: - Compound EPS growth of 7.5% p.a. or less: 0% - Compound EPS growth between 7.6% to 9.9%: 4% of the EPS award for each 0.1% of compound EPS growth above 7.5% - Compound EPS growth of 10% p.a. or more: 100% EPS performance period Performance Options Tranche 1: 3 year period commencing 1 January 2009 with the base year being the period ended 31 December 2008. Performance Options Tranche 2: 3 year period commencing 1 January 2010 with the base year being the period ended 31 December 2009. Why vesting conditions are chosen The vesting conditions were chosen as performance conditions as they reflect, at the date TSR performance target The Company will be given percentile ranking having regards to its performance relative to they were granted, the improvement of earnings. a comparator group consisting of the S&P/ASX Small Ordinaries Index (ASX code: ASO). The Company will be given a percentile ranking having regard to its performance relative to the comparative group of companies. The percentage of the TSR reward that vests will be determined by the Company’s ranking as follows: - - - TSR rank less than 50th percentile: 0% TSR ranks 50th percentile: 50% TSR rank between 50th and 75th percentile: 50% plus an additional 2% of this award for each additional percentile ranking above 50th percentile - TSR rank at or above 75th percentile: 100% 26 TSR performance period Performance Options Tranche 1: As at 1 January 2009 Performance Options Tranche 2: As at 1 January 2010 Why vesting conditions are chosen The vesting conditions were chosen as performance conditions as they reflect, at the date they were granted, alignment with shareholder expectations. Vesting date Performance Options Tranche 1: 1 January 2012 Performance Options Tranche 2: 31 December 2012 Exercise period Performance Options Tranche 1: From vesting date to expiry date Performance Options Tranche 2: From vesting date to expiry date Expiry date Performance Options Tranche 1: 31 December 2013 Disposal restriction No disposal restriction imposed at the time of this grant. Performance Options Tranche 2: 31 December 2014 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 Group executives who received the highest remuneration for the year ended 31 December 2010. 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: 27 ANNUAL REPORT 2011DIRECTORS’ REPORT Short Term Post employment Share-based payments Salary and fee $ STI cash bonus $ Non- monetary benefits $ Total $ Superan- nuation benefits Termi- nation ben- efits Options and rights Shares Total Proportion of remu- neration perfor- mance related Value of options as pro- portion of remu- neration $ $ $ $ % % DIRECTORS Non-Executive Directors P Mansell* 2010 24,751 2009 64,599 S Penglis 2010 62,145 2009 55,000 D Griffiths 2010 67,500 2009 58,750 F de Vicente* 2010 49,050 2009 - - - - - - - - - Executive Director N Montarello 2010 649,527 48,000 2009 594,444 EXECUTIVES A Baum* 2010 141,666 2009 - - - - N Barker 2010 322,996 26,000 2009 321,330 10,000 - - - - - - - - - - - - - - 24,751 64,599 62,145 55,000 67,500 58,750 49,050 - 2,228 5,814 5,593 4,950 6,075 5,288 - - 697,527 31,651 594,444 40,318 141,666 10,000 - - 348,996 31,410 331,330 29,820 M Radotic** 2010 103,859 17,816 15,317 136,992 9,076 2009 233,922 34,692 20,653 289,267 21,410 S McDonagh* 2010 165,046 22,425 2009 259,231 6,500 G Varma 2010 268,623 15,089 2009 251,487 50,000 - - - - 187,471 16,872 265,731 23,916 283,712 25,534 301,487 27,134 G Parry 2010 228,807 21,010 9,946 259,763 11,440 2009 248,790 19,824 11,686 280,300 12,439 2010 2,083,970 150,340 25,263 2,259,573 149,879 2009 2,087,552 121,016 32,339 2,240,907 171,088 Total Total * ** - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 87,531 14,174 - - - - - - - - - - 26,979 70,413 67,738 59,950 73,575 64,038 49,050 - - - - - - - - - - - - - - - - - 816,709 648,936 17% 11% 2% 2% 10,903 24,889 187,458 - 35,671 8,847 5,949 2,591 - 2,591 13,872 5,825 18,685 2,591 - - - - - - - - - - - - 416,077 369,996 152,017 313,267 204,343 292,237 323,118 334,445 289,889 295,330 172,612 24,889 2,606,953 36,617 - 2,448,612 6% - 15% 5% 16% 12% 11% 3% 4% 2% 14% 8% 12% 6% 6% - 9% 2% 4% 1% - 1% 4% 2% 6% 1% 7% 1% During the year, the Key Management Personnel has either resigned or been appointed. Please refer to the following page for details. Remuneration up to 30 June 2010, as Mr Radotic was reposted to a new role, where he is no longer classified as a KMP. 28 The following are Key Management Personnel of the Group: Executive Director n N Montarello (Chairman, Managing Director and Chief Executive Officer, ThinkSmart Limited) P Mansell (Chairman, ThinkSmart Limited) – resigned 22 May 2010 Non-Executive Director n n D Griffiths (Deputy Chairman, ThinkSmart Limited) – appointed Deputy Chairman 22 May 2010 n S Penglis (Non-Executive Director, ThinkSmart Limited) n F de Vicente (Non-Executive Director, ThinkSmart Limited) – appointed to Board on the 7 April 2010 A Baum (Group Chief Operating Officer, ThinkSmart Limited) – appointed 1 September 2010 Executives n n N Barker (Group Chief Financial Officer, ThinkSmart Limited) n S McDonagh (Executive General Manager, RentSmart Unit Trust) – resigned 23 July 2010 n M Radotic (General Manager Sales & Marketing Continental Europe, RentSmart Limited) – ceased being a KMP after reposting as General Manager Customer Care, RentSmart Unit Trust, on the 1 July 2010 n G Varma (Group Chief Information Officer, ThinkSmart Limited) n G Parry (Managing Director - UK, RentSmart Limited) C. SERVICE AGREEMENTS - AUDITED Service agreements can provide for the provision of short-term performance incentives, eligibility for the ThinkSmart ESOP, other benefits including the use of a Company motor 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 been extended to a fixed term of 3 years to 28 August 2012. All other employment agreements are unlimited in term but capable of termination with one to three months’ notice by either the Company or the executive. The Company can make a payment in lieu of notice. In the event of retrenchment, the executives listed in the table on page 28 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. D. SHARE BASED COMPENSATION (OPTIONS) - AUDITED All options refer to options over ordinary shares of ThinkSmart Limited, which are exercisable on a one-for-one basis under the Employee Share Options Plan (“ESOP”). Options and rights over equity instruments granted as compensation – audited Details on options over ordinary shares in the Company that were granted as compensation to each key management person during the reporting period and details on options that vested during the reporting period are as follows: 29 ANNUAL REPORT 2011DIRECTORS’ REPORT No of options granted during 2010 Grant date Fair value per option at grant date ($) Exercise price per option ($) Expiry date No of options vested during 2010 1,000,000 05/05/2010 0.2746 1.11 31/12/2014 333,333 333,333 100,000 100,000 200,000 01/09/2010 05/05/2010 05/05/2010 05/05/2010 05/05/2010 0.2287 0.2746 0.2746 0.2746 0.2746 1.11 1.11 1.11 1.11 1.11 31/12/2014 31/12/2014 31/12/2014 31/12/2014 31/12/2014 - - - - - - DIRECTORS N Montarello EXECUTIVES A Baum N Barker M Radotic G Varma G Parry No options are granted since the end of the financial year. The options are provided at no cost to the recipients. Modification of terms of equity-settled share-based payment transactions - audited No terms of equity-settled share-based payment transactions (including options and rights granted as compensation to a key management person) have been altered or modified by the issuing entity during the reporting period or the prior period. Exercise of options granted as compensation - audited During the reporting period, the following shares were issued as a result of the exercise of options in the 2010 financial year. EXECUTIVES N Barker No of shares Amount paid $/share 280,000 0.625 30 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 of shares Grant Date % vested in year % forfeited in year (a) Financial year in which grant vest DIRECTORS N Montarello EXECUTIVES A Baum N Barker S McDonagh M Radotic G Varma G Parry 1,400,000 1,000,000 1,000,000 333,333 *280,000 160,000 120,000 500,000 333,333 300,000 160,000 120,000 300,000 100,000 *280,000 150,000 100,000 160,000 120,000 300,000 200,000 28/08/2006 30/06/2009 05/05/2010 01/09/2010 05/01/2006 17/04/2007 17/04/2007 30/06/2009 05/05/2010 30/06/2009 17/04/2007 17/04/2007 30/06/2009 05/05/2010 05/01/2006 30/06/2009 05/05/2010 17/04/2007 17/04/2007 30/06/2009 05/05/2010 -% -% -% -% 33% -% -% -% -% -% -% -% -% -% 33% -% -% -% -% -% -% -% -% -% -% -% -% -% -% -% 100% -% -% -% -% -% -% -% -% -% -% -% 2009 2012 2012 2013 2010 2009 2009 2012 2013 2012 2009 2009 2012 2013 2010 2012 2013 2009 2009 2012 2013 (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. * Option series vest equally over 3 years on 1 January 2008, 2009 and 2010. 31 ANNUAL REPORT 2011 DIRECTORS’ REPORT 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. Granted in year $ (a) Exercised in year $ (b) Lapsed in year $ (c) DIRECTORS N Montarello EXECUTIVES A Baum N Barker S McDonagh M Radotic G Varma G Parry Total 274,600 76,233 91,533 - 27,460 27,460 54,920 - - 56,200 - - - - - - - 87,000 - 19,600 - 552,206 56,200 106,600 (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. E. SHARE BASED COMPENSATION (SHARES) - AUDITED All shares refer to shares over ordinary shares of ThinkSmart Limited. Shares granted as compensation – audited Details on shares of the Company that were granted as compensation to each key management person during the reporting period and details on shares vested during the reporting period are as follows: No of shares Grant Date Fair value at grant Vesting period No of shares vested granted during 2010 date ($) during 2010 EXECUTIVES A Baum 350,000 01/09/2010 0.64 3 years - No shares are granted since the end of the financial year. The shares are provided at no cost to the recipient. These shares were issued to A Baum upon him joining ThinkSmart Ltd and are held in escrow. The shares are ordinary shares in the Company and will vest upon completion of a 3-year service period. During this period, Mr Baum is entitled to any dividends declared by the Company and normal voting rights are attached. In the event that Mr Baum’s employment with the 32 Company ceases before the vesting period (i.e. through resignation or termination), the shares will be cancelled. If Mr Baum is retrenched by the Company due to changes in the Company’s structure or operations, he will be entitled to retain the shares and they will become immediately unconditional if this occurs before the escrow period expires. Analysis of shares granted as compensation - audited Details of vesting profiles of the shares 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. Shares granted No of shares Grant Date % vested in year % forfeited in Financial year in year (a) which grant vest EXECUTIVES A Baum 350,000 01/09/2010 -% -% 2013 (a) The % forfeited in the year represents the reduction from the maximum number of shares available to vest due to the highest level service criteria not being achieved. Analysis of movement of shares - audited The movement during the reporting period, by value of 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. EXECUTIVES A Baum Total Granted in year $ (a) Vested in year $ (b) Lapsed in year $ (c) 224,000 224,000 - - - - (a) The value of shares granted in the year is the fair value of the shares as determined in reference to the prevailing market price of the Company’s shares on the ASX. (b The value of shares vested during the year is calculated as the market price of shares of the Company on the ASX as at close of trading on the date the shares were vested. (c) The value of the shares that lapsed during the year represents the benefit forgone and is determined in reference to the prevailing market price of the Company’s shares on the ASX at the date the shares lapsed, with no adjustments for whether the service criteria had been achieved. 33 ANNUAL REPORT 2011DIRECTORS’ REPORT F. 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: DIRECTORS N Montarello EXECUTIVES N Barker S McDonagh M Radotic G Varma G Parry Short term incentive bonus Included in remuneration $ (a) Maximum entitlement $ % vested in year % forfeited in year (b) 48,000 240,000 26,000 22,425 17,816 15,089 21,010 130,000 78,000 63,429 50,297 63,429 20% 20% 29% 28% 30% 33% 80% 80% 71% 72% 70% 67% (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 2010 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 S Penglis. 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. The external auditors, CEO and CFO, are invited to the Audit Committee meetings at the discretion of the Committee. The external auditor met with the Audit Committee and the Board of Directors twice during the year without management being present. 34 Risk management The Committee’s specific function with respect to risk management is to review and report to the Board that: n the Company’s ongoing risk management program effectively identifies all areas of potential risk; n adequate policies and procedures have been designed and implemented to manage identified risks; 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). Internal audit The Committee has the responsibility of: n reviewing the internal audit objectives and resourcing (including determining whether the internal audit function is to be provided by an internal or external party provider); ensuring an appropriate program of internal audit activity is conducted each financial year; reviewing and monitoring the progress of an internal audit and work program (without the presence of management); overseeing the coordination of the internal and external audit; and evaluating and critiquing management’s responsiveness to internal audit finding and recommendations. n n n n Financial reporting The Chief Executive Officer and the Chief Financial Officer have 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. Assessment of effectiveness of risk management The Audit and Risk Committee is responsible for approving the internal audit plan to be conducted each financial year and for the scope of the work to be performed. An independent review to assess and evaluate the quality of the internal audit function is undertaken once every two years. ETHICAL STANDARDS All directors, managers and employees are expected to act with the utmost integrity and objectivity, striving at all times to enhance the reputation and performance of the 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. 35 ANNUAL REPORT 2011DIRECTORS’ REPORT Where the Board believes that a significant conflict exists for a director on a Board matter, the director concerned does not receive the relevant Board papers and is not present at the meeting whilst the item is considered. Details of director related entity transactions with the Company and the Group are set out in note 31 to the financial statements. Code of conduct ThinkSmart has developed a Code of Conduct which states ThinkSmart’s and its employees’ commitment to the conduct of its business with employees, customers, funders, retailers and other external parties. The Code is directed at maintaining high ethical standards and integrity. Employees are expected to adhere to 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 directors and employees 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. The Guidelines establish a ‘window period’, where, generally, Relevant Persons may buy or sell ThinkSmart’s securities on ASX the announcement of half-yearly results; in the period from 31 days from the day following: n n n the holding of the annual general meeting, the announcement of annual results; or 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 n n n a director must receive approval from the Chair of the Board; the Chair must receive approval from the Board or the most senior director; executives and senior management must receive approval from the CEO; and all other Relevant persons must receive approval from the Company Secretary. The Guidelines also prohibit short term dealing (buying and selling within 3 months) in ThinkSmart securities by Relevant Persons. 36 DISCLOSURE POLICY ThinkSmart understands its obligations under the ASX Listing Rules and Corporations Act 2001 to keep the market fully informed of information which may have a material effect on the price or value of ThinkSmart’s securities. ThinkSmart has adopted a Disclosure Policy which sets out its policy to strictly comply with the continuous disclosure requirements. 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 time that should be considered for release to the market, it must be reported immediately to the CEO, or the Group CFO / Company Secretary. n Operating and divisional heads and group functional 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. In summary, the Continuous Disclosure Policy operates as follows: n Information is communicated to shareholders through ASX announcements, the annual report, annual general meeting and half year and full year results announcements. n Shareholders are able to access information, including media releases, key policies and the terms of reference of the Board Committees through ThinkSmart’s website. All relevant ASX announcements will be posted on 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. PRINCIPAL ACTIVITIES The Group’s principal activity in the course of the financial year was to arrange finance for the renting of equipment in Australia and Europe. 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 $6,773,013 (2009: $5,171,776). The period has seen the Group improve EBITDA by 12%, from $11.9m to $13.3m, or 21% if the impact of the strengthening Australian dollar on translation of offshore earnings is ignored. EBITDA in the second half of 2010 was 34% higher than the first half as a result of increased volumes and improved margins in Australia and the launch of the new Infinity consumer product in the UK. The investments in core technology in the last 2 years continue to deliver operational efficiencies across the Group with the cost of doing business reducing by 17% in the year. The Australian operations has increased its EBITDA contribution by 34% from 45% higher settled volumes and a 12% increase in operating costs, whilst increasing revenue by 30%. 37 ANNUAL REPORT 2011 Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 no contraventions of the auditor independence require- ments as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG Partner Perth Denise McComish 18 February 2011 To: the directors of ThinkSmart Limited I declare that, to the best of my knowledge and belief, in re- lation to the audit for the financial year ended 31 December 2010 there have been: DIRECTORS’ REPORT The UK operations result was impacted by the expenses relating to the establishment of capacity to introduce the Infinity consumer product. Total revenue was unchanged for the year at £7.3m and EBITDA reduced by 8% with a small positive contribution from the first 2 months of Infinity volumes. Settled volumes of the SmartPlan B2B product were down 12%, the impact of which was offset by the 12% increase in average transaction volumes. Revenues from inertia increased by 5% for the year. The successful launch of the services based Infinity product with Dixons in UK provides a benchmark for future product development initiatives across the Group. The Group has increased its distribution channels in existing markets through signing of retail operating agreements in Italy with Computer Discount in addition to extending existing retailer agreements with JB HiFi and Dick Smith in Australia and Dixons in UK. 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. DIVIDENDS Dividends paid or declared by the Company to members since the end of the previous financial year were: Declared and paid during the year 2010 Final 2009 ordinary 2.0 1,937,788 100% Franked 23 April 2010 Cents per share Total amount Franked/ Date of payment unfranked Declared after year end 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 2010 ordinary 3.5 4,545,779 45% Franked 29 April 2011 The financial effect of these dividends has not been brought to account in the financial statements for the year ended 31 December 2010 and will be recognised in subsequent financial reports. Dividends have been dealt within the financial report as: Declared and paid during the year 2010 Final 2009 ordinary Note Total amount ($) 20(c) 1,937,788 SIGNIFICANT EVENTS AFTER THE BALANCE DATE 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 other than the announcement on 17 February 2011 confirming ThinkSmart had executed an Operating Agreement for GBP40m of new financing facilities in UK and received credit approval from a major Australian bank for a AUD$100m securitisation facility in Australia. 38 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, Australia and New Zealand. In mainland Europe the Group will continue to execute a multi- channel retailer model akin to the Australian business which should deliver market share gains in selected territories. There will be an increased focus on direct origination of new business through online retail distribution. 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. 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 Securities Exchange in accordance with s205G(1) of the Corporations Act 2001, at the date of this report is as follows: N Montarello S Penglis D Griffiths F de Vicente ThinkSmart Limited Number of ordinary shares Number of options granted over 22,020,297 1,272,600 2,160,000 - ordinary shares 2,000,000 - - - SHARE OPTIONS Options granted to directors and officers of the Company During or since the end of the financial year, the Company granted options for no consideration over unissued ordinary shares in the Company to the following directors and to the following of the five most highly remunerated officers of the Company as part of their remuneration: DIRECTORS N Montarello EXECUTIVES N Barker A Baum G Varma G Parry No of options granted Exercise price Expiry date 1,000,000 333,333 333,333 100,000 200,000 $1.11 $1.11 $1.11 $1.11 $1.11 31/12/2014 31/12/2014 31/12/2014 31/12/2014 31/12/2014 All options were granted during the financial year. No options have been granted since the end of the financial year. 39 ANNUAL REPORT 2011 DIRECTORS’ REPORT Shares granted to directors and officers of the Company During or since the year end of the financial year, the Company granted shares for no consideration to the following directors and to the following of the five most highly remunerated officers of the Company as part of their remuneration: EXECUTIVES A Baum *Shares are escrowed for 3 years until 1 September 2013. 350,000* $0.64 1/09/2013 No of options granted Share price at grant date Vesting date All shares were granted during the financial year. No shares have been granted since the end of the financial year. 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 840,000 Amount paid on each share $0.625 Unissued shares under options At the date of this report, unissued ordinary shares of the Company under option are: Number of shares under option Exercise price of options Expiry date of options 480,000 480,000 2,900,000 2,433,333 $1.375 $3.00 $0.62 $1.11 31 December 2011 31 December 2011 31 December 2013 31 December 2014 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 pages 22 to 34. These options do not entitle the holder to participate in any share issue of the Company or any other body corporate. 40 INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS In accordance to the Company’s constitution, the Company must indemnify its directors and officers on a full indemnity basis and to the full extent permitted by law against all liabilities incurred by the directors and officers in their capacity as an officer of the Company or of a related body corporate. 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 Act 2001. The contract of insurance prohibits disclosure of 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 auditor; and n The non-audit services provided do not undermine the 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 25. AUDITOR’S INDEPENDENCE DECLARATION The auditor’s independence declaration which forms part of this report, is included in page 42 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 N Montarello Director Perth, 18 February 2011 41 ANNUAL REPORT 2011AUDITOR’S INDEPENDENCE DECLARATION Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To: the directors of ThinkSmart Limited I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 31 December 2010 there have been: (i) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and (ii) no contraventions of any applicable code of professional conduct in relation to the audit. KPMG Denise McComish Partner Perth 18 February 2011 42 DIRECTORS’ DECLARATION 1. In the opinion of the Directors of ThinkSmart Limited (the “Company”): a) The consolidated 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 19 to 96, are in accordance with the Corporations Act 2001, including: I. Giving a true and fair view of the Group’s financial position as at 31 December 2010 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; and c) 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 2010. Signed in accordance with a resolution of the directors: N Montarello Director Perth, 18 February 2011 43 ANNUAL REPORT 2011CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2010 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 Insurance costs Other expenses EBITDA - results before interest, tax, depreciation and amortisation Finance costs Foreign exchange loss Depreciation expense EBTA – results before amortisation and income tax (expense) Amortisation of intangibles Profit before Tax Income tax expense Profit from continuing operations Other comprehensive income Notes 6(a) 6(b) 6(f) 6(e) 6(c) 6(d) 7 2010 $ 2009 $ 42,110,562 36,755,199 (10,908,454) (11,040,118) (10,520,320) (7,119,362) (1,062,593) (1,042,872) (662,027) (239,514) (682,473) (656,468) (713,383) (244,175) (706,689) (475,590) (2,594,617) (2,046,496) (207,847) (151,335) (1,319,156) (1,333,339) 13,257,093 11,881,840 (530,591) (492,911) (465,167) (992,980) (603,651) (555,159) 11,768,424 9,730,050 (2,053,385) (2,096,726) 9,715,039 7,633,324 (2,942,026) (2,461,548) 6,773,013 5,171,776 Foreign currency translation differences for foreign operations Other comprehensive income for the period, net of income tax Total comprehensive income for the period attributable to owners of the Company (1,337,529) (1,065,883) (1,337,529) (1,065,883) 5,435,484 4,105,893 Earnings per share Basic (cents per share) Diluted (cents per share) 31 31 6.52 6.29 5.35 5.26 The attached notes form an integral part of these consolidated financial statements. 44 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2010 Notes 2010 $ 2009 $ 22(a) 21,186,022 Current Assets Cash and cash equivalents Trade and other receivables Inventories Prepayment Other Total Current Assets Non-Current Assets Deposits held by funders Prepayments Plant and equipment 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 Deferred tax liability Other Total Non-Current Liabilities Total Liabilities Net Assets Equity Issued Capital Reserves Accumulated profits/(losses) Total Equity The attached notes form an integral part of these consolidated financial statements. 8 9 10 11 8 12 13 15 16 7 18 19 7 20 21 2,582,338 57,707 3,276,469 394,083 5,468,171 1,740,369 74,586 4,315,120 310,615 27,496,619 11,908,861 6,737,156 2,372,572 1,120,251 4,348,343 3,540,774 287,676 731,609 2,953,610 1,091,334 3,775,984 4,177,746 100,550 18,406,772 12,830,833 45,903,391 24,739,694 4,825,478 2,489,944 521,144 7,836,566 367,698 - 367,698 8,204,264 3,549,365 2,494,222 333,344 6,376,931 198,387 493 198,880 6,575,811 37,699,127 18,163,883 39,615,239 23,614,091 (4,135,736) (2,834,607) 2,219,624 (2,615,601) 37,699,127 18,163,883 45 ANNUAL REPORT 2011CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2010 Consolidated Fully paid ordinary shares $ Equity settled employee benefits reserve $ Foreign currency translation reserve $ Accumulated (Losses)/ Profit $ Attributable to equity holders of the parent $ Balance at 1 January 2009 23,614,091 147,142 (1,968,454) (4,886,695) 16,906,084 Exchange differences arising on translation of foreign operations Net income recognised directly in equity Profit for the period Total comprehensive income for the period Transactions with owners of the Company, recognised directly in equity Contributions by and distributions to owners of the Company Dividends paid Recognition of share-based payments - - - - - - - - - - - 52,584 (1,065,879) (1,065,879) - - (1,065,879) (1,065,879) - 5,171,776 5,171,776 (1,065,879) 5,171,776 4,105,897 - - (2,900,682) (2,900,682) - 52,584 Balance at 31 December 2009 23,614,091 199,726 (3,034,333) (2,615,601) 18,163,883 Balance at 1 January 2010 23,614,091 199,726 (3,034,333) (2,615,601) 18,163,883 - - - - (5,176) (1,332,353) (5,176) (1,332,353) - - (1,337,529) (1,337,529) - - 6,773,013 6,773,013 (5,176) (1,332,353) 6,773,013 5,435,484 Exchange differences arising on translation of foreign operations Net income recognised directly in equity Profit for the period Total comprehensive income for the period Transactions with owners of the Company, recognised directly in equity Contributions by and distributions to owners of the Company Issue of ordinary shares, net of after tax capital raising costs Share options exercised Dividends paid Share-based payments held in escrow 224,000 (224,000) Recognition of share-based payments - 260,400 15,252,148 525,000 - - - - - - - - - - - 15,252,148 525,000 (1,937,788) (1,937,788) - - - 260,400 Balance at 31 December 2010 39,615,239 230,950 (4,366,686) 2,219,624 37,699,127 The attached notes form an integral part of these consolidated financial statements. 46 CONSOLIDATED STATEMENT OF CASH FLOW FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2010 Cash Flows from Operating Activities Receipts from customers Payments to suppliers and employees Interest received Interest paid Income tax paid Notes 2010 $ 2009 $ 36,882,735 37,008,698 (28,668,294) (27,195,464) 437,417 (121,109) 67,339 (112,694) (1,722,399) (2,451,419) Net cash from operating activities 22(b) 6,808,350 7,316,460 Cash Flows from Investing Activities Payments for plant and equipment Proceeds from sale of plant and equipment Payment for intangible assets – Software Payment for intangible assets – Contract rights Net cash used in investing activities Cash Flows from Financing Activities Hire purchase and lease finance repaid Finance charges Proceeds from rights issue Payment for equity raising cost Proceeds from exercise of share options Dividend paid Net cash from/(used in) financing activities Net increase in cash and cash equivalents Effect of exchange rate fluctuations on cash held (625,535) 132,611 (464,937) - (1,182,736) (1,526,957) (1,551,111) - (3,226,771) (1,991,894) (3,543) (846,899) 16,000,000 (1,068,354) 525,000 (112,593) (930,066) - - - (1,937,788) (2,900,682) 12,668,416 (3,943,341) 16,249,995 1,381,225 (532,144) (460,425) Cash and cash equivalents at beginning of the financial year 5,468,171 Net available cash and cash equivalents at the end of the financial year 22(a) 21,186,022 Restricted cash and cash equivalent at the end of the financial year (2,917,361) 4,547,371 5,468,171 - Total cash and cash equivalent at the end of the financial year 18,268,661 5,468,171 The attached notes form an integral part of these consolidated financial statements. 47 ANNUAL REPORT 2011NOTES TO THE FINANCIAL STATEMENTS 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 2010 comprise of the Company and its subsidiaries (the “Group”). The Group’s principal activity is to arrange finance for renting of equipment in Australia, New Zealand and Europe. 2. BASIS OF PREPARATION A) STATEMENT OF COMPLIANCE The consolidated financial statements are general purpose financial statements which have been prepared in accordance with the Australian Accounting Standards (AASBs) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial statements comply with International Financial Reporting Standards (IFRSs) and interpretations adopted by the International Accounting Standards Board (IASB). The consolidated financial statements were authorised for issue by the Board of Directors on 18 February 2011. B) 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 on the fair values of the consideration given in exchange for assets. All amounts are presented in Australian Dollars unless otherwise noted. C) FUNCTIONAL AND PRESENTATION CURRENCY These consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency. D) CHANGES IN ACCOUNTING POLICIES Information regarding changes to the accounting policies of the Group are found as follows: - - Business combination – note 3(b) Consolidation – note 3(b) E) REMOVAL OF PARENT ENTITY FINANCIAL STATEMENTS The Group has applied amendments to the Corporations Act (2001) that remove the requirement for the Group to lodge parent entity financial statements. Parent entity financials statements have been replaced by the specific parent entity disclosures in note 32. F) ACCOUNTING POLICIES AVAILABLE FOR EARLY ADOPTION NOT YET ADOPTED A number of new standards and interpretations are effective for annual periods beginning after 1 July 2010 and have not been applied in preparing this financial report. None of these are expected to have material effect on the financial report of the Group, except for IFRS 9 Financial Instruments, which becomes mandatory for the Group’s 2014 financial report and could change the classification and measurement of financial assets. The extent of the impact has not been determined. 48 3. SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities, except as explained in note 2(d), which address changes in accounting policies. Certain comparative amounts have been reclassified to conform with the current year’s presentation (see note 6(g)). A) BASIS OF CONSOLIDATION The consolidated financial statements incorporate the financial statements of the company and entities controlled by the company (its subsidiaries). Control is achieved when the company has the power to govern the financial and operating policies of an entity so as to obtain the benefits from its activities. The results of 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. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with those by other members of the Group. All intra-group balances, transactions, income and expenses are eliminated in full on consolidation. B) BUSINESS COMBINATIONS Change in accounting policy The Group has adopted revised AASB 3 Business Combinations (2009) and amended AASB 127 Consolidated and Separate Financial Statements (2009) for business combinations occurring in the financial year starting 1 January 2010. All business combinations occurring on or after 1 January 2010 are accounted for by applying the acquisition method. The change in accounting policy is applied prospectively and has had no material impact on earnings per share, or any other disclosures in this financial report. For every business combination, the Group identifies the acquirer, which is the combining entity that obtains control of the other combining entities or businesses. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable. The acquisition date is the date on which control is transferred to the acquirer. Judgement is applied in determining the acquisition date and determining whether control is transferred from one party to another. Measuring goodwill The Group measures goodwill as the fair value of consideration transferred including the recognised amount of any non- controlling interest in the acquiree, less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. Consideration transferred includes the fair values of the asset transferred, liabilities incurred by the Group to the previous owners of the acquiree, and equity interests issued by the Group. Consideration transferred also includes the fair value of any contingent consideration and share-based payment awards of the acquiree that are replaced mandatorily in the business combination (see below). Share-based payment awards When share-based payment awards exchanges (replacement awards) for awards held by acquiree’s employees (acquiree’s awards) relate to past services, then a part of the market-based measure of the awards replaced is included in the consideration 49 ANNUAL REPORT 2011NOTES TO THE FINANCIAL STATEMENTS transferred. If they require future services, then the difference between the amount included in consideration transferred and the market-based measure of the replacement awards is treated as post-combination compensation cost. Contingent liabilities A contingent liability of the acquiree is assumed in a business combination only if such a liability represents a present obligation and arises from a past event, and its fair value can be measured reliably. Non-controlling interest The group measures any non-controlling interest at its proportionate interest in the identifiable net assets of the acquiree. Transaction costs Transaction costs that the Group incurs in connection with a business combination, such as finder’s fees, legal fees, due diligence fees, and other professional and consulting fees, are expensed as incurred. C) CASH AND CASH EQUIVALENTS 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 Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property, plant and equipment have different useful lives they are accounted for as separate items (major components) of property, plant and equipment. The gain or loss on disposal of an item of property, plant and equipment is determined by comparing the proceeds from disposal with the carrying amount of the property, plant and equipment, and is recognised net within other income/other expenses in profit or loss. Depreciation Depreciation is based on the cost of an asset less its residual value. Significant component of individual assets are assessed and if a component has a useful life that is different from the remainder of the asset, that component is depreciated separately. Depreciation recognised in profit or loss on a straight-line basis over the estimated useful lives of each component of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. 50 The following estimated useful lives are used in the calculation of depreciation: - Office furniture, fittings, equipment and computers Leasehold improvements - - Self-funded rental assets - Motor vehicles - Leased computer equipment and software 2.5 to 5 years the lease term 2.5 to 5 years 5 years 2.5 to 5 years Depreciation methods, useful lives and residual values are reviewed at each reporting date. 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. 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 entity becomes obliged to make future payments resulting from the purchase of goods and services. G) INVESTMENTS Investments in controlled entities 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 measured 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. 51 ANNUAL REPORT 2011 NOTES TO THE FINANCIAL STATEMENTS Loans and receivables Trade receivables, loans, and other receivables are recorded at amortised cost less impairment. Insurance prepayment 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. Where a policy is cancelled, the unexpired premiums are refunded to RentSmart Limited. I) IMPAIRMENT OF ASSETS Financial assets A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss 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 financial assets are assessed collectively in groups that 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 financial assets that are equity securities, the reversal is recognised directly in other comprehensive income. Non-financial assets The carrying amounts of the Group’s non-financial assets, 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. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value 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 testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units that are expected to benefit from the synergies of the combination. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in 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. 52 An impairment loss in respect of goodwill is not reversed. 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. J) INTANGIBLE ASSETS Intellectual property Intellectual property is recorded at the cost of acquisition over the fair value of the identifiable net assets acquired, and is amortised on a straight line basis over 20 years. 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. Inertia Assets At the conclusion of the initial rental period, the 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. 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. Contract Rights The contractual rights obtained by the Group under financing agreements entered into with its funding partners and retail partners constitute intangible assets with finite useful lives. These contract rights are recognised initially at cost and amortised over their expected useful lives. In relation to funder contact rights, the expected useful life is the earlier of the initial contract term or expected period until facility limit is reached. At each reporting date a review for indicators of impairment is conducted. Software development 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 has been tested and is ready for use in the manner intended by management. Software development expenditure is capitalised only if the development costs can be measured reliably, the product process is technically and commercially feasible, 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 impairment losses. 53 ANNUAL REPORT 2011NOTES TO THE FINANCIAL STATEMENTS 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) is less than the carrying amount of the CGU (or group of CGUs), the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU (or group of CGUs) and then to the other assets of the CGU (or group of CGUs) pro-rata on the basis of the carrying amount of each asset in the CGU (or CGUs). The impairment loss recognised for goodwill is recognised immediately in the profit or loss and is not reversed in the subsequent period. 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. L) GOVERNMENT GRANTS Government grants are assistance by the Government in 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 The grant date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market 54 vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do not meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. 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: Commission income Commission receivable from funders is recognised at the time finance approval is given to the customer, adjusted for an allowance for loans not expected to proceed to a contract by the funder. 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. • Ongoing rental income Where the asset acquired from the funder is rented to third parties the income from that rental is brought to account when the control of the right to receive this income is attained and can be reliably measured, usually on a monthly basis. No ongoing rental income is brought to account in respect of the unexpired rental contracts. Income earned from sale of equipment • Where the asset acquired is sold the net sale proceeds are brought to account at the time of the sale. Insurance income Commission income includes commissions received on insurance policies issued by third party insurers to cover theft and damage of rental equipment. In UK, a proportion of the insurance income is recognised at inception on the basis of stage of completion of the service, with the remaining income recognised over the life of the policy. The revenue recognition policy for the Australian insurance income is consistent with the treatment of commission income from funders. P) FINANCIAL INSTRUMENTS Non-derivative financial assets The group initially recognises loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the right to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the group is recognised as a separate asset or liability. 55 ANNUAL REPORT 2011NOTES TO THE FINANCIAL STATEMENTS Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Non-derivative financial liabilities The Group initially recognises debt securities issued and subordinated liabilities on the date that they are originated. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest rate method. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. 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 and tax offsets can be utilised. However, deferred tax 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. 56 Deferred tax assets arising from deductible temporary 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. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the 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. Tax consolidation The Company and its wholly owned Australian resident entities formed a tax-consolidated group during 2009. As a consequence, all members of the tax-consolidated group are taxed as a single entity from 1 January 2009. The head entity within the tax- consolidated group is ThinkSmart Ltd. R) GOODS AND SERVICES TAX Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST) except: i) where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; and ii) receivables and payables which are recognised inclusive of GST. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables. Cash flows are included in the statement of cash flows on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows. 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. Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is 57 ANNUAL REPORT 2011NOTES TO THE FINANCIAL STATEMENTS the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the year. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are presented in profit or loss on a net basis, except for differences arising on the retranslation of a financial liability designated as a hedge of the net investment in a foreign operation that is effective, which are recognised in other comprehensive income. Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to the functional currency at exchange rates at the reporting date. The income and expenses of foreign operations, excluding foreign operations in hyperinflationary economies, are translated to Australian dollars at exchange rates at the dates of the transactions. The income and expenses of foreign operations in hyperinflationary economies are translated to the functional currency at the reporting date. Prior to translating the financial statements of foreign operations in hyperinflationary economies, their financial statements for the current period are restated to account for changes in the general purchasing power of the local currency. The restatement is based on relevant price indices at the reporting date. Foreign currency differences are recognised in other comprehensive income, and presented in the foreign currency translation reserve in equity. However, if the operation is a non-wholly-owned subsidiary, then the relevant proportionate share of the translation difference is allocated to the non-controlling interests. When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to the profit or loss as part of the gain or loss on disposal. When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to non-controlling interests. When the Group disposes of only part of its investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion of the cumulative amount is classified to profit or loss. T) EARNINGS PER SHARE Basic earnings per share 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 shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. U) CORPORATE DEVELOPMENT COSTS Corporate developments costs are expensed as incurred in investing in new markets and primarily comprise of salary costs, travel, consultancy and trademark protection. 58 V) PROVISIONS A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligations. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. 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 are known. 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. Finance expenses comprise interest expense on borrowings, unwinding of the discount on provisions, dividends on preference shares classified as liabilities, 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 basis. Y) SEGMENT REPORTING An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. All operating segments’ operating results are regularly reviewed by the Group’s CEO to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. 59 ANNUAL REPORT 2011NOTES TO THE FINANCIAL STATEMENTS 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 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)). Trade and other receivables 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). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value. The fair value of employee shares provided as compensation is measured using the closing share price on the date the shares are granted. Contingent consideration The fair value of contingent consideration is calculated using the income approach based on the expected payment amounts and their associated probabilities (i.e. probability-weighted). Since the contingent consideration is long-term in nature, it is discounted to present value. 60 4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the application of the Group’s accounting policies, which are described in note 3, management is required 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 which form the basis of making the judgments. Actual results may differ from these estimates. 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 2009. a) Key sources of estimation uncertainty and critical judgements in applying the entity’s accounting policies 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 which the estimate is revised and in any future periods affected. 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 n Note 15 – recoverable amount of intangible assets n Note 7 – utilisation of tax losses n Note 20 – measurement of share based payments n Note 26 and 27 – contingent assets and liabilities n Note 18 – Provision for employee entitlements 61 ANNUAL REPORT 2011NOTES TO THE FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT Overview The Group has exposure to the following risks from the use of financial instruments: n Credit risk n Liquidity risk n Market risk n Operational risk This note presents information about the Group’s exposure to each of the above risks, the objectives, policies and processes for measuring and managing risks, and the management of capital. Further quantitative disclosures are included throughout this financial report. The Board of Directors has overall responsibility for the 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 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 Group’s activities. The Group, through its training and management standards and procedures, aims 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 Group’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Audit and Risk Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit and Risk Committee. 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 arises 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. In most cases, 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 Group’s credit risk exposure to funder deposits are more concentrated, however the counterparties are regulated banking institutions and the credit risk exposure is assessed as low. The Group closely monitors the credit risk associated with each funder deposit counterparty. The Group assesses the impairment of receivables on an individual basis. The carrying amount of financial assets recorded in the financial statements, net of any allowances for losses, represents the Group’s maximum exposure to credit risk. Guarantees Group policy is to provide financial guarantees only to wholly-owned subsidiaries. Details of outstanding guarantees are provided in note 32. 62 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 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 is payable at ANZ’s reference rate. n Secured bill acceptance facility of $5,000,000, in which $2,500,000 is presently drawn down. Interest is payable at prevailing bank rate. n Other operational facilities are set out in note 22 (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. Interest on borrowings is denominated in currencies that match the cash flows generated by the underlying operations of the Group, primarily AUD, but also GBP and EUR. This provides an economic hedge and no derivatives are entered into. Liabilities incurred in each respective geographical territory are paid for by the cash flows of the functional currency of that territory. Exposures for singular transactions greater than $50,000 are considered for 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 (2009: 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 into. In respect of other monetary assets and liabilities 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 interest-bearing 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. 63 ANNUAL REPORT 2011NOTES TO THE FINANCIAL STATEMENTS Operational risk Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Group’s processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Group’s operations. The Group’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group’s reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity. The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall group standards for the management of operational risk in the following areas: n Requirements for appropriate segregation of duties, including the independent authorisation of transactions n Requirements for the reconciliation and monitoring of transactions n Compliance with regulatory and other legal requirements n Documentation of controls and procedures n Requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified Training and professional development n Development of business continuity plans n n n Risk mitigation, including insurance where this is effective Ethical and business standards 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 constantly changing, management may change the amount of dividends to be paid to shareholders, return of capital to shareholders, issue new shares or sell assets to reduce debt. The Group’s debt-to-adjusted capital ratio at the end of the reporting period was as follows: Total liabilities Less cash and cash equivalents Net debt/(cash) Total equity Less adjustments Adjusted capital Debt-to-adjusted capital ratio at 31 December 2010 $ 8,204,261 21,186,022 (12,981,761) 2009 $ 6,575,811 5,468,171 1,107,640 37,699,127 18,163,883 - - 37,699,127 18,163,883 - 0.06 The Board encourages employees to hold shares in the Company. At present employees hold 22.8% (2009: 23.7%) of ordinary shares. The Group is not subject to externally imposed capital requirements. For the purposes of capital management, capital consists of share capital, reserves and retained earnings. 64 6. PROFIT Profit is arrived at after crediting/(charging) the following items: a) Revenue Commission income from funders Revenue received on sale of equipment Rental income Insurance and warranty brokerage income Other revenue b) Employee benefits expense Payments to employees Employee superannuation cost 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 contract rights Amortisation of distribution network Amortisation of inertia contracts Amortisation of intellectual property Notes 2010 $ 2009 $ 25,501,346 19,972,868 4,675,138 6,076,363 5,050,340 807,375 4,959,036 5,692,057 5,120,436 1,010,802 42,110,562 36,755,199 9,321,359 9,923,028 739,670 260,400 587,025 547,730 15,727 553,633 10,908,454 11,040,118 365,650 63,827 - - 35,690 465,167 660,681 635,406 100,988 624,219 32,091 320,891 104,626 3,344 565 125,733 555,159 586,788 205,423 124,427 1,147,994 32,094 2,053,385 2,096,726 65 ANNUAL REPORT 2011 NOTES TO THE FINANCIAL STATEMENTS 6. PROFIT (CONT.) e) Finance (costs)/benefits Interest revenue – other entities – related parties Total finance benefits Interest expense – other entities – related parties Total interest costs Finance charges Total finance benefit/(cost) f) Other Expenses Gain/(Loss) on sale of property and equipment Other expenses 2010 $ 437,417 - 437,417 2009 $ 67,339 - 67,339 (121,109) (130,253) - - (121,109) (130,253) (846,899) (530,591) (930,066) (992,980) 73,866 - (1,393,022) (1,333,339) (1,319,156) (1,333,339) Other expenses comprise of other administrative expenses including postage, travel and training. g) Reclassification of items of income and expense To facilitate accurate comparison to 2010, certain items of income and expense have been reclassified as follows: 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 Insurance costs Other expenses Prior year accounts 2009 $ Reclassification $ Current year comparative 2009 $ 36,756,819 (10,522,389) (6,880,869) (1,043,357) (590,522) (244,175) (686,886) (475,184) (2,046,496) (150,355) (2,234,746) (1,620) 36,755,199 (517,729) (238,493) 485 (122,861) - (19,803) (406) - (980) (11,040,118) (7,119,362) (1,042,872) (713,383) (244,175) (706,689) (475,590) (2,046,496) (151,335) 901,407 (1,333,339) EBITDA - results before interest, tax, depreciation and amortisation 11,881,840 - 11,881,840 66 7. INCOME TAX The major components of income tax expense for the year ended 31 December are: Current income tax expense Current income tax charge Adjustment for prior period Deferred income tax expense Origination and reversal of temporary differences Adjustment for prior period Change in unrecognised temporary differences 2010 $ 2009 $ 2,562,286 1,940,806 54,694 (139,865) 348,182 (48,435) 25,299 237,447 203,476 219,684 Income tax expense/ (benefit) reported in income statement 2,942,026 2,461,548 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 - other Overseas tax losses not recognised Adjustments in respect of prior periods 9,715,039 2,914,512 12,229 30,619 (51,988) 30,394 6,260 7,633,324 2,289,997 (63,389) 91,034 (31,132) 238,649 (63,611) Income tax expense reported in the income statement 2,942,026 2,461,548 Income tax recognised directly in equity Equity raising cost 320,500 - 67 ANNUAL REPORT 2011 NOTES TO THE FINANCIAL STATEMENTS 7. INCOME TAX (CONT.) Deferred tax asset Corporate development cost Employee entitlement Equity raising cost Consulting cost Borrowing cost Plant & equipment Other Total Deferred tax liability Deals awaiting settlement Intangible assets Plant & equipment ABL servicer fee Other Total Net deferred tax asset (i) Net deferred tax liability (i) 2010 $ 477,214 194,110 553,128 2,026 13,919 241,675 133,604 2009 $ 357,444 229,988 595,340 2,702 - 1,076,351 62,029 1,615,676 2,323,854 118,225 246,732 300,424 792,637 237,680 93,039 337,274 1,515,399 331,628 144,351 1,695,698 2,421,691 287,676 367,698 100,550 198,387 (i) Deferred tax assets and deferred tax liabilities that relate to the same taxable entity has been netted off. Unrecognised deferred tax assets Deferred tax assets have not been recognised in respect of the following items: Tax losses 726,920 726,920 1,256,608 1,256,608 The deductible temporary differences and tax losses do not expire under current tax legislation. Deferred tax assets that relate to tax losses in France and USA 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 there from. 68 8. TRADE AND OTHER RECEIVABLES Note 2010 $ 2009 $ Current Trade receivables (i) Allowance for doubtful debts Deposits held by funder (ii) Sundry debtors Non-current Deposits held by funder (ii) 2,362,465 1,519,955 (112,178) (214,448) 143,398 188,653 373,816 61,044 2,582,338 1,740,369 6,737,156 6,737,156 731,609 731,609 (i) (ii) 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 28. Deposits held by funders for the servicing and management of their portfolios in the event of default. The deposits earn interest at market rates of return for similar instruments. The Group’s exposure to credit risk related to trade and other receivables is disclosed in note 28. 9. INVENTORIES Promotional stock on hand Rental asset inventory 10. PREPAYMENTS - CURRENT Insurance prepayment Retailer marketing prepayment Other prepayment 11. OTHER CURRENT ASSETS Deals awaiting settlement Other 12. PREPAYMENTS – NON CURRENT Insurance prepayment 3(h) - 57,707 57,707 1,296,775 1,004,617 975,077 1,826 72,760 74,586 2,393,154 1,148,961 773,005 3,276,469 4,315,120 394,083 - 394,083 310,131 484 310,615 3(h) 2,372,572 2,372,572 2,953,610 2,953,610 69 ANNUAL REPORT 2011 NOTES TO THE FINANCIAL STATEMENTS 13. PLANT & EQUIPMENT Gross Carrying Amount Cost or deemed cost Balance at 1 Jan 2009 Net foreign currency translation differences Additions Disposals Plant & Equipment $ Leasehold improvements $ Self funded rentals $ Web Sites $ Lease equipment & software $ Total $ 1,895,802 338,799 149,958 76,450 2,272,620 4,733,629 (154,602) (62,110) 382,680 - - - - - - - - - (22,594) (239,306) 82,257 464,937 - - Balance at 31 Dec 2009 2,123,880 276,689 149,958 76,450 2,332,283 4,959,260 Net foreign currency translation differences Additions Disposals (179,554) (41,467) 384,004 - - - - - (9,012) (230,033) 241,531 625,535 (665,179) (4,718) (149,958) (76,450) (1,636,053) (2,532,358) Balance at 31 Dec 2010 1,663,151 230,504 - - 928,749 2,822,404 Accumulated Depreciation Balance at 1 Jan 2009 (1,153,126) (140,884) (140,011) (75,157) (1,963,495) (3,472,674) Net foreign currency translation differences Disposals 98,799 38,513 - - - - - - 22,594 159,906 - - Depreciation expense (320,891) (104,626) (3,344) (565) (125,733) (555,159) Balance at 31 Dec 2009 (1,375,218) (206,997) (143,355) (75,722) (2,066,634) (3,867,926) Effect of movement in exchange rate Disposals 111,068 566,746 37,247 3,073 - - 9,010 157,325 143,355 75,722 1,684,719 2,473,615 Depreciation expense (365,650) (63,827) Balance at 31 Dec 2010 (1,063,054) (230,504) - - - - (35,690) (465,167) (408,595) (1,702,153) Net Book Value At 31 Dec 2009 At 31 Dec 2010 748,662 600,097 69,692 - 6,603 - 728 - 265,649 1,091,334 520,154 1,120,251 70 14. INTEREST IN SUBSIDIARIES Interest in Subsidiaries RentSmart Unit Trust RentSmart Pty Ltd ThinkSmart Finance Ltd (i) RentSmart Servicing (Bendigo) Pty Ltd (ii) 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 SmartPlan Spain SL ThinkSmart France SARL ThinkSmart Sweden AB ThinkSmart Italy Srl ThinkSmart Inc % of Equity 2010 2009 Country of Incorporation Australia Australia Australia Australia UK Australia New Zealand Singapore UK UK UK Spain Spain France Sweden Italy USA 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% (i) (ii) ThinkSmart Finance Ltd was incorporated on the 27 July 2010. RentSmart Servicing (Bendigo) Pty Ltd was incorporated on the 10 August 2010. 71 ANNUAL REPORT 2011NOTES TO THE FINANCIAL STATEMENTS 15. INTANGIBLE ASSETS Gross carrying amount At cost Contract rights $ Software $ Distribution network $ Intellectual Property $ Inertia Contracts $ Total $ Balance at 1 January 2009 897,506 1,814,801 563,789 641,816 3,996,366 7,914,278 Additions 300,403 1,169,748 56,806 Effect of movement in exchange rate (73,025) - (79,300) - - - 1,526,957 (562,112) (714,437) Balance at 31 December 2009 1,124,884 2,984,549 541,295 641,816 3,434,254 8,726,798 Additions 1,551,111 1,182,736 - Effect of movement in exchange rate (32,357) - (130,676) - - - 2,733,847 (523,613) (686,646) Balance at 31 December 2010 2,643,638 4,167,285 410,619 641,816 2,910,641 10,773,999 Accumulated amortisation and impairment Balance at 1 January 2009 (447,578) (365,636) (261,013) (272,774) (2,014,593) (3,361,594) Amortisation expense (205,423) (586,788) (124,427) (32,094) (1,147,994) (2,096,726) Effect of movement in exchange rate 65,028 - 48,655 - 393,823 507,506 Balance at 31 December 2009 (587,973) (952,424) (336,785) (304,868) (2,768,764) (4,950,814) Amortisation expense (635,406) (660,681) (100,988) (32,091) (624,219) (2,053,385) Effect of movement in exchange rate 31,034 - 65,167 - 482,342 578,543 Balance at 31 December 2010 (1,192,345) (1,613,105) (372,606) (336,959) (2,910,641) (6,425,656) Net book value At 31 December 2009 At 31 December 2010 536,911 2,032,125 204,510 1,451,293 2,554,180 38,013 336,948 304,857 665,490 3,775,984 - 4,348,343 72 16. GOODWILL Balance at beginning of financial year Effect of movement in exchange rate Balance at end of financial year Notes 2010 $ 2009 $ 4,177,746 4,861,551 (636,972) (683,805) 3,540,774 4,177,746 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. 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: • • Cash flows were projected based on the forecast operating results for 2011, 5% year-on-year growth to 2015, and conservative estimated terminal growth at 2.5%. A post tax discount rate of 14.31% 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 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 22(c). 73 ANNUAL REPORT 2011 NOTES TO THE FINANCIAL STATEMENTS 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 Notes 2010 $ 2009 $ 3,514,163 2,365,369 218,442 585,006 231,200 276,667 - 185,429 497,321 264,766 214,501 21,980 4,825,478 3,549,366 (i) Trade liabilities are normally settled on 30 day terms. (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 28. 19. CURRENT BORROWINGS This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings, which are measured at amortised cost. For more information about the Group’s exposure to interest rate, foreign currency and liquidity risk, see note 28. Term loans (ii) Hire purchase and lease liabilities (i) 2,489,944 2,490,679 - 3,543 2,489,944 2,494,222 (i) (ii) The hire purchase and lease liabilities are secured by a charge over the respective assets (refer note 23). The $2,489,944 fixed term loan relates to a $2,500,000 180-day commercial bill denominated in Australian Dollar with a fixed interest of 4.96% pa. The loan was payable on the 17 January 2011. The Company has subsequently rolled the $2,500,000 commercial bill for another 30-day ending 16 February 2011 with a fixed interest of 4.86%. 20. ISSUED CAPITAL (a) Issued and Paid up Capital 2010 $ 2009 $ 129,879,390 Ordinary Shares fully paid (2009: 96,689,390) 39,615,239 23,614,091 Fully Paid Ordinary Shares Balance at beginning of the financial year Issue of new shares following exercise of options Issue of new shares for employee share based payment Issue of new shares from rights issue Rights issue costs, net of deferred tax Balance at end of the financial year Number $ 96,689,390 23,614,091 840,000 350,000 525,000 224,000 32,000,000 16,000,000 - (747,852) 129,879,390 39,615,239 During the year, 840,000 employee share options were exercised for total proceeds of $525,000 (2009: No employee share options were exercised). The Company has issued 350,000 escrowed shares to Mr A Baum (Chief Operating Officer) during the year as part of his remuneration, refer to note 20(b)(ii). The Company has also completed a rights issue of 32,000,000 shares at $0.50 per share. 74 20. ISSUED CAPITAL (CONT.) 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 each Share is entitled to one vote. The Company does not have authorised capital or par value in respect to its issued shares. (b)(i) Share Options – Employee Options 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. Options issued in previous periods: • • • 640,000 options over ordinary shares were issued 17 April 2007 and exercisable at $1.375, vesting and exercisable on 1 January 2009 exercisable until 31 December 2011. 720,000 options over ordinary shares were issued 17 April 2007 and exercisable at $3.00, vesting and exercisable on 1 January 2009 exercisable until 31 December 2011. 3,350,000 options over ordinary shares were issued 30 June 2009 and exercisable at $0.62, with an exercise period between 1 January 2012 to 31 December 2013. Vesting of the options is subject to achievement of the following performance conditions: - - 50% of options are subject to achievement of Earnings per Share (“EPS”) performance conditions; and 50% of options are subject to achievement of Total Shareholder Return (“TSR”) performance condition. Options issued in the current period: • 2,200,000 and 333,333 options over ordinary shares were issued 5 May 2010 and 1 September 2010 respectively. The options are exercisable at $1.11, with an exercise period between 1 January 2013 to 31 December 2014. Vesting of the options is subject to achievement of the following performance conditions: - - 50% of options are subject to achievement of Earnings per Share (“EPS”) performance conditions; and 50% of options are subject to achievement of Total Shareholder Return (“TSR”) performance condition. The value of these options will be expensed over the vesting period in accordance with AASB 2. Below are options that were issued in 2010 and 2009: Options series issued in 2010 Number Grant date Exercise period Exercise price $ Fair value at grant date Employee options 2,200,000 05/05/2010 Employee options 333,333 01/09/2010 1 January 2013 to 31 December 2014 1 January 2013 to 31 December 2014 $1.11 $1.11 $0.2746 $0.2287 Options series issued in 2009 Number Grant date Exercise period Exercise price $ Fair value at grant date Employee options 3,350,000 30/06/2009 1 January 2012 to 31 December 2013 $0.62 $0.0683 The weighted average fair value of the share options granted in 2010 is $0.27 (2009: $0.0683). Options were priced using a binomial option pricing model. Expected volatility is based on that observed for comparable listed companies over the time period appropriate to the option grant in question. 75 ANNUAL REPORT 2011NOTES TO THE FINANCIAL STATEMENTS 20. ISSUED CAPITAL (CONT.) (b)(i) Share Options – Employee Options (cont.) Below are the inputs used to measure the fair value of the options: Issued in 2010 Grant date Fair value at grant date Grant date share price Exercise price Expected volatility Option life Dividend yield Risk-free interest rate Issued in 2009 Grant date Fair value at grant date Grant date share price Exercise price Expected volatility Option life Dividend yield Risk-free interest rate Employee options Employee options 5/05/2010 1/09/2010 $0.2746 $0.815 $1.11 61.5% $0.2287 $0.62 $1.11 83.7% 3.7 years 3.3 years 3.5% 5.26% 7.46% 4.35% Employee options 30/06/2009 $0.0683 $0.48 $0.62 40.0% 4.0 years 9.01% 4.96% The following reconciles the outstanding share options granted under the employee share option plan and at the beginning and end of the financial year: 2010 2009 Number of options Weighted average exercise price $ Number of options Weighted average exercise price $ Balance at beginning of the financial year Granted during the financial year Forfeited during the financial year 6,736,667 2,533,333 (550,000) $1.05 $1.11 $0.71 Exercised during the financial year (840,000) $0.625 Expired during the financial year Balance at the end of financial year Exercisable at end of the financial year (1,586,667) 6,293,333 960,000 $1.51 $1.05 $2.19 5,186,667 3,350,000 (400,000) - (1,400,000) 6,736,667 3,106,667 $1.52 $0.62 $2.35 - $1.38 $1.05 $1.56 76 20. ISSUED CAPITAL (CONT.) (b)(i) Share Options – Employee Options (cont.) The options outstanding at 31 December 2010 have an exercise price in the range of $0.62 to $3.00 (2009: $0.625 to $3.00) and a weighted average contractual life of 3.08 years (2009: 2.56 years). The weighted average share price at the date of exercise for share options exercised during the year ended 31 December 2010 was $0.80 (2009: Nil, 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 options granted in 2009 – equity settled Share options granted in 2010 – equity settled Shares as remuneration granted in 2010 – equity settled Total expense recognised as employee costs (b)(ii) Share Compensation – Employee Shares 2010 $ 20,740 51,960 162,811 24,889 260,400 2009 $ 23,656 28,928 - - 52,584 Details on shares of the Company that were granted as compensation to each key management person during the reporting period and details on shares vested during the reporting period are as follows: Executives A Baum No of shares granted during 2010 Grant date Fair value at grant date ($) Vesting period No of shares vested during 2010 350,000 01/09/2010 0.64 3 years - No shares are granted since the end of the financial year. The shares are provided at no cost to the recipients. These shares were issued to A Baum upon him joining ThinkSmart Ltd and are held in escrow. The shares are ordinary shares in the Company and will vest upon completion of a 3-year service period. During this period, Mr Baum is entitled to any dividends declared by the Company and normal voting rights are attached. In the event that Mr Baum’s employment with the Company ceases before the vesting period (i.e. through resignation or termination), the shares will be cancelled. If Mr Baum is retrenched by the Company due to changes in the Company’s structure or operations, he will be entitled to retain the shares and they will become immediately unconditional if this occurs before the escrow period expires. 77 ANNUAL REPORT 2011NOTES TO THE FINANCIAL STATEMENTS 20. ISSUED CAPITAL (CONT.) (c) Dividends Dividends recognised in the current year by the Group are: 2010 Final Ordinary 2009 2009 Final ordinary 2008 Interim ordinary 2009 Cents per share Total amount Franked/ unfranked Date of payment 2.0 $1,937,788 100% franked 23 April 2010 1.5 1.5 $1,450,341 100% franked 14 April 2009 $1,450,341 100% franked 16 October 2009 Franked dividend declared or paid during the year was 100% franked at the tax rate of 30% (2009: 100% franked at the tax rate of 30%). After 31 December 2010, the following dividends were declared by the directors for 2010. The dividends have not been provided for. The declaration and subsequent payment of dividends has no income tax consequences. Cents per share Total amount Franked/ Unfranked Date of payment Final ordinary 2010 3.5 $4,545,779 45% franked 29 April 2011 The financial effect of these dividends has not been brought to account in the financial statements for the year ended 31 December 2010, and will be recognised in subsequent financial reports. (d) Franking credits Franking credit account balance as at the beginning of the financial year at a tax rate of 30% (2009: 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% (2009: 30%) 2010 $ 2009 $ 545,068 434,600 1,160,426 1,400,092 (1,090,489) (1,289,624) 615,005 545,068 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 declared after the balance sheet date but not recognised as a liability is to reduce it by $876,686 (2009: $828,766). A tax instalment has been paid in January 2011 and another instalment will be paid in April 2011, which will provide sufficient franking credit for the payment of partially franked dividend on 29 April 2010. 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 2010, the subsidiaries have no franking credits for the benefit for the Company (2009: nil). 78 21. RESERVES Equity settled employee benefits reserve – options (i) Equity settled employee benefits reserve – shares (i) Foreign currency translation reserve (ii) 2010 $ 419,061 (188,111) 2009 $ 199,726 - (4,366,686) (3,034,333) (4,135,736) (2,834,607) (i) The share-based compensation reserve arises on the grant of share options and shares to executives under the employee share option plan. Amounts are transferred out of the reserves and into issued capital when the options are exercised. For shares issued as remuneration and accounted for as a share based payment arrangement, the full fair value of the shares are initially recognised in the reserve and share capital, and are subsequently transferred out of the reserve to the profit and loss over the vesting period. Further information about the share-based payments is made in note 20(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. 22. 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: - - Available cash and cash equivalents Restricted cash 18,268,661 2,917,361 5,468,171 - The restricted cash is held as part of the Group’s funding arrangements and the restriction will cease as the contract term expires. The Group’s exposure to credit risk, interest rate and sensitivity analysis of the financial assets and liabilities are discussed in note 28. 79 ANNUAL REPORT 2011NOTES TO THE FINANCIAL STATEMENTS 22. NOTES TO THE CASH FLOW STATEMENT (CONT.) (b) Reconciliation of the profit /(loss) for the year to net cash flows from 2010 $ 2009 $ operating activities: Profit after tax Depreciation Amortisation Loss on disposal of plant and equipment Provision for doubtful debts Provision for employee entitlements Equity settled share based payment Finance charges recognised as financing activity (Increase) / decrease in assets: Trade receivables and deposits with funders 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 6,773,013 465,167 2,053,385 (73,866) 239,514 6,620 260,400 846,899 (7,082,898) 1,623,821 133,372 (83,465) 16,879 1,272,890 (91,134) 448,245 (492) 5,171,776 555,158 2,096,726 - 244,175 (31,576) 52,584 930,066 (759,941) 1,010,760 865,018 (117,243) (9,066) (1,057,647) (1,132,219) (463,956) (38,155) Net cash from/(used in) operating activities 6,808,350 7,316,460 80 22. NOTES TO THE CASH FLOW STATEMENT (CONT.) (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 Other finance facilities (business credit card, payroll facility, term loan, multi-option facility): - - amount used amount unused Total Financing Facility 2010 $ 2009 $ - 250,000 250,000 - 10,000 10,000 2,500,000 2,500,000 5,000,000 - 250,000 250,000 3,543 10,000 13,543 2,500,000 2,500,000 5,000,000 121,500 7,523,500 108,500 7,536,500 7,645,000 7,645,000 12,905,000 12,908,543 The total financing facility of $12,905,000 (2009: $12,908,544) 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 (2009: Nil). 81 ANNUAL REPORT 2011NOTES TO THE FINANCIAL STATEMENTS 23. 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 2010 No later than 1 year Later than 1 year and not later than 5 years 31 December 2009 No later than 1 year Later than 1 year and not later than 5 years Consolidated Interest Future minimum lease payments $ $ Present value of minimum lease payments $ - - - 4,033 - 4,033 - - - 490 - 490 - - - 3,544 - 3,544 The carrying amounts recorded in the financial statements approximate their aggregate net fair values. 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 No provisions have been recognised in respect of non-cancellable operating leases. 2010 $ 2009 $ 807,061 1,709,594 2,516,655 809,814 2,614,348 3,424,162 24. SEGMENT INFORMATION The Group has 3 reportable segments, which are the group’s strategic business units. The strategic business units offer the same products and services, and are based on geographical location. For each of the strategic business units, the CEO reviews the internal management reports on at least a quarterly basis. The following summary describes the operations in each of the Group’s reportable segments: • • • Europe: Includes UK, Spain, Italy and France Australasia: Includes Australia and New Zealand USA Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit before income tax as included in the internal management reports that are reviewed by the Group’s CEO. Segment profit is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. Inter-segment pricing is determined on an arm’s length basis. Comparative segment information has been represented in conformity with the requirement of AASB 8 Operating Segments. 82 24. SEGMENT INFORMATION (CONT.) Operating Segments Europe Australasia USA Total Information about reportable segments for the year ended 31 December 2010 $ 2009 $ 2010 $ 2009 2010 2009 $ $ $ 2010 $ 2009 $ External revenues Intersegment revenue Interest income Interest expense 14,459,016 15,244,638 27,648,749 21,509,066 2,797 1,495 42,110,562 36,755,199 - - 1,474,304 2,061,806 9,628 2,374 2,484,275 950,438 (1,011,740) (915,329) (1,174,838) (100,397) - - - - - - - - 1,474,304 2,061,806 2,493,902 952,812 (2,186,578) (1,015,726) (2,518,552) (2,651,886) Depreciation and amortisation (1,166,759) (1,690,667) (1,351,793) (961,219) Reportable segment profit before income tax Other material non-cash items: Impairment on plant and 2,294,722 3,984,700 11,775,145 8,065,567 (16,983) (27,210) 14,052,883 12,023,058 equipment and intangible assets - - - - - - - - Reportable segment assets 17,707,606 15,591,339 27,902,009 8,817,925 Reportable segment liabilities 1,788,765 2,223,576 6,473,983 4,402,771 Capital expenditure 444,331 414,377 2,915,050 1,577,518 1,894 2,105 - 6,456 45,611,508 24,415,720 430 8,264,853 6,626,777 - 3,359,381 1,991,895 Reconciliation of reportable segment revenues Total revenue for reportable segments Elimination of inter-segment revenue Consolidated revenue Reconciliation of reportable segment profit or loss Total profit or loss for reportable segments Elimination of inter-segment profits Unallocated expenses Consolidated profit before tax Reconciliation of reportable segment assets Total assets for reportable segments Other unallocated amounts Consolidated total assets Reconciliation of reportable segment liabilities Total liabilities for reportable segments Other unallocated amounts Consolidated total liabilities 43,584,866 38,817,005 (1,474,304) (2,061,806) 42,110,562 36,755,199 14,052,883 12,023,058 (1,482,828) (2,284,082) (2,855,016) (2,105,652) 9,715,039 7,633,324 45,611,508 24,415,720 291,883 323,974 45,903,391 24,739,694 8,264,853 6,626,777 (60,589) (50,966) 8,204,264 6,575,811 There has been no change to the basis of segmentation or the measurement basis for the segment profit or loss since 31 December 2009. Major customer Revenues from the Group’s funding partners represent $25,501,346 (2009: $19,972,868) of the Group’s total revenue. 83 ANNUAL REPORT 2011 NOTES TO THE FINANCIAL STATEMENTS 25. REMUNERATION OF AUDITORS Audit services: Auditors of the Company: Audit and review of financial reports (Australia) Audit and review of financial reports (Overseas) Services other than statutory audit: Other assurance services Tax and other services The Group’s auditors are KPMG in 2010 and 2009. 2010 $ 2009 $ 224,807 68,337 293,144 181,330 86,902 268,232 22,133 22,133 33,896 33,896 26. COMMITMENTS AND CONTINGENT LIABILITIES Under the terms of the UK former funding agreement the group is potentially liable to refund part of its brokerage income in the event that the funders bad debts exceed certain pre-agreed levels. As at 31 December 2010, the maximum amount of brokerage income that the group may potentially have to refund in the future is $492,027 (2009:$485,516). Under the terms of the UK current funding agreement with Secure Trust Bank, the group is obliged to purchase delinquent leases from the funder at the funded amount. At 31 December 2010, the total funded amount of all leases funded by the funder is $11,845,103 (2009: nil) against which the group has provided $683,372 (2009: nil) being its estimate of the funded amount of these leases that are likely to become delinquent in the future. Included in cash and cash equivalents, $2,917,361 (2009: nil) which are held as part of the Group’s funding arrangements and are restricted. Under the terms of its Australian funding agreement the group has deposits held by the funder as credit support for the portfolio of leases funded by the funder. These deposits represent amounts held in excess of expected future losses, however the group has a potential risk that, should losses exceed expected levels and alternate remedies are not made, a portion of these deposits may be forfeit. As at 31 December 2010, the maximum amount of funder deposits that the group may potentially forfeit in the future is $3,122,945 (2009: nil). Further funder deposits are held by the funder against the risk of default by the group under the servicing provisions of its Australian funding agreement. Should the group default against these obligations, the entire deposit would be forfeit. As at 31 December 2010 the deposit held against servicing default was $2,643,398 (2009: $1,105,425). Under the terms of its Australian funding agreement the group has issued a bank guarantee, held by a third party, in favour of its Australian funder as an additional layer of credit support for the portfolio of leases funded by the funder. In the unlikely event that losses exceed expected levels and alternate remedies are not made, including accessing funder deposits, and the funder calls on the bank guarantee, the group would have a liability to the amount called upon. As at 31 December 2010, the maximum exposure the group had under the bank guarantee was $7 million (2009: $7 million). Under the terms of a new Retailer Agreement entered into in 2010, the Group committed to pay a deferred establishment fee of $1,350,000. This establishment fee, when paid will be recognised as a contract rights intangible asset and amortised over its expected useful life. 84 27. 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 2010, are discounted using appropriate risk factors. The estimated value of future cash flows is $9,572,203 (2009: $10,635,969), 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 2010, this asset is fully amortised with nil carrying amount. 28. FINANCIAL INSTRUMENTS 28 (a) Interest rate risk Profile At the reporting date, the interest rate profile of the Group’s interest-bearing financial instrument were: Fixed rate instruments Hire purchase and finance lease liability Financial liability Variable rate instruments Cash and cash equivalent Deposits held by funder (current) Deposits held by funder (non-current) Term loan Net financial asset Carrying amount Note 2010 $ 2009 $ - - 3,543 3,543 21,186,022 5,468,171 143,398 6,737,156 373,816 731,609 (2,489,944) (2,490,679) 25,576,632 4,082,917 85 ANNUAL REPORT 2011NOTES TO THE FINANCIAL STATEMENTS 28. FINANCIAL INSTRUMENTS (CONT.) Interest rate risk (Cont.) 28 (a) Sensitivity analysis 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 $255,766 (2009: $40,829). 28 (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. 28 (c) Credit risk management Exposure to credit risk The maximum credit risk exposure of the Group is the sum of the carrying amount of the Group’s financial assets and the contingent liabilities in note 26. The carrying amount of the Group’s financial assets that is exposed to credit risk at reporting date is: Cash and cash equivalent Trade receivables (current) Deposits held by funder (current) Deposits held by funder (non-current) Sundry debtors Deals awaiting settlement Prepayments (current) Prepayments (non-current) Note 22(a) 8 8 8 8 11 10 12 2010 $ 2009 $ 21,186,022 5,468,171 2,362,465 1,519,955 143,398 6,737,156 188,653 394,083 373,816 731,609 61,044 310,131 1,296,775 2,393,154 2,372,572 2,953,610 34,681,124 13,811,490 The carrying amount of the Group’s financial assets that is exposed to credit risk at reporting date by geographic region is: 22,110,658 4,419,067 12,568,574 9,386,297 1,892 6,126 34,681,124 13,811,490 Australasia Europe USA 86 28. FINANCIAL INSTRUMENTS (CONT.) 28 (c) Credit risk management (cont.) The carrying amount of the Group’s financial assets that is exposed to credit risk at reporting date by types of counterparty is: Banks Funders Retail partners Insurance partners Others 2010 $ 2009 $ 21,186,022 5,468,171 8,202,305 1,448,720 790,063 529,695 3,669,346 5,346,765 833,388 1,018,139 34,681,124 13,811,490 In 2010, 66% (2009: 73%) 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. Impairment losses 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 2010 $ 2,088,171 104,134 88,350 79,042 2,769 Impairment 2010 $ 53,993 5,468 25,172 27,545 - Gross 2009 $ 1,040,151 98,626 93,604 209,286 78,288 2,362,465 112,178 1,519,955 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 Bad debt written off Effect of exchange rate Balance at 31 December 2010 $ 214,448 239,513 (308,555) (33,228) 112,178 Impairment 2009 $ 23,246 32,494 26,927 125,820 5,961 214,448 2009 $ 258,615 244,175 (264,222) (24,120) 214,448 87 ANNUAL REPORT 2011NOTES TO THE FINANCIAL STATEMENTS 28. FINANCIAL INSTRUMENTS (CONT.) 28 (c) Credit risk management (cont.) Trade receivables are reviewed and considered for impairment on a periodic basis, based on the number of days outstanding and number of payments in arrears. 90% (2009: 55%) of the net trade receivables balance is owed by the Group’s most significant financiers, and 3% (2009: 21%) of the remaining net receivables balance is owed by debtors with a good credit history with the Group. 28 (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 Gross exposure 31 December 2010 GBP 6,392,124 1,913,291 EUR 491,964 70,180 (1,738,530) (229,750) 6,566,885 332,394 NZD 48,531 107,939 (82,448) 74,222 USD 1,894 - (2,105) (212) 31 December 2009 GBP 3,253,711 360,190 EUR NZD USD 236,491 60,560 6,129 66,145 76,681 - (1,345,557) (211,075) (89,336) (430) 2,268,344 91,561 47,905 5,699 The following significant exchange rates applied during the year: Average rate Reporting date spot rate 2010 0.6938 0.5950 0.9197 1.2744 2009 0.5664 0.5044 0.7927 1.2481 2010 0.7647 0.6585 1.0163 1.3171 2009 0.6241 0.5581 0.8969 1.2354 AUD EUR GBP USD NZD 88 28. FINANCIAL INSTRUMENTS (CONT.) 28 (d) Currency risk management (cont.) Sensitivity analysis 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 2009: 31 December 2010 EUR GBP USD NZD 31 December 2009 EUR GBP USD Equity $ 76,472 (1,447,168) 19 (24,525) Profit or loss $ 20,665 (82,553) 1,544 (3,684) 70,836 69,065 (1,215,251) (133,817) 548 2,473 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. 28 (e) Liquidity risk management The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements: Carrying Amount $ Contractual cash flow $ Less than 1 year $ 1-2 years 2-5 years $ $ Consolidated 31 December 2010 Trade and other payables Term loans 31 December 2009 Trade and other payables Term loans 4,317,615 (4,317,615) (4,317,615) 2,489,944 (2,500,000) (2,500,000) 6,807,559 (6,807,559) (6,807,559) 3,048,126 (3,048,126) (3,048,126) 2,490,679 (2,500,000) (2,500,000) Hire purchase and lease liabilities 3,543 (3,543) (3,543) Product plan (non-current) 492 (492) - 5,542,840 (5,542,840) (5,542,348) - - - - - - (492) (492) - - - - - - - - 89 ANNUAL REPORT 2011NOTES TO THE FINANCIAL STATEMENTS 29. 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 – resigned 22 May 2010 D Griffiths – appointed Deputy Chairman 22 May 2010 S Penglis F de Vicente – appointed 7 April 2010 Executive Directors N Montarello (Chairman, Managing Director and Chief Executive Officer) Executives A Baum (Group Chief Operating Officer, ThinkSmart Limited) – appointed 1 September 2010 N Barker (Group Chief Financial Officer, ThinkSmart Limited) S McDonagh (Executive General Manager, RentSmart Unit Trust) – resigned 23 July 2010 M Radotic (General Manager Sales & Marketing Continental Europe, RentSmart Limited) – ceased being a KMP after reposting as General Manager Customer Care, RentSmart Unit Trust, on the 1 July 2010 G Varma (Group Chief Information Officer, ThinkSmart Limited) G Parry (Managing Director - UK, RentSmart Limited) The KMP compensation included in ‘employee benefits expense’ in note 6(b) is as follows: Short-term employee benefits Post-employment benefits Share-based payment 2010 $ 2009 $ 2,259,573 2,240,908 149,879 197,501 171,089 36,619 2,606,953 2,448,616 The KMP receive no compensation in relation to management of the Company (2009: nil). 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. 90 29. RELATED PARTY DISCLOSURES (CONT.) Loans to KMP and their related parties There has been no loan provided to KMP and their related parties as at 31 December 2010 (2009: nil). Other KMP transactions During the year and previous year, there has been no transaction with entities in which the KMP has significant control or influence over those entities’ financial or operating policies. 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: Held at 1 January 2010 Granted as compensa- tion Exercised Lapsed or forfeited Held at 31 December 2010 Vested during the year Vested and exercisable at 31 December 2010 Employee Options 2010 Directors P Mansell S Penglis D Griffiths F de Vicente - - - - - - - - N Montarello 2,400,000 1,000,000 Executives A Baum N Barker - 333,333 1,060,000 333,333 (280,000) S McDonagh 300,000 - M Radotic G Varma G Parry 2009 Directors P Mansell S Penglis D Griffiths 580,000 100,000 336,667 100,000 580,000 200,000 Held at 1 January 2010 Granted as compensa- tion - - - - - - N Montarello 2,800,000 1,000,000 Executives N Barker S McDonagh M Radotic G Varma G Parry 560,000 500,000 - 300,000 280,000 300,000 186,667 150,000 280,000 300,000 - - - - - - - - - - - - - - (1,400,000) 2,000,000 - - 333,333 1,113,333 - - - - (300,000) - (186,667) - - 680,000 250,000 780,000 - - - - - - - - - - - - - - - - - 280,000 - 280,000 - 280,000 Exercised Lapsed or forfeited Held at 31 December 2010 Vested during the year Vested and exercisable at 31 December 2010 - - - - - - - - - - - - - - - - - - - - - (1,400,000) 2,400,000 1,400,000 1,400,000 - - - - - 1,060,000 373,333 560,000 300,000 580,000 336,667 580,000 - 280,000 93,333 280,000 - 280,000 186,667 280,000 91 ANNUAL REPORT 2011NOTES TO THE FINANCIAL STATEMENTS 29. RELATED PARTY DISCLOSURES (CONT.) 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: Purchases Rights issue Sales Received on exercise of options Granted as compensation Held at 31 December 2010* 2010 Directors P Mansell S Penglis D Griffiths Held at 1 January 2010 1,550,000 1,060,500 1,800,000 F de Vicente - - - - - - 212,100 360,000 - N Montarello 17,404,565 1,134,819 3,480,913 - - - - - - - - - - - - - 280,000 - - - - - - - - - n/a 1,272,600 2,160,000 - 22,020,297 350,000 - - - - - 626,910 547,999 n/a 35,000 185,082 25,357 Executives A Baum N Barker S McDonagh M Radotic G Varma G Parry 2009 Directors P Mansell S Penglis D Griffiths - 5,800 271,110 - - - - - 95,000 - - (46,100) - 43,114 (256,365) - - 172,999 111,000 35,000 398,333 25,357 Held at 1 January 2009 Purchases Sales Received on exercise of options Held at 31 December 2009 1,300,000 250,000 - 1,610,500 - (550,000) 1,613,360 186,640 N Montarello 17,253,192 151,373 Executives N Barker S McDonagh M Radotic G Varma G Parry 172,999 51,000 35,000 398,333 25,357 - 60,000 - - - - - - - - - - - - 1,550,000 1,060,500 1,800,000 17,404,565 172,999 111,000 35,000 398,333 25,357 - - - - - - - n/a: Personnel have resigned before reporting date. The share movement only relates to the period up to their respective resignation dates. * The following shares are subject to escrow as at 31 December 2010 (refer to note 20 (b)(ii): Executive A Baum Parent The parent entity of the Group is ThinkSmart Limited. 92 Held at 31 December 2010 350,000 30. 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. 31. EARNINGS PER SHARE Basic earnings per share From continuing operations Diluted earnings per share From continuing operations Basic earnings per share 2010 Cents per share 2009 Cents per share 6.52 5.35 6.29 5.26 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 2010 $ 6,773,013 6,773,013 2010 Number 2009 $ 5,171,776 5,171,776 2009 Number Weighted average number of ordinary shares for the purposes of basic earnings per share 103,818,543 96,689,390 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: 2010 $ 2009 $ Profit after tax from continuing operations Earnings used in the calculation of diluted EPS from continuing operations 6,773,013 6,773,013 5,171,776 5,171,776 2010 Number 2009 Number 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 103,818,543 96,689,390 Shares deemed to be issued for no consideration in respect of: Employee options 3,925,035 1,693,407 Weighted average number of ordinary shares used in the calculation of diluted EPS 107,743,578 98,382,797 At 31 December 2010, 3,393,333 options (2009: 3,386,667) were excluded from the diluted weighted average number of ordinary shares calculation as their effect would have been anti-dilutive. 93 ANNUAL REPORT 2011NOTES TO THE FINANCIAL STATEMENTS 32 PARENT ENTITY DISCLOSURES As at, and throughout, the financial year ending 31 December 2010, the parent entity of the Group was ThinkSmart Limited. Result of parent entity Profit for the period Other comprehensive income Total comprehensive income for the period Financial position of parent entity at year end Current assets Total assets Current liabilities Total liabilities Total equity of the parent entity comprising of: Share capital Share based payment reserve Retained earnings Total equity Parent entity contingencies 2010 $ 2009 $ 492,256 1,772,102 - - 492,256 1,772,102 12,353,442 39,391,828 69,109 23,617,470 3,405,428 3,662,416 2,474,892 2,474,892 39,615,237 23,614,091 230,947 199,726 (4,116,772) (2,671,239) 35,729,412 21,142,578 The directors are of the opinion that provisions are not required in respect of these matters, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement. Contingent liabilities considered unlikely Performance guarantees Note 2010 $ 2009 $ (a) 7,000,000 7,000,000 (a) A bank guarantee has been issued on behalf of the parent entity, to an unrelated party, in relation to the performance of a subsidiary in the management of a portfolio of rental agreements. In the event of a default, the third party can call upon the bank guarantee to offset losses it incurs as a result of the default. The parent entity has provided a commitment to continue its financial support of RentSmart Unit Trust, ThinkSmart Europe Ltd and RentSmart Ltd to enable the subsidiaries to pay their debts as and when they fall due. The Company will not call for the repayment of its loan until RentSmart Unit Trust, ThinkSmart Europe Ltd and RentSmart Ltd are in a financial position to make such a payment without affecting its operational capabilities. 94 INDEPENDENT AUDIT REPORT Independent auditor’s report to the members of ThinkSmart Limited We have audited the accompanying financial report of ThinkSmart Limited (the company), which comprises the consolidated statement of financial position as at 31 December 2010, and consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year ended on that date, notes 1 to 32 comprising a summary of significant accounting policies and other explanatory information and the directors’ declaration of the Group comprising the company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement whether due to fraud or error. In note 2, the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements of the Group comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards, a true and fair view which is consistent with our understanding of the Group’s financial position and of its performance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. 95 ANNUAL REPORT 2011INDEPENDENT AUDIT REPORT Auditor’s opinion In our opinion: (a) the financial report of the Group is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 31 December 2010 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. (b) the financial report also complies with International Financial Reporting Standards as disclosed in note 2. Report on the remuneration report We have audited the Remuneration Report included in the directors’ report for the year ended 31 December 2010. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with Section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with auditing standards. Auditor’s opinion In our opinion, the remuneration report of ThinkSmart Limited for the year ended 31 December 2010, complies with Section 300A of the Corporations Act 2001. KPMG Denise McComish Partner Perth 18 February 2011 96 SHAREHOLDER INFORMATION The shareholder information set out below was applicable as at 31 March 2011. 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 Cogent Nominees Pty Ltd JP Morgan Nominees Australia Ltd HSBC Custody Nominees (Australia) Ltd National Nominees Ltd Voting rights Ordinary shares Refer to note 20 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 % 22,321,697 13,161,707 12,553,124 9,114,904 6,531,895 17.19 10.13 9.67 7.02 5.03 Number of equity security holders Ordinary Shares Options 90 378 262 459 68 - - - - 12 The number of shareholders holding less than a marketable parcel of ordinary shares is 21. Unquoted equity securities Options issued under the ESOP to take up ordinary shares 6,293,333 12 No. on issue No. of holders The Company has no other unquoted equity securities. On-market buy-back There is no current on-market buy-back. 97 ANNUAL REPORT 2011No. of ordinary shares held Percentage of capital held (%) 22,321,697 13,161,707 12,553,124 9,114,904 6,531,895 5,189,473 4,802,001 4,692,184 3,960,000 3,925,046 3,600,000 2,500,000 1,756,032 1,274,000 1,150,000 1,119,248 1,017,850 916,800 800,000 790,000 17.19 10.13 9.67 7.02 5.03 4.00 3.70 3.61 3.05 3.02 2.77 1.92 1.35 0.98 0.89 0.86 0.78 0.71 0.62 0.61 SHAREHOLDER INFORMATION Twenty largest shareholders Name UBS Wealth Management Australia Nominees Pty Ltd Cogent Nominees Pty Ltd JP Morgan Nominees Australia Ltd HSBC Custody Nominees (Australia) Ltd National Nominees Ltd JAWP Pty Ltd Wroxby Pty Ltd JP Morgan Nominees Australia Limited Kemast Investments Pty Ltd Citicorp Nominees Pty Limited Phoenix Properties International Pty Ltd Aileendonan Investments Pty Ltd Darju Pty Ltd Osborne Properties Pty Ltd Manfam Pty Ltd Wulura Investments Pty Ltd Wulura Investments Pty Ltd Mrs Kelyna Margaret Penglis Bradgale Nominees Pty Ltd Equity Trustees Limited 98 

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