AAV Limited 2006 Annual Report

WORLDWIDE INTEGRATED EVENT SERVICES AAV Limited ABN 69 083 269 701 Annual Report 2006 Corporate Directory AAV Limited ABN 69 083 269 701 Directors Bob Mansfield AO Chairman, Non-executive Director Michael Gardner Chief Executive Officer David Hunter Non-executive Director (appointed 28.02.06) John Murphy Non-executive Director Greg Robertson Non-executive Director Bryan Waters Non-executive Director Company Secretaries Jeffrey Krug Lyndon Goulding Registered Office 68-72 Lilyfield Road Rozelle NSW 2039 Telephone 61 2 9556 8880 Facsimile 61 2 9556 8887 www.aav.com.au Share Registrar Link Market Services Limited Locked Bag A14 Sydney South NSW 1235 Telephone 1300 554 474 Telephone 61 2 8280 7111 Facsimile 61 2 9287 0303 Email registrars@linkmarketservices.com.au www.linkmarketservices.com.au Stock Exchange Listing The Company’s shares are listed on the Australian Stock Exchange Limited under ASX Code ‘AVV’ Contents 0 Chairman’s Report 02 Chief Executive Officer’s Report 03 Directors’ Report 04 Directors’ Report – Remuneration Report 05 Directors’ Report – Corporate Governance Statement 06 Financial Statements Income Statement Balance Sheet Statement of Changes in Equity Cash Flow Statement Notes to the Financial Statements 03 07 15 29 39 45 46 47 48 49 106 107 108 110 112 07 Directors’ Declaration 08 Independent Audit Report 09 Supplementary Information 0 Business Directory Annexure A – Auditor’s Independence Declaration /0 0 Your Board has taken the view that AAV should build a global Event Services capability as well as move into adjacent and allied businesses. 02/ AAV Limited Annual Report 2006 Chairman’s Report In this my fourth Report to you as Chairman of AAV Limited, I am very pleased to report to shareholders that your Company has returned to profits for the year to 30 June 2006 and that your directors have declared a fully franked final dividend of 2.5 cents per share in respect of the performance for the year. AAV is reporting overall revenues of $111.5 million (prior period $67.7 million), EBITDA of $27.2 million (prior period $11.7 million loss) and an overall profit after tax and minority interests of $15.4 million (prior period $17.8 million loss). References to the prior accounting period are to the Financial Period of 6 months ended 30 June 2005, this being the first accounting period following a change in the accounting year end from 31 December to 30 June. The financial performance of the Company for the period was favourably impacted by bringing to account the one-off gain of $7.3 million on the sale of our investment in the Media Manufacturing business, AAV Regency, on 30 June 2006. You may recall that a year ago I advised shareholders of the operational and business issues we had identified, the need to restore market confidence in AAV and to refine the Company into a progressive, acquisitive and profitable organisation going forward. I am also very pleased to report that all of these issues have been completed. We have now moved away from investigation and repair and are now pursuing our stated and identified growth opportunities and strategies to sustainably grow shareholder value. Additionally, I also reported on the results of the management team’s in depth review of the sustainability of AAV’s businesses as part of a public company. That review provided compelling evidence that AAV should no longer be in its foundation business of Digital Media Services. At that time, the review had still to determine whether the investment in the Media Manufacturing businesses, AAV Regency and Multi Media Logistics, should also be retained or sold. We subsequently determined that AAV should divest itself of the Media Manufacturing businesses subject to the ability to achieve an acceptable sale price. Acceptable sale prices for all underperforming business streams were achieved and the businesses have been sold. Further details of the sales appear in this Annual Report. Your directors have determined that a final fully franked dividend of 2.5 cents per share be declared to shareholders of record on 8 September 2006 and paid on 22 September 2006. This will bring the fully franked dividend per AAV ordinary share to 5.0 cents per share in respect of the 30 June 2006 financial year. AAV entered the financial year ended 30 June 2006, with a new management team under the then recently appointed CEO, Michael Gardner and CFO, Jeff Krug. Michael has brought to AAV an innovative and forward thinking approach to his role as CEO and has focused his executive team on building shareholder value through expanding the global business footprint for the event services business, Staging Connections. Michael and Jeff have built a robust executive team around them, gathering together individuals with diverse, yet extraordinary levels of experience in the services industry, in corporate management, strategic development, mergers and acquisitions and business turn-around strategies. /03 Chairman’s Report continued In addition, during the year under review, your Company appointed Bill Davidson as Managing Director of Staging Connections and appointed David Hunter as an independent Non-executive Director. Michael Gardner’s Chief Executive Officer’s Report provides some details on Bill’s experience and business acumen. David Hunter’s personal credentials and business experience are impeccable and provide a complementary fit with the skills mix of existing Board members. David was formerly with the highly respected and progressive company, Accenture and its predecessor organisations, for a period of 30 years. The Chief Executive Officer’s Report and the Directors’ Report which follow in this Annual Report provide details on individual acquisitions and investments secured to date and in progress. Your Board has taken the view that AAV should build a global Event Services capability as well as move into adjacent and allied businesses. During the year under review and also since the year end, a number of Event Services related investments and acquisitions have been successfully negotiated, have been completed or are in various stages of completion. These are reported below and further on in this Annual Report. The management team has also reviewed a number of opportunities in adjacent and allied businesses but these have not passed the critical financial and business hurdles we have set before we invest shareholders’ money. Your Board maintains a very active watching brief on opportunities both in Australia and globally. During the year ended 30 June 2006, our Event Services business, Staging Connections, expanded into China with a 51% investment in ETG Staging Connections China, based in Beijing and Shanghai and also successfully opened operations in three venues in Fiji; with another venue opening shortly. Negotiations have been successfully completed for the acquisition of an interest in an additional Event Services business in South East Asia – further details can be found in the Chief Executive Officer’s Report and the Directors’ Report following. In addition, within Australia, Staging Connections has opened in Canberra, having purchased a previously franchised operation, acquired Stageworks Pty Limited in Cairns, thereby dramatically extending its North Queensland service capability, and acquired the leading Australian trade show and consumer exhibitions business, Exhibitions and Trade Fairs Pty Limited. We have also recently been successful in securing the services of one of Australia’s leading creative specialists, Paul Kenny. The addition of these new businesses and Paul’s expertise will ensure a full range of event services is available through Staging Connections. This is a very exciting time for your Company and one which your Board anticipates will see it become a world recognised leader in Event Services management, ownership and creative and staging services. For the year ended 30 June 2006, Staging Connections exceeded its expected performance under a reinvigorated and refocused management team led by Bill Davidson. I am confident that between Michael Gardner and Bill Davidson, positive change and growth will continue to be driven through our Event Services business in the year before us and thereafter. Your Company has been able to maintain its solid balance sheet, its low level of gearing and access to cash to pursue any opportunities which may emerge and which meet our strict strategic, financial and operational hurdles for investment or acquisition. I am confident that we will see AAV grow globally both in its existing field of expertise and in adjacent and allied businesses in the future. I look forward to being able to report to you over the next twelve months on the successful achievement of these initiatives and opportunities. It is going to be a very exciting and rewarding year for your Company. Accompanying this Annual Report is the Notice of Annual General Meeting of shareholders to be held at Theatrette 1, 68-72 Lilyfield Road, Rozelle on Thursday 9 November 2006 at 11:00 am. Your Board encourages you to attend and participate in the meeting at this very important time in the Company’s development. Bob Mansfield AO Chairman 04/ AAV Limited Annual Report 2006 /05 02 The Company is on track to grow its Event Services business, Staging Connections, into a leading global events business and service provider. We have invested in acquisitions to introduce further profitable revenues, adding scale, profit, a global footprint and a compelling strategic direction to the Group. 06/ AAV Limited Annual Report 2006 Chief Executive Officer’s Report Introduction In this my second report to shareholders since being appointed as your Chief Executive Officer on 25 February 2005, I am extremely pleased to be able to advise you that we have now successfully delivered on all of the operational and performance issues we had identified and promised to address following our review of the Company and its business streams over the last eighteen months. We have addressed the business issues and taken the necessary decisions to streamline AAV into a progressive and acquisitive market oriented company and returned the Group to profitability. As you may recall, we reported in the 2005 Annual Report that the new management team had undertaken a complete review of AAV’s operating businesses, and was still reviewing the investment in the Media Manufacturing Joint Venture, AAV Regency. Our review concentrated on assessing each business’ ability to deliver long term shareholder value, future profits and returns sufficient for AAV’s shareholders as a publicly listed company. The review concluded that we should dispose of certain underperforming businesses and position the Company for growth in activities which provided the required level of sustainable returns and growth opportunities. I am pleased to say that we have achieved all of these objectives and we are now well positioned, and have commenced to profitably grow your Company. Results It is satisfying to be able to report to you that your Company has recorded a major increase in both profitability and the breadth and geographic span of its service offerings domestically and in overseas locations. Details of the expansion of AAV’s Event Services business follow in this Report. For the year ended 30 June 2006, AAV Limited achieved revenues from continuing operations of $83.9 million for the period (prior period $35.8 million) with EBITDA from continuing operations of $13.6 million (prior period $7.8 million). References to the prior accounting period are to the Financial Period of 6 months ended 30 June 2005; being the first accounting period following a change in the accounting year end from 31 December to 30 June. The pre-tax profit for the year from continuing operations was $6.7 million (prior period $4.5 million), with net profit after tax and minority interests of $7.3 million (prior period $3.1 million). The financial results for the year ended 30 June 2006 have been positively assisted by the sale of the Media Manufacturing businesses on 30 June 2006 to Regency Recordings Pty Limited as announced on 28 February 2006. The sale contributed net cash inflows of some $17.0 million and a one-off book gain on disposal of $7.3 million for the financial year. The financial results for the year ended 30 June 2006 have been affected marginally by operations in the discontinued business of Digital Media Services from 1 July 2005 until the date of completion on 11 and 12 August 2005. The loss on disposal of these businesses was taken to account in the 30 June 2005 results. /07 Chief Executive Officer’s Report continued The trading year ended 30 June 2006 For the full year, AAV operated two distinct businesses: 1 Event Services (Staging Connections); and 2 edia Manufacturing (AAV Regency and Multi Media Logistics). M The Media Manufacturing business was sold effective 30 June 2006. For the period 1 July to 12 August 2005, AAV operated the Digital Media Services businesses. These businesses were sold effective 11 and 12 August 2005 and the net loss on disposal was accounted for in the 30 June 2005 results, as previously reported. The performance of these three businesses is detailed in the Directors’ Report and the accompanying Financial Statements. In summary, the businesses contributed the following results for the year: Continuing Operations 2005 $m Revenues EBITDA EBIT Profit/(Loss) Profit/(Loss) after tax and minority interest 3.1 7.3 35.8 7.8 5.1 4.5 2006 $m 83.9 13.6 7.0 6.7 Discontinued Operations 2005 $m 31.9 -19.5 -22.5 -22.5 -20.9 2006 $m 27.6 13.6 10.7 10.0 8.1 Total 2005 $m 67.7 -11.7 -17.3 -18.0 -17.8 2006 $m 111.5 27.2 17.7 16.7 15.4 Financial Position For the year ended 30 June 2006, total assets of the AAV Group were $117.4 million (at 30 June 2005, $119.7 million) with equity of $73.1 million (at 30 June 2005, $58.3 million). As at the close of business on 30 June 2006, our leading Event Services business generated a strong financial performance, cash flows and returns. This business performed solidly for the year and continues to deliver superior results following a very successful year which has seen the emergence of a rejuvenated and re-energised management and strongly engaged work force. 08/ AAV Limited Annual Report 2006 Continuing Operations Event Services The Event Services business, Staging Connections provides innovative and creative design, major event management and staging and production services to a large number of corporate clients in Australia, New Zealand, Fiji, China and South East Asia. The business also services and operates in-house at over 70 major venues and convention centres throughout its service area. In November 2005, Bill Davidson was appointed as Managing Director of Staging Connections following an in depth global search to employ the right leader to launch Staging Connections into its strategic expansion throughout the local and world events market. Bill brought to Staging Connections over 20 years experience with international service providers specialising in delivering services to clients in-house. Bill’s enthusiasm, drive and tenacity have reinvigorated Staging Connections through his ‘can do’ attitude and constant challenge to all of the previously accepted business parameters. Staging Connections and its staff have embraced Bill’s energy and drive and have contributed to its new attitude and focus on excellence in customer and service delivery as well as excellence in creative and innovative design and execution. It is now a seamless event services provider capable of creating and delivering a consistent high standard throughout a number of countries. During the year ended 30 June 2006, AAV expanded its Staging Connections’ operations through the following important business investments and/or acquisitions: • 1% investment in ETG Staging 5 Connections (China) Co Limited based in Beijing and Shanghai; • pening of operations at three venues in O Fiji’s Denauru hotel development area; and • 00% acquisition of Staging Connections, 1 Canberra, a former franchise operation. Since 30 June 2006, Staging Connections has acquired an interest in the following businesses locally and internationally: • cquired 100% of Exhibitions and A Trade Fairs, a leading trade shows and consumer exhibitions business. This acquisition will form the backbone for a concentrated push into the business’ horizontal expansion into this relevant and core exhibitions sector; • cquired 100% of Stageworks, an A events business based in Cairns; • cquired a 70% interest in The A Event Company, a leading Singapore based creative content and event management business; • ntered into a strategic business E relationship with the pre-eminent creative designer, Paul Kenny; and • cquired a 70% interest in Techmex, A a leading event production group in Singapore and Malaysia as well as Techmex China with offices in Beijing and Shanghai. As at the date of this Report the Company is expected to enter into an agreement for the acquisition of a majority interest in a leading event production and staging services business based in the UAE; and entered the final stages of due diligence for the acquisition of one of Australia’s leading international creative and strategic special events business. We expect to finalise theses opportunities in the near future. These strategic relationships and businesses will provide Staging Connections with a very important extension to its growing list of seamless services in the event, exhibitions and staging market. The Event Services business, Staging Connections provides innovative and creative design, major event management and staging and production services to a large number of corporate clients in Australia, New Zealand, Fiji, China and SE Asia. The business also services and operates in-house at over 70 major venues and convention centres throughout its service area. /09 Chief Executive Officer’s Report continued Discontinued Operations i Media Manufacturing AAV’s interests in Media Manufacturing operations were sold to its Joint Venture partner in these businesses, Regency Recordings Pty Limited, on 30 June 2006 for an amount of $22.0 million plus AAV’s share of the Joint Venture’s working capital and cash on hand as at that date. Further upside may occur should Regency Recordings on sell all or a major proportion of the AAV Regency business to a third party by 31 December 2006. Following the repayment of debt associated with the Joint Venture, AAV received net cash inflows of $17.0 million from the sale at 30 June 2006. ii Digital Media Services As previously reported, on 11 August 2005 the Digital Media Services businesses (excluding AAV Broadcast Rentals) were sold to Omnilab Pty Limited for an amount of $5 million. On 12 August 2005 AAV Broadcast Rentals was sold to Becker Group Limited (which purchased the assets) and Ranik Pty Limited (which purchased the operations) for an aggregate amount of $4 million. All financial exposures identified and the loss on disposal of Digital Media Services’ businesses were taken into account in the 30 June 2005 results. iii Discontinued operations financial results The discontinued operations of Media Manufacturing and Digital Media Services contributed revenues of $27.6 million (prior period, $31.9 million) and an EBITDA of $13.6 million (prior period $9.5 million loss) for the year to 30 June 2006. Shared Services Initiative and IT development AAV has continued to develop its shared services model as the foundation for fulfilling its aspirations to become a bigger and more diversified business. During the year we appointed a new Head of IT who has led a complete review of our systems, hardware and infrastructure, and hired new leaders for the IT Department to drive rationalisation, modernisation and systems upgrade programmes. The Company’s philosophy and focus has been to prepare for a period of strategically planned and executed growth both in the Event Services business and in other carefully targeted allied and adjacent businesses with the core goal being the growth of sustainable earnings for shareholders. AAV’s preparation for this growth has included pro-active management initiatives to ensure its central back office is capable of supporting a much larger business than AAV is today. AAV’s shared services back office now contains all of the functions required to professionally support the business, including administration, payroll, IT, legal, secretarial and finance. AAV currently recharges a share of costs for related tasks back to its divisions, thereby clearly matching overhead costs with revenues for the relevant business. AAV has continued to develop its shared services model as the foundation for fulfilling its aspirations to become a bigger and more diversified business. 0/ AAV Limited Annual Report 2006 AAV’s Event Services group Staging Connections leads the way in the provision of world wide intergrated event services. / Heading 0 Chief Executive Officer’s Report continued Growth Aspirations Focus on Core Event Sector and Offshore Expansion The Company is on track to grow its Event Services business, Staging Connections, into a leading global events business and service provider and a world leader in its field. Through considered strategic analysis we have invested in acquisitions to introduce further profitable revenues; all EPS accretive to the Group. We have swiftly added scale, profit, a global footprint and a compelling strategic direction to the Group. Our Staging Connections business continues to review and seek opportunities in its field of expertise across the world. Apart from developing its service capability in Australia and expanding its creative expertise, Staging Connections has been very active in seeking overseas businesses suitable for outright acquisition, or more usually, where it can take a majority shareholding and also retain local management and expertise. We see the retention of local expertise as an integral part of the international expansion programme. In this Report, we have mentioned only a few of the businesses we have reviewed. Those mentioned have met the parameters of our model and are expected to provide the obligatory returns and growth required for our participation and investment. These businesses will form the foundations for the global expansion of our Staging Connections’ business. Staging Connections is positioning itself to establish geographical hubs in key international cities to service a growing event and staging footprint across the world. Aligned to this, our IT systems have been reviewed and are being upgraded to provide the extensive systems and infrastructure required to streamline and efficiently manage our assets world-wide. AAV has a strong balance sheet to support its expansionary aims and has undrawn debt facilities available to it in the order of $30 million with the availability of substantial additional debt facilities for acquisitions which meet the Board’s strict financial parameters. As foreshadowed in our 2005 Annual Report, we reinstated the payment of dividends in March 2006 with the declaration of a 2.5 cents per share fully franked interim distribution to shareholders. I am pleased to report that in respect of the financial year ended 30 June 2006, your directors have declared a 2.5 cents per share fully franked final dividend to shareholders of record on 8 September 2006 payable on 22 September 2006. Finally, in what has been a very positive year for the Company, and one which I expect to be a precursor to annually being able to report on our success in fulfilling our growth aspirations, I would like to thank our staff members for their continued effort and dedication in ensuring that we deliver a first class product and service on time, on budget, and most importantly, to the satisfaction of our customers. Michael Gardner Chief Executive Officer 2/ AAV Limited Annual Report 2006 AAV has recorded a major increase in both profitability and the breadth and geographic span of its service offerings in 90 worldwide locations. * * s at the date of this Report, the Company A is expected to acquire a majority interest in a leading event production and staging services business based in the UAE. /3 03 Staging Connections is now a seamless event services provider capable of creating and delivering a consistent high standard throughout a number of countries. 4/ AAV Limited Annual Report 2006 /04 AAV Limited Annual Report 2006 Directors’ Report Robert Mansfield AO Non-executive Chairman Michael Gardner Executive Director, Chief Executive Officer Mr Gardner was appointed CEO of AAV Limited on 25 February 2005 and since that date has been the driving force behind strategically challenging the existing businesses of the Company and in developing a robust business model designed to provide innovation, change and profitable growth in Australia and globally. Mr Gardner brings extensive global M&A business skills to the Company focused on delivering greater shareholder value. Mr Gardner has over twenty years experience in business having established his own computer services business in 1989 specialising in the implementation, support and management of solution based managed services, outsourcing, consultancy and IT technology into the IT and financial services markets. In 1998, he sold a 20% stake to Computershare, which acquired the total business in December 2000. From 1998, he was a senior executive with Computershare’s global business and continued to lead his own business as CEO. In 2002, he returned to Australia and assumed the role of Managing Director of Computershare Investor Services, successfully instigating and completing a major turnaround of the business. His career has been based around leadership, service and provision of high level sales and marketing of IT related solutions and services to blue chips and finance enterprises throughout the UK, USA and Australian marketplaces. Mr Gardner has held no other public company directorships over the last three years and is a Member of the Australian Institute of Company Directors. Your directors submit their 2006 Report for operations of the Company and the consolidated group for the year ended 30 June 2006. Directors The names and details of the Company’s directors in office during the financial period and until the date of this Report are as follows. Directors were in office for this entire period unless otherwise stated. Names, qualifications, experience and special responsibilities Mr Mansfield has a varied background in business across a wide range of industries and has held the CEO position at McDonald’s Australia Limited, Wormald International Limited, Optus Communications and John Fairfax. In more recent years he has filled a number of roles for the Federal Government and pursued his own business interests. In 1996 he reviewed the operating Charter of the ABC, he was a Major Projects Facilitator on a consultancy basis reporting directly to the Prime Minister and was appointed Strategic Investment Co-ordinator, in addition to his Major Projects role, within the Prime Minister’s Office. In November 1999, he completed his Federal Government roles and was appointed a Director of Telstra Corporation Limited and was Chairman from January 2000 until April 2004. In December 2003, he was appointed Non-executive Chairman of AAV Limited and during the past three years has also served as a director with the following public companies: • Telstra Corporation Limited • McDonalds Australia Limited* • estfield Management Limited and W Westfield America Management Limited • Investec Bank (Australia) Limited* • CDS Technologies Limited* • Allco Finance Group Limited* * denotes current directorship Mr Mansfield holds a Bachelor degree in Commerce, majoring in accounting. In January 2000 he was honoured with an Order of Australia award for his contribution to Australian business and economic development and to the telecommunications industry. /5 David Hunter Non-executive Director Mr Hunter was elected as a Non-executive Director of the Company on 28 February 2006 and re-elected at the General Meeting of Shareholders on 10 April 2006. Mr Hunter brings to the Board extensive global senior executive and management experience in mergers and acquisitions, change management, capital management, operational performance, strategic planning, dispute resolution and major clients and contracts. He has over thirty years managerial and operational experience at board and chief executive level with the global public company, Accenture and between 1994 and 2005 held the positions of Group Chief Executive of the global Government Operating group and Chief Executive Officer, Asia Pacific. Mr Hunter has not held any other public company directorships over the last three years. Mr Hunter holds a Bachelor degree in economics and is a member of the Institute of Chartered Accountants in Australia and the Australian Institute of Company Directors. John Murphy Non-executive Director Mr Murphy has over twenty five years accounting experience with a global accounting firm; fifteen years of which were at partner level with regional responsibilities. In 2002, he joined Investec Wentworth Private Equity Limited and is currently Managing Director and a director of all of the companies in which the Fund invests. Mr Murphy serves on the Company’s Nomination and Remuneration Committee. He was formerly the Chairman of AAV Limited between October 2002 and December 2003 and served on the Finance, Audit and Risk Committee until 28 February 2006. Mr Murphy’s public company directorships over the last three years have included: • Investec Bank (Australia) Limited* • nvestec Wentworth Private I Equity Limited* • First Opportunity Fund Limited* • Fone Zone Group Limited* • Mitre 10 Australia Limited* • Millers Retail Limited* • ustralian Pharmaceutical A Industries Limited* • MS Management and S Technology Limited • Southcorp Limited • Invocare Limited • Eduvest Limited • Kids Campus Limited * denotes current directorship Gregory Robertson Non-executive Director Mr Robertson has extensive business experience in business reconstruction and turnaround projects, private equity investments, accounting and law, having spent the first seventeen years of his career with an international accounting firm, eight of these as a partner, and two years as Chief Operating Officer of an electronic commerce services company, before joining Investec Wentworth Private Equity Limited in 2002. Mr Robertson is Chairman of the Company’s Finance, Audit and Risk Committee. Over the last three years, he has held the following public company directorships: • nvestec Wentworth Private I Equity Limited* • Eduvest Limited • ustralian Pharmaceutical Industries A Limited (alternate director)* • Fone Zone Group Limited* * denotes current directorship Mr Robertson holds Bachelor degrees in Economics and Law and a Masters degree in Business Administration. He is also a Solicitor of the Supreme Court in NSW and the ACT and a Member of the Institute of Chartered Accountants in Australia. Mr Murphy holds Bachelor and Master degrees in Commerce and Fellowships in the Institute of Chartered Accountants in Australia and the Society of Certified Practising Accountants. 6/ AAV Limited Annual Report 2006 Bryan Waters Non-executive Director Mr Waters has been a director of AAV Limited since October 2002 when the businesses of AAV Australia and ISIS Communications merged and became AAV Limited. He was previously a director and Chairman of ISIS Communications Limited. Mr Waters has extensive local and international business experience in human resources, banking and governance following a successful career as an executive director of the Bank of Melbourne and prior to that as a senior executive with National Australia Bank both in Australia and internationally. In the last three years he has held several Non-executive Directorships with privately held companies as well as consulting to a leading global careers management and leadership company. He has held no other public company directorships during the last three years. Mr Waters is Chairman of the Company’s Nomination and Remuneration Committee and a member of the Finance, Audit and Risk Committee. Mr Waters holds a Diploma of Business and is a Fellow of the Financial Services Institute of Australasia, a Member of the Australian Institute of Company Directors and is a Governor of the American Chamber of Commerce in Australia. Jeffrey Krug Chief Financial Officer/Company Secretary Mr Krug was appointed Chief Financial Officer on 7 March 2005 and Company Secretary of the Company on 12 April 2005. He was previously Chief Financial Officer, Vice Chairman and Chief Operating Officer of McCann-Erickson South Pacific, and previously held various regional and VP positions, including Regional CFO and VP (Advertising) McCann Asia Pacific with responsibilities for fourteen markets. Mr Krug commenced with McCann-Erickson in South Africa in 1982. Mr Krug has extensive experience in finance, commerce, treasury and IT, and holds Bachelor degrees in Accounting Science (Hons) and Commerce. He is a Member of the Australian Institute of Company Directors. Lyndon Goulding Company Secretary Mr Goulding was appointed as Company Secretary on 2 February 2004. He was previously Company Secretary of the listed entities United Energy Limited (1994 to 2003) and its subsidiary Uecomm Limited (1998 to 2004), and MacarthurCook Limited (2003 to 2004). Prior to 1994, he was Company Secretary of McIntosh Securities Limited (1987 to 1994). Mr Goulding holds a Bachelor degree in Commerce, and holds Fellowships in Chartered Secretaries Australia and the Society of Certified Practising Accountants. He is a Member of the Australian Institute of Company Directors. /7 Directors’ Report continued Interests in the shares and options of the Company and related bodies corporate As at the date of this Report, the interests of the persons who were directors during the period in the shares and options of AAV Limited were: Options over Ordinary Shares – 1,300,000 – – – – Director Mansfield, Robert Gardner, Michael Hunter, David Murphy, John Robertson, Gregory Waters, Bryan Ordinary Shares 345,186 200,000 1,000,000 190,000 297,500 53,300 Earnings per share Cents Basic earnings per share continuing operations Diluted earnings per share continuing operations Basic earnings per share Diluted earnings per share 8.3 8.3 17.7 17.7 Dividends Cents Final dividend on Ordinary Shares in respect of the 2005/6 financial year Interim dividend on Ordinary Shares in respect of the 2005/6 financial year 2.5 2.5 $’000 2,176 2,174 8/ AAV Limited Annual Report 2006 Corporate Information Corporate Structure AAV Limited is a company limited by shares that is incorporated and domiciled in Australia. It has no ultimate parent entity. AAV Limited has prepared a consolidated financial report incorporating the entities that it controlled during the financial period to 30 June 2006, which are outlined in the following illustration of the Group’s corporate structure: Nature of operations and principal activities The principal activities during the financial period within the consolidated enterprise were: • Event Services • Media Manufacturing (sold 30 June 2006) • igital Media Services D (sold 11 and 12 August 2005) During the period there were a number of significant changes to the nature of the activities of the Group. These changes are detailed on pages 20 to 22 of this Report. Employees The consolidated entity employed 929 employees (full time equivalents) as at 30 June 2006 (30 June 2005: 1,025 employees). Group Overview AAV Limited was first listed on the Australian Stock Exchange Limited following the merger with ISIS Communications Limited in late 2002. During the year ended 30 June 2006, the Company successfully concluded the disposal of businesses identified as a result of an in depth review of AAV’s business streams during 2005 for sustainability of earnings, growth prospects and contribution to shareholder returns. During the year, the Company sold its Digital Media Services operations to Omnilab Pty Limited and in a separate sale, AAV Broadcast Rentals was sold to Becker Group Limited and Ranik Pty Limited, for an aggregate amount of some $9 million. The results of the sales were taken to account in the previous financial year. The sales were successfully closed on 11 and 12 August 2005 respectively. On 28 February 2006, the Company announced that it had entered into an agreement with Regency Recordings Pty Limited for the sale of AAV Duplication Services Pty Limited, the company holding the investment in the DVD/CD/VHS/Cassette manufacturer, AAV Regency Pty Limited and the associated logistics business, Multi Media Logistics Pty Limited. The sale was completed on 30 June 2006. /9 Directors’ Report continued Event Services Staging Connections Pty Limited is Australasia’s leading event production and staging services provider specialising in technical and creative services for business events, such as product launches, promotions and conferences. Staging Connections provides end-to-end event production, event design, event staging and venue services, technical management, creative development and audio visual and staging equipment for corporate presentations, product launches, promotions, conferences, television broadcasts and award ceremonies. It operates in the corporate market and from over 70 leading hotels and convention centres in Australia, New Zealand, Fiji, China and SE Asia. Since the end of the financial year ended 30 June 2006, Staging Connections has extended its suite of services through a number of strategic acquisitions, details of which appear later in this Report, and now offers significant capability in developing, managing and organising trade shows and consumer exhibitions and a service reach which extends into Taiwan, Japan, Vietnam, The Philippines, Thailand and Indonesia. Staging Connections has been actively reviewing business opportunities in Australia and overseas and has been successful in acquiring an investment in a number of businesses during the year; details of which appear on page 20 of this Report. Media Manufacturing During the full year under review, AAV held a 51% interest in the home entertainment products manufacturer, AAV Regency Pty Limited and a 25.5% interest in the associated distribution and logistics business, Multi Media Logistics Pty Limited. On 30 June 2006, AAV sold its interest in these businesses for an amount of $22 million plus a share of the excess cash and working capital in that business as at that date. Refer page 21 of this Report for further details. 20/ AAV Limited Annual Report 2006 AAV Regency manufactures DVD/CD/ VHS/Cassettes for the home entertainment industry for a diverse range of multi-national and independent home entertainment and corporate clients. Digital Media Services The disposal of the Digital Media Services businesses was reported in the 2005 Annual Report. They were sold to third parties on 11 and 12 August 2005. More details of the divestment of these businesses can be found on page 21 of this Report. Investment activities During the year, the Company held investments in the following four businesses: 1 Continuing operations: 1.1 TG Staging Connections (China) E Co. Limited (business stream – Event Services). 2 Discontinued operations: 2.1 AV Regency Pty Limited (business A stream – Media Manufacturing, 51% – sold 30 June 2006); 2.2 ulti Media Logistics Pty Limited M (business stream – Media Manufacturing, 25.5% – sold 30 June 2006); and 2.3 ubsat Pty Limited (business stream – D Digital Media Services, 50% – sold 11 August 2005). Performance Indicators On a monthly basis the Board of directors monitors company and divisional performances against the annual strategic plan and fiscal budgets as well as receiving detailed operating business unit financial performance analyses on a quarterly basis. The strategic plan and financial budgets are set annually and carefully monitored for consistency with current business performance and adjusted when considered appropriate to account for changing conditions and effects on fiscal projections. The Board conducts an annual review of its effectiveness, composition and performance, and engages in an annual strategy planning process which commences at the business unit manager level to engage each manager and to ensure their familiarity, ownership and acceptance of the strategic plan and expected financial performance for each business unit. Business Dynamics Event Services The 2005/6 financial year confirmed the leading edge performance of the Event Services Division. With the appointment of the new Managing Director of Staging Connections, Bill Davidson, the business has undergone a resurgence of enthusiasm and development, with all aspects of the business coming under critical review to ensure greater emphasis on customer focus and service through the reorganisation and rejuvenation of its service delivery model. As part of the rejuvenation of the Division, new Directors of Marketing and Sales were employed to restructure and refocus the teams supporting these two key functions. During the financial year, Staging Connections expanded its domestic and international operations, and global service delivery capability by: 1 aking a 51% investment in ETG Staging T Connections with operations in Beijing, Shanghai and Guangzhou, China. ETG Staging Connections services two major hotel chains in China, and has adopted the Staging Connections service delivery model and is actively pursuing additional venues and emerging opportunities; 2 pening in three hotel venues in Fiji, with O the opportunity to expand into further new hotels being brought on line over the next 12 months; and 3 cquired Staging Connections, Canberra, A a previously franchised business. The acquisition of the Canberra franchise has enabled greater co-operation and synergistic development of the Sydney/ Canberra service delivery model and rationalised equipment usage and capital expenditure. Since the end of the financial year, Staging Connections has continued to investigate and pursue opportunities in adjacent and developing markets and has recently announced the following developments and investment initiatives: 1 cquired all of the business of Exhibitions A and Trade Fairs Pty Limited, a leading Australian exhibition owner, organiser and manager, specialising in trade shows and consumer exhibitions. The deal was settled on 1 September 2006 ; 2 cquired all of the business of Stageworks, A Cairns, a far North Queensland events business; 3 cquired a 70% interest in The Event A Company, Singapore; 4 ntered into a strategic business E relationship with Paul Kenny, one of the world’s leading creative designers; and 5 cquired a 70% interest in Techmex A Singapore and Malaysia and Techmex China with offices in Beijing and Shanghai. 6 s at the date of this Report the Company A is expected to enter into agreements to acquire a majority interest in a leading event production and staging services business in UAE; and 7 ntered the final stages of due diligence E for the acquisition of one of Australia’s leading international creative and special events businesses. Staging Connections is actively pursuing further opportunities for global expansion of its service delivery model and is strategically focussing upon establishing a major international creative, staging and event company. During the year under review, Staging Connections concentrated on its performance through the active engagement of all levels of staff in business development, client presentations, event execution and its promise of ‘delivering on certainty’ for all clients. The business has revised, and is reinforcing, its staff training and education processes and is placing greater emphasis on internal and external communication, as well as client liaison and contact. Media Manufacturing The Media Manufacturing business, AAV Regency was sold to the 49% joint venture investor in that business on 30 June 2006. This sale followed an extensive operational and business performance review which determined that it was not a business which would provide long term sustainable earnings for AAV’s shareholders. AAV sold its 51% interest to Regency Recordings Pty Limited for $22.0 million plus adjustments for cash on hand and working capital through to the date of settlement. AAV booked a one-off book profit on the sale of $7.3 million. Multi Media Logistics Pty Limited, the associated logistics and distribution business specialising in the distribution of home entertainment and media product was also sold as part of the AAV Regency sale. Multi Media Logistics continued with its solid on budget performance for the year. Digital Media Services The results for the year under review include revenues and certain residual costs associated with the operations of the Digital Media Services businesses sold on 11 and 12 August 2005, for an aggregate amount of $9 million, to Omnilab and the sale of the outside broadcast business to Becker Group and Ranik. All identified major costs associated with the former businesses were provided for in the Statement of Financial Position at 30 June 2005. Operating Results for the Year (Comparative figures are for the prior financial period of six months ended 30 June 2005) From 1 July 2005, with the consent of the Australian Securities and Investments Commission, AAV moved to a 30 June financial year. The Financial Statements for 30 June 2006 are in respect of the financial year ended on that date. The Financial Statements have been prepared under the Australian Equivalents to International Financial Reporting Standards (AIFRS). AAV recorded a net profit after tax for the financial year of $15.4 million (prior period loss of $17.8 million) after booking a one-off gain associated with discontinued operations amounting to $7.3 million (prior period charge, $20.1 million). The Company reports revenues from continuing operations for the financial year of $83.9 million ($35.8 million prior period), with operating profit before tax from continuing operations of $6.7 million (prior period $4.5 million). The contributions from continuing and discontinued operations for the year ended 30 June 2006 after tax were: 1 Investment in this sector sold 30 June 2006 2 Investment in this sector sold 10 and 11 August 2005 /2 Directors’ Report continued At 30 June 2006, the Company had one continuing business sector, Event Services (Staging Connections). The Staging Connections business recorded an EBIT of $7.0 million (prior period $5.1 million) on revenues of $83.9 million (prior period $35.8 million). Staging Connections’ capital expenditure for the year was $9.9 million expended on upgrading existing venue facilities, new venue fit-outs and start up of the Fiji and China based operations. AAV has continued the development of its shared services structure, which will provide administrative, strategic, IT and business development services to an expanding and growth oriented company. A review of the Company’s IT capability undertaken during the year to 30 June 2006 has identified the need for IT systems and infrastructure to be upgraded. A management steering group has been formed to plan, develop and implement the Company wide IT upgrade. The discontinued operations of Media Manufacturing and Digital Media Services businesses contributed an EBIT profit of $10.7 million for the year (prior period loss of $22.4 million) on revenues of $27.6 million (prior period $31.9 million). The results for the Media Manufacturing business were adversely impacted by increased competition and absence of block buster DVD titles from the major studios. The costs associated with the sale of the Digital Media Services businesses were reflected in the 30 June 2005 financial results of the Company. Historical Performance The Company and consolidated entity have undergone considerable change, growth and rationalisation over the last five years. In 2000, AAV Limited was known as ISIS Communications Limited and AAV Australia Pty Limited was a separately run unlisted company. In October 2002, AAV Australia and ISIS Communications merged and ISIS Communications changed its name to AAV Limited. AAV Limited became the listed entity on the Australian Stock Exchange Limited. Contemporaneously with the merging of the businesses, a 10:1 capital consolidation was undertaken together with the issue of additional shares. In July 2003, AAV formed the AAV Regency Pty Limited joint venture with Regency Recordings Pty Limited, and in November 2003, it acquired Staging Connections Pty Limited. In June 2005, following disappointing financial performance and a complete review and restructuring, the Company announced that it was divesting its Company’s Digital Media Services operations. These operations were sold in August 2005. In February 2006, AAV announced its agreement to sell its investment in the Media Manufacturing businesses AAV Regency Pty Limited and Multi Media Logistics Pty Limited. On 30 June 2006, the Company sold its subsidiary company, AAV Duplication Services Pty Limited, the company holding its investment in the Media Manufacturing businesses, to Regency Recordings Pty Limited. The following table shows AAV’s dividend history (including the current period) for the past five years Profit Before Tax over the past 6 reporting periods ($’M) 20 15 10 0 -5 -10 -5.1 2002 (1) 1 17.5 12.5 4.5 6.7 2003 2004 (3) 2005 (2)(3) 2006 (3) SIS Communications Limited full year / AAV two months following merger 2 Six months period to 30 June 2005 3 Profit before tax for Continuing Operations I The years 2002, 2003 and 2004 have been calculated in accordance with AGAAP. The Financial Year ended 30 June 2006 year and the financial period of six months ended 30 June 2005, have been prepared in accordance with AIFRS. Please refer to the accompanying Notes to the Financial Statements, Note 1(ab) – Impact of adoption of AIFRS for discussion on the type of impact that the adoption of AIFRS has made to the Financial Statements. 22/ AAV Limited Annual Report 2006 The following table shows AAV’s dividend history (including the current period) for the past five years Date paid 22.09.06 21.03.06 29.03.06 20.09.06 26.03.04 16.09.03 Cents per ordinary share 2.5 2.5 4.0 5.0 4.0 2.5 The following table shows AAV’s opening and closing share price history (including the current period) for the last five years. 12 months ended 31/12/2002 Opening share price Closing share price * Opening price on ASX listing on 30 October 2002 12 months ended 31/12/2003 0.56 1.66 12 months ended 331/12/2004 1.66 1.39 12 months ended 31/12/2005 1.39 1.32 12 months ended 31/12/2006 1.32 1.07 0.64* 0.56 Shareholder Returns The price of the Company’s shares have moved in the range of $0.83 to $1.38 per share during the year and at the date of this Report were $1.11 per share. Following cessation of the September 2005 dividend to shareholders, payment of dividends to shareholders were recommenced in March 2006 with a 2.5 cents per share fully franked interim dividend for the six months ended 31 December 2005. Directors have declared a fully franked final dividend of 2.5 cents per ordinary share in respect of the 2006 financial year. The performance of the Company as reflected in various financial measures is shown below: Measure Basic earnings per share (cents) Return on assets (%) Weighted average cost of capital (%) Return on equity (%) Cost of equity (%) Net debt/equity ratio (%) Dividend payout ratio (%) Available franking credits ($’000) 1 2003 (3)(4) 16.80 8.96 7.84 15.18 13.87 11.55 14.88 13,202 2004 (3)(5) 13.10 9.17 18.55 14.42 31.24 18.02 68.70 12,666 2005 (1)(5) -21.30 -15.17 12.24 -30.51 10.53 24.21 -21.28 11,633 2006 (2)(5) 17.70 14.22 12.21 21.42 14.28 -20.70 28.29 12,800 Half year ended 30 June 2 Year ended 30 June 3 Year ended 31 December 4 Calculated in accordance with AGAAP 5 Calculated in accordance with AIFRS /23 Directors’ Report continued Investments for future growth Following the successful divestment of the under performing businesses of Digital Media Services and Media Manufacturing, AAV is now strategically positioned to concentrate on its Event Services businesss sector and also to focus on growing AAV through investment in aligned and adjacent businesses both nationally and globally. Staging Connections has identified and announced a number of global initiatives and strategic acquisitions and investments aimed at increasing its international and Australian presence and is strategically and geographically well placed to achieve its aim of becoming a dominant international player in the events and staging arena. During the year, Staging Connections finalised the acquisition of a 51% interest in ETG Staging Connections, China with operations in Beijing and Shanghai, and opened its Fijian base with three major hotel venues and soon to be opened further venues. Staging Connections also entered into agreements for investments in new businesses in Australia, Singapore and key offshore event hub locations as detailed earlier in this Report. These investments represent exciting growth opportunities for Staging Connections. The Company continues to actively review opportunities, not only for its events and staging business, but also in adjacent and allied businesses, where it can identify strategic and synergistic benefits and growth in shareholder returns for the future. The Company has been very active in reviewing a number of opportunities, many of which it has not pursued past initial due diligence due to the emergence of unsatisfactory operational, financial or legal issues discovered during that rigorous review process. Your directors are committed to pursuing growth initiatives but will only do so where the opportunities meet the stringent financial, governance and operational hurdles set by the Company to ensure that sustainable returns to shareholders are secured by the investment. Review of financial condition Capital Structure During the period under review, the Company’s capital structure was affected by the following: 1 s a result of the valid exercise of vested A options under the AAV Directors and Executives Share Option Plan and the Employees Share Option Plan, the Company issued 320,000 new shares during the period to participants at issue prices varying between $0.70 and $0.80 per share. Shares issued under the Share Option Plans rank equally with all existing ordinary shares from the date of issue; 2 n 27 February 2006, directors approved O the AAV Option and Performance Shares Plan and the grant of 1,790,000 options thereunder to certain AAV executives. Details of the terms and conditions of the grant of options under the new Plan can be found on page 86 of this Annual Report; 3 n 10 April 2006, AAV shareholders O approved the grant of 500,000 options to the CEO, Michael Gardner under the AAV Option and Performance Shares Plan. Details of the terms and conditions of the grant can be found on page 86 of this Annual Report; 4 ollowing the sale of the Digital Media F Services businesses, 120,000 unvested options over AAV ordinary shares held by employees employed by those businesses under the Employees Share Option Plan were cancelled following the transfer of employment to the new owners thereof, or in certain circumstances, cessation of employment; 5 n 27 February 2006, directors approved O the cancellation of 940,000 previously granted but unvested options to a number of executives which were significantly out-of-the-money, were unlikely to ever be exercised and which were regarded as a disincentive to the participants; 6 n 15 December 2005, 8,571,429 O ordinary shares issued to certain vendors of Staging Connections in December 2003 and held in escrow, became unrestricted; 7 ince the end of the financial year, S 345,000 options granted to certain Staging Connections employees following the acquisition of Staging Connections by AAV Limited in late 2003 and which vested with the participants on 20 June 2004, were cancelled upon reaching their expiry date; 8 n 1 September 2006, 3,340,000 O ordinary shares issued to certain vendors of Staging Connections in June 2005 and held in escrow, became unrestricted; and 9 ollowing the sale of the Media F Manufacturing business on 30 June 2006, 70,000 options granted under the Employees Share Option Plan became exercisable. On 4 September 2006, these options were exercised in equal tranches at $0.70 and $0.80 per option. The increase in paid-up capital of the Company was $281,500 million for the period 1 July 2005 to the date of this Report. 24/ AAV Limited Annual Report 2006 Treasury Policy The Company has established a strong working relationship with its bankers and maintains a low level of gearing in readiness for any opportunity which may emerge for the strategic growth of the business. The Board of directors through the Finance, Audit and Risk Committee formulates the Treasury Policy of the Company. The Board of directors receives detailed monthly reports on Treasury activities and the debt position of the Company. During the period, the Company retired $7.705 million in Hire Purchase and Leases following the sale of the Digital Media Services businesses in August 2005 and the Media Manufacturing businesses on 30 June 2006. The net cash balances (after deducting debt) of the Company at 30 June 2006 were $15.1 million (prior period net debt of $14.1 million) and as at the date of this Report, net debt of $7.3 million. The Company maintains an interest rate hedging policy. Cash from operations Net cash flows from operating activities for the year ended 30 June 2006 were $22.1 million, up over the previous six months ended 30 June 2005 of $6.4 million. The increase in cash was a result of the reporting period being twelve months (prior period six months) and receipt of proceeds from the sale of the Digital Media Services and Media Manufacturing businesses. Trade debtors at 30 June 2006 were $16.2 million compared with $19.8 million at 30 June 2005. At 30 June 2005, the Company booked provisions for doubtful debts primarily associated with the Digital Media Services businesses of $2.7 million. Since that date a number of recoveries have been made and the Company continues to pursue the outstanding long term debtors for payment. This provision will be written back as and if these debts are collected. Net cash inflows from the sale of the Digital Media Services businesses amounted to $6.3 million and for the sale of the Media Manufacturing business, $17.0 million. Liquidity and funding The Company has access to undrawn debt facilities with its bankers of $30.4 million and net cash balances (after deducting debt) as at 30 June 2006 of $15.1 million. The Company has sufficient funds to finance its growth aspirations and identified targets to date as well as its operations. Undrawn bank facilities are primarily maintained to facilitate business opportunities and unforseen/ unbudgeted expenditure as these may arise from time to time. Risk Management The Company has in place a comprehensive Corporate Governance Policy which includes adherence to an effective risk management programme based on Standards Australia’s Risk Management Standard AS/NZS 4360:2004. The Board of directors through its Finance, Audit and Risk Committee is responsible for ensuring that risks and opportunities are identified on a timely basis and that the Company’s objectives and activities are aligned with the risks and opportunities identified by the Board. The Company maintains a policy that directors must be included in the risk management process through the deliberations of the Finance, Audit and Risk Committee. From time to time, the Board will form a special Committee of directors who have particular skills and/or experience to review an issue and to recommend action to the full Board. The Board has a number of recommendations in place to ensure that the objectives and activities of management are aligned with the risks identified by the Board. These recommendations include the following: • strategic plan approved by the Board A aligned to meet key stakeholder needs and management of business risks; • oard approved operating plans and B budgets with monthly reporting against key performance indicators, both financial and operational; • he establishment of committees to T address specific issues and business risks comprised of those directors and managers who are most qualified and/or experienced to address the issues under consideration; and • he Board has a self evaluation process T which is undertaken annually to ensure that it is operating effectively and that it is made up of members with a mix of skills and experience appropriate for the organisation. Statement of Compliance The Report is based on the guidelines in The Group of 100 Incorporated publication Guide to the Review of Operations and Financial Condition. /25 Directors’ Report continued Significant changes to the state of affairs During the period 1 July 2005 to the date of this Report, total equity increased from $58.3 million to $73.1 million, an increase of $14.8 million. The movement was due to several factors: 1 he issue of 390,000 ordinary shares to participants in the Company’s Directors and Executives Share Option Plan and the Employees Share T Option Plan who have exercised vested options under the Plans in accordance with the Plan Rules and conditions of grant of options. The shares issued under the Option Plans rank equally with existing AAV ordinary shares and were exercised and issued at the following prices: Number of options exercised in the year ended 30 June 2006 270,000 50,000 Increase in shareholder equity Weighted average exercise price/share Number of options exercised in the period 1 July 2006 to the date of this Report 35,000 35,000 Exercise price per option $0.70 $0.80 Shareholder equity contributed in the year ended 30 June 2006 ($) 189,000 40,000 229,000 $0.716 Shareholder equity contributed in the period 1 July 2006 to the date of this Report ($) 24,500 28,000 52,500 $0.750 2 ivestment of the Digital Media Services businesses on 11 and 12 August 2005. The financial impact of the divestment was charged to the D results for the period to 30 June 2005. 3 Divestment of the investment in Media Manufacturing on 30 June 2006. Resources generated by the consolidated entity have been applied to strategic acquisitions, operating expenditure and towards capital expenditure associated with the expansion of the Event Services Division into new venues and businesses. 26/ AAV Limited Annual Report 2006 Significant events after the balance date Since 30 June 2006, the following significant events have occurred: 1 cquired all of the business of Exhibitions A and Trade Fairs Pty Limited, a leading Australian exhibition owner, organiser and manager, specialising in trade shows and consumer exhibitions. The deal was settled on 1 September 2006 ; 2 cquired all of the business of A Stageworks, Cairns, a far North Queensland events business; 3 cquired a 70% interest in The Event A Company, Singapore; 4 cquired a 70% interest in Techmex A Singapore and Malaysia and Techmex China with offices in Beijing and Shanghai; 5 s at the date of this Report the Company A is expected to enter into agreements to acquire a majority interest in a leading event production and staging services business in the UAE; and 6 ntered the final stages of due diligence E for the acquisition of one of Australia’s leading international creative and special events businesses. Environmental regulation and performance The consolidated entity is not subject to any particular or significant environmental regulation. To its knowledge, it has not breached, nor received any notices under any environmental legislation. Indemnification and insurance of directors and officers The Company has in place an agreement to indemnify the directors and officers for any liability arising out of the conduct of the business or in the discharge of their duties as a director or officer of the consolidated entity. The Company maintains a contract of insurance for the directors and officers of AAV Limited and its controlled entities. The premium attributable to the period under review was $43,384. The Company has entered into a Deed of Indemnity and Access with each director which provides the director with access to certain records of the Company and insurance cover under the Directors’ and Officers’ Insurance Policy during the term of office and for a period of seven years post cessation as a director of the Company. Share options Unissued shares As at the date of this Report, there were 3,685,000 unissued ordinary shares under options (4,100,000 at reporting date). Refer to Note 25 the Financial Statements for further details of options outstanding. Option holders do not have any rights, by virtue of the options, to participate in any share issue of the Company or any related body corporate or in the interest issue of any other registered scheme. Shares issued as a result of the exercise of options During the year ended 30 June 2006, employees and directors exercised vested options to acquire 320,000 ordinary shares in AAV Limited at a weighted average exercise price of $0.716 per share. Further details are provided on page 26 of this Report. In the period since balance date, a further 70,000 options have been exercised at a weighted average exercise price of $0.750 per share. Further details are provided on page 26 of this Report. Likely developments and expected results The 2006/7 financial year is expected to be one of growth through strategic and adjacent business acquisitions, both nationally and internationally. The 2006/7 financial year is expected to see a continued growth in profitability and shareholder returns. The Company is committed to timely and full disclosure to shareholders and the investment community. In respect of opportunities currently before the Company for acquisitions and investments, announcements will be made in accordance with the continuous disclosure obligations of the Australian Stock Exchange’s Listing Rules. Any premature release of details of these strategic acquisitions and investments may be prejudicial to current negotiations. /27 04 28/ AAV Limited Annual Report 2006 The Company aims to remunerate executives with a level and mix of remuneration commensurate with their responsibilities and accountabilities within the Company. Directors’ Report – Remuneration Report The remuneration report is set out under the following main headings: A) rinciples used to determine the nature P and amount of renumeration B) Details of renumeration C) Service agreements D) Share-based compensation E) Additional information The information provided under headings A-D includes remuneration disclosures that are required under Accounting Standard AASB 124 Related Party Disclosures. These disclosures have been transferred from the financial report and have been audited. The disclosures in Section E are additional disclosures required by the Corporations Act 2001 and the Corporations Regulations 2001 which have not been audited. This Report details the renumeration arrangements in place for directors and exectutives of the Company. dependent upon achievement of agreed pre-determined performance hurdles; • ach executive is to be entitled to E participation in the Employee Share Option Plan or the Option and Performance Shares Plan on terms and conditions consistent with the Plans’ Rules, the Corporations Act (2001) and ASX Listing Rule requirements; and • ach executive is to be subject E to a rigorous annual performance review process. Nomination and Remuneration Committee The Board has formed a Nomination and Remuneration Committee for the purposes of determining recommendations to the Board regarding the remuneration of directors, the Chief Executive Officer and direct reports to the Chief Executive Officer. In addition, the Committee has responsibilities for the selection of directors, and reviewing the performance of the Chief Executive Officer, the Board and each director. The Committee Charter is set out on page 40 of the Corporate Governance Statement which forms part of this Report. The Nomination and Remuneration Committee reviews the appropriateness of the nature and amount of remuneration of directors, the Chief Executive Officer and those senior managers who report directly to the Chief Executive Officer. The Committee makes reference on a periodic basis to relevant employment market conditions to assess the appropriateness of remuneration and to ensure alignment to maximising shareholder value from the retention of high calibre board members and senior executives. Remuneration structure The structure of Non-executive Director and senior executive remuneration is separate and distinct, in accordance with best practice corporate governance. A) Principles used to determine the nature and amount of remuneration (audited) The performance of the Company is dependent upon the skills and quality of its directors and executives. The Company maintains a policy of paying competitive remuneration in line with market forces sufficient to attract, motivate and retain highly skilled and dedicated directors and key management personnel (executives). The following principles have been embodied into the Company’s remuneration policies: • rovide competitive rewards to attract P and retain high calibre executives; • hareholder value to be the driver for S executive rewards, but recognising the achievement of pre-set KPI’s under a Balanced Scorecard approach as an alternative during a period of restructure and growth; • ach executive is to have an agreed E percentage of total remuneration at risk and /29 Directors’ Report – Remuneration Report continued Non-executive Director remuneration Objective The Board has set the aggregate remuneration of the Non-executive Directors after reviewing market trends and comparable companies listed on the Australian Stock Exchange. The remuneration is set at a level to ensure that directors of the highest calibre are attracted and retained by the Company. Structure The aggregate remuneration of the Nonexecutive Directors of the Company is set in accordance with the Rules of the Company’s Constitution and the ASX Listing Rules. The aggregate remuneration is approved from time to time in General Meeting by the shareholders of the Company and divided between directors in accordance with a resolution of directors. The latest determination of the level of aggregate directors’ fees was at the Annual General Meeting held on 29 April 2004 when shareholders approved an aggregate remuneration of $400,000 per year. The amount of the aggregate remuneration as approved by shareholders and the manner in which it is apportioned between directors is reviewed periodically. The Board considers advice from external consultants and the level of fees paid by peer group companies when undertaking the periodic review of Nonexecutive Directors’ fees. Non-executive Directors receive a fee for sitting on the Board of the Company plus a fee for any board committee involvement. In exceptional circumstances, additional fees may be payable where a director has provided significant additional time commitment, provided that these fees sit within the aggregate cap of directors’ fees as approved by shareholders from time to time. Non-executive Directors of the Company are also shareholders of the Company, such shares having been purchased on market or 30/ AAV Limited Annual Report 2006 obtained by virtue of the merger of AAV with ISIS Communications Limited in 2002 and/or the acquisition of Staging Connections Pty Limited in late 2003. The Board holds a view that it is healthy for Non-executive Directors to maintain a shareholding in the Company; however Non-executive Directors do not participate in the Company’s Share Option Plans. Senior manager and executive remuneration Objective The Company aims to remunerate executives with a level and mix of remuneration commensurate with their responsibilities and accountabilities within the Company. The remuneration philosophy is designed to: • eward executives for performance at the R Company, business unit and personal level measured against agreed and pre-set benchmarks; • lign the interests of shareholders and A executives; • ink reward with achievement of strategic L goals and Company performance; • nsure that total remuneration is E competitively based by market standards; and • otal remuneration is based on a T ‘Total Employment Cost’ approach to the Company. Structure The Nomination and Remuneration Committee is charged with formulating recommendations for the Board and reviewing the level of remuneration to be paid to the Company’s executives. The Chairman of the Committee consults external market advisers as to market developments and trends for consideration by the Committee in its deliberations. The Company enters into service agreements with each executive in a standard format as set by the Committee. The provisions of the service agreement for the Chief Executive Officer appear on page 34 and are representative of these agreements. The remuneration of executives is fixed within a capped ‘Total Employment Cost’ (TEC) comprised of the following base and ‘at risk’ components: • Fixed remuneration • Variable remuneration, divided between: 1 Short term incentive (STI); and 2 Long term incentive (LTI). The proportion of fixed remuneration and variable remuneration is established for each executive by the Chief Executive Officer in consultation with the Chairman of the Nomination and Remuneration Committee. The proportion of fixed and variable remuneration for the Chief Executive Officer is recommended by the Committee to the Board of the Company. Tables 1-2 on pages 32-33 set out the components of remuneration for key management personnel of the Company and the consolidated entity. Fixed remuneration Objective The level of fixed remuneration is set to provide a base level of remuneration appropriate to the position and which is competitive in the market. The Company undertakes an annual review of fixed remuneration through the Nomination and Remuneration Committee which assesses market movements, company, business unit and personal performance and seeks independent external market advice, where appropriate, to ensure that it has access to the latest trends in remuneration planning and structuring. Executives are capable of structuring their fixed remuneration in a number of forms to optimal effect without creating any increased cost to the Company. Executives may ‘salary sacrifice’ their fixed remuneration into motor vehicles and expense payment plans within the overarching fringe benefits taxation legislation. The fixed remuneration component of the key management personnel of the Company is contained in Table 2 on page 33 of this Report. Variable remuneration – Short Term Incentive (STI) Objective The aim of the STI component of remuneration is to align the achievement of the Company’s operational targets with the remuneration received by the executives charged with the achievement of those targets. The level of STI is set so as to provide sufficient incentive to executives to achieve the operational targets but constraining the level of remuneration within the reasonable bounds of TEC to the Company. Structure The amount of STI payments due to each executive depends upon the extent to which the executive achieves specific operational targets as set and agreed at the commencement of each financial year. The operational targets consist of both financial and non-financial measures generically regarded as key performance indicators (KPIs), and can include such items as business unit financial contribution to profit (EBITA), customer service, risk management, business development, strategic growth initiatives, etc. The Board has set pre determined bench marks which must be met to trigger the payment of STI. The payment of STI is undertaken annually following the completion of the Company’s annual financial statements. The Nomination and Remuneration Committee is responsible for the determination of the STI payment to the Chief Executive Officer and for reviewing and approving the STI payment recommendation of the Chief Executive Officer in respect of the performance of his direct reports. The Board approves the payment of the STI payment to the Chief Executive Officer. STI payments are paid in cash with the ability for the executive to nominate that any STI due, or part thereof, in the future may be directed into the superannuation fund of the executive concerned. The election to direct any future STI payment into superannuation must be made prior to the date a STI is earned or due. Variable remuneration – Long Term Incentive (LTI) Objective The main element behind LTI as a reward for executives is the alignment of the creation and/or increase of shareholder wealth with the remuneration of executives. As a result, the granting of LTI benefits to executives is restricted to those executives who have a material influence on the Company’s performance in achieving long term performance objectives. Structure LTI benefits are currently in the form of options over ordinary shares in the Company under the Directors and Executives Share Option Plan (DESOP), the Employees Share Option Plan (ESOP) and the Option and Performance Rights Plan (OPRP). Historically, the entitlement to the grant of LTI to executives has been dependent upon the achievement of long term objectives as agreed with executives and utilising the ‘Balanced Scorecard’ approach considered appropriate during the period of restructure and reorganisation of the Company. The criteria used under the Balanced Scorecard approach include measures within the following categories tailored for each individual executive: • Strategic and business excellence; • Operational excellence; • Human asset management; • Company position and marketing; and • Corporate excellence. With the introduction of the OPRP, the Company has moved to a minimum two year vesting period following the date of grant and to measuring the improvement in the Company’s Total Shareholder Returns (TSR) compared with the performance of the ASX/S&P Small Ordinaries Index over a common specified period. The percentile achievement of increased TSR will determine the percentage of options which will vest with a participant at the testing date. The directors have considered the bases of measurement of performance for the purposes of the Company’s remuneration policy and have agreed that given the historical changes to the entity it is now appropriate for the remuneration of the executives to be linked to company performance and in particular Total Shareholder Return, Earnings Per Share, etc and for it to be compared with the performance of the S&P/ASX Small Ordinaries Index for the purposes of executives’ entitlements to LTI benefits. In the event that the measures within the testing criteria are not achieved for a performance measurement period, the entitlement to vesting of options under the Company’s Share Option Plans will be either: 1 ll options will be held over and a performance retested at the end of the next performance measurement period and subsequent performance measurement periods until the option expiry date; or 2 proportion of the options will vest with a the executive and the remaining unvested options will be held over and retested in accordance with (1) above. Under the Rules of the Share Option Plans, the directors have discretion to amend the terms of an offer for options in the Company provided that strict compliance with ASX Listing Rules and the Corporations Act (2001) is maintained. /3 Directors’ Report – Remuneration Report continued B) Details of renumeration (audited) Table 1: Key Management Personnel remuneration for the year ended 30 June 2006 Short term employee benefits Salary Directors R. Mansfield M. Gardner D. Hunter J. Murphy G. Robertson B. Waters E. Gregory P. Colby R. Cartledge 2006 2005* 2006 2005* 2006 2005* 2006 2005* 2006 2005* 2006 2005* 2006 2005* 2006 2005* 2006 2005* 135,156 70,000 339,450 150,952 16,726 – 60,000 25,000 60,000 35,000 72,405 37,500 – 51,647 – 78,500 – 40,646 – – 110,092 45,872 – – – – – – – – – – – – – – – – 27,523 2,600 – – 1,153 – 2,205 – – – – 115,066 – 348,6199 – 136,693 12,164 6,300 42.936 17,714 1,505 – – – – – 6,516 3,375 – 4,648 – 6,525 – – – – 66,031 23,983 – – – – – – – – – (6,619) – (6,619) – (6,619) 147,320 76,300 586,032 241,121 18,231 – 61,153 25,000 62,205 35,000 78,921 40,875 – 164,742 – 427,025 – 170,720 Bonus Other Post employment benefits Superannuation Share based payments Options Name Year Total 32/ AAV Limited Annual Report 2006 Specified Executives P Kolevas J Krug (1) 2006 2005* 2006 2005* 2006 2005* 2006 2005* 2006 2005** 221,483 87,219 298,165 91,041 229,358 104,128 187,308 – 166,093 – – 51,325 89,450 27,523 57,339 55,582 56,192 – 30,483 – 29,686 24,000 – – – – – – – – 24,553 12,469 34,885 10,671 25,803 14,374 21,916 – 17,694 – 25,417 28,410 75,091 27,488 31,412 28,410 11,991 – 25,130 – 301,139 203,423 497,591 156,723 343,912 202,494 277,407 – 239,400 – G Kearns B Davidson (2) V Hekimian * 2005 = half year ended 30 June 2005 ** Hekimian was not a speccified executive in 2005 1 Appointed 7 March 2005 2 Appointed October 2005 Table 2: The table below confirms the percentage of the disclosable key management personnel’s’ annual remuneration which is At Risk versus Fixed, the percentage of the value of their remuneration for 2006 that consists of share options, and the percentage of total bonus paid and forfeited. Share options Fixed At Risk as % of total Remuneration Remuneration remuneration Directors R. Mansfield M. Gardner J. Murphy G. Robertson B. Waters D. Hunter Specified Executives P. Kolevas J. Krug G. Kearns B. Davidson V. Hekimian 92% 65% 73% 74% 76% 8% 35% 27% 26% 24% 8% 15% 9% 4% 10% N/A 100% 100% 100% 66% N/A 0% 0% 0% 34% 100% 68% 100% 100% 100% 100% — 32% — — — – — 11% — — — – N/A 100% N/A N/A N/A N/A N/A 0% N/A N/A N/A N/A % of bonus payable % of bonus forfeited /33 Directors’ Report – Remuneration Report continued C) Service Agreements (audited) Executives are employed under service agreements which are open ended as to period of service. Exceptions will prevail for the employment of business vendors who are engaged for an agreed period following acquisition of their business as part of the transaction. Service Agreements contain the following provisions: • tatement of duties and reporting structure; s • alary packaging arrangements and s components (including Fixed remuneration, STI, LTI and superannuation); • ntitlements to sick, long service and e annual leave; • confidentiality agreement; • estraint and non-interference clauses r following termination of service; • termination period; and • dispute resolution. The services of the Chief Executive Officer (CEO) are secured under a service agreement dated 10 January 2005. The terms of the agreement are: • the term of engagement is open; • uring employment the CEO is restrained d from participating in any similar business to the business of the Company or its associated businesses; • he Company may terminate the services of t the CEO by providing three months written notice and the payment of twelve months TEC from the date of such written notice. Any vested but unexercised options held by the CEO under the Company’s Directors and Executives Share Option Plan or Option and Performance Shares Plan may be exercised by the CEO within 90 days of the date of termination. Under the Plans’ Rules, directors maintain discretion to permit the early vesting of any unvested options held at the termination date; • he Company may immediately terminate t the services of the CEO in the event of serious misconduct, dishonesty, fraud or breach of duty. In this event, the CEO is only entitled to that proportion of remuneration which is due up to and including the date of termination. Under the Rules of the Option Plans, vested options may be exercised within 90 days of the date of termination; all unvested options will be cancelled; • he CEO may terminate his services by the t giving of three months written notice to the Company; and • he CEO will remain under confidentiality, t non-compete and non-interference obligations for a period of 6 months following cessation of employment. D) Share-based compensation (audited) Table 3: Remuneration options: Granted, cancelled and vested during the year During the financial year options were granted as equity compensation benefits to certain specified directors and specified executives as disclosed below. The options were issued free of charge. Each option entitles the holder to subscribe for one fully paid ordinary share in the entity at a pre-determined exercise price. Other specific details on options including vesting period, and expiry dates. Weighted Exercise price Grant Date per share — 28.2.06 — — — — — $0.90 — — — — First Exercise Date — 28.2.08 — — — — Last Exercise Date — 28.2.11 — — — — Directors R. Mansfield M. Gardner J. Murphy G. Robertson B. Waters D. Hunter Total: Directors Specified Executives P. Kolevas J. Krug G. Kearns B. Davidson V. Hekimian Total: Specified executives 34/ AAV Limited Annual Report 2006 Vested number — 200,000 — — — — 200,000 Cancelled Number — — — — — — — Granted Number — 500,000 — — — — 500,000 — — — — — — — (375,000) (125,000) — (100,000) (600,000) — 375,000 125,000 250,000 100,000 850,000 — 28.2.06 28.2.06 28.2.06 28.2.06 — $0.90 $0.90 $0.90 $0.90 — 28.2.08 28.2.08 28.2.08 28.2.08 — 28.2.11 28.2.11 28.2.11 28.2.11 Table 4: Option holdings of specified Directors and specified executives Granted as Balance at beginning remunerOptions of period 1 July 2005 ation Exercised Balance at Options end of Forfeited period 30 June 2006 — — — — — — — — (375,000) (125,000) — (100,000) (600,000) — 1,300,000 — — — — 1,300,000 250,000 500,000 250,000 250,000 200,000 1,450,000 Vested at 30 June 2006 Not ExerciseTotal exerciseable able — 400,000 — — — — 400,000 187,500 125,000 125,000 — 100,000 537,500 — — — — — — — — — — — — — — 400,000 — — — — 400,000 187,500 125,000 125,000 — 100,000 537,500 Share Based Payment expense calculated on these options Future 2006 $ years $ — 66,031 — — — — 66,031 25,417 75,091 31,412 11,991 25,130 169,041 — 134,966 — — — — 134,966 — 110,909 29,879 59,759 23,904 224,451 Directors R. Mansfield M. Gardner J. Murphy G. Robertson B. Waters D. Hunter Total: Directors Specified Executives P. Kolevas J. Krug G. Kearns B. Davidson V. Hekimian Total: Specified Executives 250,000 500,000 250,000 — 200,000 1,200,000 — 375,000 125,000 250,000 100,000 850,000 — — — — — — — 800,000 — — — — 800,000 — 500,000 — — — — 500,000 — — — — — — — /35 Directors’ Report – Remuneration Report continued Fair value of options The fair value of each option is estimated on the date of grant using a Binomial option pricing model with the following weighted average assumptions used for grants made in the years 2006, 2005, 2004 and 2003: 2006 Dividend yield Volatility Risk free interest rate Expected life of options 5.00% 33.0% 5.75% 5.0 years 2005 7.52% 33.0% 5.29% 5.2 Years 2004 5.625% 25.3% 5.41% 2.35 Years 2003 5.00% 47.5% 6.20% 2.07 Years The dividend yield reflects the decision that dividend for September 2005 has been suspended and that the Company returned to paying dividends in March 2006. The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns which may occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may not necessarily be the case. The resulting average fair value per option for those options vesting after 1 July 2005 are: Number of options 35,000 62,500 62,500 200,000 200,000 200,000 1,790,000 500,000 Grant date 05.06.03 30.06.04 30.06.04 14.06.05 14.06.05 14.06.05 28.02.06 28.04.06 Vesting date 30.06.06 30.06.06 30.06.07 30.06.06 31.12.06 30.06.07 28.02.08 28.04.08 Value per option ($) 0.240 0.480 0.500 0.106 0.099 0.092 0.287 0.287 These fair values are recognised as an expense in the financial statements accompanying this Report. The amount recognised as an expense in the financial statements is $269,000 (prior year $263,000). E) Additional information (unaudited) Table 5: Remuneration of the 5 named executives who received the highest remuneration for the year ended 30 June 2006 Name Year Short term employee benefits Salary G. Hackett J. Krug (1) G. Kearns P. Kolevas B. Davidson (2) 2006 2005* 2006 2005* 2006 2005* 2006 2005* 2006 2005* 224,007 126,938 298,165 91,041 229,358 104,128 221,483 87,219 187,308 – Bonus – 58,490 89,450 27,523 57,339 55,582 – 51,325 56,192 – Other 382.887 – – – – – 29,686 24,000 – – Post employment benefits Superannuation 25,425 16,688 34,885 10,671 25,803 14,374 24,553 12,469 21,916 – Share based payments Options (52,850) 61,094 75,091 27,448 31,412 28.410 25,417 28,410 11,991 – 579,469 263,210 497,591 156,723 343,912 202,494 301,139 203,423 277,407 – Total * 2005 = half year ended 30 June 2005 1 Appointed 7 March 2005 2 Appointed 1 October 2005 36/ AAV Limited Annual Report 2006 Corporate Governance Statement Directors’ meetings The number of meetings of directors (including meetings of committees of directors) held during the year ended 30 June 2006 and the number of meetings attended by each director were as follows: Directors’ meetings Number of meetings held: Number of meetings attended: R. Mansfield M. Gardner D. Hunter J. Murphy G. Robertson B. Waters 19 20 5 19 20 19 20 Finance, Audit and Risk Committee meetings 4 N/A N/A 1 1 4 4 Nomination and Remuneration Committee meetings 5 N/A N/A N/A 5 N/A 5 Committee membership As at the date of this Report, the Company had two standing committees of the Board; a Finance, Audit and Risk Committee and a Nomination and Remuneration Committee. Members of the Committees of the Board during the year ended 30 June 2006 and to date were: Finance, Audit and Risk Committee: Mr Robertson (Chairman) Mr Hunter (appointed 28.02.06) Mr Murphy (retired 28.02.06) Mr Waters Nomination and Remuneration Committee: Mr Waters (Chairman) Mr Murphy Notes: r Hunter was appointed a director on 28 February 2006. M Mr Hunter replaced Mr Murphy on the Finance, Audit and Risk Committee effective 28 February 2006. Rounding The amounts contained in this Report and in the Financial Report have been rounded to the nearest $1,000 (where rounding is applicable) under the option available to the Company under ASIC Class Order 98/0100. The Company is an entity to which the Class Order applies. for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. At the balance date, the possibility of default is remote. The head entity of the tax consolidation group is AAV Limited. PricewaterhouseCoopers. The half year review papers of Ernst & Young have been provided to PricewaterhouseCoopers. The directors have received a declaration from the Auditor of AAV Limited in respect of auditor independence. The declaration is appended as Annexure A to this Report. Please refer to Note 30 of the Financial Report for details of non-audit services provided by the entity’s Auditor, PricewaterhouseCoopers. The directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act (2001). The nature and scope of each type of nonaudit services provided means that auditor independence was not compromised. /37 Auditor independence and non-audit services During the year, the Company sought and received shareholder approval to change its audit services provider to PricewaterhouseCoopers from Ernst & Young. The half year audit review undertaken in respect of the six months ended 31 December 2005 was performed by Ernst & Young. The final full year audit was undertaken by Tax consolidation On 1 November 2002, for the purposes of income taxation, AAV Limited and its 100% owned subsidiaries became a tax consolidated group. Members of the group have entered into a tax sharing arrangement in order to allocate income tax expense to the wholly owned subsidiaries on a pro-rata basis. In addition, the agreement provides 05 38/ AAV Limited Annual Report 2006 The Board has continued to further develop and refine the Company’s Corporate Governance practices to ensure that they meet the standards expected of a publicly listed company. Directors’ Report – Corporate Governance Statement Corporate Governance In February 2004, the directors of AAV Limited adopted the Australian Stock Exchange (‘ASX’) Corporate Governance Councils’ “Principles of Good Corporate Governance” as the basis for the Company’s ongoing Corporate Governance practices. The Board has continued to further develop and refine the Company’s Corporate Governance practices to ensure that they meet the standards expected of a publicly listed company. The Corporate Governance practices were in place throughout the year ended 30 June 2006. The Board remains committed to the highest standards of ethical, responsible and accountable behaviour, and maintains a watching brief on the latest developments in Corporate Governance practices to ensure that it remains at the forefront of best practice. The Board has approved and released a Corporate Code of Conduct which can be accessed on the Company’s website under www.aav.com.au/investors and is progressing the development of its risk management programme based on Standards Australia’s Risk Management Standard AS/NZS 4360:2004. For the purposes of reporting the Company’s compliance with each of the ASX Corporate Governance Council’s recommendations, the following information is provided: 2 stablish the level of the Company’s E capital structure and set its dividend policy; 3 pprove the annual and half-year A financial statements; 4 nsure compliance with applicable laws, E and that effective compliance and risk management systems are in place; 5 nsure adequate delegations and E appropriate policies are in place sufficient to effectively govern the Company; 6 pprove the appointment (and removal A if appropriate) of the Chief Executive and evaluate his/her ongoing performance and remuneration; 7 pprove the appointments (and removal A if appropriate) of the Chief Operating Officer, Chief Financial Officer and Company Secretary, and evaluate their performance and remuneration; 8 nsure that remuneration and E performance policies, and an appropriate succession plan for senior management are in place; 9 doption of an entity structure A supportive of best practice in Corporate Governance and which is aligned to the Company’s mission, vision, values, strategies, ethical standards and regulatory environment; 10 nsure that all shareholders are E treated equally; 11 hrough the Finance, Audit and Risk T Committee, maintain close liaison with the Company’s auditors. The Board has formed two standing Committees to assist it in carrying onto its responsibilities. The Committees of the Board are: • Finance, Audit and Risk Committee; and • Nomination and Remuneration Committee. The Company has provided each Nonexecutive/independent Director with a letter of appointment setting out the terms of a director’s engagement and the duties, responsibilities and expectations attaching to that position. /39 01 Lay Solid Foundations for Management and Oversight by the Board The Board’s responsibilities to its shareholders and the community are set out in the Corporate Governance Policy, which is accessible on the Company’s web-site. These responsibilities include: 1 et the strategic direction of the S Company in a long-term strategic and annual business plan, and to monitor management’s performance against measurable targets; Directors’ Report – Corporate Governance Statement continued The Chairman’s role is to provide leadership and to manage the Board so that it operates efficiently and effectively, and to facilitate interaction between the Chief Executive Officer, (‘CEO’) and the Board. The Board recognises that the performance of its members and the CEO are critical to the Company’s ongoing success. The Board has approved and implemented a process to evaluate its performance and those of its members, and to consider the performance reports (through the Nomination and Remuneration Committee) of the CEO and the senior executives at least annually. 02 Structure the Board to Add Value The Company’s Constitution provides that the Board will have a minimum of three directors, and a maximum of ten. The Board currently is comprised of six directors, with five directors being Nonexecutive Directors and the CEO being an executive director. The Board considers that this mix is appropriate for the effective operation of the Company. As a principle, a majority of the Board are to be independent directors; free from business or other relationships, which could materially interfere with – or could reasonably be perceived to materially interfere with – the exercise of their independent judgement. In the context of director independence, ‘materiality’ is considered from both a company and a director perspective. The determination of materiality requires both quantitative and qualitative elements. An item is presumed to be quantitatively immaterial if it is equal to or less than 5% of the appropriate base amount. It is presumed to be material (unless there is qualitative evidence to the contrary) if it is equal to or greater than 10% of the appropriate base amount. Qualitative factors considered include whether a relationship is strategically important, the competitive landscape, the nature of the 40/ AAV Limited Annual Report 2006 relationship and the contractual or other arrangements governing it and other factors which point to the actual ability of the director in question to shape the direction of the Company’s loyalty. Independent directors are also independent of management. In accordance with the definition of independence above, and the materiality thresholds set, the following directors of AAV Limited are considered to be independent: David Hunter, Non-executive Director Bryan Waters, Non-executive Director The remaining Non-executive Directors (Messrs Mansfield, Murphy and Robertson) are associates of Investec Wentworth Private Equity Limited, which manages a fund which is a substantial shareholder in the Company, currently holding 9,104,761 ordinary shares (10.5% of issued capital). The Board, whilst recognising the principle that Non-executive Directors should also be independent, considers that the current structure is in the best interest of the Company and for the benefit of shareholders given the level of experience the directors bring to the Board and the current stage of development of the Company and its aspirations for strategic growth. During the year, the Board delivered on its undertaking to appoint a further independent Non-executive Director with the appointment of David Hunter on 28 February 2006. As at the date of this Report, the term in office for each director is as follows: Mansfield, R 2 years 8 months Gardner, M 1 year 6 months Hunter, D 8 months Murphy, J 3 years 11 months Robertson, G 3 years 11 months Waters, B 8 years 2 months The Constitution of the Company requires that at each Annual General Meeting, one-third of the number of directors must retire by rotation. Any directors appointed by the Board to fill a casual vacancy since the last Annual General Meeting or General Meeting of shareholders, must stand-down and seek re-election at the next Annual General Meeting. The Board has determined that it should be made up of members with an appropriate mix of skills and judgements, and that from 1 January 2005, the collective performance and that of each director is to be reviewed annually. To assist it effectively managing its responsibilities, the Board has appointed two standing Committees; details of which are contained in Principle 1 above. The Board may appoint other Committees from time-to-time as required, but cannot delegate major decisions to Committees. Committees of the Board make recommendations to the Board, but in certain circumstances, they may be authorised to decide an issue by the Board. The Nomination and Remuneration Committee is comprised of two Non-executive Directors, Messrs Waters (Chairman) and Murphy; the CEO, Mr Gardner attends by invitation. The Charter of the Committee includes the following responsibilities: • eview of the composition of the Board R at least annually to ensure that it maintains an appropriate mix of expertise and experience; • roposal of suitable nominees to the Board P should a vacancy occur; • stablish the terms of employment of NonE executive Directors and form of letters of appointment thereof; • eview the Company’s incentive, R superannuation, retirement, termination and other benefits policies; • nnually review the performance of the A Committee; • nsure that a system for appropriate E succession planning is in place and is regularly reviewed; • ecommend to the Board, remuneration R policies and programmes, including incentive strategies and performance targets; and • ecommend to the Board, the remuneration R for Non-executive and executive Directors, and senior executives who report directly to an executive director; and manage succession planning for the senior executive and key corporate positions. The Committee seeks the advice of experienced external consultants where necessary. 03 Promote Ethical and Responsible Decision Making The Company has developed a Code of Conduct, which is applicable to all directors and employees. The Code is based on the premise, that all dealings with employees, stakeholders, the community and regulatory authorities is to be conducted fairly, diligently, honestly and lawfully. The Board has approved a Share Trading Policy for dealing in the Company’s shares. This policy permits directors and all staff to trade in the Company’s shares in two periods of eight weeks in each year commencing immediately after – • The half year profit announcement; and • he full year profit announcement; and T One period of four weeks commencing immediately after the date of the Annual General Meeting. Notwithstanding that trading in the Company’s shares is permitted in three periods during the year, should any director or member of staff be in possession of unreleased price- sensitive information, they may not trade in the Company’s shares. In accordance with ASX disclosure obligations, all directors are to advise the Company of any disclosable interest immediately. 04 Safeguard Integrity of Financial Reporting The Board has appointed a Finance, Audit and Risk Committee, composed of three Non-executive Directors; Messrs Robertson (Chairman), Hunter and Waters; the CEO, Mr Gardner attends by invitation. As a principle, it is accepted that the Chairman of the Committee must be an independent Nonexecutive Director who is not the Chairman of the Company. In the current circumstances, the Chairman of the Committee is Mr Robertson who is an associate of Investec Wentworth Private Equity Limited, a substantial shareholder in the Company. Mr Robertson’s suitability, qualifications and experience to act as Chairman appear below. The Board has approved a Committee Charter, which includes the following responsibilities: • eview the quality of the reporting process R and accounting policies, and monitor compliance with current laws, regulations, accounting standards and other professional reporting standards; • eview the effectiveness of the external R audit function, including review and approval of the audit plan; • eview and report to the Board on R the effectiveness of the management information, risk management and internal controls systems in safeguarding the Company’s assets; • eview management’s recommendation R for the appointment of the external auditor and to recommend to the Board the appointment of the external auditor and an appropriate audit fee; • onvey to the Board, independent C of management, the concerns of the external auditors; • eview the financial information provided R to the Board and shareholders, and ensure that the accounting records are properly maintained in accordance with statutory requirements; • eview and recommend to the Board the R half year and annual financial statements and to review the management letter of the external auditors relating thereto; • ndertake any investigations relating U to financial matters and risks it deems appropriate; • romulgate an appropriate policy on ethical P standards of behaviour and business conduct; and regularly review the external auditor’s performance and ensure that any non-audit services performed do not compromise the auditor’s independence. The Chairman of the Committee provides a report to the next meeting of the Board on the proceedings at each Committee meeting. The members of the Finance, Audit and Risk Committee during the year were: Robertson, G (Chairman) Hunter, D (appointed 28.02.06) Murphy, J (retired 28.02.06) Waters, B Qualifications of Finance, Audit and Risk Committee members: Mr Greg. Robertson – has been a Nonexecutive Director of the Company since October 2002 and has served as the Chairman of the Finance, Audit and Risk Committee from that date. He is a director of a number of companies, including Investec Wentworth Private Equity Limited and spent 17 years with a global accounting firm, 8 of which were as a partner. He holds Bachelors degrees in economics and law and a Masters degree in Business Administration. He is a solicitor of the Supreme Court in NSW and the ACT and is a member of the Institute of Chartered Accountants in Australia. Mr David Hunter – was appointed as a Non-executive Director and as a member of the Committee on 28 February 2006. He has extensive global senior executive and management experience in mergers and acquisitions, change management, capital management, operational performance, strategic planning dispute resolution and major clients and contracts. His experience has been obtained over the last thirty years in managerial and operational experience at /4 Directors’ Report – Corporate Governance Statement continued board and chief executive level with the global public company, Accenture and between 1994 and 2005 he held the positions of Group Chief Executive of the global Government Operating group and Chief Executive Officer, Asia Pacific. Mr Hunter holds a Bachelor degree in economics and is a member of the Institute of Chartered Accountants in Australia and the Australian Institute of Company Directors. Mr John Murphy – has been a Non-executive Director of the Company since October 2002 and served as its Chairman between that date and December 2003. He is a director of a number of companies, including Managing Director of Investec Wentworth Private Equity Limited and was previously employed for 25 years with a global accounting firm, 15 of which were as a partner. He holds Bachelors and Masters degrees in Commerce and is a Fellow of the Institute of Chartered Accountants in Australia and the Society of Certified Practising Accountants. He retired from the Committee on 28 February 2006. Mr Bryan Waters – has been a director of AAV Limited since October 2002, serving as Chairman from that date until October 2002. He has extensive local and international business experience in human resources, banking and governance and is a consultant to a leading global careers management and leadership company. He is Chairman of the Company’s Nomination and Remuneration Committee and holds a Diploma of Business and a Fellowship of the Financial Services Institute of Australasia. He is also a Member of the Australian Institute of Company Directors and is a Governor of the American Chamber of Commerce in Australia. The Company Secretary has been nominated as the Continuous Disclosure Officer. Directors are given the opportunity to comment and to approve all announcements prior to their release. Directors receive copies of all releases immediately after they are announced. Where it is decided that information is not to be released, the reasons for the non-release are entered into a register. As part of the internal staff induction programme, all staff receive information on the ‘Continuous and Market Disclosure Policy’ so that they can readily identify any matter which may require disclosure. 06 Respect the Rights of Shareholders Central to the Board’s responsibilities, is the equitable treatment of the Company’s shareholders. The Board is committed to ensuring that shareholders are fully informed of matters affecting their Company. The Company has developed a comprehensive web-site on its history, activities, policies and performance. Following the review of Corporate Governance practices conducted in February 2004, the Australia Chairman’s Panel “Code for the running of general meetings of shareholders”, to ensure that meetings are effectively run and that shareholders have adequate time to ask questions of directors, the CEO and the Company’s auditors at those meetings. manage risk is the audit process. Each risk identified is to be weighted in accordance with AS/NZS 4360 and monitored until the risk is mitigated or no longer relevant. The Board appointed Pricewaterhouse- Coopers as external auditor on 10 April 2006. The previous auditor was Ernst & Young. The ASX recommendations require that the CEO and CFO formally sign-off on the ‘financial reporting risks and associated controls, which underpin the integrity of the entity’s financial reporting’, and that the Company maintains an effective ‘sound system of risk management and internal compliance and control’. The Company has a formal sign-off by the CEO and CFO in a form which is compliant with the ASX recommendations. 08 Encourage Enhanced Performance The Board has in place a process for the review of its performance, the performance of directors’ Committees, the CEO and senior management. As part of the performance review, the Board is to allow time for it to review its own and its Committee’s performances, the effectiveness and relevance of its Committees, and ensuring that the composition of each body is appropriate given members’ skills, experience and performance. The review of performance of the CEO is undertaken by the Nomination and Remuneration Committee, which recommends to the Board on any remuneration adjustment or incentive payment. The review of the performance of senior management is undertaken by the CEO, who provides a recommendation to the Nomination and Remuneration Committee on any remuneration adjustments or incentive payments. After deliberation, the Committee provides its recommendation to the Board for decision. 07 Recognise and Manage Risk The Company continues to develop its risk management programme based upon Standards Australia’s AS/NZS 4360:2004 (Risk Management). The Finance, Audit and Risk Committee is to receive and review reports on the Company’s risks, and mitigation thereof. The primary process in place to identify, assess and 05 Make Timely and Balanced Disclosure The Board has in place a comprehensive ‘Continuous and Market Disclosure Policy’ which governs the release of disclosable information. 42/ AAV Limited Annual Report 2006 The Board has provided each Non-executive Director with a formal letter of appointment, and has developed a Company formal induction protocol. The protocol encapsulates in one document all details on the Company’s policies, operations, financial performance, risk management, corporate governance and related codes of conduct, directors’ duties, access to independent professional advice, access to the Company Secretary and senior management, and any additional information considered necessary for informed decision making. Directors and senior management are expected to adhere to a process of continuing education in matters relevant to the Company’s industry and its legal and regulatory environment. The Board receives information in a form, time frame, and quality that will enable it to effectively discharge its duties. The Company Secretary is responsible to the Board on all Corporate Governance matters. • ach executive is to be entitled E to participation in the Option and Performance Shares Plan or the Employee Share Option Plan on terms and conditions consistent with each Plans’ Rules, the Corporations Act (2001) and ASX Listing Rule requirements; and • ach executive is to be subject to a rigorous E annual performance review process. Further details on the Company’s remuneration philosophy and framework can be found in the Remuneration Report forming part of the Directors’ Report (page 29). The Board has established the Nomination and Remuneration Committee (see Principle 2 above), to assist it address the many issues in this area. The Committee meets at least twice per year to discuss performance, remuneration, incentives, and other matters. The CEO attends Committee meetings by invitation. Non-executive Directors are paid fees in accordance with a determination of the Board, but within a global limit of $400,000 as approved by shareholders in general meeting on 29 April 2004. The Board has access to external professional advice to ensure the level of fees payable to Non-executive Directors is comparable to other listed companies. The remuneration of the Non-executive Chairman was determined after accessing external professional advice. Details of directors’ remuneration appear on page 32 of this Report. Directors are not entitled to any incentive payment or termination benefit (other than accrued earnings and statutory superannuation contributions). Senior managers of the Company receive a fixed salary plus an ‘at risk’ component, which is linked to personal and Company performances. The ‘at risk’ component is comprised of a bonus payment (STI) and the ability to participate in one of the Company’s Share Option Plans (LTI). The Board has access to and annually consults external professional advice on senior management’s remuneration and incentive levels. The Nomination and Remuneration Committee considers the recommendation of the CEO and the external advice before making a recommendation to the Board on any adjustments or incentive payments. Further details on the Company’s Remuneration Policies are located on page 29 of this Report. The Company maintains three Share Option Plans. Details of the levels of participation and Rules of the Plans appear in Note 25 of the Financial Report. Senior managers of the Company have entered into service agreements governing their terms of employment, termination payments, etc. The terms of the service agreement for the CEO (which is representative of those for senior managers) are detailed on page 34 of this Report. 10 Recognise Legitimate Interests of Stakeholders The Board has developed a Code of Conduct, which requires a high level of ethical behaviour for directors and all staff of the Company. The Code has been developed since the release of the ASX Principles. The Code also provides for a mechanism for employees to report breaches of the Code without fear of retribution. A committee of senior managers can be called together to deal with breaches, monitor compliance and to report to the Board. Signed in accordance with a resolution of directors. 09 Remunerate Fairly and Responsibly The performance of the Company is dependent upon the skills and quality of its directors and executives. The Company maintains a policy of paying competitive remuneration in line with market forces sufficient to attract, motivate and retain highly skilled and dedicated directors and executives. The following principles have been embodied into the Company’s remuneration policies: • rovide competitive rewards to attract and P retain high calibre executives; • hareholder value to be the driver for S executive rewards, but recognising achievement of pre-set KPI’s under a Balanced Scorecard approach as an alternative during a period of restructure and growth; • ach executive is to have an agreed E percentage of total remuneration at risk and dependent upon achievement of agreed pre-determined performance hurdles; B Mansfield AO Director M Gardner Director Date: 28 September 2006 /43 06 44/ AAV Limited Annual Report 2006 AAV has a strong balance sheet to support its expansionary aims and undrawn debt facilities in the order of $30m with the availability of substantial additional debt facilities for acquisitions which meet the Board’s strict financial parameters. Income Statement 12 months ended 30 June 2006 CONSOLIDATED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 AAV LIMITED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 Notes CONTINUING OPERATIONS REVENUE Other income Employee benefits Costs of services rendered Depreciation and amortisation Finance costs Expenses from ordinary activities Share of net profits of associates accounted for using the equity method PROFIT FROM CONTINUING OPERATIONS BEFORE INCOME TAX INCOME TAX BENEFIT (EXPENSE) PROFIT AFTER INCOME TAX (EXPENSE) / BENEFIT FROM CONTINUING OPERATIONS PROFIT / (LOSS) AFTER TAX FROM DISCONTINUED OPERATIONS PROFIT (LOSS) FOR THE YEAR PROFIT ATTRIBUTABLE TO MINORITY INTEREST PROFIT / (LOSS) ATTRIBUTABLE TO MEMBERS OF AAV LIMITED Earnings per share (cents per share) Basic EPS for the year Basic EPS from continuing operations Diluted EPS for the year Diluted EPS from continuing operations 28 28 22 6 5(a) 4(a) 4(b) 11(b) 3(a) 3(b) 4(c) 83,718 143 (41,111) (16,639) (6,667) (829) (11,942) 76 6,749 1,211 7,960 8,123 16,083 (706) 15,377 17.7 8.3 17.7 8.3 34,794 1,029 (18,032) (6,545) (2,744) (966) (3,230) 250 4,556 (1,393) 3,163 (20,938) (17,775) — (17,775) (21.3) 3.8 (21.3) 3.8 8,021 4,231 (3,882) — (82) (590) (8,176) — (478) 2,703 2,225 — 2,225 — 2,225 12,991 210 — — — — (308) — 12,893 (2,083) 10,810 — 10,810 — 10,810 Important Notes: This financial report complies with Australian Equivalents to International Financial Reporting Standards (AIFRS). In addition, due to a change in the financial year end for the Company, prior year results are reported for the six month period to 30 June 2005. The comparatives have been restated to correct an error identified in the financial statements of the entity relating to 30 June 2005. Refer to Note 2, Correction to Prior Period. The comparative has also been restated from the 2005 Annual Report to include the Media Manufacturing segment into discontinued operations. Refer to Note 6, Discontinued Operations. The above income statements should be read in conjunction with the accompanying notes. /45 Balance Sheet at 30 June 2006 CONSOLIDATED AAV LIMITED Notes CURRENT ASSETS Cash and cash equivalents Receivables Tax receivable Inventories Assets classified as held for sale TOTAL CURRENT ASSETS NON-CURRENT ASSETS Receivables Other financial assets Investments in associates accounted for using the equity method Property, plant and equipment Intangible assets Deferred tax asset TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables Interest-bearing loans and other borrowings Provisions Liabilities directly associated with assets held for sale TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing liabilities and other borrowings Provisions TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Contributed Equity Reserves Accumulated Losses Parent entity interest Minority interest in controlled entity TOTAL EQUITY 22 20 21 21 18 19 16 17 19 6 9 12 11 14 15 5(c) 23(b) 8 5(d) 10 6 30 June 2006 $’000 30 June 2005 $’000 30 June 2006 $’000 30 June 2005 $’000 29,142 16,204 583 — — 45,929 — 2 105 17,578 45,889 7,942 71,516 117,445 16,767 6,927 9,852 — 33,546 7,090 3,695 10,785 44,331 73,114 156,005 980 (85,195) 71,790 1,324 73,114 12,436 19,858 1,513 2,406 8,608 44,821 120 4 275 25,121 40,532 8,801 74,853 119,674 18,804 8,603 4,527 2,130 34,064 17,938 9,421 27,359 61,423 58,251 155,776 873 (98,398) 58,251 — 58,251 32,537 537 2 — — 33,076 — 64,198 — 306 — 5,040 69,544 102,620 1,106 28,967 5,088 — 35,161 6,020 94 6,114 41,275 61,345 156,005 1,064 (95,724) 61,345 — 61,345 — 134 — — — 134 2,243 69,993 — — — 2,720 74,956 75,090 75 1,782 — — 1,857 7,740 4,697 12,437 14,294 60,796 155,776 795 (95,775) 60,796 — 60,796 The above balance sheets should be read in conjunction with the accompanying notes. 46/ AAV Limited Annual Report 2006 Statement of Changes in Equity 12 months ended 30 June 2006 CONSOLIDATED 12 months ended 30 June 2006 $’000 58,251 21(a) (162) (162) 15,377 15,215 6 months ended 30 June 2005 $’000 75,225 (57) (57) (17,775) (17,832) AAV LIMITED 12 months ended 30 June 2006 $’000 60,796 — — 2,225 2,225 6 months ended 30 June 2005 $’000 49,128 — — 10,810 10,810 Notes Total equity at the beginning of the financial year Exchange differences on translation of foreign operations Net income recognised directly in equity Profit for the year Total recognised income and expense for the year Transactions with equity holders in their capacity as equity holders: Contributions of equity, net of transaction costs Dividends provided for or paid Employee share options Minority interest on acquisition of subsidiary Total equity at the end of the financial year 20(b) 7 21(b) 22 229 (2,174) 269 1,324 (352) 73,114 3,916 (3,321) 263 — 858 58,251 229 (2,174) 269 — (1,676) 61,345 3,916 (3,321) 263 — 858 60,796 The above Statement of Changes in Equity should be read in conjunction with the accompanying notes. /47 Cash Flow Statement 12 months ended 30 June 2006 CONSOLIDATED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 AAV LIMITED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 Notes CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers (Inclusive of GST) Payments to suppliers and employees (Inclusive of GST) Interest received Finance costs Income tax refunded (paid) Dividends received NET CASH INFLOW (OUTFLOW) FROM OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment Payments for intangible assets of businesses acquired Payment for purchases of controlled entities Proceeds from sale of investments Proceeds from sale of controlled entities Proceeds from sale of assets held for resale Proceeds from disposal of non current assets Payments associated with disposal of controlled entity Funds transferred between group companies NET CASH INFLOW (OUTFLOW) INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Repayments of borrowings Dividends paid to company shareholders Proceeds from options exercised Proceeds from short term borrowings Proceeds from related party Repayment of finance lease principal NET CASH INFLOW (OUTFLOW) FINANCING ACTIVITIES NET INCREASE/(DECREASE) IN CASH HELD Cash at beginning of period CASH AND CASH EQUIVALENTS AT END OF PERIOD 23 (b) 23 (a) 110,612 (88,537) 580 (1,066) 387 75 22,051 (11,766) (2,732) (2,490) 245 22,000 9,000 178 (3,543) — 10,892 (10,280) (2,174) 229 2,600 1,093 (7,705) (16,237) 16,706 12,436 29,142 75,581 (67,115) 744 (1,377) (1,488) 53 6,398 (4,065) — — — — — 66 — — (3,999) (851) (3,321) 376 — — (1,678) (5,474) (3,075) 15,511 12,436 170 (4,780) 257 (590) 380 — (4,563) (371) — — 91 — — — — 38,507 38,227 (1,720) (2,174) 229 2,600 — — (1,065) 32,599 (62) 32,537 — (62) 5 (309) 1 — (365) — — — — — — — — — — — (321) 375 — — — 54 (311) 249 (62) The above cash flow statements should be read in conjunction with the accompanying notes. 48/ AAV Limited Annual Report 2006 Notes to the Financial Statements 30 June 2006 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial report of AAV Limited for the year ended 30 June 2006 was authorised for issue in accordance with a resolution of the directors on 28 September 2006. The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial report includes separate financial statements for AAV Limited as an individual entity and the consolidated entity consisting of AAV Limited and its subsidiaries. (a) Basis of preparation The financial report is a general-purpose financial report which has been prepared in accordance with the requirements of the Corporations Act 2001 which includes Australian Accounting Standards. Other mandatory professional reporting requirements (Urgent Issues Group Consensus Views) have also been complied with. The financial report has been prepared in accordance with the historical cost convention, except for derivative financial instruments, and Assets and Liabilities classified as held for sale, that have been measured at fair value. In the prior year the Company requested and was granted permission to change its year-end from 31 December to 30 June. The comparative financial statements have therefore been prepared for the 6 month period from 1 January 2005 to 30 June 2005. Where necessary comparative figures have been adjusted to conform with changes in presentation in the current period and disclosure requirements in relation to discontinued operations. The financial report is presented in Australian dollars and values are rounded to the nearest thousand dollars ($’000) unless otherwise stated under the option available to the company under ASIC Class Order 98/100. The Company is an entity to which the class order applies. Historical cost convention These financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, financial assets and liabilities (including derivative instruments) at fair value through profit or loss, certain classes of property, plant and equipment and investment property. (b) Statement of compliance with IFRS The financial report complies with Australian Accounting Standards, which include the Australian equivalents to International Financial Reporting Standards (‘AIFRS’). The preparation of financial statements in conformity with AIFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 1 (af) below. (c) Basis of consolidation The consolidated financial statements are those of the consolidated entity, comprising AAV Limited (the parent entity) and all entities which AAV Limited controlled from time to time during the year and at balance date. Subsidiaries are all those entities over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. Information from the financial statements of subsidiaries is included from the date the parent company obtains control until such time as control ceases. Where there is loss of control of a subsidiary, the consolidated financial statements include the results for the part of the reporting period during which the parent company has control. Subsidiary acquisitions are accounted for using the purchase method of accounting. The financial statements of subsidiaries are prepared for the same reporting period as the parent entity, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies which may exist. All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. Unrealised losses are eliminated unless costs cannot be recovered. Minority interests in the results and equity of subsidiaries are shown separately in the consolidated income statement and balance sheet respectively. Investments in subsidiaries are accounted for at cost in the individual financial statements of AAV Limited. /49 Notes to the Financial Statements continued 30 June 2006 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) (d) Investment in associates The consolidated entity’s investment in its associates is accounted for under the equity method of accounting in the consolidated Financial Statements. Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights, and which are neither subsidiaries nor joint ventures. The financial statements of the associates are used by the consolidated entity to apply the equity method. The reporting dates of the associates and the consolidated entity are identical and both use consistent accounting policies. The Group’s share of its associates’ post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative postacquisition movements are adjusted against the carrying amount of the investment. Dividends receivable from associates are recognised in the parent entity’s income statement, while in the consolidated financial statements they reduce the carrying amount of the investment. (e) Interest in joint venture operation Jointly controlled assets The proportionate interests in the assets, liabilities and expenses of a joint venture activity have been incorporated in the financial statements under the appropriate headings. Details of the joint venture are set out in note 13. (f) Investments and other financial assets The Group classifies its investments in the following categories: loans and receivables, and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition. All investments are initially recognised at cost, being the fair value of the consideration given and including acquisition charges associated with the investment. (i)Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of selling the receivable. They are included in current assets, except for those with maturities greater than 12 months after the balance sheet date which are classified as noncurrent assets. Loans and receivables are included in receivables in the balance sheet. (ii)Available-for-sale financial assets Available-for-sale financial assets, including marketable equity securities, are nonderivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. 50/ AAV Limited Annual Report 2006 The Group assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of a security below its cost is considered in determining whether the security is impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit and loss - is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments classified as available-for-sale are not reversed through the income statement. (g) Cash and cash equivalents Cash and short term deposits in the Balance Sheet comprise cash at bank and short term deposits with an original maturity of three months or less. For the purposes of the Statement of Cash Flows, cash includes cash on hand and in banks, and money market investments readily convertible to cash as defined above, net of outstanding bank overdrafts. (h) Trade and other receivables Trade receivables are recognised and carried at original invoice amount, which represents fair value, and subsequently measured at amortised cost, less a provision for any uncollectible debts. Collectibility of trade receivables is reviewed on an ongoing basis. The amount of the provision is recognised in the income statement. An estimate for doubtful debts is made when there is objective evidence that collection of the full amount is no longer probable. The amount of the provision is recognised in the income statement. Bad debts are written-off as incurred. Receivables from related parties are recognised and carried at amortised cost. (i) Inventories Inventories are valued at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Costs incurred in bringing each product to its present location and condition are accounted for as follows: Raw materials – purchase cost on a first-in-first-out basis; and Finished goods and work-in-progress – cost of direct material and labour and a proportion of manufacturing overheads based on normal operating capacity. Notes to the Financial Statements continued 30 June 2006 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) (j) Property, plant and equipment Cost and valuation Property, plant and equipment is stated at historical cost less accumulated depreciation and any impairment in value. Historical costs include expenditure that is directly attributable to the acquisition of the items. Depreciation and Amortisation Depreciation and amortisation is provided on a straight-line basis over their estimated useful lives on all property, plant and equipment. Major depreciation / amortisation periods are as follows: Leasehold improvements: Property, plant and equipment: 7 years 2.5 to 10 years Operating leases The minimum lease payments of operating leases, where the lessor effectively retains substantially all of the risks and benefits of ownership of the leased item, are recognised as an expense on a straight line basis over the period of the lease. 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 inception of the lease at the fair value of the leased equipment or, if lower, at the present value of the minimum lease payments. Capitalised lease assets are initially disclosed as property, plant and equipment under lease with a corresponding lease liability of equal value recognised. The corresponding rental obligations, net of finance charges, are included in long term lease liabilities. Capitalised lease assets are depreciated over the estimated useful life of the assets. Lease payments are allocated between finance charges and reduction of the lease liability with the finance charges calculated using the interest rate implicit in the lease and charged directly to the Income Statement. The cost of improvements to leasehold property is capitalised, disclosed as leasehold improvements, and amortised over 7 years. (l) Intangibles Goodwill Goodwill on acquisition is initially measured at 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. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortised. Instead goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. As at the acquisition date, any goodwill acquired is allocated to each of the cash-generating units expected to benefit from the combinations synergies. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill or asset relates, being the lowest levels for which there are separately identifiable cash inflows which are largely independent. Where the recoverable amount of the cashgenerating unit is less than the carrying amount, an impairment loss is recognised. The recoverable amount is the higher of an asset’s fair value, less costs to sell, and value in use. /51 The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the Income Statement. Impairment The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets and cash-generating units are written down to their recoverable amount respectively. The recoverable amount of plant and equipment is the greater of fair value less costs to sell and value in use. 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. Impairment losses are recognised in the income statement when incurred. (k) Leases Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement so as to reflect the risks and benefits incidental to ownership. Notes to the Financial Statements continued 30 June 2006 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained. Trademarks Trademarks are valued at cost of acquisition and are amortised on a straight line basis over the period in which the benefits are expected to be realised. Trademarks are tested for impairment where an indicator of impairment exists, either individually or at the cash generating unit level. Useful lives are also examined on an annual basis and adjustments, where applicable, are made on a prospective basis (m) Impairment of assets At each reporting date, the consolidated entity assesses whether there is any indication that an asset may be impaired, distinguishing between goodwill and other assets, refer Note 1(l). Where an indicator of impairment exists, the consolidated entity makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount. Recoverable amount is the greater of fair value less costs to sell and value in use. It is determined for an individual asset, unless the asset’s value in use cannot be estimated to be close to its fair value less costs to sell and it does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent. 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. (n) Trade and other payables Liabilities for trade creditors and other amounts are carried at cost which is the fair value of the consideration to be paid in the future for goods and services received, whether or not billed to the consolidated entity. The amounts are unsecured and are usually paid within 30 days of recognition. Payables to related parties are carried at the amortised cost. Interest, when charged by the lender, is recognised as an expense on an accrual basis. (o) Revenue recognition Revenue is recognised to the extent that it is probable that economic benefits will flow to the entity and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances and amounts collected on behalf of third parties. The following specific recognition criteria must also be met before revenue is recognised: Sale of goods Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and can be measured reliably. Risks and rewards are considered passed to the buyer at the time of delivery of the goods to the customer. Rendering of services Revenue is recognised in accordance with the stage of completion method. Where the contract outcome can be reliably measured, control of the right to be compensated for the services and the stage of completion can be reliably measured. Stage of completion is measured by reference to the labour hours incurred to date as a percentage of total estimated labour hours for each contract or by matching specific tasks completed as part of the contract and the revenue associated with those tasks, which ever is the most appropriate in the circumstances. Where the contract outcome cannot be reliably measured, revenue is recognised only to the extent of costs recognised that are recoverable. Interest Revenue is recognised as the interest accrues (using the effective interest method, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument) to the net carrying amount of the financial asset. Dividend revenue Revenue is recognised when the shareholders’ right to receive payment is established. (p) Finance costs Finance costs are recognised as an expense when incurred. (q) Taxes Income tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the notional income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. 52/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) Deferred income tax liabilities are recognised for all taxable temporary differences, and to unused tax losses: • except where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and at the time of the transaction affects neither the accounting profit nor taxable profit or loss; and in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Income taxes relating to items recognised directly in equity are recognised in equity and not in the income statement. Goods and services tax (GST) Revenues, expenses and assets are recognised net of the amount of GST except: • where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. Tax consolidation legislation AAV Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation as of 1 November 2002. The head entity, AAV Limited, and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand alone taxpayer in its own right. In addition to its own current and deferred tax amounts, AAV Limited also recognises the current tax liabilities or assets and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the group. Details about the tax funding agreement are disclosed in note 5(f). Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. (r) Contributed equity Ordinary share capital is recognised at the fair value of the consideration received by the parent entity. Any transaction costs arising on the issue of new ordinary shares are recognised directly in equity as a reduction of the share proceeds received. On the exercise of employee share options, the cumulative share based payments for the options exercised remains in the share payments reserve. (s) Employee benefits Provisions are made for employee entitlement benefits accumulated as a result of employees rendering services up to the reporting date. These benefits include wages and salaries, annual leave and long service leave. Liabilities arising in respect of wages and salaries, annual leave, and any other employee benefits expected to be settled within twelve months of the reporting date are measured at their nominal amounts based on remuneration rates which are expected to be paid when the liability is settled. All other employee entitlement liabilities are measured at the present value of the estimated future cash outflow to be made in respect of services provided by employees up to the reporting date. In determining the present value of the future cash outflows, the interest rates attaching to government guaranteed securities which have terms to maturity approximating the terms of the related liability are used. /53 • The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the Balance Sheet. Cash flows are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority, are classified as operating cash flows. Notes to the Financial Statements continued 30 June 2006 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) (s) Employee benefits (cont’d) Consideration is also given to expected future wage and salary levels, experience of employee departures and periods of service. Employee benefits expenses and revenues arise in respect of the following categories: • • • • • • wages and salaries; non-monetary benefits; annual leave; long service leave and other leave benefits; other types of employee benefits are charged against profits on a net basis in their respective category; and the group contributes to defined contribution schemes for all employees. Contributions to the defined contribution fund are recognised as an expense as they become payable. Where discounting is used, the increase in the provision due to the passage of time is recognised as an interest expense. (v) Interest bearing loans and borrowings All loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of issue costs associated with the borrowing. Borrowings are subsequently measured at amortised cost. Any difference between the borrowing proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless AAV Limited has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Interest is charged as an expense as it accrues. Finance lease liabilities are determined in accordance with the requirements of AASB 117 “Leases”. (w) Non-current assets (or disposal groups) held for sale and discontinued operations Non-current assets (or disposal groups) are classified as held for sale and stated at the lower of their carrying amount and fair value less costs to sell if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell. A gain is recognised for any subsequent increases in fair value less costs to sell of an asset (or disposal group), but not in excess of any cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale of the non-current asset (or disposal group) is recognised at the date of derecognition. Non-current assets (including those that are part of a disposal group) are not depreciated or amortised while they are classified as held for sale. Interest and other expenses attributable to the liabilities of a disposal group classified as held for sale continue to be recognised. Non-current assets classified as held for sale and the assets of a disposal group classified as held for sale are presented separately from the other assets in the balance sheet. The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the balance sheet. (t) Earnings per share Basic earnings per share is calculated as net profit attributable to members, adjusted to exclude costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares, adjusted for any bonus elements in ordinary shares issued during the year. Diluted earnings per share is calculated as net profit attributable to members, adjusted for: • costs of servicing equity (other than dividends); • the after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and • other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares: divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus elements in ordinary shares issued during the year. (u) Provisions Provisions are recognised when the economic entity has a present legal, equitable or constructive obligation to make a future sacrifice of economic benefits as a result of past transactions or other past events, it is probable that a future sacrifice of economic benefits will be required and a reliable estimate can be made of the amount of the obligation. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. 54/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) A discontinued operation is a component of the entity that has been disposed of or is classified as held for sale and that represents a separate major line of business or geographical area of operations, is part of a single co-ordinated plan to dispose of such a line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are presented separately on the face of the income statement. (x) Foreign Currencies 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 consolidated financial statements are presented in Australian dollars, which is AAV Limited’s functional and presentation currency. Translation of foreign currency transactions Transactions in foreign currencies are converted to functional currency at the rate of exchange ruling at the date of the transaction. All differences in the consolidated financial report are taken to the Income Statement with the exception of differences in foreign currency borrowings that provide a hedge against a net investment in a foreign entity. These are taken directly to equity until disposal of the net investment, at which time they are recognised in the income statement. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the Balance Sheet date. Tax charges and credits attributable to exchange differences on those borrowings are recognised in equity. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. The functional currency of the overseas subsidiaries is the currency of the primary economic environment in which the subsidiaries operate. As at the reporting date the assets and liabilities of these overseas subsidiaries are translated into the presentation currency of AAV Limited at the closing rate of exchange ruling at the balance sheet date and the income statements are translated at the weighted average exchange rates for the year. The exchange differences arising on the retranslation are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the Income Statement. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entities and translated at the closing rate. (y) Unearned revenue Unearned revenue is recognised upon receipt of payment where the service has not yet been performed. Revenue is then recognised and brought to account over time, as it is earned. (z) Derivative financial instruments Forward exchange contracts The consolidated entity may enter into forward exchange contracts where it agrees to buy or sell specified amounts of foreign currencies in the future at a pre-determined exchange rate. The objective is to match the contract with anticipated future cash flows from sales and purchases in foreign currencies, to protect the consolidated entity against the possibility of loss from future exchange rate fluctuations. The forward exchange contracts are usually for no longer than 12 months. Forward exchange contracts are recognised at fair value. The fair value of forward exchange contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are taken directly to net profit or loss for the year. At 30 June 2006 and 30 June 2005 there were no forward exchange contracts outstanding. (aa) Share-based payment transactions The Group provides benefits to employees of the Group in the form of share-based payment transactions, whereby employees render services in exchange for shares (‘equity-settled transactions’). There are currently three plans in place to provide these benefits: Employee Share Option Plan (ESOP), which provides benefits to senior executives (ii) Directors and Executives Share Option Plan (DESOP), which provides benefits to executive directors, and . (iii) Options and Performance Shares Plan (OPSP) /55 (i) Notes to the Financial Statements continued 30 June 2006 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) The cost of equity-settled transactions is measured by reference to the fair value at the date at which they are granted. The fair value is determined using a binomial model. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of the company (‘market conditions’). The cost of equity-settled transactions is recognised as an expense, together with a corresponding increase in the share based payment reserve over the period in which the performance conditions are fulfilled, ending on the date on which the participants become fully entitled to the award (‘vesting date’). The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects (i) the extent to which the vesting period has expired and (ii) the number of awards that in the opinion of the directors, will ultimately vest. This opinion is formed based on the best available information at balance date. No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition. Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any increase in the value of the transaction as a result of the modification, as measured at the date of modification. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph. The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of earnings per share. The Group has applied the requirements of AASB 1 ‘First-time Adoption of Australian Equivalents to International Financial Reporting Standards’ in respect of equity-settled awards and has applied AASB2 ‘Share-Based Payments’ only to equity instruments granted after 7 November 2002 that had not vested on or before 1 January 2005. Therefore, for options granted before 7 November 2002 and/or vested before 1 January 2005, no expense is recognised for the options or shares issued to employees for nil consideration, with proceeds allocated to share capital on exercise of the options. (ab) Segment Reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different to those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment and is subject to risks and returns that are different from those of segments operating in other economic environments. (ac) Dividends Provision is made for the amount of any dividend declared, appropriately authorised and no longer at the discretion of the entity, on or before the end of the financial year but not distributed at balance date. (ad) Business combinations The purchase method of accounting is used to account for all business combinations, including business combinations involving entities or businesses under common control, regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange plus costs directly attributable to the acquisition. Where equity instruments are issued in an acquisition, the fair value of the instruments is their published market price as at the date of exchange unless, in rare circumstances, it can be demonstrated that the published price at the date of exchange is an unreliable indicator of fair value and that other evidence and valuation methods provide a more reliable measure of fair value. Transaction costs arising on the issue of equity instruments are recognised directly in equity. 56/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill (refer to note 1(l)). If the cost of acquisition is less than the Group’s share of the fair value of the identifiable net assets of the subsidiary acquired, the difference is recognised directly in the income statement, but only after a reassessment of the identification and measurement of the net assets acquired. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. (ae) New accounting standards and UIG interpretations Certain new accounting standards and UIG interpretations have been published that are not mandatory for 30 June 2006 reporting periods. The Group has made an assessment of the impact of these new standards and interpretations, and do not expect that they will have a material impact on the financial statements. (af) Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. • Estimated impairment of goodwill (ag) Fair value estimation The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt instruments held. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The fair value of forward exchange contracts is determined using forward exchange market rates at the balance sheet date. The nominal value less estimated credit adjustments of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in note 1(m). The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of assumptions. Refer to note 15 for details of these assumptions and the potential impact of changes to the assumptions. /57 Notes to the Financial Statements continued 30 June 2006 2. CORRECTION TO PRIOR PERIOD This note is to advise that an error has been identified in the financial statements of the entity relating to 30 June 2005. The error relates to recognition of a deferred tax asset in the entity’s discontinued operations. The error was first reported in the December 2005 Interim Report. During August 2005, AAV Limited divested certain operations in the Media Services segment, and in doing so, sold the property plant and equipment and inventory. The Financial Statements were prepared on the basis of divestment of these divisions. However, for tax purposes a deferred tax asset was recognised of $2.125M in June 2005, being the deductible temporary difference at 30 June 2005. The deductible temporary difference arose as a result of a write down of the assets to their sale value. At the time of preparing the 30 June 2005 Financial Statements it was not considered probable that losses could be utilised. As a result the Company should not have recognised the deferred tax asset and this is therefore considered a prior period error. The financial report at 30 June 2006 has been prepared by correcting the above error retrospectively to 30 June 2005, being the earliest prior period. CONSOLIDATED 30 June 2005 $’000 BALANCE SHEET Assets Liabilities Equity INCOME STATEMENT Profit / (Loss) after income tax expense from continuing operations Loss after tax from discontinued operation Loss attributable to members of AAV Limited BASIC AND DILUTED (LOSS) PER SHARE Basic earnings per share (cents per share) Diluted earnings per share (cents per share) (21.3) (21.3) (18.8) (18.6) 3,163 (20,938) (17,775) 3,163 (18,813) (15,650) Restated 119,674 61,423 58,251 Previously reported 121,799 61,423 60,376 58/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 3. REVENUE AND OTHER INCOME FROM CONTINUING OPERATIONS CONSOLIDATED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 AAV LIMITED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 (a) Revenue Revenue from provision of services Dividends received, related parties Interest, other persons/corporations Revenues from continuing operations (b) Other income Revaluation of loan receivable to fair value (Losses) / Gains from disposal of property, plant and equipment Other relevant revenue (Workcover rate adjustment) Management fees from controlled entities Other income Revenues and other income from continuing operations 4. EXPENSES FROM ORDINARY ACTIVITIES Profit before income tax includes the following specific expenses: (a) Finance costs Interest expense Hire purchase & finance lease Other Total finance costs expensed (b) Other expenses Audit and consulting fees Communications Insurance Repairs and maintenance Operating lease payments Travel Impairment of investment in controlled entity Listing expenses Net foreign exchange gains Other administrative expenses Total other expenses (c) Employee benefits Employee benefits, non share based expense Defined contibution superannuation Employee benefits, share based expense Total employee benefits (37,887) (2,955) (269) (41,111) (16,556) (1,300) (176) (18,032) (3,390) (310) (182) (3,882) — — — — (440) (965) (1,090) (998) (3,159) (463) — (107) 212 (4,932) (11,942) (506) (441) (309) (332) (1,343) (226) — (58) 1 (16) (3,230) (388) (76) — (32) (141) (129) (6,054) (107) 23 (1,272) (8,176) (68) — — — — — — (58) — (182) (308) (163) (666) (829) (101) (865) (966) — (590) (590) — — — — (17) 160 — 143 83,861 247 12 770 — 1,029 35,823 — — — 4,231 4,231 12,252 210 — — — 210 13,201 83,068 — 650 83,718 34,362 — 432 34,794 508 7,050 463 8,021 12,991 1,291 11,700 /59 Notes to the Financial Statements continued 30 June 2006 5. INCOME TAX CONSOLIDATED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 AAV LIMITED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 (a) Income tax expense (benefit) Current tax Deferred tax Over provided in prior year Income tax expense is attributable to: Profit from continuing operations Profit from discontinued operations Aggregate income tax expense (benefit) Deferred income tax (revenue) expense included in income tax expense comprises: Decrease (increase) in deferred tax assets (Decrease) increase in deferred tax liabilities (b) Numerical reconciliation of income tax benefit (expense) to prima facie tax payable A reconciliation of income tax expense applicable to accounting profit before income tax at the statutory income tax rate to income tax expense at the effective income tax rate is as follows: Profit before income tax from continuing operations Profit (Loss) before tax from discontinued operations 6,749 9,954 16,703 Tax at the Australian tax rate of 30% (2005 - 30%) Share based payment expense Capital gain on disposal of investment Entertainment Present value interest Impairment of investment in controlled entity Fair value revaluations to financial assets Reversal of overprovision of taxes in prior year on unremitted earnings of overseas subsidiaries Dividends received (fully franked) Future income tax (benefit) / expense relating to (additional) / reduced recognition of prior year tax losses Sundry items Overprovision of taxes in prior year 5,011 81 (1,808) 107 195 — — (518) — (2,067) 127 1,128 (508) 620 4,556 (22,710) (18,154) (5,446) 79 — — — — 62 — — 4771 155 (379) — (379) (478) — (478) (143) 55 — — — 1,816 — — (2,115) (1,979) 46 (2,320) (383) 2,703 12,893 — 12,893 3,868 — — — — — 62 — (3,511) 1954 (290) 2,083 — 2,083 875 (715) 160 167 299 466 (2,301) (19) (2,320) 1,953 39 1,992 (1,211) 1,831 620 1,393 (1,772) (379) (2,703) — (2,703) 2,083 — 2,083 968 160 (508) 620 — 466 (845) (379) — (2,320) (383) (2,703) 91 1,992 — 2,083 60/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 5. INCOME TAX (cont’d) CONSOLIDATED AAV LIMITED 30 June 2006 $’000 (c) Deferred tax assets and liabilities Balance comprises temporary differences attributable to the following, as recognised in the profit and loss Deferred income tax liabilities Accrued income Income tax on unremitted earnings of subsidiaries Value of investments in associates Prepayments Accelerated depreciation for tax purposes Gross deferred income tax liabilities Deferred income tax assets Employee benefits Accelerated depreciation for accounting purposes Provisions deductible for tax in future Losses available for offset against future taxable income Restructuring provision Provision for makegood on property leases Provision for property lease contract Other Gross deferred income tax assets Net deferred income tax assets 739 376 350 5,127 916 57 271 138 7,974 7,942 — — (32) — — (32) 30 June 2005 $’000 30 June 2006 $’000 30 June 2005 $’000 (179) (518) — (50) — (747) 1,352 3,817 804 908 1,082 572 946 67 9,548 8,801 (10) — — — (10) (20) 73 — 34 4,953 — — — — 5,060 5,040 — — — (39) — (39) — — — 2,759 — — — — 2,759 2,720 CONSOLIDATED 12 months ended 30 June 2006 $’000 Movements in deferred tax assets Opening balance at 1 July 2005 (Charged) / credited to the income statement Disposal of investment (note 6) Closing balance at 30 June 2006 Movements in deferred tax liabilities Opening balance at 1 July 2005 Credited / (charged) to the income statement Closing balance at 30 June 2006 Net deferred tax assets at 30 June 2006 Net deferred tax assets to be recovered after more than 12 months (747) 715 (32) 7,942 7,942 (448) (299) (747) 8,801 8,801 9,548 (875) (699) 7,974 9,715 (167) — 9,548 6 months ended 30 June 2005 $’000 AAV LIMITED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 2,759 2,301 — 5,060 4,712 (1,953) — 2,759 (39) 19 (20) 5,040 5,040 — (39) (39) 2,720 2,720 /61 Notes to the Financial Statements continued 30 June 2006 5. INCOME TAX (cont’d) CONSOLIDATED AAV LIMITED 30 June 2006 $’000 (d) Tax receivable Current tax receivable (e) Tax losses Unused tax losses for which no deferred tax asset has been recognised as realisation of the benefit is not regarded as probable. Potential tax benefit @ 30% 12,863 3,859 (583) 30 June 2005 $’000 30 June 006 $’000 30 June 2005 $’000 (1,513) (2) — 20,330 6,099 — — — — This future income tax benefit will only be obtained if; • future assessable income is derived of a nature and of an amount sufficient to enable the benefit to be realised • the conditions for deductibility imposed by tax legislation continued to be complied with ; and • no changes in tax legislation adversely affect the consolidated entity in realising the benefit. The unused tax losses were incurred by Australian entities in the amount of $29.4M and New Zealand entities $0.5M totalling $29.9M. A deferred tax asset of $5.1M, which represents probable tax losses to be utilised of $17M has been raised. The remaining tax losses of $12.863M have not been recognised as their benefit is not regarded as probable. (f) Tax consolidation Effective 1 November 2002, for the purposes of income tax, AAV Limited and its 100% owned subsidiaries became a tax consolidated group. Members of the group have entered into a tax sharing arrangement in order to allocate income tax expense to the wholly-owned subsidiaries on a pro-rata basis. In addition, the agreement provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. At the balance date, the possibility of default is remote. The head entity of the tax consolidated group is AAV Limited. As a result of the revised tax legislation, there have been no material effects on the future income tax benefit or provision for deferred taxation. AAV Limited has formally notified the Australian Taxation Office of its formation of a tax consolidated group. The entities have also entered into a tax funding agreement as set out in note 1 (q) 62/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 6. DISCONTINUED OPERATIONS The Company completed the divestment of two segments during the 2006 financial year, being the Media Manufacturing segment and the Digital Media Services segments. Media Manufacturing On 30 June 2006, the Company divested its interest in the Media Manufacturing segment for $22M. The sale consisted of a disposal of all shares in AAV Duplication Services Pty Limited. AAV Duplication Services Pty Limited is the holder of a 51% interest in AAV Regency, an unincorporated joint venture with Regency Recordings Pty Limited and the owner of a 25.5% interest in Multi Media Logistics Pty Limited. AAV Regency provides a comprehensive and integrated VHS, DVD, CD Mastering and audio cassette duplication, replication and packaging business. Multi Media Logistics Pty Limited operates a distribution logistics company used in conjunction with AAV Regency. Both of these businesses incorporating the Media Manufacturing segment operated primarily in the Australian market. The sales consideration was the aggregate of: - The Completion Amount of $22M - a Working Capital Adjustment, and - a Final Adjustment The Final Adjustment is payable if Regency Recordings enters into any agreement for the on-sale of AAV Regency, prior to 31 December 2006, and subsequently completes that transaction. In that case, AAV Limited will be entitled to a further amount. This has not been recognised in the consideration receivable at this point. If the consideration is recognised in a future period it will increase the profit on sale of the division. Profit on sale of this segment was $7.279M. AAV continues to carry provision for royalties of $4.719M in relation to the sale of the Media Manufacturing business. Digital Media Services On 12 August, 2005, the Company completed the sale of Broadcast Rentals for proceeds of $4 million to Becker Group Limited and Ranick Pty Limited. On 11 August, 2005, the Company completed the sale of the Digital Pictures network (including AAV New Zealand Limited) to Omnilab Pty Limited for proceeds of $5 million. Digital Pictures was involved in enhancing movies, television commercials, and programs through digital transfer and film colourisation, editing, visual effects creation, computer animation, sound mixing, editing and track-laying. Broadcast Rentals supplied broadcasting services and equipment to the Australasian television and production industries, specialising in establishing and operating remote location production facilities. AAV New Zealand’s primary business activities include digital media services, MPEG compression and duplication services. Digital Pictures suffered from a lack of domestic and offshore feature film and TV series work, creating difficult market conditions and increased competition in the TV commercial sector. Broadcast Rentals suffered from significant price based competition which drove slim margin outcomes. AAV New Zealand was principally a videocassette duplication facility which is in a rapidly declining business segment. Digital Pictures operated primarily in the Australian market and AAV New Zealand operated primarily in the New Zealand market. The assets and liabilities of these businesses were classified as disposal groups and were held for sale and had been impaired to sales value in the prior year. However, a further impairment loss of $610,000 has been recognised in the current year. Costs of sale of $0.392M were deducted in the calculation of carrying value to give total impairment of $9.707M in the prior year. /63 Notes to the Financial Statements continued 30 June 2006 6. DISCONTINUED OPERATIONS (cont’d) CONSOLIDATED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 Results from discontinued segments Combination of Media Manufacturing and Digital Media Services segments Operations of discontinued segments Revenue Expenses Profit / (loss) from discontinued operations before income tax Income tax (expense) benefit Profit/ (loss) on sale from discontinued operations after income tax Sale of discontinued operations Profit / (loss) on sale of division before income tax Income tax expense Profit / (loss) on sale of division after income tax Profit / (loss) from discontinued operations The combined results above are split into the two discontinued segments described in the commentary as follows: Media Manufacturing Operation of discontinued segments Revenue Expenses Profit from operations before income tax Profit on sale of segment Profit from Media Manufacturing segment before income tax Digital Media Services Revenue Expenses (Loss) from operations before income tax (Loss) on impairment of assets in segment (Loss) from Digital Media Services segment before income tax Profit from Digital Media Manufacturing segment before tax (Loss) from Media Services segment before tax Profit / (loss) from discontinued segments Income tax (expense) / benefit Profit / (loss) from discontinued operations after tax 64/ AAV Limited Annual Report 2006 27,513 (24,228) 3,285 (1,831) 1,454 31,932 (44,935) (13,003) 1,772 (11,231) 6,669 — 6,669 8,123 (9,707) — (9,707) (20,938) 24,623 (20,498) 4,125 7,279 11,404 12,543 (11,933) 610 — 610 2,890 (3,730) (840) (610) (1,450) 11,404 (1,450) 9,954 (1,831) 8,123 19,389 (33,002) (13,613) (9,707) (23,320) 610 (23,320) (22,710) 1,772 (20,938) Notes to the Financial Statements continued 30 June 2006 6. DISCONTINUED OPERATIONS (cont’d) CONSOLIDATED 2006 $’000 Assets and liabilities of discontinued segments Combined assets and liabilities of discontinued segments The major classes of assets and liabilities of the divested cash-generating units measured at the lower of carrying amount and fair value less costs to sell as at 30 June are as follows: Assets Inventory Property, Plant and equipment Receivables and other assets Total Assets Liabilities Trade creditors Provisions for employee entitlements Borrowings and other liabilities Liabilities directly associated with non-current assets classified as held for sale Total liabilities Net assets attributable to discontinued operations The combined values above are split into the two discontinued segments described in the commentary as follows: Media Manufacturing * Assets Inventory Property, plant and equipment Receivables and other assets Total assets Liabilities Trade creditors Provision for employee entitlements Borrowings and other liabilities Total liabilities Net assets attributable to Media Manufacturing *Balances represent assets and liabilities of the Media Manufacturing segment on the date of the sale, 30 June 2006 1,079 382 — 1,461 14,722 1,396 8,852 5,935 16,183 1,079 382 — — 1,461 14,722 1,396 8,852 5,935 16,183 2005 $’000 2,760 17,676 7,778 28,214 8,491 446 7,556 2,130 18,623 9,591 2,410 10,418 6,778 19,606 8,491 446 7,556 16,493 3,113 /65 Notes to the Financial Statements continued 30 June 2006 6. DISCONTINUED OPERATIONS (cont’d) CONSOLIDATED 2006 $’000 Digital Media Services Assets Inventory Property, plant and equipment Receivables and other assets Total assets classified as held for resale Liabilities Liabilities directly associated with assets classified as held for sale Total liabilities — — — — — — 2005 $’000 350 7,258 1,000 8,608 2,130 2,130 Net assets attributable to Digital Media Services — 6,478 CONSOLIDATED 12 months ended 30 June 2006 $’000 Cashflows Net cash inflow from operating activities Net cash outflow from investing and financing activities Net (decrease) increase in cash generated by the division Earnings per share Basic Diluted 9.3 9.3 (25.1) (24.9) 12,062 (24,281) (12,219) 1,621 (2,964) (1,343) 6 months ended 30 June 2005 $’000 66/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 7. DIVIDENDS PAID AND PROPOSED CONSOLIDATED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 AAV LIMITED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 (a) Paid during the year Interim fully franked dividend for 2006 at 2.5 cents per share (2005: Nil cents per share) Final fully franked dividend for 2004: 2,174 — 2,174 (b) Proposed for approval at AGM (not recognised as liability at balance date) Final fully franked dividend for 2006 at 2.5 cents (c) Franking credit balance The amount of franking credits available for the subsequent financial year: Franking account balance as at the end of the financial year at 30% (2005: 30%) Franking credits that will arise from the payment of dividend declared 12,780 (932) 11,848 13,074 (1,441) 11,633 12,780 (932) 11,848 13,074 (1,441) 11,633 2,175 — 2,175 — — 3,321 3,321 2,174 — 2,174 — 3,321 3,321 The impact on the franking account of dividends proposed or declared before the financial report was authorised for issue but not recognised as a distribution to equity holders during the period, will be a reduction in the franking account by $0.932M to $11.848M . The tax rate at which paid dividends have been franked is 30% (2005: 30%). All franking credits are expressed on a tax paid basis. The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for: (a) franking credits that will arise from the payment of the amount of the provision for income tax (b) franking debits that will arise from the payment of dividends recognised as a liability at the reporting date, and (c) franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date. /67 Notes to the Financial Statements continued 30 June 2006 8. RECEIVABLES (CURRENT) CONSOLIDATED AAV LIMITED Notes Trade debtors Provision for doubtful debts Sundry debtors and prepayments Related party receivables: Controlled entities (a) (a) 30 June 2006 $’000 13,834 (1,168) 12,666 3,538 — 16,204 30 June 2005 $’000 20,380 (2,680) 17,700 2,158 — 19,858 30 June 2006 $’000 — — — 537 — 537 30 June 2005 $’000 — — — 134 — 134 (a) Terms and conditions relating to financial instruments: Trade debtors are non-interest bearing and generally on 30 day terms. Other receivables are non-interest bearing and are predominantly prepayments to be charged against future revenues. They are not classified as financial instruments. (b) Bad and doubtful trade receivables The Group has recognised a gain of $204,000 (2005: loss of $2,226,000) in respect of bad and doubtful trade receivables during the year ended 30 June 2006. 9. RECEIVABLES (NON-CURRENT) Funds on deposit (security deposits) Related party receivables: Wholly-owned group Controlled entities Provision for non-recovery — — — Terms and conditions relating to financial instruments: a) Funds on deposit are interest bearing and have an average maturity of greater than 12 months. b) Related party receivables do not accrue interest and settlement is by mutual arrangement. There was no arrangement in place in the prior year to settle the loan within 12 months. 10. INVENTORIES Finished goods at cost — 2,406 — — — — 120 — — — 10,224 (7,981) 2,243 (a) (b) — 120 — — 68/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 11. INVESTMENTS IN ASSOCIATES CONSOLIDATED AAV LIMITED 30 June 2006 $’000 Investments accounted for using the equity method Investments in associates 105 30 June 2005 $’000 30 June 2006 $’000 30 June 2005 $’000 275 — — (a) Interest in Associate Country of Name incorporation Balance date Ownership interest held by consolidated entity 2006 % Staging Connections associated entities Multi Media Logistics Pty Ltd DubSat Pty Ltd Total interest in Associates Australia Australia Australia 30 June 30 June 30 June 25 — — 2005 % 25 25.5 50 Carrying value of associated entity consolidated 2006 $’000 105 — — 105 2005 $’000 121 154 — 275 Principal activities Staging Connections associated entities’ principle activities are events management and provision of audio visual and event staging services. Multi Media Logistics Pty Ltd provides logistical services for AAV Regency, a joint venture operation in which the company had an interest up to 30 June 2006. DubSat Pty Ltd provides customers with a satellite transmission system to deliver television commercials and program content in digital format to television networks. The investment in Dubsat Pty Ltd is classified as an asset held for sale at 30 June 2005 and disposed of in August 2006. Multi Media Logistics was sold as part of the sale of AAV Duplication Services Pty Limited. Refer Note 6 Dubsat Pty Limited was disposed of as part of the sale of the Digital Pictures group. Refer Note 6 /69 Notes to the Financial Statements continued 30 June 2006 11. INVESTMENTS IN ASSOCIATES (cont’d) CONSOLIDATED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 AAV LIMITED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 (b) Share of associate’s revenue and profits / (losses) Revenue Profit /(loss) before income tax Income tax expense / (benefit) attributable to net profit Share of associate’s net profits / (losses) after income tax Share of associate’s net profits is made up as follows; Continuing Discontinuing 76 — 76 250 (655) (405) — — — — — — 1,455 122 46 76 10,858 (579) (174) (405) — — — — — — — — The consolidated entity’s share in the retained profits and reserves of the associated company is not available for payment of dividends to shareholders of AAV Limited until such time as those profits and reserves are distributed by the associated company. (c) Carrying amount of investment in associate Balance at the beginning of the financial year Share of associate’s net profits (losses) for the financial year Dividends received from associates Removal of prior year balance of discontinued investment in associate Carrying amount of investment in associate at the end of the financial year (d) Share of associate’s assets and liabilities Current assets Non-current assets Current liabilities Non-current liabilities Net assets 594 10 (496) (3) 105 1,300 386 (799) (612) 275 — — — — — — — — — — 275 76 (75) (171) 105 598 250 (401) (172) 275 — — — — — — — — — — There were no impairment losses relating to the investment in associate and no other commitments or contingent liabilities. Subsequent events affecting the associate’s profits/losses for the ensuing year are disclosed in Note 27. The consolidated entity’s share of the associate’s commitments and contingent liabilities are disclosed in Notes 24 and 26 respectively. 12. OTHER FINANCIAL ASSETS (Non – Current) CONSOLIDATED 30 June 2006 $’000 30 June 2005 $’000 AAV LIMITED 30 June 2006 $’000 30 June 2005 $’000 Investments at cost comprise: Shares Shares in subsidiaries Listed — 2 2 — 4 4 64,198 — 64,198 69,993 — 69,993 70/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 12. OTHER FINANCIAL ASSETS (Non – Current) (Con’t) INTERESTS IN SUBSIDIARIES Name Staging Connections Pty Ltd (and its controlled entities) SC1 Pty Ltd SC2 Pty Ltd SC3 Pty Ltd SC4 Pty Ltd SC5 Pty Ltd SC6 Pty Ltd Staging Connections (Asia Pacific) Pty Ltd Staging Connections (New Zealand) Limited Staging Connections Hong Kong Ltd (and its controlled entities) ETG Staging Connections (HK) Ltd ETG Staging Connections (China) Co. Ltd Staging Connections (Investments) Pty Ltd (and its controlled entities) Audio Visual Express Pty Ltd Themeworks Pty Ltd Captivation Pty Ltd Gearhouse Pty Ltd Gordon Lilyfield Nominees Pty Ltd Staging Connections (Fiji) Pty Ltd AAV Australia Pty Ltd (and its controlled entities) AAV Duplication Services Pty Limited AAV Pacific Ltd (Formerly AAV NZ Ltd) Garner MacLennan Design Pty Ltd AAV USA Post Production & Outside Broadcast Inc (formerly ISIS Communications Inc.) ISIS Education & Training Pty Ltd ISIS Digital Broadcasting Pty Ltd ISIS Broadcast Media Pty Ltd (a) Entity incorporated during the current financial year (b) Acquired during the year. Refer to Note 32 (c) Sold during the year. Refer to Note 6 (c) (a) (a) (b) (b) Note Country of incorporation Class of shares Percentage of equity interest held by the consolidated entity 2006 % 2005 % 100 100 100 100 100 100 100 100 100 — — — 100 100 100 100 100 100 — 100 100 100 100 100 100 100 100 Australia Australia Australia Australia Australia Australia Australia Australia New Zealand Hong Kong Hong Kong China Australia Australia Australia Australia Australia Australia Fiji Australia Australia New Zealand Australia USA Australia Australia Australia Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 100 100 100 100 100 100 100 100 100 51 51 100 100 100 100 100 100 100 100 — 100 100 100 100 100 100 No cross guarantees are in place within the group. However, specific guarantees exist in respect of individual bank borrowings, where all entities within the group guarantee these borrowings. /71 Notes to the Financial Statements continued 30 June 2006 13. INTEREST IN JOINT VENTURE OPERATION CONSOLIDATED AAV LIMITED 30 June 2006 $’000 30 June 2005 $’000 30 June 2006 $’000 30 June 2005 $’000 A subsidiary had entered into a joint venture with Regency Recordings Pty Ltd. The venture, AAV Regency, provided a comprehensive and integrated VHS, DVD, CD Mastering and audio cassette duplication, replication, packaging, and distribution logistics facility. The subsidiary had a 51% participating interest in this joint venture and is entitled to 51% of its profits. The Group’s interests in the assets employed in the joint venture are included in the consolidated balance sheet, in accordance with the accounting policy described in note 1(e), under the following classifications: AAV Regency Pty Ltd and AAV Regency Management Pty Ltd was the vehicle through which the joint venture operated, and was jointly controlled. On 30 June 2006, the Company divested its interest in the Media Manufacturing segment for $22M. Refer to Note 6. Assets which have been employed in the unincorporated joint venture and are included in the financial statements are as follows: Current Assets Cash Receivables Inventories Total Current Assets Non-Current Assets Property, plant and equipment Total Non-Current Assets Total Assets There were no impairment losses in the joint venture operation. — — — 6,444 6,444 14,947 — — — — — — — — — — 1,538 4,555 2,410 8,503 — — — — — — — — 72/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 14. PROPERTY, PLANT AND EQUIPMENT CONSOLIDATED AAV LIMITED 30 June 2006 $’000 Event Services: Plant and equipment At cost Accumulated depreciation 47,732 (33,348) 14,384 Plant and equipment under lease At cost Accumulated depreciation 6,058 (3,848) 2,210 Leasehold improvements At cost Accumulated depreciation 1,799 (1,106) 693 Media Segments & AAV Head Office: Plant and equipment At cost Accumulated depreciation 343 (78) 265 30 June 2005 $’000 30 June 2006 $’000 30 June 2005 $’000 43,521 (31,267) 12,254 — — — — — — 4,607 (2,743) 1,864 — — — — — — 1,410 (931) 479 — — — — — — 26,281 (16,477) 9,804 388 (82) 306 — — — Leasehold improvements At cost Accumulated amortisation 30 (4) 26 Total property, plant and equipment At cost Accumulated depreciation and amortisation Total property, plant and equipment 55,962 (38,384) 17,578 76,594 (51,473) 25,121 388 (82) 306 — — — 775 (55) 720 — — — — — — Assets under lease are pledged as security for these leases. Assets relating to Media Manufacturing form part of the comparative, but were sold in the current year as set out in Note 6. /73 Notes to the Financial Statements continued 30 June 2006 14. PROPERTY, PLANT AND EQUIPMENT (cont’d) CONSOLIDATED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 AAV LIMITED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 Reconciliations Event Services: Plant and equipment Opening net book value Additions Disposals Net foreign currency movements on foreign controlled entities Transfers in/(out) Depreciation expense Closing net book value Plant and equipment under lease Opening net book value Additions Disposals Transfers in/(out) Depreciation expense Closing net book value Leasehold Improvements Opening net book value Additions Transfers in/(out) Depreciation expense Closing net book value Total net book value Event services Digital Media Segments & AAV Head Office: Plant and equipment Opening net book value Additions Disposals Transfers in/(out) Transferred to assets held for sale Depreciation expense Closing net book value 9,804 2,165 (8,735) — — (2,969) 265 20,266 919 (4) — (9,805) (1,572) 9,804 — 388 — — — (82) 306 — — — — — — — 479 389 — (175) 693 17,287 487 48 13 (69) 479 14,597 — — — — — — — — — — — — 1,864 1,698 (36) — (1,316) 2,210 3,640 — (15) (1,137) (624) 1,864 — — — — — — — — — — — — 12,254 7,487 (241) (146) — (4,970) 14,384 10,456 2,925 (195) (14) 1,125 (2,043) 12,254 — — — — — — — — — — — — — — 74/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 14. PROPERTY, PLANT AND EQUIPMENT (cont’d) CONSOLIDATED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 AAV LIMITED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 Reconciliations (cont’d) Media Segments & AAV Head Office (cont’d) Plant and equipment under lease Opening net book value Additions Disposals Transfers in/(out) Transferred to Assets held for sale Depreciation expense Closing net book value Leasehold Improvements Opening net book value Additions Disposals Transferred to Assets held for sale Depreciation expense Closing net book value Total net book value Media segment and head office 720 27 (717) — (4) 26 291 1,373 173 — (792) (34) 720 10,524 — — — — — — 306 — — — — — — — — — — — — — — 6,690 — — — (6,690) — — — — — — — — — — — — — — — — The opening written down values of assets which form part of the discontinued operations was transferred to Assets held for sale. See Note 6, Discontinued Operations for more information. The depreciation expense for these assets for the year is contained in the expenses from discontinued operations in that note. /75 Notes to the Financial Statements continued 30 June 2006 15. INTANGIBLES CONSOLIDATED 12 months ended 30 June 2006 $’000 Trademarks $’000 Goodwill 35,024 (2,383) 32,641 $’000 Formation Costs — — — $’000 Total 37,364 (2,649) 34,715 AAV LIMITED 6 months ended 30 June 2006 $’000 Total — — — At 1 January 2005 Cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount Year ended 30 June 2005 Opening net book amount Additions Attributed to discontinued operation Amortisation Closing net book amount At 30 June 2005 Cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount Year ended 30 June 2006 Opening net book amount Additions Impairment Amortisation Closing net book amount At 30 June 2006 Cost (gross carrying amount) Accumulated amortisation Net carrying amount 66 (25) 41 48,156 (2,316) 45,840 10 (2) 8 48,232 (2,343) 45,889 — — — 701 5 (630) (35) 41 39,831 6,009 — — 45,840 — 10 — (2) 8 40,532 6,024 (630) (37) 45,889 — — — — — 809 (108) 701 42,147 (2,316) 39,831 — — — 42,956 (2,424) 40,532 — — — 2,074 — (1,344) (29) 701 32,641 8,238 (1,048) — 39,831 — — — — — 34,715 8,238 (2,392) (29) 40,532 — — — — — 2,340 (266) 2,074 Impairment testing Goodwill is allocated to the Group’s cash-generating units (CGUs) identified according to business segment and country of operation. The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use cash flow projections of financial budgets approved by senior management covering a five-year period. The cash flows have been discounted at a rate of 12.21% (2005: 12.24%) to determine the present value of future cash flows. The present values of the cash flows have then been compared to the net book value in the financial report to determine if impairment is required. These assumptions have been used for the analysis of each CGU within the business segment. The weighted average growth rates used are consistent with forecasts. The discount rates used reflect specific risks relating to the relevant segments and the countries in which they operate. 76/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 15. INTANGIBLES (cont’d) A segment-level summary of the goodwill allocation is presented below: CONSOLIDATED 30 June 2006 $’000 Australia Other 42,219 3,621 45,840 30 June 2005 $’000 39,831 — 39,831 AAV LIMITED 30 June 2006 $’000 — — — 30 June 2005 $’000 — — — Trademarks The trademarks in Event Services, which have a written down value at 30 June 2006 of $0.04M (2005: $0.04M) are being amortised over 10 years. Trademarks in Media Manufacturing, which form part of the discontinued operations (book value 2005: $0.7M) were being amortised over its useful life. Recoverable amount testing is performed at each reporting date and when an impairment indicator exists. The recoverable amount has been determined based on the value in use calculation at the cash generating unit level. Goodwill For the continuing operations at 30 June 2006, these assets were tested for impairment. No impairment loss was charged from continuing operations in the 2006 financial year (2005: Nil). Recoverable amount testing is performed at each reporting date and when an impairment indicator exists. The recoverable amount has been determined based on the value in use calculation at the cash-generating unit level. Formation Costs For the continuing operations at 30 June 2006, these assets were tested for impairment. No impairment loss was charged from continuing operations in the 2006 financial year (2005: Nil). Recoverable amount testing is performed at each reporting date and when an impairment indicator exists. The recoverable amount has been determined based on the value in use calculation at the cash-generating unit level 16. TRADE AND OTHER PAYABLES (CURRENT) Notes Trade creditors Unearned income Other creditors and accruals (a) CONSOLIDATED 30 June 2006 $’000 2,712 1,325 12,730 16,767 (a) Terms and conditions relating to financial instruments: Trade creditors are non-interest bearing and are normally settled on 30 day terms. Other creditors are non-interest bearing and have an average term of less than 12 months. 30 June 2005 $’000 6,120 2,124 10,560 18,804 AAV LIMITED 30 June 2006 $’000 239 — 867 1,106 30 June 2005 $’000 23 — 52 75 /77 Notes to the Financial Statements continued 30 June 2006 17. INTEREST-BEARING LOANS AND BORROWINGS (CURRENT) CONSOLIDATED 30 June 2006 $’000 30 June 2005 $’000 AAV LIMITED 30 June 2006 $’000 30 June 2005 $’000 Effective interest rate % Obligations under hire purchase contracts (secured) Other loans – Secured Bank bill $1,720,000 Bank bill $2,600,000 BBSW +0.85 BBSW +0.85 7.42 Maturity 2006 2006 2006 1,514 1,720 2,600 6,883 1,720 — — 1,720 2,600 — 1,782 — Loans from related company, unsecured 1,093 6,927 — 8,603 24,647 28,967 — 1,782 Obligations under hire purchase contracts The hire purchase contracts have lease terms of between 3-5 years. The average discount rate implicit in the leases is 7.42% (2005: 7.21%). Obligations are secured by a charge over the leased assets. The prior year current portion of the lease liability includes $3,586,000 which is directly related to assets held for sale and has been paid subsequent to year end. Bank bills The bank bills are secured by a First Registered Mortgage Debenture over the whole of the assets of AAV Limited, including uncalled capital and called but unpaid capital. Bank bill $1,720,000 This represents the current portion of the total bill of $7,740,000 (for non-current portion refer to Note 18). The bill is held in the name of AAV Limited. The bill matures on short term intervals and is refinanced subject to repayment of $430,000 each quarter. Bank bill $2,600,000 The bill is held in the name of AAV Limited. The bill matures on short term intervals and is refinanced at these intervals. There is currently no agreement in place as to the repayment of this bill. However it is expected that it will be repaid before 30 June 2007 and it is classified as current. Loans from related company This loan is unsecured, interest free and is repayable by mutual arrangement. It is the parent entity’s intention to settle this loan in the near future, hence its classification as current. 78/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 18. INTEREST-BEARING LOANS AND BORROWINGS (NON-CURRENT) CONSOLIDATED 30 June 2006 $’000 30 June 2005 $’000 AAV LIMITED 30 June 2006 $’000 30 June 2005 $’000 Effective interest rate % Obligations under hire purchase contracts (secured) Other loans (secured) Bank bill $7,740,000 Bank bill $3,500,000 Bank bill $3,500,000 NZD $1,679,250 overseas currency loan BKBM + 0.85 BBSW + 0.85 BBSW + 0.85 BBSW + 0.85 7.42 Maturity 2007/08 17.12.10 15.09.05 15.09.05 08.09.05 1,070 6,020 — — — 7,090 1,638 7,740 3,500 3,500 1,560 17,938 — 6,020 — — — 6,020 — 7,740 — — — 7,740 Obligations under hire purchase contracts The hire purchase contracts have terms of between 3-5 years. The average interest rate implicit in the contracts are 7.42% (2005: 7.21%). Obligations are secured by a charge over the leased assets. Bank bills All bank bills are secured by a First Registered Mortgage Debenture over the whole of the assets of AAV Limited, including uncalled capital and called but unpaid capital The BKBM is the New Zealand equivalent to the BBSW. Bank bill $6,020,000 This represents the non-current portion of the total bill of $7,740,000 (for current portion refer to Note 17). The bill is held in the name of AAV Limited. The bill matures on short term intervals and is refinanced subject to repayments of $430,000 each quarter. /79 Notes to the Financial Statements continued 30 June 2006 19. PROVISIONS CONSOLIDATED AAV LIMITED 30 June 2006 $’000 Current Employee benefits Restructuring Provision for onerous property lease contracts Provision for makegood on property leases Deferred cash consideration Other 1,681 142 904 190 6,785 150 9,852 Non-Current Employee benefits Provision for onerous property lease contracts Provision for makegood on property leases Deferred profit on sale and lease-back of assets Deferred cash consideration payable on Staging Connections deferred vendor consideration 784 1,255 1,656 — — 3,695 30 June 2005 $’000 30 June 2006 $’000 30 June 2005 $’000 1,558 1,652 1,133 66 — 118 4,527 148 — — — 4,957 (17) 5,088 — — — — — — — 865 2,020 1,839 — 4,697 9,421 94 — — — — 94 — — — — 4,697 4,697 On 14 June 2005 shareholders approved an amendment to the Staging Connections deferred consideration arrangement that comprised of the issue of 3,340,000 fully paid ordinary shares in the capital of AAV Limited and a cash payment of $5 million on 1 September 2006. The deferred cash consideration has been measured at its present value. A further deferred consideration is also payable to the vendors of ETG China amounting to $1.915M, payable on 31 March 2007. The deferred cash consideration has been measured at its present value of $1.828M. For more information on this acquisition refer to note 32. Movements in provisions Restructuring Carrying amount at the beginning of the year Additional Provision Amounts utilised during the year Carrying amount at the end of the year 1,652 — (1,510) 142 564 1,652 (564) 1,652 — — — — — — — — A restructuring provision has been raised for $142,000 (2005: $1,652,000) as an estimate of future commitments in relation to divestment of business segments as outlined in Note 6, ‘Discontinued Operations’. These commitments are expected to be settled in the next financial year. Management has estimated the provision based on discussions and negotiations with the purchaser and quotations of the work to be performed. Provision for Makegood on property leases Carrying amount at the beginning of the year Additional Provision Amounts utilised during the year Carrying amount at the end of the year 1,905 — (59) 1,846 — 1,905 — 1,905 — — — — — — — — A provision for makegood on property leases for $1,846,000 (2005:$1,905,000) has been raised as an estimate of the future liability for returning premises back to their original state prior to termination of the lease terms on premises occupied by the discontinued businesses. Management expects that $190,000 of these makegood costs will be settled within the next financial year, with the remaining costs of $1,656,000 expected to be settled in the following year. Management has estimated the provision based on indicative quotations of work to be performed to bring the properties to a satisfactory state at the end of the leases. 80/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 19. PROVISIONS (cont’d) CONSOLIDATED AAV LIMITED 30 June 2006 $’000 Provision for onerous property lease contracts Carrying amount at the beginning of the year Additional Provision Amounts utilised during the year Carrying amount at the end of the year 3,153 — (994) 2,159 30 June 2005 $’000 30 June 2006 $’000 30 June 2005 $’000 — 3,153 — 3,153 — — — — — — — — A provision for onerous lease contracts has been raised for $2,159,000 (2005:$3,153,000) as an estimate of future unrecovered rent payments for leases that the Group continues to lease. Management expect that $904,000 of these unrecovered rent payments will be settled within the next financial year, with the remaining unrecovered rent payments of $1,255,000 expected to be settled in the following years. Management has estimated the provision based on current rental payments and a forecast of future payments taking into consideration increases allowed under the lease contract, less any offset through sub-leasing currently being received and contracted to be received in the future. 20. CONTRIBUTED EQUITY (a) Issued and paid up capital Ordinary shares fully paid (b) Movements in shares on issue AAV LIMITED 2006 Number of shares Beginning of the financial year Issued during the year – Staging Connections deferred consideration brought forward — – exercise of options End of financial year 320,000 87,029,248 — 229 156,005 3,340,000 565,000 86,709,248 3,540 376 155,776 86,709,248 $’000 155,776 2005 Number of shares 82,804,248 $’000 151,860 156,005 155,776 156,005 155,776 On 14 June 2005 shareholders approved an amendment to the Staging Connections Earn-Out that comprised of the issue of 3,340,000 fully paid ordinary shares in the capital of AAV Limited escrowed until 1 September 2006 and a cash payment of $5 million on 1 September 2006. The fair value of the issued shares was $1.06 per share ($3,540,000), the value of the shares at the acquisition date. (c) Terms and conditions of contributed equity Ordinary Shares Ordinary shares entitle the holder to receive dividends as declared and, in the event of winding up the company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on shares held. Ordinary shares entitle their holder to one vote, either in person or by proxy at a meeting of the company. Shares have no par value. Options Option plans are detailed at Note 25. /81 Notes to the Financial Statements continued 30 June 2006 21. RESERVES AND ACCUMULATED LOSSES CONSOLIDATED AAV LIMITED Notes Foreign currency translation reserve Share-based payments (a) (b) 30 June 2006 $’000 (84) 1,064 980 30 June 2005 $’000 78 795 873 (98,398) 30 June 2006 $’000 — 1,064 1,064 (95,724) 30 June 2005 $’000 — 795 795 (95,775) Accumulated losses (a) Foreign currency translation (i) Nature and purpose of reserve (c) (85,195) The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign controlled entities. The reserve is recognised in profit and loss when disposed of. Balance at the beginning of period Gain / (loss) on translation of overseas controlled entities Balance at end of period (b) Share-based payments Nature and purpose of reserve The Directors and Executives Share Option Plan (DESOP) , Employee Share Option Plan (ESOP) and Options and Performance Shares Plan (OPSP) reserve is used to record the value of equity benefits provided to directors, executives and employees as part of their remuneration. Refer to Note 25 for further details of these plans. Balance at beginning of period Share-based payment expense Balance at end of period (c) Accumulated losses Balance at the beginning of period Net profit attributable to members of AAV Limited Dividends paid Balance at end of period 22. MINORITY INTEREST Interest in Share Capital Retained Profits 618 706 1,324 — — — — — — — — — (98,398) 15,377 (2,174) (85,195) (77,302) (17,775) (3,321) (98,398) (95,775) 2,225 (2,174) (95,724) (103,264) 10,810 (3,321) (95,775) 795 269 1,064 532 263 795 795 269 1,064 532 263 795 78 (162) (84) 135 (57) 78 — — — — — — 82/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 23. STATEMENT OF CASH FLOWS CONSOLIDATED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 AAV LIMITED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 (a) Reconciliation of profit after tax to net cash flows from operating activities Profit / (loss) from ordinary activities after tax Non-Cash Items Depreciation and amortisation of non-current assets Contribution of equity accounted investments Movement in foreign currency translation reserve Profit on disposal of controlled entity Profit on disposal of investments Fair value (gains)/losses on other financial assets at fair value through profit or loss Share-based payment expense Loss on sale of property, plant and equipment Deferred profit on sale and leaseback Deferred cash consideration provision Write down of intangible assets Impairment of investments in controlled entities Loss recognised on the restatement of assets being sold to fair value Changes in assets and liabilities (Increase)/decrease in receivables (Increase)/decrease in inventory Decrease/(increase) in tax receivable Increase/(Decrease) in provision for employee benefits (Increase)/decrease in liabilities held for sale (Decrease)/increase in provision for onerous property leases (Decrease)/increase in provision for makegood on property leases (Decrease)/increase in provision for restructuring (Decrease)/increase in trade and other creditors Net cash inflow (outflow) from operating activities (b) Reconciliation of cash Cash balance comprises: – cash on hand – short term deposits 3,711 25,431 29,142 (c) Financing facilities available At reporting date, the following financing facilities had been negotiated and were available: Facilities used Facilities unused Finance facilities available 18,975 25,491 44,466 28,522 15,514 44,036 15,340 19,830 35,170 9,460 — 9,460 /83 16,083 9,469 (171) (162) (6,671) (202) (2) 269 13 — 289 1,253 — — (17,775) 8,499 109 57 — 2,225 82 — — — — 10,810 — — — — 18 263 142 (377) — — 9,707 — 182 — — — — 6,054 — 18 — — — — — — (3) 1,010 1,089 331 — (994) (58) (1,510) 2,018 22,051 8,839 318 (1,708) (1,852) 2,130 3,153 1,905 1,651 (8,681) 6,398 (403) — (2,320) 242 — — — — (10,625) (4,563) (9,082) — 1,324 — — — — — (3,435) (365) 12,316 120 12,436 9,394 23,143 32,537 (62) — (62) Notes to the Financial Statements continued 30 June 2006 24. EXPENDITURE COMMITMENTS CONSOLIDATED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 AAV LIMITED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 (a) Lease expenditure commitments (i) Operating leases (non-cancellable): Minimum lease payments not later than one year later than one year and not later than five years later than five years Aggregate lease expenditure contracted for at balance date 3,853 5,083 47 8,983 4,578 8,778 — 13,356 152 207 — 359 — — — — Operating leases have an average lease term of 5 years. Assets that are the subject of operating leases include office premises and equipment. Future minimum lease payments expected to be received in relation to non-cancellable sub-leases of operating leases (ii) Finance leases: not later than one year later than one year and not later than five years total minimum lease payments future finance charges lease liability current liability non-current liability Total finance lease liability 1,631 1,117 2,748 (164) 2,584 1,514 1,070 2,584 3,995 1,858 5,853 (322) 5,531 3,740 1,791 5,531 — — — — — — — — — — — — — — — — 2,686 — — — Finance leases have an average lease term of 4 years. Assets that are the subject of operating leases include plant and equipment used in the generation of income, such as rental assets. The average rate implicit in the lease is 7.42% (2005: 6.94%) (b) Capital expenditure commitments Estimated capital expenditure contracted for at reporting date, but not provided for, payable: - not later than one year joint venture (51% share) controlled entities — 1,328 1,328 753 944 1,697 — — — — — — The above capital commitments include installations of rental equipment into the Crown in Melbourne $600,000 (2005 - $nil) and Burswood in Perth $405,000 (2005 – $nil). 84/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 25. EMPLOYEE BENEFITS AND SUPERANNUATION COMMITMENTS CONSOLIDATED 30 June 2006 $’000 30 June 2005 $’000 AAV LIMITED 30 June 2006 $’000 30 June 2005 $’000 (a) Employee Benefits The aggregate employee entitlement liability is comprised of: Provisions (current) Provisions (non-current) 1,681 784 2,465 (b) Employee Share and Option Plan (ESOP) At the Annual General Meeting of shareholders held on 29 April 2003, shareholders approved the implementation of an Employee Share and Option Plan (“ESOP”). Under ESOP, eligible employees may be offered options to acquire shares in the Company at a specified price. The Board has the discretion to determine eligibility, option price, exercise date and other terms and conditions. ESOP is not available to executive directors. The Board has imposed certain performance criteria appropriate to each individual participant. Options granted under ESOP must be exercised in multiples of 5,000, or all remaining options if less than this number. Options may not be transferred and are not listed on the Australian Stock Exchange. Options will lapse on the first to occur of the following: a) b) c) d) the 5th anniversary of the date of grant (or such other date as determined by the Board); the expiry of the option term; cessation of employment by the option holder; or termination of employment of the option holder by the Company for misconduct, fraud or similar reasons. 1,558 865 2,423 148 94 242 — — — During the year, directors granted nil options (2005: 500,000 options) to eligible employees. Options cancelled during the year were 1,650,000 (2005: 440,000). The number of ESOP options exercised during the year was 320,000 (2005:100,000). The average share price at the date of exercise for the options exercised is $1.18 (2005: $1.23). The terms of the grant of options are detailed below: Year of grant 2004 Exercise price $1.90 $1.96 $2.02 $2.08 2005 $1.49 $1.60 $1.70 $1.80 Vesting % 100 100 100 100 100 100 100 100 Vesting date 30.06.04 30.06.05 30.06.06 30.06.07 30.06.05 30.06.06 31.12.06 30.06.07 Expiry date 30.06.06 30.06.07 30.06.08 30.06.09 30.06.09 30.06.10 31.12.10 30.06.11 /85 Notes to the Financial Statements continued 30 June 2006 25. EMPLOYEE BENEFITS AND SUPERANNUATION COMMITMENTS cont’d (c) Directors and Executives Share and Option Plan (DESOP) At the AGM held on 29 April 2003, shareholders also approved the introduction of the Director and Executives Share Option Plan (DESOP). Options under DESOP are granted to directors and senior executives subject to performance hurdles tailored appropriate for the role and responsibilities of each participant. All options are subject to the satisfaction of certain performance criteria. During the year, directors granted nil options (2005: 800,000) to eligible employees. During the period 420,000 options were cancelled (2005: 315,000) under the DESOP. The number of options exercised during the period was nil (prior year 465,000). The average share price at the date of exercise for the options exercised was n/a (2005: $1.33). The terms of the grant of options are detailed below: Year of grant 2004 Exercise price $1.56 $1.67 $1.79 $1.91 2005 $1.47 $1.60 $1.70 $1.80 Vesting % 100 100 100 100 100 100 100 100 Vesting date 30.06.04 30.06.05 30.06.06 30.06.07 30.06.05 30.06.06 31.12.06 30.06.07 Expiry date 30.06.06 30.06.07 30.06.08 30.06.09 30.06.09 30.06.10 31.12.10 30.06.11 d) Options and Performance Shares Plan (OPSP) In order to update the Company’s employee share plans to reflect current trends as to entitlement, alignment of reward with performance and provide for the future possibility of granting performance shares to senior employees, in accordance with current practice and the ASX Listing Rules, on 27 February 2006 the directors approved a new employee share plan entitled the AAV Options and Performance Shares Plan (“OPSP”). On 27 February 2006 directors approved a one-off grant of options under the OPSP to certain senior executives and Staging Connections managers and on 28 April 2006 following receipt of shareholder approval, a grant of options to the CEO, on the following terms and conditions: i. Exercise price: $0.90 per option ii. Options granted under the OPSP must be exercised in multiples of 5,000, or all remaining options if less than this number. Options may not be transferred and are not listed on the Australian Stock Exchange. iii. Options will lapse on the first to occur of the following: the 5th anniversary of the date of grant (or such other date as determined by the Board); the expiry of the option term; cessation of employment by the option holder; or termination of employment of the option holder by the Company for misconduct, fraud or similar reasons. iv. Options will vest with the participant on the second anniversary of the date of grant subject to the level of achievement of the Company’s Total Shareholder Return (“TSR”) measured against the performance of the S&P/ASX Small Ordinaries Index over the one year ended the half year or full year balance date immediately preceding the grant anniversary date. The resultant performance will determine the percentage of the options which will vest with the participants. Those options which do not vest on the second anniversary of the date of grant will be held over for retesting on the third and fourth anniversaries of the date of grant. Options which remain unvested after the fourth anniversary of the date of grant will expire as unvested options on the fifth anniversary of the date of grant. The number of options granted during the period was 2,290,000 (prior year nil options) to eligible employees. There were no options cancelled during the period and none was capable of being exercised. Year of grant 2006 Exercise price $0.90 Vesting % 100 Vesting date 28.02.08 Expiry date 28.02.11 86/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 25. EMPLOYEE BENEFITS AND SUPERANNUATION COMMITMENTS cont’d Options outstanding under DESOP, ESOP and OPSP at balance date: 2006 OPSP Weighted average exercise price — ESOP Weighted average exercise price $1.6371 DESOP Weighted average exercise price $1.6735 2005 ESOP Weighted average exercise price $1.6114 DESOP Weighted average exercise price $1.0795 OPSP Number of options ‘000 Balance at start of year Options granted during year Options forfeited Options exercised during year Balance at period end Nil ESOP Number of options ‘000 2,980 DESOP Number of options ‘000 1,220 ESOP Number of options ‘000 3,020 DESOP Number of options ‘000 1,200 2,290 Nil $0.9000 — — (1,650) — $1.6446 — (420) — $1.7325 500 (440) $1.6460 $0.7500 800 (315) $1.6425 $0.8000 Nil 2,290 — $0.9000 (320) 1.010 $0.7156 $1.8307 — 800 — $1.6375 (100) 2,980 $0.6000 $1.6371 (465) 1,220 $0.6790 $1.6735 Fair Value of Options Granted and Assumptions used: The fair value of the options are estimated at the date of grant using the binomial model. The following table gives the fair value of the options granted and assumptions made in determining the fair value in the year to 30 June 2006. ESOP Tranche 1 Fair value of options Assumptions: Dividend yield (%) Expected volatility (%) Risk-free interest rate (%) Expected life of option (years) Weighted average option exercise price ($) Share price at grant date ($) DESOP Tranche 1 Fair value of options Assumptions: Dividend yield (%) Expected volatility (%) Risk-free interest rate (%) Expected life of option (years) Weighted average option exercise price ($) Share price at grant date ($) 1.47 0.95 1.60 0.95 1.70 0.95 1.80 0.95 1.47 0.95 1.60 0.95 1.70 0.95 1.80 0.95 /87 2006 Tranche 2 0.22 Tranche 3 0.21 Tranche 4 0.20 Tranche 1 0.22 Tranche 2 0.22 0.22 2005 Tranche 3 0.21 Tranche 4 0.20 6.60 32.9 5.29 4.00 1.49 1.32 6.60 32.9 5.29 5.00 1.60 1.32 2006 Tranche 2 0.11 6.60 32.9 5.29 5.50 1.70 1.32 6.60 32.9 5.30 6.00 1.80 1.32 6.60 32.9 5.29 4.00 1.49 1.32 6.60 32.9 5.29 5.00 1.60 1.32 2005 6.60 32.9 5.29 5.50 1.70 1.32 6.60 32.9 5.30 6.00 1.80 1.32 Tranche 3 0.10 Tranche 4 0.10 Tranche 1 0.11 Tranche 2 0.11 Tranche 3 0.10 Tranche 4 0.10 0.11 8.10 32.95 5.29 4.00 8.10 32.95 5.29 5.00 8.10 32.95 5.29 5.50 8.10 32.95 5.30 6.00 8.10 32.95 5.29 4.00 8.10 32.95 5.29 5.00 8.10 32.95 5.29 5.50 8.10 32.95 5.30 6.00 Notes to the Financial Statements continued 30 June 2006 25. EMPLOYEE BENEFITS AND SUPERANNUATION COMMITMENTS cont’d OPSP Tranche 1 Fair value of options Assumptions: Dividend yield (%) Expected volatility (%) Risk-free interest rate (%) Expected life of option (years) Weighted average option exercise price ($) Share price at grant date ($) 5.00 33.00 5.75 5.00 0.90 1.00 0.29 n/a — — — — — — — — 2006 n/a — — — — — — — — n/a — — — — — — — — n/a — — — — — — — — n/a — — — — — — — — 2005 n/a — — — — — — — — n/a — — — — — — — — The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome. The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. Share options issued under the ESOP, DESOP and OPSP and outstanding at the end of the year have the following exercise prices: 2006 Expiry Date 30.6.06 30.6.06 30.6.07 30.6.07 30.6.07 30.6.08 30.6.08 30.6.08 30.6.09 30.6.09 30.6.09 30.6.09 30.6.10 31.12.10 30.6.11 28.2.11 Total Exercise Price $1.90 — $0.70 — $1.96 $0.80 — $2.02 $1.47 $1.49 — $2.08 — — — $0.90 — OPSP Number of options — — — — — — — — — — — — — — — 2,290,000 2,290,000 ESOP Number of options 345,000 — 35,000 — 345,000 35,000 — 62,500 — 125,000 — 62,500 — — — — 1,010,000 DESOP Number of options — — — — — — — — 200,000 — — — 200,000 200,000 200,000 — 800,000 2005 Exercise Price $1.90 $1.56 $0.70 $1.67 $1.96 $0.80 $1.79 $2.02 $1.47 $1.49 $1.91 $2.08 $1.60 $1.70 $1.80 — — ESOP Number of options 442,500 — 355,000 — 442,500 355,000 — 442,500 — 125,000 — 442,500 125,000 125,000 125,000 — 2,980,000 DESOP Number of options — 105,000 — 105,000 — — 105,000 — 200,000 — 105,000 — 200,000 200,000 200,000 — 1,220,000 The weighted average contractual life for the ESOP, DESOP and OPSP share options outstanding as at 30 June 2006 is between 1 and 6 years (2005: 1-6 years). 88/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 25. EMPLOYEE BENEFITS AND SUPERANNUATION COMMITMENTS cont’d Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were as follows: CONSOLIDATED 12 months ended 30 June 2006 $’000 Options and Performance Shares Plan (OPSP) Directors and Executives Share and Option Plan (DESOP) Employee Share and Option Plan (ESOP) 110 (11) 170 269 6 months ended 30 June 2005 $’000 — 65 198 263 AAV LIMITED 12 months ended 30 June 2006 $’000 58 42 82 182 6 months ended 30 June 2005 $’000 — — — — Superannuation Commitments All superannuation contributions made by the consolidated entity on behalf of employees are the legally enforceable contributions of 9%. This is in accordance with the requirements laid down in the Australian Governments’ Superannuation Guarantee Legislation. Employees may elect to make additional contributions on a regular or irregular basis at their discretion. No additional contributions are made by the consolidated entity. Employee numbers At 30 June 2006 the consolidated AAV Limited group entity had 929 full time equivalent employees (2005: 1,025). 26. CONTINGENCIES Contingent consideration Additional contingent consideration in relation to the acquisitions detailed in Note 27. Additional amounts will be payable in relation to those acquisitions. Guarantees The Parent has provided bank guarantees totalling $5.0M as a bank guarantee to Staging Connections Pty Limited deferred vendors at 30 June 2006, in accordance with the 2005 Deed relating to this payment, ratified by shareholders on 14 June 2005. This liability has been extinguished at 2 September 2006. The Parent has guaranteed commercial hire purchase agreements for the controlled entities in the amount of $2.584M (2005 $8.521M). The Parent also has guarantees on behalf of the Group in relation to leasing of properties in the amount of $1.050M. These guarantees may give rise to liabilities in the Parent if the subsidiaries do not meet their obligations under the terms of the leases and other liabilities subject to the guarantees. No material losses are anticipated in respect to any of these contingencies. /89 Notes to the Financial Statements continued 30 June 2006 27. SUBSEQUENT EVENTS Acquisition of the event staging and event production business Stageworks Pty Limited (Australia) On 16 August 2006, the Company announced that it had finalised negotiations for the acquisition of the event staging and event production business of Stageworks Pty Limited, the leading events and staging operator in the Far North Queensland region. The purchase price is payable in two instalments, the first in the amount of $2.1M was paid upon completion of the transaction on 31 August 2006 and the final of $0.7M on the first anniversary of completion. This final instalment is variable depending on achievement of certain earnings targets. Details of net assets acquired and goodwill are as follows: Cash paid Estimate of deferred consideration payable 16 August 2007 Estimate of direct costs relating to acquisition Total purchase consideration Fair value of plant and equipment acquired Fair value of motor vehicles acquired Goodwill and other IP rights $’000 2,100 700 35 2,835 (650) (75) 2,110 An assessment has not been made of the fair value of the assets acquired at the date of this report. This assessment will be made when the information has been considered in full. The financial effects of the above transaction have not been brought to account at 30 June 2006. The operating results and liabilities of the company will be consolidated from 1 September 2006. Acquisition of interest in the event production business of The Event Company Pte Limited (Singapore) On 4 September 2006, the company announced it had agreed to acquire a majority interest in the event production business operated by The Event Company Pte Limited (TEC), one of South East Asia’s leading event production businesses, based in Singapore. The 70% interest in TEC has been acquired for SGD$7.0M, payable in two instalments, the first in the amount of SGD$4.2M upon completion of the transaction and the final of SGD$2.8M on the first anniversary of commencement of operations. This final instalment is variable depending on achievement of certain earnings targets but is at a minimum of $nil and a maximum of $3.9M. As no payments have been made at the date of this report, no Australian Dollar equivalents are available. Details of net purchase price, in Singaporean Dollars, are as follows: First instalment payable on completion Estimate of deferred consideration payable on 1st anniversary of completion Estimate of direct costs relating to acquisition Total estimated purchase consideration SGD$’000 4,200 2,800 60 7,060 The financial effects of the above transaction have not been brought to account at 30 June 2006. The operating results and liabilities of the company will be consolidated from 1 September 2006. 90/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 27. SUBSEQUENT EVENTS (Cont’d) Acquisition of interest in the event production business of Techmex Event Production Pte Limited (Singapore) On 18 September 2006, the company announced it had agreed to purchase a controlling interest in Techmex Event Production Pte Limited (Techmex). This acquisition comprises a 70% interest in the Singapore event production business and a 100% of the China event production business. The Singapore business includes an office in Malaysia, servicing the growing market place in Thailand and Vietnam. The acquisition cost is estimated to be in the vicinity of SGD$3.973M for the Singapore business, payable over two tranches, 50% upon completion of the transaction documents and 50% upon the first anniversary of commencement of operations, this second instalment subject to achievement of certain earnings targets over that one year period. The total second instalment is capped at SGD$3.789M. The total consideration of the China business will be valued on similar multiples and paid after the first anniversary date, also subject to the achievement of certain earnings targets over the ensuring one year period. The total consideration payable for the China business is capped at SGD$1.5M. As no payments have been made at the date of this report, no Australian Dollar equivalents are available. Details of net purchase price, in Singaporean Dollars, are as follows: First instalment payable on completion for Singapore business Estimate of deferred consideration payable on 1st anniversary of commencement of operations for Singapore business Estimate of deferred consideration payable on 1st anniversary of commencement of operations for China business Estimate of direct costs relating to acquisition Total estimated purchase consideration SGD$’000 1,987 1,987 800 60 4,834 The financial effects of the above transaction have not been brought to account at 30 June 2006. The operating results and liabilities of the company will be consolidated from 1 October 2006. Acquisition of the exhibitions management business of Exhibitions and Trade Fairs Pty Limited (Australia) On 16 August 2006, the company announced that it had finalised negotiations for the acquisition of the exhibition and trade fairs management business of Exhibitions and Trade Fairs Pty Limited (ETF), a leading Australian based exhibition organiser and manager specialising in local and international trade shows and consumer exhibitions. The transaction was completed on 1 September 2006. The purchase of ETF will expand the event businesses services bringing into our service offering a number of trade shows and consumer exhibitions. The purchase price for ETF was $13.1M, with $12.1M paid on completion and a further payment of $1.0M at the end of December 2006, payable upon the signing of a contract to secure a particular event scheduled for 2010. Details of net assets acquired and goodwill are as follows: Cash paid Deferred consideration payable 31 December 2006 Direct costs relating to acquisition Total purchase consideration $’000 12,132 1,000 132 13,264 An assessment has not been made of the fair value of the assets acquired at the date of this report. This assessment will be made when the information has been considered in full. The financial effects of the above transaction have not been brought to account at 30 June 2006. The operating results and liabilities of the company will be consolidated from 1 September 2006. Payment of deferred consideration - Staging Connections Pty Limited On 1 September 2006, the company paid the final instalment of the deferred consideration payable to the vendors of Staging Connections Pty Limited. The final instalment of the deferred consideration was $5.0M in cash, as ratified in the Annual General Meeting of shareholders on 14 June 2005. This liability had been reflected in the purchase price of Staging Connections in the previous report. 3,340,000 shares issued to the deferred vendors as approved by shareholders on 14 June 2005 were removed from escrow on 1 September 2006. /91 Notes to the Financial Statements continued 30 June 2006 CONSOLIDATED 28. EARNINGS PER SHARE Net profit attributable to equity holders from continuing operations Profit (Loss) attributable to equity holders from discontinued operations Net profit attributable to equity holders 2006 $’000 7,254 8,123 15,377 2005 $’000 3,163 (20,938) (17,775) Number of shares Weighted average number of ordinary shares on issue used in the calculation of basic earnings per share Effect of dilutive securities Share options Adjusted weighted average number of ordinary shares used in calculating diluted earnings per share 129,789 87,045,037 86,915,248 Number of shares 83,282,867 308,486 83.591,353 Cents per share Cents per share Basic earnings per share Basic earnings per share from continuing operations Diluted earnings per share Diluted earnings per share from continuing operations The earnings calculation is the same for basic and diluted earnings. Conversions, calls, subscription or issues after 30 June 2006 Since 30 June 2006, 70,000 share options have been converted to ordinary shares. There have been no other conversions to, calls of, or subscriptions for ordinary shares or issues of potential ordinary shares since the reporting date and before the completion of this financial report. Information concerning the classification of securities Options Options granted to employees under the Options and Performance Shares Plan (OPSP) are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share to the extent to which they are dilutive. The options have not been included in the determination of basic earnings per share. The 665,000 options granted under the Employee Share and Option Plan (ESOP) and 1,220,000 options granted under the Directors and Executives Share and Option Plan (DESOP) in previous years are not included in the calculation of diluted earnings per share because they are antidilutive for the year ended 30 June 2006. These options could potentially dilute basic earnings per share in the future. Details relating to the options are set out in Note 25. 17.7 8.3 17.7 8.3 (21.3) 3.8 (21.3) 3.8 92/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 29. KEY MANAGEMENT PERSONNEL DISCLOSURES (a) Details of Directors and key management personnel (i) Directors R. Mansfield Non-Executive Chairman M. Gardner Chief Executive Officer J. Murphy Non-Executive Director G. Robertson Non-Executive Director B. Waters Non-Executive Director D. Hunter Non-Executive Director – Appointed 28 February, 2006 (ii) Key management personnel J. Krug Chief Financial Officer B. Davidson Managing Director, Staging Connections Pty Limited G. Kearns Commercial Director P. Kolevas Resigned 1 September 2006 V. Hekimian Operations Director, Staging Connections Pty Limited, Resigned 25 August 2006 J. Fleming Resigned 11 August 2005 G. Hackett Retired from Executive Committee 14 June 2005, Resigned 31 March 2006 P. Hardie Resigned 11 August 2005 (b) Remuneration of Directors and Key management personnel (i) The Nomination and Remuneration Committee of the Board of Directors of AAV Limited is responsible for determining and reviewing compensation arrangements for the directors, the chief executive officer and the executive team. The Remuneration Committee assesses the appropriateness of the nature and amount of emoluments of such officers on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality board and executive team. Such officers are given the opportunity to receive their base emolument in a variety of forms including cash and fringe benefits. It is intended that the manner of payment chosen will be optimal for the recipient without creating undue cost for the company. To assist in achieving these objectives, the Nomination and Remuneration Committee links the nature and amount of executive directors’ and officers emoluments to the company’s share price (market performance). Senior executives have the opportunity to qualify for participation in the AAV Options and Performance Shares Plan (“OPSP”) and Employee Share Option Plan (ESOP). Executive Directors have the opportunity to participate in the Director and Executive Share Option Plan (DESOP). These plans provide incentives to participants based on market performance. Service Agreements Michael Gardner, Chief Executive Officer (CEO), AAV Limited • • • • Term of agreement – unspecified, commencing 10 January 2005 Base salary, inclusive of superannuation, for the year ended 30 June 2006 of $400,000 to be reviewed annually by the Nomination and Remuneration Committee with a minimum increase of 1% A bonus of 30% of salary at 30 June 2006, amounting to $120,000 including superannuation was payable at 30 June 2006 subject to the company meeting budget targets and key performance indicators set by the Board Payment of a termination benefit will be required, if termination occurs without cause, in the amount of 12 months of the current salary. There is a three-month notice period for resignation and termination. /93 Notes to the Financial Statements continued 30 June 2006 29. DIRECTOR AND SPECIFIED EXECUTIVE DISCLOSURES (Cont’d) Jeff Krug, Chief Financial Officer (CFO), AAV Limited • Term of agreement – unspecified, commencing 7 March 2005 • Salary, inclusive of superannuation, for the year ended 30 June 2006 of $325,000, to be reviewed annually by the Nomination and Remuneration Committee • A bonus of 30% of salary at 30 June 2006, amounting to $97,500 including superannuation was payable at 30 June 2006 subject to meeting budget targets and key performance indicators set by the Board • Payment of a termination benefit will be required, if termination occurs without cause, in the amount of 12 months of the current salary. There is a three-month notice period for resignation and termination. Bill Davidson, Managing Director, Staging Connections Pty Limited • Term of agreement – unspecified, commencing 28 November 2005 • Salary, inclusive of superannuation, of $350,000 (on a pro-rata basis for the seven month period employed to 30 June 2006, amounting to • • $204,166 including superannuation), and is to be reviewed annually by the CEO and approved by the Nomination and Remuneration Committee A bonus of 30% of salary (on a pro-rata basis for the period employed) at 30 June 2006, amounting to $61,250 including superannuation was payable at 30 June 2006 subject to achieving a satisfactory performance review and any key performance indicators set and agreed by the CEO Payment of a termination benefit will be required, if termination occurs without cause, in the amount of 6 months of the current salary. There is a three-month notice period for resignation and a one-month notice period for termination. Graeme Kearns, Commercial Director, AAV Limited • Term of agreement – unspecified, commencing 15 May 1995 • Salary, inclusive of superannuation, for the period employed during the year ended 30 June 2006 of $250,000 is to be reviewed annually by the CEO and approved by the Nomination and Remuneration Committee • A bonus of 25% of salary at 30 June 2006, amounting to $62,500 including superannuation was payable at 30 June 2006 subject achieving a satisfactory performance review and any key performance indicators set and agreed by the CEO • Payment of a termination benefit will be required, if termination occurs without cause, in the amount of 12 months of the current salary. There is a three-month notice period for resignation and no termination notice period. Gary Hackett, previous Managing Director, Staging Connections Pty Limited • Term of agreement – 3 years commencing 1 July 2005 • Base salary, inclusive of superannuation, for the year ended 30 June 2006 of $249,432 • No bonus was payable at 30 June 2006 • Employment was terminated on 31 March 2006. Payment of a termination benefit of 12 month of the current salary package was made, along with the other entitlements at that point in time Vicken Hekimian, Operations Director, Staging Connections Pty Limited • Term of agreement – unspecified, commencing 26 April 1991 • Base salary, inclusive of superannuation, as at 30 June 2006 of $200,000 • A bonus of 25% of salary at 30 June 2006, amounting to $50,000 including superannuation was payable at 30 June 2006 subject to achieving a satisfactory performance review and any key performance indicators set and agreed by the Managing Director, Staging Connections. • Employment was terminated on 25 August 2006. No other employment agreements have been entered into. 94/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 CONSOLIDATED 12 months ended 30 June 2006 $’000 (c) Key management personnel compensation Short-term employee benefits Directors Key management personnel Post employment benefits Directors Key management personnel Share- based payments Directors Key management personnel 66 169 235 2,616 4 123 127 2,057 63 125 188 39 58 97 825 1,368 2,193 1,138 695 1,833 6 months ended 30 June 2005 $’000 AAV LIMITED 12 months ended 30 June 2006 $’000 6 months ended 30 June 2005 $’000 — 825 674 1,499 63 61 124 66 107 173 1,796 1,138 — 1,138 — 39 — 39 4 — 4 1,181 The key management personnel compensation for the parent entity, AAV Limited only includes key personnel identified in note 29(a) that receive compensation directly from the parent entity. These persons are all the directors. J. Krug and G. Kearns The Company has taken advantage of the relief provided by ASIC Class Order 06/50 and has transferred the detailed remuneration disclosures to the directors’ report. The relevant information can be found on pages 29 to 37 of the directors report. (d) Other transactions and balances with directors and key management personnel Director-related entity transactions (i) Directors fees for J Murphy and G Robertson of $60,000 (6 months 2005: $25,000) and $65,000 (6 months 2005: $35,000) respectively were paid to Investec Wentworth Private Equity Limited, a company associated with J Murphy and G Robertson. (ii) Consultancy fees were also paid to Investec Wentworth Pty Limited, a company associated with J Murphy an G Robertson, regarding the sale of discontinued segments of the business in the amount of $638,136 /95 Notes to the Financial Statements continued 30 June 2006 29. KEY MANAGEMENT PERSONNEL DISCLOSURES (Cont’d) (e) Option holdings of Directors and key management personnel The numbers of options over ordinary shares in the company held during the financial year by each director of AAV Limited and other key management personnel of the Group, including their personally related parties, are set out below. Balance at Granted as beginning remunerof period ation 1 July 2005 Directors R. Mansfield M. Gardner J. Murphy G. Robertson B. Waters D. Hunter P. Kolevas J. Krug G. Kearns B. Davidson V. Hekimian — 800,000 — — — — 250,000 500,000 250,000 — 200,000 — 500,000 — — — — — 375,000 125,000 250,000 100,000 — — — — — — — — — — — — — — — — — (375,000) (125,000) — (100,000) — 1,300,000 — — — — 250,000 500,000 250,000 250,000 200,000 Balance at end of period 30 June 2005 — 800,000 — — — — — — — — — 500,000 — — — — — 105,000 255,000 105,000 — — — — — — — — — — (105,000) (255,000) (105,000) — — — — — — 800,000 — — — — — — 100,000 420,000 100,000 250,000 500,000 — 400,000 — — — — — 187,500 125,000 125,000 — 100,000 — — — — — — — — — — — — 400,000 — — — — 187,500 125,000 125,000 — 100,000 — 66,031 — — — — 25,417 75,091 31,412 11,991 25,130 — 134,966 — — — — — 110,909 29,879 59,759 23,904 Balance at end of period 30 June 2006 Share Based Payment expense calculated on these options 2006 $ Future years $ 2006 Options Exercised Options Forfeited Vested at 30 June 2006 Total Not exerciseable Exercisable Key management personnel 2005 Balance at Granted as beginning of remunerperiod ation 1 January 2005 Options Exercised Options Forfeited Vested at 30 June 2005 Total — 200,000 — — — — — — 50,000 210,000 50,000 125,000 125,000 Not exerciseable Exercisable — — — — — — — — — — — — — — 200,000 — — — — — — 50,000 210,000 50,000 125,000 125,000 Share Based Payment expense calculated on these options 2005 $ — 23,983 — — — (6,619) (6,619) (6,619) 2,993 61,094 2,993 28,410 27,488 Future years $ — 57,497 — — — — — — 3,907 73,150 3,907 25,417 78,375 Directors R. Mansfield M. Gardner J. Murphy G. Robertson B. Waters Resigned directors E. Gregory P. Colby R. Cartledge J. Fleming G. Hackett P. Hardie P. Kolevas J. Krug 210,000 360,000 210,000 100,000 420,000 100,000 250,000 — — — — — — Key management personnel 96/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 29. KEY MANAGEMENT PERSONNEL DISCLOSURES (Cont’d) (f) Shareholdings of Directors and Key management personnel The numbers of shares in the company held during the financial year by each director of AAV Limited and other key management personnel of the Group, including their personally related parties, are set out below. There were no shares granted during the reporting period as compensation. 2006 Shares held in AAV Ltd Directors R. Mansfield M. Gardner J. Murphy G. Robertson B. Waters D. Hunter Key management personnel P. Kolevas J. Krug G. Kearns B. Davidson V. Hekimian 52,424 20,000 52,424 — — — — — — — — — — — — — 50,000 — — — 52,424 70,000 52,424 — — 260,186 200,000 190,000 297,500 36,900 — — — — — — — — — — — — — — — — — — 532,000 260,186 200,000 190,000 297,500 36,900 532,000 Balance 1 July 2005 Granted as remuneration Balance 30 June 2006 On exercise of options Net change other 2005 Shares held in AAV Ltd Directors R. Mansfield M. Gardner J. Murphy G. Robertson B. Waters Resigned directors E. Gregory P.Colby R. Cartledge Balance 1 January 2005 160,186 — 190,000 297,500 36,900 221,865 60,173 210,000 Granted as remuneration — — — — — — — — On exercise of options — — — — — 105,000 255,000 105,000 Net change other 100,000 200,000 — — — (100,000) (85,000) (105,000) Balance 30 June 2005 260,186 200,000 190,000 297,500 36,900 226,865 230,173 210,000 Key management personnel J. Fleming G. Hackett P. Hardie P. Kolevas J. Krug 100,000 1,000,000 — 52,424 — — — — — — — — — — — (100,000) 1,070,000 — — 20,000 — 2,070,000 — 52,424 20,000 /97 Notes to the Financial Statements continued 30 June 2006 30. AUDITORS’ REMUNERATION CONSOLIDATED 12 months ended 30 June 2006 $ 6 months ended 30 June 2005 $’000 AAV LIMITED 12 months ended 30 June 2006 $ 6 months ended 30 June 2005 $’000 Amounts received or due and receivable by PricewaterhouseCoopers Australia (2005: Ernst & Young) for: an audit or review of the financial report of the entity and any other entity in the consolidated entity other services in relation to the entity and any other entity in the consolidated entity assurance related – AIFRS conversion tax compliance regulatory compliance and accounting services — — — 160,349 Amounts received or due and receivable by auditors other PricewaterhouseCoopers Australia for: other services in relation to the entity and any other entity in the consolidated entity an audit or review of the financial report of the entity and any other entity in the consolidated entity 55,958 216,307 8,744 242,956 55,958 216,307 — — 75,027 5,000 6,697 234,212 — — — 160,349 — — — — 160,349 147,488 160,349 — 31. RELATED PARTY TRANSACTIONS (a) Parent entities The Parent entity within the Group is AAV Limited. (b) Subsidiaries Interests in subsidiaries are set out in Note 12. (c) Key management personnel Disclosures relating to key management personnel and director related entities are set out in Note 29. (d) Wholly-owned group transactions Interest free loans between AAV Limited and wholly owned controlled entities existed during the year. The amount outstanding on these loans is as detailed in Notes 8, & 17. (e) Guarantees Disclosures relating to guarantees are included in Note 26. 98/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 (f) Tax consolidation legislation CONSOLIDATED 30 June 2006 $’000 30 June 2005 $’000 — — AAV LIMITED 30 June 2006 $’000 968 (12,153) 30 June 2005 $’000 — (12,461) Current tax payable assumed from wholly-owned tax consolidated entities Tax losses assumed from wholly-owned tax consolidated entities 32. BUSINESS COMBINATIONS — — Acquisition of ETG China On 1 March 2006, the Company announced that it had acquired a 51% equity interest in the Chinese event staging and event production business known as ETG China. ETG is one of the major event production and event staging operations in the South East Asia region, servicing a wide client base including global providers of IT and telecommunication products and services in China and Hong Kong. The Staging Connections business model and service delivery excellence will provide added value to the ETG business. The transaction required that the existing business of ETG China (based in China and Hong Kong) be restructured and consolidated into two new entities in which the Company acquired its interest. The company now owns a 51% controlling interest in the shares of ETG Staging Connections (HK) Limited which in turn is, the 100% owner of ETG Staging Connections (China) Co. Limited The purchase price is payable in two instalments, the first paid on 28 February 2006 in the amount of $2.151M and the final instalment of $1.785M (measured at present value) on 31 March 2007. This final instalment reduces to nil depending on achievement of certain earnings targets. Details of net assets acquired and goodwill are as follows: Cash paid Deferred consideration payable 31 March 2007 Direct costs relating to acquisition Total purchase consideration Fair value of net identifiable assets acquired (after minority interests) Goodwill (Note 15) Purchase consideration Outflow of cash to acquire subsidiary, net of cash acquired Cash consideration Assets and liabilities acquired The assets and liabilities arising from the acquisition are as follows: Fair value $’000 Cash Property, plant and equipment Motor vehicles Net assets Minority interests Net identifiable assets acquired 1 1,114 132 1,247 (617) 630 2,466 $’000 2,151 1,785 315 4,251 630 3,621 /99 Notes to the Financial Statements continued 30 June 2006 33. SEGMENT INFORMATION Business segments The consolidated entity’s operating companies are organised and managed separately according to the nature of the products and services they provide on a global basis, with each segment offering different products and serving different markets. Continuing operations, including event services The event services industry provides services involved in the co-ordination and production of staging events. The event services industry segment was acquired by AAV Limited at 31 October 2003. Discontinued The media manufacturing segment provides services including duplication, replication and logistics. The discontinued operations include media manufacturing, and digital media services. The media manufacturing segment is new to the discontinued operations due to its sale on 30 June 2006 (Refer Note 6). Continuing Operations 2006 $’000 Revenue Sales to external customers Other income Total segment revenue before finance income Finance income Total segment revenues Results Profit / (loss) before income tax, interest, depreciation and results of Associates Finance income Finance costs Depreciation and amortisation Share of Associates profits/(losses) Consolidated entity profit/loss before income tax expense Income tax benefit (expense) Profit/loss from operations after tax Profit attributable to minority interest Profit/loss after tax 83,068 143 83,211 650 83,861 34,362 1,029 35,391 432 35,823 27,376 — 27,376 137 27,513 31,759 (139) 31,620 312 31,932 110,444 143 110,587 787 111,374 66,121 890 67,011 744 67,755 2005 $’000 Discontinued Operations 2006 $’000 2005 $’000 Total Operations 2006 $’000 2005 $’000 13,519 650 (829) (6,667) 76 6,749 1,211 7,960 (706) 7,254 7,584 432 (966) (2,744) 250 4,556 (1,393) 3,163 — 3,163 13,506 137 (887) (2,802) — 9,954 (1,831) 8,123 — 8,123 (19,018) 312 (413) (2,936) (655) (22,710) 1,772 (20,938) — (20,938) 27,025 787 (1,716) (9,469) (76) 16,703 (620) 16,083 (706) 15,377 (11,434) 744 (1,379) (5,680) (405) (18,154) 379 (17,775) — (17,775) 100/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 33. SEGMENT INFORMATION (Cont’d) Business segment Continuing Operations 2006 $’000 Assets Segment Assets Non-segment assets Total assets Liabilities Segmented liabilities Non-segment liabilities Total liabilities Investements in associates Other segment information Intangible assets Acquisitions of property, plant and equipment, intangibles and other non-current segment assets Impairment losses Share-based payments 45,889 39,123 — 708 45,889 39,831 10,070 24,522 34,592 105 12,744 23,436 36,180 104 5,591 4,148 9,739 — 25,243 — 25,243 171 15,661 28,670 44,331 105 37,987 23,436 61,423 275 111,866 4,272 116,138 59,036 4,296 63,332 1,307 — 1,307 56,342 — 56,342 113,173 4,272 117,445 115,378 4,296 119,674 2005 $’000 Discontinued Operations 2006 $’000 2005 $’000 Total Operations 2006 $’000 2005 $’000 9,849 — 254 2,973 — 128 1,917 — 15 2,835 9,707 135 11,766 — 269 5,808 9,707 263 2006 balances represent the results for the 12 months of the Media Manufacturing segment, as sold on 30 June 2006, and the results for the 2 months of the Digital Media Services segment, as sold in August 2005. Segment assets and liabilities are those held by the AAV group as at 30 June 2006, which were not sold as part of the segment disposals as discussed in Note 6. 2005 balances represent the results for Discontinued Operations for the six months ended 30 June 2005 in relation to the Digital Media Services segment, as previously disclosed, and has been restated to include the results of the Media Manufacturing segment for the same period. Segment assets and liabilities represent those assets and liabilities as held for sale at 30 June 2005, as previously disclosed, and has been restated to include those assets and liabilities held by the Media Manufacturing segment as at 30 June 2005. /101 Notes to the Financial Statements continued 30 June 2006 33. SEGMENT INFORMATION (Cont’d) Geographical segments The continuing operations consist entirely of the event services segment of AAV Limited. The event services segment operates in two main geographical areas: Australia/New Zealand and Pacific Region The home country of the parent entity, event services operations exist in Australia, New Zealand and a start up operation in Fiji. Asia Comprises the operation based in China with divisions in Beijing, Shanghai and Guangzhou. Segment revenues are allocated based on the geographic location of the customer. Segment assets and capital expenditures are allocated based on where the assets are located. Australia & New Zealand 2006 $’000 Revenue Sales to external customers Other income Total segment revenue before finance income Finance income Total segment revenues Results Profit / (loss) before income tax, interest, depreciation and results of Associates Finance income Finance costs Depreciation Share of Associates profits Consolidated entity profit before income tax expense Income tax benefit (expense) Net profit after tax Profit attributable to minority interest Net profit 76,476 143 76,619 597 77,216 34,362 — 35,391 432 35,823 6,592 — 6,592 53 6,645 — — — — — 83,068 143 83,211 650 83,861 34,362 — 35,391 432 35,823 2005 $’000 South East Asia 2006 $’000 2005 $’000 Total Continuing Operations 2006 $’000 2005 $’000 11,687 597 (750) (6,512) 76 5,098 915 6,013 — 6,013 7,584 432 (966) (2,744) 250 4,556 (1,393) 3,163 — 3,163 1,832 53 (79) (155) — 1,651 296 1,947 (706) 1,241 — — — — — — — — — — 13,519 650 (829) (6,667) 76 6,749 1,211 7,960 (706) 7,254 7,584 432 (966) (2,744) 250 4,556 (1,393) 3,163 — 3,163 102/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 33. SEGMENT INFORMATION (Cont’d) Geographical segments Australia & New Zealand 2006 $’000 Assets Segment assets Non-segment assets Total assets Liabilities Segmented liabilities Non-segment liabilities Borrowings Deferred consideration on earn out Other Total liabilities Other segment information Intangible assets Acquisitions of property, plant and equipment, intangibles and other non-current segment assets Share-based payments 42,268 39,123 3,621 — 45,889 39,123 6,711 8,847 5,185 3,129 4,137 28,009 12,744 — 18,020 4,697 719 36,180 3,359 — 1,092 1,828 304 6,583 — — — — — — 10,070 8,847 6,277 4,957 4,441 34,592 12,744 — 18,020 4,697 719 36,180 99,991 4,272 104,263 59,036 4,296 63,332 11,874 — 11,874 — — — 111,866 4,272 116,138 59,036 4,296 63,332 2005 $’000 South East Asia 2006 $’000 2005 $’000 Total Continuing Operations 2006 $’000 2005 $’000 8,407 254 2,973 128 1,442 — — — 9,849 254 2,973 128 34. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The main risks arising from the Group’s financial instruments are interest rate risk, foreign currency risk, liquidity risk and credit risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. Interest rate risk The Group’s exposure to market risk for changes in interest rates relates primarily to the Group’s long-term debt obligations. The Group’s policy is to manage its interest cost using a mix of fixed and variable rate debt. The Group’s principal financial instruments comprise of bank loans, hire purchase contracts, cash and short term deposits. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial instruments such as trade debtors and trade creditors, which arise directly from its operations. Foreign currency risk Foreign exchange risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency. The Group has operations in New Zealand, China, Hong Kong and Fiji. However, only a small proportion of the revenue generated by the Group is from these overseas operations. However, when considered appropriate, forward contracts, transacted with Group Treasury, are used to manage foreign exchange risk. Group Treasury is responsible for managing exposures in each foreign currency by using external forward currency contracts. /103 Notes to the Financial Statements continued 30 June 2006 Credit risk The Group seeks to trade with creditworthy third parties. It is the Group policy that all customers who wish to trade on terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant. In light of the discontinuation of various operations within the Group, the directors have reassessed the recoverability of debts from its discontinued operations; further details are included in Note 6. There are no significant concentrations of credit risk within the Group. Liquidity risk The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, bank loans and hire purchase contracts. 35. FINANCIAL INSTRUMENTS – CONSOLIDATED 35(a) Interest rate risk The consolidated entity’s exposure to interest rate risks and the effective interest rates of financial assets and financial liabilities, both recognised and unrecognised at the balance date, are as follows: Floating interest rate Financial Instruments 1 year or less More than 5 years 2006 $’000 (i) Financial assets Cash Trade and other receivables Term deposits Total financial assets (ii) Financial liabilities Trade and other creditors and accruals Loan from associated company Finance lease liability Bank Bills — — — — — — — — — — — — — — — — — — 7,000 7,000 29,142 — — 29,142 12,436 — — 12,436 — — — — — — — — 2005 $’000 2006 $’000 2005 $’000 Fixed interest rate Non-interest bearing Total carrying Weighted average amount as per the effective interest balance sheet rate 2006 $’000 — — — — 2005 $’000 — — — — 2006 $’000 — 16,204 — 16,204 2005 $’000 — 19,858 — 19,858 2006 $’000 29,142 16,204 — 45,346 2005 $’000 12,436 19,858 120 32,414 2006 % 5.03 N/A 5.73 2005 % 5.06 N/A 4.00 — — 2,584 10,340 12,924 — — 8,521 11,020 19,541 16,767 1,093 — — 17,860 18,804 — — — 18,804 16,767 1,093 2,584 10,340 30,784 18,804 — 8,521 18,020 45,345 N/A N/A 7.42 6.06 N/A N/A 6.94 6.24 N/A – not applicable for non-interest bearing financial instruments. 104/ AAV Limited Annual Report 2006 Notes to the Financial Statements continued 30 June 2006 35. FINANCIAL INSTRUMENTS – CONSOLIDATED (cont’d) 35(a) Interest rate risk (cont’d) The consolidated entity’s exposure to fixed interest rate risks, are detailed as follows: Fixed interest rate maturing in: Financial Instruments < 1 year 2006 $’000 (ii) Financial liabilities Finance lease liability Bank Bills 1,514 4,320 5,834 6,883 1,720 8,603 775 1,720 2,495 1,486 1,720 3,206 295 1,720 2,015 152 1,720 1,872 — 1,720 1,720 — 1,720 1,720 — 860 860 — 1,720 1,720 — — — — 2,420 2,420 2,584 10,340 12,924 8,521 11,020 19,541 2005 $’000 >1 - <2 years 2006 $’000 2005 $’000 >2 - <3 years 2006 $’000 2005 $’000 >3 - <4 years 2006 $’000 2005 $’000 >4 - <5 years 2006 $’000 2005 $’000 >5 years 2006 $’000 2005 $’000 Total 2006 $’000 2005 $’000 35(b) Net fair values The financial assets and liabilities recorded in the statement of financial position as at 30 June 2006 are stated at their fair values. The following methods and assumptions are used to determine the net fair values of financial assets and liabilities: Recognised financial instruments Cash, cash equivalents and short-term investments: The carrying amount approximates fair value because of their short-term to maturity. Trade receivables, trade creditors: The carrying amount approximates fair value. Finance lease liability: The carrying amount approximates fair value because of their short-term to maturity. Forward exchange contracts: The fair value of forward exchange contracts is determined as the recognised gain or loss at reporting date calculated by reference to the contracted forward exchange rate. 35(c) Credit risk exposures The consolidated entity’s maximum exposures to credit risk at reporting date in relation to each class of recognised financial assets is the carrying amount of those assets as indicated in the balance sheet. 35(d) Concentrations of credit risk Credit risk in trade receivables is managed in the following ways: – – payment terms are 30 days except where contracted otherwise; a risk assessment process is used for customers. /105 Director’s Declaration 30 June 2006 07 In the directors’ opinion: (a) the financial statements and notes set out on pages 45 to 105 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of the company’s and consolidated entity’s financial position as at 30 June 2006 and of its performance, as represented by the results of their operations, changes in equity and their cash flows, for the financial year ended on that date; and (b) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and (c) the audited remuneration disclosures set out on pages 32 to 36 of the directors’ report comply with Accounting Standards AASB 124 Related Party Disclosures and the Corporations Regulations 2001; and The directors have been given the declarations by the chief executive officer and chief financial officer required by section 295A of the Corporations Act 2001 This declaration is made in accordance with a resolution of the directors. On behalf of the Board Robert Mansfield AO Chairman Sydney 28 September 2006 Michael Gardner Director Sydney 28 September 2006 106/ AAV Limited Annual Report 2006 Independent audit report to the members of AAV Limited 08 Audit opinion In our opinion: 1. the financial report of AAV Limited: • • 2. gives a true and fair view, as required by the Corporations Act 2001 in Australia, of the financial position of AAV Limited and the AAV Limited Group (as defined below) as at 30 June 2006, and of their performance for the year ended on that date, and is presented in accordance with the Corporations Act 2001, Accounting Standards and other mandatory financial reporting requirements in Australia, and the Corporations Regulations 2001; and the audited remuneration disclosures that are contained on pages 29 to 37 of the directors’ report comply with Accounting Standard AASB 124 Related Party Disclosures (AASB 124) and the Corporations Regulations 2001. This opinion must be read in conjunction with the rest of our audit report. Scope The financial report, remunerations disclosures and directors’ responsibility The financial report comprises the balance sheet, income statement, cash flow statements, statement of changes in equity, accompanying notes to the financial statements, and the directors’ declaration for both AAV Limited (the Company) and the AAV Limited Group (the consolidated entity), for the year ended 30 June 2006. The consolidated entity comprises both the company and the entities it controlled during that year. The company has disclosed information about the remuneration of directors and executives (audited remuneration disclosures) as required by AASB 124, under the heading “remuneration report” on pages 29 to 37 of the directors’ report, as permitted by the Corporations Regulations 2001. The directors of the company are responsible for the preparation and true and fair presentation of the financial report in accordance with the Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report. The directors are also responsible for the remuneration disclosures contained in the directors’ report. Audit approach We conducted an independent audit in order to express an opinion to the members of the company. Our audit was conducted in accordance with Australian Auditing Standards, in order to provide reasonable assurance as to whether the financial report is free of material misstatement and the remuneration disclosures comply with AASB 124 and the Corporations Regulations 2001. The nature of an audit is influenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected. For further explanation of an audit, visit our website http://www.pwc.com/au/financialstatementaudit. We performed procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001, Accounting Standards and other mandatory financial reporting requirements in Australia, a view which is consistent with our understanding of the company’s and the consolidated entity’s financial position, and of their performance as represented by the results of their operations, changes in equity and cash flows. We also performed procedures to assess whether the remuneration disclosures comply with AASB 124 and the Corporations Regulations 2001. We formed our audit opinion on the basis of these procedures, which included: • • examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial report and remuneration disclosures, and assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made by the directors. Our procedures include reading the other information in the Annual Report to determine whether it contains any material inconsistencies with the financial report. While we considered the effectiveness of management’s internal controls over financial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls. Our audit did not involve an analysis of the prudence of business decisions made by directors or management. Independence In conducting our audit, we followed applicable independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001. PricewaterhouseCoopers DS Wiadrowski, Partner Sydney 28 September 2006 Sydney 28 September 2006 /107 Supplementary Information 09 Shares 9,104,761 7,833,912 6,222,814 5,748,116 4,876,816 4,598,254 4,556,698 3,742,095 2,961,380 2,575,987 2,223,566 2,200,000 1,488,726 1,000,000 915,663 770,000 743,714 740,000 736,300 615,390 63,654,192 % 10.45 8.99 7.14 6.60 5.60 5.28 5.23 4.30 3.40 2.96 2.55 2.53 1.71 1.15 1.05 0.88 0.85 0.85 0.85 0.71 73.08 Additional information required by the Australian Stock Exchange and not shown elsewhere in this Report. The information is current as at 8 September 2006. TOP 20 SHAREHOLDERS Ranking 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Total Name MGB Equity Growth Pty Limited National Nominees Limited ANZ Nominees P/L (MMC Asset Management Account) RBC Dexia Investor Services Aust Nom’s Pty Ltd (PIIC A/c) ANZ Nominees P/L (Cash Income A/c) JP Morgan Nominees Australia Limited RBC Dexia Investor Serv’s Aust Nom’s P/L (PIPooled A/c) Citicorp Nominees Pty Ltd RBC Dexia Investor Servs Aust Nom’s P/L (GSJBW A/c) ASG Holdings P/L (D Goldberg Family A/c) Cogent Nominees Pty Ltd Cogent Nominees Pty Ltd (SMP Accounts) ANZ Nominees P/L (MMC Contrarian Ltd) Tugeto P/L Citicorp Nominees Pty Ltd (CFSIL C’wealth BOFF Super A/c) BT (Qld) P/L (Margin Lending) Hyneld Pty Limited Dr David Goldberg CS Fourth Nominees Pty Ltd (Unpaid Account) Bond Street Custodians Ltd (MMC Concentrated Fund) 108/ AAV Limited Annual Report 2006 Supplementary Information continued RANGE OF FULLY PAID ORDINARY SHARES HELD AT 8 September 2006. Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 – over Total Holders 2,184 945 284 356 56 3,825 Shares 981,574 2,665,361 2,295,592 10,816,740 70,339,981 87,099,248 % 1.13 3.06 2.64 12.42 80.76 100.00 The number of shareholders holding an unmarketable parcel of shares (472 shares) is 1,222 holding 310,288 shares (based on a share price of $1.06 on 8 September 2006). DIVIDEND HISTORY Date paid 22.09.06 21.03.06 29.03.05 20.09.04 26.03.04 16.09.03 Cents per ordinary share 2.5 2.5 4.0 5.0 4.0 2.5 /109 Business Directory 10 AUSTRALIA Adelaide 15-16 Deacon Avenue Richmond SA 5033 Australia T: +61 8 8159 9100 F: +61 8 8159 9199 Brisbane 33 Mayne Road Bowen Hills QLD 4006 Australia T: +61 7 3620 5300 F: +61 7 3252 4674 Cairns 240 Hartley Street Portsmith Cairns QLD 4870 Australia T: +61 7 4047 9200 F: +61 7 4047 9222 Canberra 11 Whyalla Street Fyshwick ACT 2609 Australia T: +61 2 6124 0800 F: +61 2 6124 0808 Gold Coast 6 Jade Drive Nerang QLD 4211 Australia T: +61 7 5556 9000 F: +61 7 5597 2965 Hobart 128 Argyle Street Hobart TAS 7000 Australia T: +61 3 6231 4303 F: +61 3 6231 4503 Melbourne 101 Roden Street West Melbourne VIC 3003 Australia T: +61 3 9321 6600 F: +61 3 9329 0396 Perth 34 East Parade East Perth WA 6004 Australia T: +61 8 9221 4111 F: +61 8 9221 4991 Sydney 68-72 Lilyfield Road Rozelle NSW 2039 Australia T: +61 2 9556 8888 F: +61 2 9818 3703 Whitsundays Convention Centre PO Box 130 Hamilton Island QLD 4803 Australia T: +61 7 4948 9077 F: +61 7 4948 9076 AAV LIMITED Michael Gardner Chief Executive Officer 68-72 Lilyfield Road Rozelle NSW 2039 T: +61 2 9556 8881 F: +61 2 9556 8887 E: michael.gardner@aav.com.au W: www.aav.com.au Jeff Krug Chief Financial Officer and Company Secretary E: jeff.krug@aav.com.au Lyndon Goulding Company Secretary E: lyndon.goulding@aav.com.au Investor Relations David Lindsay Channel Financial Communication Pty Limited Level 11 Challis House 4 Martin Place Sydney NSW 2000 T: +61 2 9221 0008 F: +61 2 9221 0007 E: dlindsay@channel.net.au Maria Benedetti Communications Manager E: maria.benedetti@aav.com.au STAGING CONNECTIONS PTY LIMITED Bill Davidson Managing Director Staging Connections Pty Limited 68-72 Lilyfield Road Rozelle NSW 2039 Australia T: +61 2 9556 8888 F: +61 2 9556 8800 E: bdavidson@stagingconnections.com W: www.stagingconnections.com 110/ AAV Limited Annual Report 2006 EXHIBITIONS AND TRADE FAIRS PTY LIMITED Ben Ashton Managing Director Unit 7, 68-72 Lilyfield Road Rozelle NSW 2039 Australia T: +61 2 9556 7997 F: +61 2 9556 7979 E: bashton@etf.com.au W: www.etf.com.au Melbourne 101 Roden Street West Melbourne VIC 3003 T: +61 2 9556 7997 F: +61 2 9556 7979 W: www.etf.com.au Beijing ETG STAGING CONNECTIONS (CHINA) LTD 6th Floor Parkview Center 5 Fang Yuan Road West Beijing 100016 China T: +86 10 6432 1111 F: +86 10 6430 1108 W: www.etgsc.com TECHMEX STAGING CONNECTIONS PTE LIMITED Room 103 Building 5 Yong He Garden No. 3 Dong Bin He Road An Ding Men, Dong Cheng District Beijing 10013 China T: +86 10 5102 6411 F: +86 10 5102 6350 W: www.techmexevent.com Guangzhou ETG STAGING CONNECTIONS (CHINA) LTD 8th floor Yue Feng Tower 18 Cui Zhu Road Guangzhou 510310 China T: +86 10 6432 1111 F: +86 10 6430 1108 W: www.etgsc.com INTERNATIONAL OFFICES PACIFIC RIM STAGING CONNECTIONS NZ PTY LIMITED 9 Tawari Street Mount Eden Auckland 1003 New Zealand T: +64 9 630 4183 F: +64 9 630 4261 W: www.stagingconnections.com.au STAGING CONNECTIONS FIJI PTY LIMITED Unit 2 Lot 5 Qanville Estate Nasoso Fiji Islands T: +61 3 6231 4303 F: +61 3 6231 4503 W: www.stagingconnections.com NORTHERN ASIA Shanghai ETG STAGING CONNECTIONS (CHINA) LTD Ground Floor Building 18 Shanghai Universal Software Park Lane 879 Zhongjiang Road Putuo District Shanghai 20033 China T: +86 21 5120 8228 F: +86 21 5120 8229 W: www.etgsc.com TECHMEX STAGING CONNECTIONS PTE LIMITED Room 809 Yadu Shangwulou No. 9 Nandan East Road Lane No. 300 Xuihui District Shanghai 200030 China T: +86 21 5109 9096 F: +86 21 5119 7060 W: www.techmexevent.com SOUTH EAST ASIA Singapore TEC STAGING CONNECTIONS PTE LIMITED 15 Jalan Kilang Barat Level 8 Frontech Centre Singapore 159357 T: +65 6377 7527 F: +65 6270 0261 W: www.eventco.com TECHMEX STAGING CONNECTIONS PTE LIMITED 20 Bendemeer Road Cyberhub #06-03/05 Singapore 339914 T: +65 6256 2322 F: +65 6256 2220 W: www.techmexevent.com Malaysia TECHMEX STAGING CONNECTIONS MALAYSIA SDN BHD Unit 905 9th Floor Block A Damansara Intan No 1 Jalan SS20/27 47400 Petaling Jaya, Selangor Darul Ehsan Malaysia T: +60 3 7118 3322 F: +60 3 7118 3323 W: www.techmexevent.com /111 Annexure A – Auditor’s Independence Declaration As lead auditor for the audit of AAV Limited for the year ended 30 June 2006, I declare that to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of AAV Limited and the entities it controlled during the period. PricewaterhouseCoopers Sydney 28 September 2006 DS Wiadrowski, Partner Sydney 28 September 2006 112/ AAV Limited Annual Report 2006 AAV Limited ABN 69 083 269 701 68-72 Lilyfield Road Rozelle NSW 2039 Australia Telephone 02 9556 8880 Facsimile 02 9556 8887 www.aav.com.au