Ainsworth Game Technology Limited 2005 Annual Report

Ainsworth Game Technology Annual Report 2005 Ainsworth Game Technology has carved a strong reputation for delivering unique, innovative and entertaining games. Producing over 50 new concepts annually for distribution in 40 jurisdictions globally, Ainsworth has a vast range of games available for both their Ambassador and Celebrity gaming machines. Key Dates Annual General Meeting: Wednesday 16th November 2005 Results announcement for six months ending 31st December 2005: 21st February 2006 Results announcement for year ending 30th June 2006: 22nd August 2006 Dates may be subject to change. Notice of Annual General Meeting Ainsworth Game Technology Limited ABN 37 068 516 665 Notice is hereby given that the Annual General Meeting of the members of Ainsworth Game Technology Ltd will be held at Parramatta Leagues Club 13 - 15 O’Connell Street Parramatta, NSW 2150 on Wednesday 16th November 2005 at 10.00am. Contents Page Executive Chairman’s Report ...........................................................................................................2 Chief Executive Officer’s Report......................................................................................................4 Operational Review ..........................................................................................................................6 Information About Shareholders and Noteholders .......................................................................13 Corporate Governance Statement .................................................................................................15 Financial Report ..............................................................................................................................21 Corporate Directory .............................................................................................. Inside Back Cover Australasian Gaming Expo, Sydney 2004 Your comments are important to us as we strive to improve our business. If you have any ideas or suggestions that you would like to share with Ainsworth please e-mail them to: greatideas@ainsworth.com.au All ideas sent to greatideas@ainsworth.com.au will be considered confidential and/or privileged. 1 Executive Chairman’s Report “The Company continues to maintain a high level of spending on research and development to ensure that Ainsworth’s products maintain their premium market position.” The 2005 year has further established Ainsworth Game Technology as an accepted key player in the gaming industry. Major opportunities exist globally and this is evidenced by the increasing demand for the Company’s products in over 40 jurisdictions. Despite the opportunities and the revenue growth experienced, the loss from ordinary activities after income tax for the financial year ended 30 June 2005 amounted to $10.6 million. This is compared to a profit of $2.1 million in the corresponding period in 2004. The result for the year 2005 included $4.8 million in one off expenditure, represented by costs incurred in relation to the discontinued merger with the Unicum Group, restructuring costs in NSW, Europe and the United Kingdom and costs associated with legal matters. The Company continues to maintain a high level of spending on research and development to ensure that Ainsworth’s products maintain their premium market position. This strategy enables sales into an ever-developing variety of international markets with differring customer and regulatory requirements. Demand for gaming machines arises from the success of games and investment by the Company in this area is expected to be ongoing. In addition, the Company continues to spend on building an international distribution organisation to support sales into overseas markets. The last 12 months has required Ainsworth Game Technology to adapt and re-focus towards positioning the Company for long-term sustainable growth both in domestic and international markets. The Company has many business opportunities across the globe and anticipates substantial further growth in foreign sales. The strengthening of existing customer and distributor relationships will facilitate this expansion within current and new markets. Domestically, the gaming machine market continues to present challenges with further restrictions on Club and Hotel operations in NSW, QLD and SA. Accordingly the Company now places less reliance on these markets. Despite these challenges Ainsworth has been able to achieve an increase in revenue during this period. Heightened product performance and greater acceptance of the Company’s products has allowed Ainsworth to positively grow its domestic market share to double that of last year. The new financial year is expected to provide further opportunities as we pursue entry into the Victorian market. Our outlook continues to reflect the potential in international markets resulting in continued investment in compliance and licensing. This investment will ensure that the Company is well positioned to capitalise on the substantial international opportunities available in future periods. 2 International Sales and Marketing staff at the Australasian Gaming Expo 2005 Product development has resulted in a multiplicity of software and hardware improvements being made to the Company’s machines whilst at the same time reducing costs. The same four principles I wrote of last year still guide the Company’s machine development process and all our most recent improvements are in keeping with these. A gaming machine cabinet must be aesthetically appealing to potential players. The game must be both entertaining and interesting to players over an extended period of time. Gaming machines must be built at a competitive cost and designed for a long lifespan – they must be robust and of superior engineering quality. Finally, customer service and after sales support must reaffirm the customer’s decision. Educating our young managers, engineers and designers to these fundamental principles will ensure the future of the Ainsworth machines and provide the basis for the Company’s long term success. The appointment of CEO David Creary brings an experienced manager to the helm and the Board and I are confident that combined with our existing senior management team we have successfully built an organisation that is a mix of both youth and experience. It is the Company’s intention to continue to positively grow revenue, whilst reducing operational costs. As recently announced the Company is raising $20.5 million (after costs) through a fully underwritten rights issues of new shares. Members of my family and I, have agreed to take up our full entitlements and have fully underwritten the remaining balance. The proceeds of the issue will be used to fund the Company’s working capital and provide resources for further business growth, particularly our continued expansion into international markets and to partially repay loans I have advanced to support this growth. To further demonstrate my commitment additional funds have been made available during the year to assist the Company’s working capital requirements. On behalf of the Board, I would like to thank the Company’s shareholders for their support and acknowledge our staff for their continued commitment. I expect to report an improved trading performance in the new financial year. Len Ainsworth Executive Chairman 3 Chief Executive Officer’s Report “The Company and its Management are wholly committed to becoming a major player in the world of gaming.” On 15th February 2005 I was appointed Chief Executive Officer of Ainsworth Game Technology Ltd. My knowledge of the Company was substantial as I had observed Ainsworth from a competitor’s perspective since its foundation and initial public offering in 2001. Having been in the gaming industry for approximately 30 years, I am confident I possess the experience and skills to undertake this role. FY05 has been a difficult period for all gaming machine manufacturers, particularly in Australia and New Zealand. Smoking bans, government legislation and regulatory changes have all contributed to a slowing in local markets subsequently creating challenges in domestic sales. During the financial year of 2005 the Company increased revenue by 29%, a very promising result. Despite this increase in revenue profit fell to a loss of $10.6 million compared to a profit of $2.1 million in the previous corresponding period, due to a number of factors as previously announced and outlined in the Executive Chairman’s Report. Internationally, the gaming industry continues to grow and Ainsworth’s business model has shifted to capitalize on emerging opportunities. Accordingly, our business operation is now shared 71% internationally and 29% domestically. Whilst allowing for entry to new international markets, this model has associated investment costs and has placed pressure on working capital. Despite the disappointing result for 2005, the management and staff at Ainsworth remain committed and enthusiastic. Moving forward, the Company is well placed to take advantage of new and growing international markets. We believe we are positioned to increase sales in Europe, Asia, America and Australia whilst ensuring that all regions are sustainable and profitable. Domestically, an increased and growing market acceptance of the Ainsworth brand, together with stronger product performance will provide a base for further sales development. In the financial year ending 30 June 2005 the Company strategically increased its service business through both acquisition and organic growth. The development of this business arm has created an additional revenue stream as well as adding value to the Company’s sales offering. Our service organisation has now achieved 8,914 machines on service maintenance contracts and this investment will assist increased sales of machines in domestic markets in FY06. 4 Chief Executive Officer’s Report Staff restructuring during FY05 allowed for a consolidation of senior management roles and for resources to be allocated in line with the business model. Research and Development and Compliance (with a focus on international licensing) departments will grow in FY06 in line with the Company’s commitment to continued product innovation and requirements for further jurisdictional approvals. Increased efficiencies are expected in both Manufacturing, Game Design and other departments together with continued downward pressure on costs of production and rationalisation of overhead expenditure. In recent months, a number of enhancements have been made to our product range and the benefits of these changes will be seen in FY06. Hardware and software management will be ongoing as we expand into new jurisdictions and continue to support existing markets. Trade shows will continue to be an integral selling tool for the Company internationally, providing a strong base for new product roll out and building on Ainsworth’s brand awareness. I look forward to a successful year ahead and can confidently assure all Ainsworth’s shareholders that the Company and its Management are wholly committed to becoming a major player in the world of gaming. David Creary Chief Executive Officer 5 Operational Review Domestic Sales Despite challenging market conditions there have been improvements in domestic results with gains in NSW, QLD and casinos. In NSW, Ainsworth further extended its growth, achieving 7% of the available replacement machine market in the financial year. Market turnover in NSW continued to slow with a reduction in the number of machines being replaced, compared with the previous twelve months. FY06 will see further growth in NSW sales as a result of increased market acceptance of the Ainsworth brand and stronger product performance. QLD market share increased with Ainsworth’s proprietary link product Ozzy’s Challenge, achieving over 500 machines installed across 81 sites on the QLD network. It is expected that in FY06 the Company’s Celebrity gaming machine will receive approval, allowing for expansion of the products available to this market. In the Victorian market, the Company has been granted both hardware and software approvals for sale into the Tattersall’s network. Submission for approval for the Tabcorp network has progressed and approval is expected over FY06. These approvals will provide opportunities as the Company gains entry into the Victorian market. The Company now has product in all 11 casinos across Australia. A number of casinos have increased their machine installations of Ainsworth product over the preceding year including Star City Casino, Conrad Treasury Casino and Sky City Auckland. Further increases in casino market share are expected with the approval of the Company’s successful link concepts, Ozzy’s Challenge and Sea Raider. Casino sales are expected to achieve significant growth in 2006 once these approvals are obtained. 6 International Sales The developing international gaming industry has presented the Company with a number of opportunities. Further growth in international sales is anticipated in FY06. Strong interest continues to be shown by potential customers, following successful recent exhibitions at gaming shows, including the ICE Expo (London), the Asian Gaming Expo (Macau) and the Global Gaming Expo (Las Vegas). Rapid growth in the global gaming machine market has allowed Ainsworth to actively diversify its sales activities and to achieve a significant upturn in international revenues. The Company’s Asian market share continues to grow and in the first half of FY06 the Company will open an office in Macau so as to further capitalise on the potential of the rapidly expanding Asian market. In New Zealand, despite difficult market conditions based on major regulatory changes during the preceding year, the Company saw an increase in gaming machine market share. New premises were established to incorporate an office, showroom, warehouse and workshop, these have provided a reduction in overheads due to localised software production. Strong product performance has underpinned an overall increase in Ainsworth’s market share in the Americas during the financial year. Further growth is anticipated in this market with approximately 50 additional Tribal and State licences still to be achieved between California, Oregon and the Mid West. FY05 saw Ainsworth granted its first US State Licence in Oregon, in addition to 16 Tribal Licences in California. “Rapid growth in the global gaming machine market has allowed Ainsworth to actively diversify its sales activities and to achieve a significant upturn in international revenues.” 7 Operational Review (continued) New markets entered during this period included Panama, Colombia and Peru.” International Sales (continued) In the Caribbean, Central and South America regions strong product performance and an increase in market share has established Ainsworth as a significant new machine provider. During FY05 Ainsworth was granted licences in the Dominican Republic and Puerto Rico (temporary). New markets entered during this period included Panama, Colombia and Peru. Following the establishment of the European office in November 2003, Ainsworth’s market position in Europe has strengthened and grown, based on market acceptance and product performance. The last financial year also saw the Company increase market share in established markets Russia, Austria, France and Germany. New markets entered during this period include Hungary, Romania, Portugal and Yugoslavia. Continued product performance and technical reliability will create further opportunities for growth in the European gaming machine market in FY06. Service In FY05, the Company strategically increased its service business through both acquisition and organic growth. This elevated the Ainsworth service offering from a basic technical support capacity to a fully fledged poker machine service operation. The development of this business arm has created an additional revenue stream for the Company as well as allowing for added value in our sales offering. Ainsworth has been able to secure just under 10% of the NSW machines on service in less than 9 months. Service staff reorganisation during the year enabled a number of senior technical support staff to be promoted to jurisdictionally based product manager roles covering Europe, the Americas, Asia and New Zealand. These product managers now undertake a specialist liaison role to provide more efficient technical support and development between remote sales locations and head office. 8 “Manufacturing has absorbed the Company’s quality assurance function and as a result has implemented initiatives to ensure consistent ‘out of the box’ quality.” Manufacturing and Engineering FY05 saw Manufacturing required to further develop its structure and capabilities to meet the higher volume demands of the Company’s rapid expansion. Core assembly skills in the Sydney and Melbourne facilities were further enhanced with a reorganisation of the facilities focusing on improved material flow and an emphasis on reducing the cost of manufacturing. Additional resources have been applied to increase capabilities in Enterprise Resource Planning (ERP) systems support and manufacturing engineering. The new financial year will realise the benefits of these strategies with greater efficiencies and reductions in overall production costs. Manufacturing has absorbed the Company’s quality assurance function and as a result has implemented initiatives to ensure consistent ‘out of the box’ quality. During FY05 Engineering undertook the evaluation, approval and release of 391 games for all jurisdictions globally. Engineering has undertaken to further evolve its capabilities in line with the continued demand for product improvements. Research and Development During FY05 Research and Development (incorporating Game Design) developed over 40 new game concepts for the Company’s Ambassador and Celebrity machines. In line with the Company’s strong international focus, games were further localised to specific markets with Spanish, Russian, Chinese and German language versions. The introduction of the new standardised platform for both the Company’s Ambassador and Celebrity machines, with improved memory and functional capacity, is facilitating increased efficiencies. This technology is achieving richer game feature sequences and has reduced the time taken for the technical development of new games. During the last year the Company released its first touch screen product, ‘Sea Raider’. This innovative concept incorporates two unique touch screen, player interactive features with multiple jackpot prizes. The flexible design of this product allows the Company to provide multiple configurations such as stand alone progressive, local area network or wide area network based on specific jurisdictional requirements. 9 Operational Review (continued) Research and Development (continued) FY05 also saw the completion of cockfighting theme ‘Sabong’, a multi-level jackpot local area network system. ‘Sabong’ operates over stand alone Celebrity games and provides the player with an interactive feature using the touch screen where the result of a tournament determines the jackpot prize awarded. Originally designed for the Asian market, the Sabong concept has been localised for release in other unregulated markets whilst awaiting other regulatory approvals. Staff restructuring within Research and Development is allowing for a departmental consolidation of senior roles and changes in project team structures. This is increasing both resource efficiency and improved accountability. Promotional material for the launch of Sabong at the Asian Gaming Expo 2005 10 Compliance and Licensing The Company continues to actively make applications for new licences and is now licensed to operate in 30 regulated jurisdictions. There are also 14 submissions currently before regulators awaiting approval, predominantly in the United States. Ainsworth is strongly conscious of the importance of its licences and the regulatory environment in which it operates. A detailed review of current processes and procedures has been undertaken to ensure best practice in relation to all areas of compliance and licensing. Additional resources and greater management focus has been introduced within the Compliance and Licensing Department over the year to ensure the Company achieves timely approvals in new market jurisdictions. Increasing Compliance management has also been required to ensure the Company maintains a rigorous Compliance regime covering all its licensed operations, including staff and suppliers. Finance As outlined in the Preliminary Final Report for the financial year ended 30 June 2005 total revenue achieved for the Company was $82.5 million, an increase of 29% over the previous corresponding period. International sales represented 71% of the Company’s total sales and increased by 44% over the previous year. Significant rationalisation of the organisation occurred during the period under review. These initiatives are expected to further benefit the overall sales growth as well as achieve significant reduction in costs of production and overheads. The cash outflow from operations for the year ended 30 June 2005 was $32.4 million, which included $35.3 million investment in working capital due to the build up of inventory to meet increased future demand and increased receivables as a result of extended credit terms necessary for some international customers. On 20 December 2004 the company issued 19,714,717 convertible notes at an issue price of $1.30 per convertible note, raising $25.6 million. The Company has also recently announced a rights issue to raise a further $20.5 million (after costs). This rights issue has been fully underwritten by Chairman Len Ainsworth and members of his immediate family. The first stage in the introduction of International Financial Reporting Standards (IFRS) was completed for the financial year ended 30 June 2005. This encompassed opening balances as at 1 July 2004 and results for the year ended 30 June 2005. The Company continues its implementation program and will report accordingly for the half year ended 31 December 2005 under IFRS. For further details refer Note 31 in the Financial Statements. For further details on the Company financial results for the 2005 year refer to the Directors’ Report under “Review and Results of Operations”. Marketing Over the last financial year the Company’s expanded marketing department adopted a new strategic direction. Whilst trade shows remained the predominant platform for both brand promotion and domestic and international sales, a number of initiatives have achieved greater cost efficiencies and allowed core business functions to better align with emerging market demands and improved technologies. 11 Operational Review (continued) Stages of development of new release Ambassador game ‘Diamond Swipe’ Marketing (continued) The Company displayed at a number of international trade shows including the Australasian Gaming Expo (Sydney), Asian Gaming Expo (Macau), Global Gaming Expo (Las Vegas) and ICE Expo (London). These major shows allowed the Company to demonstrate its emerging status as a significant manufacturer with expanding international acceptance. A new e-strategy is being progressively introduced. This will create further efficiencies for satellite offices, allowing geographically based information to be accessed online and for customers to access information specifically approved and available to their jurisdiction. This cataloguing will enable streamlined, immediate and controlled communication between Ainsworth head office, satellite offices and our international customers. Ainsworth’s head office showroom became fully operational during the financial year, having undergone revision to create a facility with the capacity to display new product. This investment allows Ainsworth to compete with a benchmark, industry-standard sales and marketing tool. Moving forward, corporate branding initiatives will continue to be developed in keeping with the Company’s overall strategic direction. Human Resources The Company has implemented a number of new strategies based around attracting, developing and retaining high performing, skilled employees. The approach involves the Company providing employees with quality performance feedback, career direction and ongoing development plans. The strategic goal of Human Resources is to build a true performance culture underpinned by strong people management skills across the total business model, whilst nurturing and developing talent and driving overall improved company performance. The Company continues to recognise its employees as its greatest asset and has implemented a number of initiatives to foster further education and ongoing workplace training. In turn, this is expected to result in improved employee retention for longer term organisational benefits. Compliance with Occupational Health and Safety Standards legislation and the ensuring of a safe workplace for all staff is of great importance and policy in this area is regularly reviewed. Initiatives will be continued in 2006 to further develop these principles within the Company. 12 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Information About Shareholders and Noteholders Securityholder information required by the Australian Stock Exchange Limited Listing Rules and not disclosed elsewhere in this report is set out below. Securityholdings (as at 19 September 2005) Number of securityholders and securities on issue The issued shares in the Company were 149,185,377 ordinary shares held by 5,796 shareholders. The issued convertible notes in the Company were 19,714,717 held by 1,263 noteholders. Substantial shareholders / noteholders The number of shares and convertible notes held by substantial securityholders and their associates are set out below: Shareholder LH Ainsworth Votraint No. 1019 Pty Ltd (Braesyde Super Fund A/C) Voting rights Ordinary shares The voting rights attaching to ordinary shares are that on a show of hands every member present in person or by proxy has one vote and upon a poll, each share shall have one vote. Convertible notes The convertible notes do not give their holders any voting rights at shareholder’s meetings. Options Option holders have no voting rights. Distribution of securityholders Category 1 1,001 5,001 10,001 Total 1,000 5,000 10,000 100,000 NUMBER OF CONVERTIBLE NOTE AND EQUITY SECURITYHOLDERS Convertible Notes Ordinary Shares Options 489 451 197 114 12 1,263 517 2,829 1,306 1,097 407 5,796 6 21 36 14 77 Number of convertible notes 10,252,382 1,500,000 Number of ordinary shares 76,892,858 8,103,717 101,000 and over The number of securityholders holding less than a marketable parcel of ordinary shares and convertible notes is 241 (893 shares) and 210 (477 notes), respectively. On market buy-back There is no current on market buy-back. Unquoted equity securities At 19 September 2005, 8,405,000 unlisted non-transferable options have been issued to 77 option holders and remain unexercised. Regulatory Considerations Affecting Shareholders The Company is subject to a strict regulatory regime in regard to the gaming licenses and operations within the gaming industry. It is necessary for the Company to regulate the holding of shares to protect the businesses of the Company in respect of which a gaming license is held. By accepting shares, each potential investor acknowledges that having regard to the gaming laws, in order for the Company to maintain a gaming license, the Company must ensure that certain persons do not become or remain a member of the Company. The Constitution of the Company contains provisions that may require shareholders to provide certain information to the Company and the Company has powers to require divesture of shares, suspend voting rights and suspend payments of certain amounts to shareholders. 13 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Information About Shareholders and Noteholders Twenty largest shareholders Name Mr LH Ainsworth Votraint No. 1019 Pty Ltd (Braesyde Super Fund A/C) Creative Magic (A/Asia) Pty Ltd CJHA Pty Ltd (CJHA Family A/C) National Nominees Limited Niako Investments Pty Ltd Mitris Group Management Pty Ltd Merrill Lynch (Australia) Nominees Pty Ltd Citicorp Nominees Pty Limited J P Morgan Nominees Australia Limited Mr CL Gentle Global Market Trading Pty Ltd The Premier Group Pty Ltd (Neway Executive S/Fund A/C) Mr N Mitris Mr DD & Mrs A Danass (D&A Danas Super Fund A/C) TSTM Pty Ltd ANZ Nominees Limited (Cash Income A/C) HSBC Custody Nominees (Australia) Limited – GSCO ECSA Hotel Bondi Pty Ltd (Bondi Unit A/C) Mr KG Maloney Mr G Alexopoulos Number of ordinary shares held 70,000,000 8,103,717 6,892,858 3,214,286 1,986,200 1,400,000 1,300,000 753,823 723,936 450,000 438,888 400,000 369,152 303,429 300,000 288,100 262,636 250,000 250,000 220,000 97,907,025 Percentage of total 46.92 5.43 4.62 2.16 1.33 0.94 0.87 0.51 0.49 0.30 0.29 0.27 0.25 0.20 0.20 0.19 0.18 0.17 0.17 0.15 65.64 Twenty largest noteholders Name Mr LH Ainsworth Creative Magic (A/Asia) Pty Ltd Votraint No. 1019 Pty Ltd (Braysyde Super Fund A/C) Citadel Investments Limited (BVI) CJHA Pty Ltd (CJHA Family A/C) Merrill Lynch (Australia) Nominees Pty Ltd (BPB A/C) Ms D Lowes SLC Capital Limited Citadel Investments Limited (BVI) Mr K Arculli Nordiv Holdings Pty Ltd (Super Fund A/C) UBS Private Clients Australia Nominees Pty Ltd (437690 Helena Hua A/C) Washington H Soul Pattinson Co Ltd Mr GC Sparre (Sparre Retirement Fund A/C) Draycott Pty Ltd Global Market Trading Pty Ltd HFT Nominees Pty Ltd (HFT Super Fund A/C) Mr GT McCosker Mr R & Mrs CY Patience (Robert Patience S/Fund A/C) Elisa Dixon Investments Pty Ltd Number of convertible notes held 8,000,000 2,252,382 1,500,000 615,384 428,572 380,307 335,000 200,000 184,903 153,846 111,000 110,460 73,961 60,000 50,499 50,000 50,000 50,000 45,500 45,000 14,696,814 Percentage of total 40.58 11.43 7.61 3.12 2.17 1.93 1.70 1.01 0.94 0.78 0.56 0.56 0.38 0.30 0.26 0.25 0.25 0.25 0.23 0.23 74.54 14 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Corporate Governance Statement Set out below are the Company’s main corporate governance principles and practices which comply with the ASX Corporate Governance Council recommendations, unless otherwise stated: Independent professional advice and access to Company information Each director has the right of access to all company information and to the Company’s executives and, upon consultation with the Chairperson, may seek independent professional advice from a suitably qualified adviser at the Company’s expense. The director must consult with an advisor suitably qualified in the relevant field and a copy of the advice received by the director is made available to all other members of the Board. Composition of the Board The names of the directors of the Company in office at the date of this report are set out in the Directors’ report on page 22 of this report. The members of the Board are selected to provide a broad range of skills, knowledge, experience and expertise encompassing international business practice, marketing, finance and gaming technology. Provision of such skills and experience is aimed to assist the Company achieve its current goals and continuing development An objective of the Company is that the majority of the Board should be independent, non-executive directors with no other significant businesses or other links to the Company. An independent director is a director who is not a member of management (ie. a non-executive director) and who: • Holds less than five % of the voting shares of the Company and is not an officer of, or otherwise associated, directly or indirectly, with a shareholder of more than five % of the voting shares of the Company; • Has not within the last three years been employed in an executive capacity by the Company or another group member, or been a director after ceasing to hold any such employment; • Within the last three years has not been a principal or employee of a material* professional adviser or a material* consultant to the Company or another group member; • Is not a material* supplier or customer of the Company or another group member, or an officer of or otherwise associated, directly or indirectly, with a material* supplier or customer; • Has no material* contractual relationship with the Company or another group member other than as a director of the Company; and • Is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director’s ability to act in the best interests of the Company. * the Board considers, “material”, in this context, where any director-related business relationship has represented, or is likely in future to represent the lesser of at least 10% of the relevant segment’s or the director-related business’s revenue. The Board considered the nature of the relevant industries’ competition, and the size and nature of each director-related business relationship, in arriving at this threshold. The Board currently comprises three non-executive directors, two being independent and the Executive Chairman. The Board is actively seeking to appoint additional independent, non-executive directors. The Executive Chairman is a substantial shareholder in the Company, and is therefore not classified as independent. The Board has appointed Mr SL Wallis as the lead independent director to ensure any conflicts that may arise are dealt with properly and in line with ASX Best Practice recommendations. Board of Directors Role of the Board The Board’s primary role is the protection and enhancement of long-term shareholder value. To fulfill this role, the Board is responsible for the overall corporate governance of the Company including formulating its strategic direction, approving and monitoring capital expenditure, reviewing the performance of the Chief Executive Officer, setting remuneration, appointing, removing and creating succession policies for directors and senior executives, establishing and monitoring the achievement of management’s goals and ensuring the integrity of internal control and management information systems. It is also responsible for approving and monitoring financial and other reporting. Details of the Board’s charter are located on the Company’s website (www.ainsworth.com.au). In his role of Executive Chairman, Mr LH Ainsworth provides a strategic overview of the Company with responsibility for management of the day-to-day operations delegated to the Chief Executive Officer. Responsibilities are delineated by formal authority delegations. Board Processes To assist in the execution of its responsibilities, the Board has established a number of Board committees including a Remuneration and Nomination Committee (previously two separate Committees), a Regulatory and Compliance Committee and an Audit Committee. The Company operated a Technology Committee from 20 July 2004 until 25 August 2005 when it was decided that the work of this Committee would be preferably undertaken by the management of the Company. These committees have formal charters and operating procedures, which are reviewed on a regular basis. The Board has also established a framework for the management of the Company including a system of internal control, a business risk management process and the establishment of appropriate ethical standards. The full Board currently holds monthly scheduled meetings throughout the year, plus strategy meetings and any extraordinary meetings at such other times as may be necessary to address any specific significant matters that may arise. The agenda for meetings is prepared in conjunction with the Chairperson, Chief Executive Officer and the Chief Financial Officer/Company Secretary. Standing items include the Chief Executive Officer’s report, financial reports, strategic matters, governance and compliance. Submissions are circulated in advance. Executives are regularly involved in Board discussions and directors have other opportunities, including visits to business operations, for contact with a wider group of employees. Director Education The Company has a formal process to educate new directors about the nature of the business, current issues, the corporate strategy and the expectations of the Company concerning performance of directors. Directors also have the opportunity to visit Company facilities and meet with management to gain a better understanding of business operations. Directors are given access to continuing education opportunities to update and enhance their skills and knowledge. 15 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Corporate Governance Statement (continued) Nomination Committee The Nomination Committee oversees the appointment and induction process for directors and committee members, and the selection, appointment and succession planning process of the Company’s Chief Executive Officer. The committee makes recommendations to the Board on the appropriate skill mix, personal qualities, expertise and diversity of each position. When a vacancy exists or there is a need for particular skills, the committee in consultation with the Board, determines the selection criteria based on the skills deemed necessary. The committee identifies potential candidates with advice from external consultants when required. The Board then appoints the most suitable candidate. Board candidates must stand for election at the next general meeting of shareholders. The Nomination Committee annually reviews the effectiveness of the Board, its committees, individual directors and senior executives. The other directors have an opportunity to contribute to the review process. The performance criteria take into account each director’s contribution to setting the direction, strategy and financial objectives of the group, and monitoring compliance with regulatory requirements and ethical standards. The reviews generate recommendations to the Board, which votes on them. The committee’s nomination of existing directors for reappointment is not automatic and is contingent on their past performance, contribution to the Company and the current and future needs of the Board and the Company. The Nomination Committee comprised the following members during the year: Mr LH Ainsworth Mr AR Amer Mr VB Matthews Mr SL Wallis Mr JM Cowling (Chairman) - Executive Chairman Independent Non-Executive Director Non-Executive Director Lead Independent Non-Executive Director Non-executive director (resigned 21st February 2005) Remuneration Committee The Remuneration Committee reviews and makes recommendations to the Board on remuneration packages and policies applicable to the Chief Executive Officer, Chief Financial Officer, senior executives and directors themselves. It is also responsible for share option schemes, incentive performance packages, superannuation entitlements, retirement and termination entitlements, fringe benefits policies and professional indemnity and liability insurance policies. The Remuneration Committee also conducts an annual review of performance of the Chief Executive Officer, the Chief Financial Officer and the senior executives reporting directly to them and the results are discussed with the Board. The members of the Remuneration Committee during the year were: Mr SL Wallis Mr AR Amer Mr ML Ludski (Chairman) - Independent Non-Executive Director Independent Non-Executive Director Chief Financial Officer / Company Secretary The Chief Executive Officer is invited to Remuneration Committee meetings, as required, to discuss senior executives’ performance and remuneration packages. The Chief Executive Officer and Chief Financial Officer are not involved in matters pertaining to them. The Remuneration Committee meets twice a year, or more as required. The committee met three times during the year and committee members’ attendance record is disclosed in the table of Directors’ meetings on page 23 of this report. The Remuneration Committee’s charter is available on the Company’s website. Remuneration report The Remuneration Report is set out on pages 26 to 27 of the Directors’ Report and within note 26 to the Financial Statements for the financial year ended 30 June 2005. Remuneration policies Remuneration levels are competitively set to attract and retain appropriately qualified and experienced directors and senior executives. The Remuneration Committee obtains independent advice on the appropriateness of remuneration packages, given trends in comparative companies both locally and internationally. Remuneration packages include a mix of fixed remuneration, performance based remuneration and equity based remuneration. The remuneration structures explained below are designed to attract suitably qualified candidates and to support the broader outcome of increasing the Company’s net profit attributable to members of the parent entity. The remuneration structures take into account: • Overall level of remuneration for each director and executive; • The executives’ ability to control the relevant segment/s’ performance; and • The amount of incentives within each executive’s remuneration. Executive directors and senior executives may receive bonuses based on the achievement of specific performance hurdles. The performance hurdles are a blend of the Company’s and each relevant segment’s result. There is no separate profit-share plan. Options are issued under the Employee Share Option Plan with the ability to exercise the options conditional on the Company achieving established performance hurdles. Non-executive directors do not receive any performance related remuneration. During 2005 the Executive Chairman was the Chairperson of the Committee. The Nomination Committee composition was reviewed by the Board and determined that it should be combined with the Remuneration Committee which is chaired by Mr SL Wallis, the lead Independent Non-Executive Director. The Nomination Committee meets annually unless otherwise required. The Committee met twice during the year and the committee members’ attendance record is disclosed in the table of Directors’ meetings on page 23 of this report. The terms and conditions of the appointment and retirement of non-executive directors are set out in a letter of appointment, including expectations for attendance and preparation for all Board meetings, appointments to other Boards, the procedures for dealing with conflicts of interest, and the availability of independent professional advice. Further details of the Nomination Committee’s charter and policies, including those for appointing directors and senior executives is to be updated and made available on the Company’s website. 16 Remuneration policies (continued) The Board considers that the above performance linked remuneration structure is generating the desired outcome. The evidence supporting this is the strong growth in revenue in 2004 and 2005. Secondly, the performance linked element of the structure appears appropriate given a majority but not all of the executives achieve a level of performance which qualifies them for bonuses and options. Total remuneration for all non-executive directors, last voted upon by shareholders is not to exceed $500,000 per annum. Directors’ base fees are presently up to $50,000 per annum. Non-executive directors do not receive bonuses nor are they issued options on securities nor do they receive any retirement benefits other than required superannuation payments Directors’ fees cover all main Board activities and membership of committees. Technology Committee The Technology Committee was established on 20 July 2004 for the purpose of providing the Board with a detailed understanding of the technology programs, priorities and resource allocation. This committee carried out its required functions and contributed to the Board’s oversight of the Company’s current and future technology strategy. Following a review by the Board, the Technology Committee was considered to be no longer necessary, as its functions were more appropriately undertaken by the management of the Company. The Committee was de-commissioned in August 2005. During its operation, the Committee comprised of three non-executive directors (two being independent), the Chief Executive Officer and a suitably qualified independent expert. The Company’s corporate counsel acted as the Committee’s secretary. The members of the Technology Committee during the year were: Mr AR Amer Mr SL Wallis Mr E Spooner Mr DP Creary Mr HW Zeidler Mr JM Cowling (Chairman) - Independent Non-Executive director Independent Non-Executive director Independent expert Chief Executive Officer (appointed 15th February 2005) Chief Operating Officer (resigned 15th February 2005) Non-Executive director (resigned 21st February 2005) Regulatory and Compliance Committee The highly regulated nature of the gaming industry requires that issues relating to probity, the obtaining and protection of gaming licenses and security are ongoing and of great importance. The charter of the Regulatory and Compliance Committee, which has been approved by the Board, is to advise and assist the Board to ensure regulatory compliance. The Regulatory and Compliance Committee, as and where appropriate, reviews information provided and makes recommendations to the Board regarding regulatory compliance, including the suitability of key employees and other persons or entities with whom the Company has or intends to have an association or affiliation where this is subject to gaming authority jurisdiction. The Regulatory and Compliance Committee currently comprises two nonexecutive directors, Mr AR Amer (Chairman) and Mr SL Wallis, the Chief Executive Officer and an independent suitably qualified person. The Regulatory and Compliance Committee met three times during the year and committee members’ attendance record is disclosed in the table of Directors’ meetings on page 23 of this report. Due to the importance of the regulatory environment within which the Company operates, and as a further demonstration of the commitment by the Board within this important area, the Committee will meet at least four times each financial year and as required to address any specific issues that may arise. The main responsibilities of the Regulatory and Compliance Committee are to: • monitor legal and procedural requirements and ensuring that the Company complies with all of its regulatory obligations; • review issues relating to regulatory compliance, either of its own initiative or on referral by the Board or the Chief Executive Officer; and • assist the Board and Chief Executive Officer in making decisions involving regulatory compliance. The Regulatory and Compliance Committee may seek independent professional advice, at the Company’s expense, in carrying out these duties, provided it has prior Board approval. The committee met three times during the year and operated under a formal charter with all findings to be reported to the Board after each meeting. Audit Committee The Audit Committee has a documented charter, which is regularly reviewed and approved by the Board. All members are currently nonexecutive directors with a majority being independent. The Chairperson is not the Chairperson of the Board. The committee advises on the establishment and maintenance of a framework of internal control and appropriate ethical standards for the management of the Company. The members of the Audit Committee during the year were: Mr AR Amer Mr SL Wallis (Chairman) - Independent Non-Executive Director Independent Non-Executive Director Mr VB Matthews Non-Executive Director The external auditors, the Chief Executive Officer and Chief Financial Officer, are invited to Audit Committee meetings at the discretion of the committee. The committee met twice during the year and committee members’ attendance record is disclosed in the table of Directors’ meetings on page 23 of this report. The Chief Executive Officer and the Chief Financial Officer declared in writing to the Board that the Company’s financial reports for the year ended 30 June 2005 present a true and fair view, in all material respects, of the Company’s financial condition and operational results and are in accordance with relevant accounting standards. This statement is required for the full year and half year reporting periods. The external auditor met with the Audit Committee and the Board during the year without management being present. 17 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Corporate Governance Statement (continued) Audit Committee (continued) The Audit Committee’s charter is available on the Company’s website along with information on procedures for the selection and appointment of the external auditor, and for the rotation of external audit engagement partners. The responsibilities of the Audit Committee are to: • assist the Board to discharge its fiduciary responsibilities with regard to the Company’s accounting, control and reporting practices by monitoring the risk and internal control environment and management over corporate assets; • review internal controls and any changes thereto approved and submitted by the Company’s Chief Financial Officer; • provide assurance regarding the quality and reliability of financial information used by the Board, to enable the Board to maintain confidence in the financial reports; • oversee the activities of the internal audit function and external audit staff of the Company and to review the Company’s risk management policies and internal control processes; • review and recommend to the Board the adoption of the Company’s half year and annual financial statements including income tax and other fiscal matters incorporated within the financial statements; • liaise with and review the performance of the external auditor, who is invited to attend Audit Committee meetings to discuss financial matters and business risk; • consider whether non-audit services provided by the external auditor are consistent with maintaining the external auditors’ independence. The external auditor provides an annual declaration of independence and compliance with independence guidelines for review by Audit Committee; and • perform, at least annually, a performance evaluation to ensure delivery on its charter and continually enhance the committee’s contribution to the Board. This performance evaluation encompasses a self evaluation of the committee with findings and recommendations to be discussed with the Board. A formal evaluation of the committee members is to be undertaken by the Chairman with his or her own performance to be evaluated by the Board Chairman. Once these evaluations have been completed, the Board Chairman and Committee Chairman discuss the outcomes so that appropriate action can be taken. The Audit Committee reviews the performance of the external auditors on an annual basis and meets with them during the year as follows: • to discuss the external audit and internal audit plans, identifying any significant changes in structure, operations, internal controls or accounting policies likely to impact the financial statements and to review the fees proposed for the audit work to be performed prior to announcement of results: - to review the half-year and preliminary final reports prior to lodgment with the ASX, and any significant adjustments required as a result of the auditor’s findings - to recommend Board approval of these documents • to finalise half-year and annual reporting: - review the results and findings of the auditor, the adequacy of accounting and financial controls, and to monitor the implementation of any recommendations made - review the draft financial report and recommend Board approval of the financial report • as required, to organize, review and report on any special reviews or investigations deemed necessary by the Board subject to the engagement not impairing audit independence. Risk Management Oversight of the risk management system The Board oversees the establishment, implementation and annual review of the Company’s Risk Management System. Management has established and implemented the Risk Management System for assessing, monitoring and managing operational, financial reporting, and compliance risks for the Company. The Chief Executive Officer and the Chief Financial Officer have declared, in writing to the Board, that the financial reporting risk management and associated compliance and controls have been assessed and found to be operating efficiently and effectively. The operational and other compliance risk management have also been assessed and found to be operating efficiently and effectively. All risk assessments covered the whole financial year and the period up to the signing of the annual financial report for all material operations in the Company and material associates. Risk profile The Audit Committee reports to the Board on the status of risks through integrated risk management programs aimed at ensuring risks are identified, assessed and appropriately managed. Further details of the Company’s risk management policy and internal compliance and control system are in the progress of being made available on the Company’s website. Each business operational unit is responsible and accountable for implementing and managing the standards required by the program. Major risks arise from such matters as actions by competitors, government policy changes, the impact of exchange rate movements on the price of raw materials and sales, difficulties in sourcing raw materials, environment, occupational health and safety, property, financial reporting, and the purchase, development and use of information systems. Risk management and compliance and control The Company strives to ensure that its products are of the highest standard. The Board is responsible for the overall internal control framework, but recognises that no cost effective internal control system will preclude all errors and irregularities. The Board’s policy on internal control is continually under review and comprises the Company’s internal compliance and control systems, including: • Operating unit controls - Operating units confirm compliance with financial controls and procedures including information systems controls detailed in procedures manuals. 18 Risk management and compliance and control (continued) • Functional specialty reporting - Key areas subject to regular reporting to the Board include Treasury and Derivatives Operations, Environmental, Legal and Self Insurance matters. • Investment appraisal - Guidelines for capital expenditure include annual budgets, detailed appraisal and review procedures, levels of authority and due diligence requirements where businesses are being acquired or divested. Comprehensive practices have been established to ensure: • Capital expenditure and revenue commitments above a certain size obtain a prior Board approval; • Financial exposures are controlled, including the use of derivatives. Further details of the Company’s policies relating to interest rate management, forward exchange rate management and credit risk management are included in Note 19 to the financial statements; • Occupational health and safety standards and management systems are monitored and reviewed to achieve high standards of performance and compliance with regulations; • Business transactions are properly authorized and executed; • The quality and integrity of personnel (see below); • Financial reporting accuracy and compliance with the financial reporting regulatory framework (see below); and • Environmental regulation compliance (see below). Quality and integrity of personnel Written confirmation of compliance with policies of the Company is obtained from all operating units. Formal appraisals are conducted at least annually for all employees. Training and development and appropriate remuneration and incentives with regular performance reviews create an environment of co-operation and constructive dialogue with employees and senior management. A formal succession plan is also in place to ensure competent and knowledgeable employees fill senior positions when retirements or resignations occur. Financial reporting The Chief Executive Officer and the Chief Financial Officer have declared, in writing to the Board, that the Company’s financial reports are founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the Board. Monthly actual results are reported against budgets approved by the directors and revised forecasts for the year are prepared regularly. Convergence with IFRS is a key current financial reporting project established by the Board and monitored by a steering committee, to ensure a smooth transition to IFRS reporting, beginning with the half year ended 31 December 2005. One of the project’s first tasks was to prepare an opening statement of financial position, under IFRS, as at 1 July 2004 as outlined in note 31 in the Financial Statements. The Board IFRS convergence plan is as follows: • Appointment of a steering committee; • Establishment of a staff training plan; • Calculation of the estimate of the financial impact of convergence; • Determination of significant changes in accounting policies; • Preparation of a management information systems conversion plan; • Calculation of the opening IFRS based statement of financial position as at 24 months prior to the first full IFRS year end (to facilitate first year IFRS comparatives); • Calculation of an IFRS based statement of financial performance in the lead up year to the first full year of IFRS based reporting, in addition to the non IFRS financial reporting, (to facilitate first year IFRS comparatives); • Preparation of IFRS only complete financial reporting in the first full year of IFRS financial reporting which commences from 1 January 2005 (for Ainsworth Game Technology Limited this is the year ending 30 June 2006); and • Provision of project status reporting to the Board. Environmental regulation The Company’s operations are not subject to significant environmental regulations under either Commonwealth or State legislation. However, the Board believes that the Company has adequate systems in place for the management of its environmental requirements and is not aware of any breaches of those environmental requirements as they apply to the Company. Assessment of effectiveness of risk management Internal Audit To further assist the Board in ensuring compliance with these internal controls and risk management programs, extra resources have been allocated to the recruitment of a suitably qualified individual to oversee and regularly review the effectiveness of the abovementioned compliance and control systems. The Audit Committee will be responsible for approving the program of internal audit visits to be conducted each financial year and for the scope of the work to be performed. Ethical Standards All directors, managers and employees are expected to act with the utmost integrity and objectivity, striving at all times to enhance the reputation and performance of the Company. Every employee has a nominated supervisor to whom they may refer any issues arising from their employment. The Board reviews the Ethical Standards procedures regularly to ensure adequate and effective processes are in place to promote and communicate these policies. Conflict of interest Directors must keep the Board advised, on an ongoing basis, of any interest that could potentially conflict with those of the Company. The Board has developed procedures to assist directors to disclose potential conflicts of interest. Where the Board believes that a significant conflict exists for a director on a Board matter, the director concerned does not receive the relevant Board papers and is not present at the meeting whilst the item is considered. Details of director related entity transactions with the Company and company transactions with the Company are set out in Note 24 in the Financial Statements. Details of director related entity transactions with the Company and company transactions with the Company are set out in Note 24 in the Financial Statements. 19 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Corporate Governance Statement (continued) Code of Conduct The Company has established a Code of Conduct which embraces high standards of personal and corporate conduct. Each director, manager and employee has been advised that they must comply with this Code. The full Code may be viewed on the Company’s website and it requires all directors and officers to: • Conduct all dealings with internal and external stakeholders in a truthful, honest and trustworthy manner • Value and maintain professionalism • Treat all persons with whom you interact, with respect and dignity • Respect the rights of individuals • Act towards others without discrimination • Comply with AGT’s internal policies and procedures • Report unethical behaviour or wrongdoing • Use authority in a fair and unbiased way • Comply with all applicable laws, regulations and licensing conditions • Not knowingly make a misleading statement A copy of the Code is made available to all staff. The Code is reviewed regularly by the Board and processes are in place to promote and communicate these policies. Trading in Company securities by directors and employees The Company has in place a security transactions policy which outlines the rules that directors and senior management must follow when dealing in the Company’s securities. The policy also details the insider trading provision of the Corporations Act. The key elements of the Company’s Policy regarding Trading in Company Securities by Directors and Employees is: • directors and senior executives may acquire shares in the Company, but are prohibited from dealing in Company shares or exercising options: - except for 30 days after either the release of the Company’s half year and annual results to the Australian Stock Exchange (“ASX”), the annual general meeting or during the offer period of a share issue the subject of a Prospectus; and - whilst in possession of price sensitive information not yet released to the market. • Raising the awareness of legal prohibitions including transactions with colleagues and external advisers; • Requiring details to be provided of intended trading in the Company’s shares; • Requiring details to be provided of the subsequent confirmation of the trade; and • Identification of process for unusual circumstances where discretions may be exercised in cases such as financial hardship. The policy stipulates a number of notification and approval procedures that must be carried out before any employee or director can deal in securities of the Company. The Company has in place internal mechanisms to review compliance with the policy. There were no breaches of the policy identified during the year and as a result of this review. Communication with Shareholders The Board provides shareholders with information using a comprehensive Continuous Disclosure Policy which includes identifying matters that may have a material effect on the price of the Company’s securities, notifying them to the ASX, posting them on the Company’s website, and issuing media releases. More details of the policy are in the process of being incorporated on the Company’s website. In summary, the Continuous Disclosure policy operates as follows: • The Chief Executive Officer, the Chief Financial Officer/Company Secretary are responsible for interpreting the Company’s policy and where necessary informing the Board. The Company Secretary is responsible for all communications with the ASX. Such matters are advised to the ASX on the day they are identified as being material, and all senior executives must follow a process, which involves monitoring all areas of the group’s internal and external environment; • The annual report is distributed to all shareholders (unless a shareholder has specifically requested not to receive the document), including relevant information about the operations of the Company during the year, changes in the state of affairs and details of future developments; • The half yearly report contains summarized financial information and a review of the operations of the Company during the period. The half year reviewed financial report is lodged with the Australian Securities and Investments Commission and the ASX, and sent to any shareholder who requests it; • Proposed major changes in the Company which may impact on share ownership rights are submitted to a vote of shareholders; • Information meetings are held on a regular basis to provide shareholders with information; • All announcements made to the market, and related information (including information provided to analysts or the media during briefings), are placed on the Company’s website after they are released to the ASX; • The full texts of notices of meetings and associated explanatory material are placed on the Company’s website; • The external auditor is requested to attend the annual general meetings to answer any questions concerning the audit and the content of the auditor’s report. All of the above information, including that of the previous years, is made available on the Company’s website. The Board encourages full participation of shareholders at the Annual General Meeting, to ensure a high level of accountability and identification with the Company’s strategy and goals. Important issues are presented to the shareholders as single resolutions. The shareholders are requested to vote on the appointment and aggregate remuneration of directors, the granting of options and shares to directors and changes to the Constitution. Copies of the Constitution are available to any shareholder who requests it. 20 Financial Report Ainsworth Game Technology Limited Page Directors’ Report .........................................................................................................................................................22 Lead Auditor’s Independence Declaration ..................................................................................................................30 Statements of Financial Performance .........................................................................................................................31 Statements of Financial Position .................................................................................................................................32 Statements of Cash Flows ..........................................................................................................................................33 Notes to the Financial Statements..............................................................................................................................34 Directors’ Declaration ..................................................................................................................................................74 Independent Audit Report ...........................................................................................................................................75 21 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report The directors present their report together with the financial report of Ainsworth Game Technology Limited (“the Company”) and of the consolidated entity, being the Company and its controlled entities, for the year ended 30 June 2005 and the auditor’s report thereon. Directors The directors of the Company at any time during or since the end of the financial year are: Name Current Mr Leonard Hastings Ainsworth Chairman Executive Director • Fellow of the Institute of Company Directors in Australia and the Australian Institute of Management • Fifty one years gaming industry experience • Founder of Aristocrat Leisure Limited • Chairman of Nomination Committee from 25 June 2004 • Director and Chairman since 1995 - appointed Executive Chairman 21 August 2003 • Fellow of the Institute of Engineers, Australia • Advisory Board member of St Hilliers Pty Limited • Representative of St Hilliers Pty Limited on Joint Venture Management Committee for Kingston Foreshore Development, ACT • Former Chief Executive and Director of Leighton Holdings Limited • Chairman of Remuneration Committee from 21 August 2003 and member of Audit Committee from appointment • Member of Regulatory Compliance Committee from 9 March 2005 • Member of Nomination Committee and Technology Committee from 25 June 2004 and 20 July 2004, respectively • Director since February 2002 • Bachelor of Arts, Master of Science, Master of Business Administration and Diploma from Australian Institute of Company Directors • Fellow of Australian Institute of Company Directors • Over twenty years general management experience in senior executive positions in such diversified industries as chemicals, management consulting, finance and retail • Former Managing Director of Amoco Australia, part of the BP Group worldwide • Chairman of Audit Committee and member of Remuneration Committee from appointment • Member of Nomination Committee and Chairman of Technology Committee from 25 June 2004 and 20 July 2004, respectively • Chairman of Regulatory Compliance Committee from 21 February 2005 • Appointed 3 October 2003 • Fellow of the Institute of Chartered Accountants • Thirty years in public practice as a Chartered Accountant and registered auditor • Over twenty years experience in auditing gaming machine manufacturers and entities in the hospitality and club industries • Member of Audit Committee from appointment • Member of Nomination Committee from 25 June 2004 • Director since August 2003 • Bachelor of Science (Economics) from University of Wales, United Kingdom • Fellow of Australian Institute of Management, Australian Institute of Company Directors and Institute of Chartered Accountants • Associate member of Securities Institute of Australia • Former senior executive and Board member of Burns, Philp & Company Limited • Former CEO of Rail Infrastructure Corporation • Chairman of Regulatory Compliance Committee until 21 February 2005 • Member of Nomination Committee and Technology Committee from 25 June 2004 and 20 July 2004, respectively until 21 February 2005 • Director since August 2003 - appointed Executive Director 1 September 2004 • Resigned as director on 21 February 2005 Experience and special responsibilities Mr Stewart Lawrence Wallis AO Lead Independent Non-Executive Director Mr Andrew Richard Amer Independent Non-Executive Director Mr Vivian Bernard Matthews Non-Executive Director Former Mr John Michael Cowling Executive Director 22 Company Secretary Mr Mark L Ludski was appointed to the position of Company Secretary in August 2000. Mr ML Ludski previously held the role of Finance Manager with another listed public company for ten years and prior to that held successive positions in two major accounting firms where he was employed in each of their respective audit, taxation and business advisory divisions. Mr M L Ludski is a Chartered Accountant holding a Bachelor of Business degree, majoring in accountancy and sub-majoring in economics. Directors’ Meetings The number of directors’ meetings (including meetings of committees of directors) and number of meetings attended by each of the directors of the Company during the financial year are: Director Board Meetings Nomination Committee Meetings A 2 2 2 2 2 B 2 2 2 2 2 Technology Committee Meetings A 3 3 3 B 3 3 3 Audit Committee Meetings A 2 2 2 B 2 2 2 Renumeration Committee Meetings A 3 3 B 3 3 Regulatory & Compliance Committee Meetings A 1 1 2 B 1 1 2 Current Mr LH Ainsworth Mr SL Wallis Mr AR Amer Mr VB Matthews Former Mr JM Cowling A 12 12 12 10 8 B 12 12 12 12 8 A – Number of meetings attended. B – Number of meetings held during the time the director held office during the year. A Technology Committee was established on 20 July 2004. Since 30 June 2005 a review of the Committees established by the Board was undertaken. The Technology Committee was considered no longer necessary as its functions were more appropriately covered by the management of the Company. The Nomination Committee has been combined with the Remuneration Committee as one sub-committee reporting to the Board. Principal Activities The principal activity of the consolidated entity during the course of the financial year was the design, development and sale of gaming machines and other related equipment and services. There were no significant changes in the nature of the activities of the consolidated entity during the year. Review and Results of Operations Introduction During the period under review, the consolidated entity achieved an increase in revenue resulting from the introduction of new products and further access to international markets. The Australian market for gaming machines continued to be difficult, however with further sales through conversions and linked products, the consolidated entity’s overall market share increased during the period under review. A continued focus and concentration on international markets through the introduction of new products resulted in increased sales revenue for the period. Significant rationalisation of the organisation occurred during the period including investment in further research and development of current and new products, progressing plans for licensing within international markets and establishing a regional distribution network for the consolidated entity within key international markets. These initiatives are expected to further benefit the overall sales growth planned for future years. 23 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report (continued) Review and Results of Operations (continued) Introduction (continued) Highlights Include: • Total revenue $82.5 million, up 29% on the previous year; • Internationally sales revenue of $58.5 million was achieved compared to $41.0 million in 2004, an increase of 44%. This was achieved through distributor relationships in the Americas, Asia, Europe and South Africa during the year under review and repeat orders within previously established markets. FINANCIAL RESULTS Revenue Sales revenue of $82.0 million was achieved compared to $63.7 million for the previous corresponding year. This represented an increase of $18.3 million (29%). Further growth in international sales resulted in international sales revenue now representing 71% of total sales compared to 64% in the corresponding period in 2004. Domestic sales revenue increased by 3% during the period with significant improvements in revenue from the primary markets of New South Wales and Queensland. New South Wales sales revenue included service revenue for the period under review of $1.0 million through the acquisition of NSW venue maintenance businesses. Difficult market conditions within South Australia continue with the reduction of gaming machines by 3,000 and the continued heavy regulations which restricts the innovation of product development. A further growth opportunity within domestic markets is expected through additional product approvals and supply of product within the Victorian market during the coming year. Internationally the consolidated entity achieved $58.5 million in sales revenue, a $17.6 million increase on the corresponding period in 2004. Significant growth was experienced within the Americas, resulting in an increase of $23.0 million during the period under review. This market now represents 54% of total international sales revenue compared to 20% in 2004. Foreign currency The consolidated entity’s risk management process identified foreign currency fluctuations as a significant financial exposure, particularly with the growth in international sales. The consolidated entity monitors and reviews this exposure within limits established by the Board so as to ensure any adverse impact is minimised. The consolidated entity recorded a net exchange loss of $1.6 million for the period which included $0.8 million for the cost of foreign exchange contracts. Operating costs Cost of sales during the period under review were $46.7 million resulting in a gross margin of 43%, the same as the corresponding period in 2004. Operating costs, excluding cost of sales, totalled $46.3 million compared to $25.7 million for the corresponding period in 2004. Included in operating costs for the period under review were $4.8 million in one-off costs in relation to restructuring expenses, discontinued merger discussions with the Unicum Group and costs associated with legal matters. After taking into effect the above one-off costs the increases in operating costs are as follows: • Sales, service and marketing costs increased by $9.0 million during the current period. Included in this increase were additional costs of $4.8 million in relation to the America’s and Europe. These markets contributed to 60% of total revenue during the period under review. Service costs incurred in relation to recent acquisitions during the year amounted to $1.0 million. Additional technical support costs of $0.5 million in relation to servicing international markets. Marketing costs during the period were $3.3 million, an increase of $0.7 million over the previous corresponding period in 2004. • Further investment in research and development costs of $10.3 million, an increase of $2.1 million over the prior year. Research and development represented 12.5% of total revenue compared to 12.6% in the corresponding period in 2004. All expenditure on research and development was expensed as incurred, however under International Financial Reporting Standards development costs may be able to be capitalised if certain criteria are met. Refer note 31 within the Annual Financial Report for further details. • Administration costs increased to $6.5 million, an increase of $1.3 million primarily as a result of additional compliance and licensing expenses. • Borrowing costs increased by $2.0 million in the period under review. This increase related to interest on convertible notes issued on 20 December 2004 and further interest on loan funds provided to the Company. Income tax The Australian companies within the consolidated entity incurred no income tax during the period under review due to the tax losses incurred. Income tax expense resulted from tax payable by an offshore controlled entity. Operating loss after income tax The loss from ordinary activities after income tax for the year ended 30 June 2005 was $10.6 million, compared to a profit of $2.1 million in the corresponding period in 2004. Included in this result was $4.8 million in significant items as identified above. Cash flow The cash outflow from operations for the year ended 30 June 2005 was $32.5 million compared to $17.4 million in the corresponding period in 2004. Included in the above net cash outflow was a $35.3 million investment in working capital due to the build up of inventory levels to meet increased future demand and increased receivables as a result of extended credit terms offered to some international customers. Subsequent to 30 June 2005, additional loan facilities have been established with an entity controlled by Mr LH Ainsworth as discussed later in this report. Proposed Capital Raising As previously announced, the Company is proposing a rights issue to raise additional funds to support its planned growth and expansion. The Company is anticipating raising $20 million which will be fully underwritten by Mr Ainsworth and family members. Further details in relation to the terms and entitlements of the issue are currently being completed and will be announced once finalised. 24 Convertible Note Issue On 20 December 2004 the company issued 19,714,717 convertible notes at an issue price of $1.30 per convertible note. The interest rate on the convertible notes is fixed at 8.0% per annum. Interest is payable semi-annually on each 30 June and 31 December until 31 December 2009, unless the convertible note is earlier redeemed or converted, in which case interest will be paid up until the date of such conversion or redemption. The first interest payment date is 30 June 2005 and interest accrues from the issue date. The conversion dates will occur on 31 December 2007 and at the maturity date on 31 December 2009. Conversion dates could also occur under certain trigger events as outlined in the Prospectus dated 22 November 2004. The Company will redeem the convertible notes on the maturity date unless the convertible notes are converted or redeemed earlier. The convertible notes will be redeemed for the issue price of $1.30 per convertible note. If converted, the note holder receives one ordinary share for each note held with the same voting rights as all other shareholders. The notes do not give their holders any voting rights at shareholders’ meetings. The notes are unsecured debt obligations of the Company ranking equally with other ordinary unsecured creditors of the Company. State of affairs Significant changes in the state of affairs of the consolidated entity during the financial year were as follows: • The Company issued 19,714,717 convertible notes at an issue price of $1.30 per convertible note; • Acquisitions of venue maintenance service companies during the year have increased the Company’s revenue opportunities within the New South Wales market; • Further rationalisation and re-structuring costs occurred following a review by the Company; and • The discontinued merger negotiations with the Unicum Group resulted in $1.5 million in one-off costs being expensed in the current period under review. Environmental Regulation The consolidated entity’s operations are not subject to significant environmental regulations under either Commonwealth or State legislation. However, the Board believes that the consolidated entity has adequate systems in place for the management of its environmental requirements and is not aware of any breaches of those environmental requirements as they apply to the consolidated entity. Looking Forward The consolidated entity remains focussed on achieving the objective of becoming a leading supplier of technologically innovative and superior gaming machines and related equipment and services globally. The current plans and resources are focussed on achieving: • Continued development of leading edge technology for gaming machines; • Consolidation of the current product range within Australia and strengthening of the domestic market position; • Increased focus on developing market share in strategically placed international markets; • Selective entry into new international markets through distributors or direct sales channels; and • Prudent focus on management of working capital and achievement of significant reduction in costs of production and overheads. Market conditions The market conditions within Australia continued to present challenges during the year under review. Legislative changes and uncertainty regarding proposed changes have adversely affected customer demand for gaming equipment and products. This will have an impact on future performance, although the consolidated entity remains focussed on increasing its domestic market share and capitalising on the significant opportunities available in international markets. Events Subsequent to Reporting Date For reporting periods beginning on or after 1 July 2005, the consolidated entity must comply with Australian equivalents to International Financial Reporting Standards (AIFRS) as issued by the Australian Accounting Standards Board. The implementation plan and potential impact of adopting AIFRS are detailed in Note 31 to the financial statements. Since 30 June 2005 the Company has amended the loan facility agreement with an entity controlled by Mr LH Ainsworth. The facility has been increased from $30 million to $40 million. The new terms of the facility are that effective 1 August 2005 the interest rate applicable on these loan funds has been increased and capped at 8.0% per annum. These terms are more favourable than those that could be achieved from the Company’s bankers and at arms length in the open market. All other terms and conditions are similar to those previously reported. Other than the matters discussed above, there has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to affect significantly the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity, in future financial years. Likely Developments The Company continues to work to satisfy regulatory authorities to ensure that the consolidated entity achieves the necessary licences to support its operations within Australia and overseas. The granting of such licences will allow the consolidated entity to expand its operations into currently unavailable markets. Further information about likely developments in the operations of the consolidated entity and the expected results of those operations in future financial years has not been included in this report because disclosure of this information would be likely to result in unreasonable prejudice to the consolidated entity. Dividends No dividends were paid or declared by the Company since the end of the previous financial year. The directors do not recommend that any dividends be paid in respect of the 2005 financial year. 25 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report (continued) Remuneration Report Directors’ and Senior Executives’ Remuneration The Remuneration Committee is responsible for making recommendations to the Board on remuneration policies and packages applicable to the Board members and senior executives of the consolidated entity. The policy of the Company is to ensure that remuneration packages properly reflect the person’s duties and responsibilities and level of performance achieved and that remuneration is competitive in attracting, retaining and motivating people of the highest quality. Senior executives may receive bonuses based on the achievement of specific goals related to the performance of the individual and the consolidated entity. The Company also issues share options to staff and management, with the ability to exercise the options being conditional on the consolidated entity achieving certain performance hurdles. The Remuneration Committee oversees the awarding of bonuses and options. Details of the nature and amount of each major element of the remuneration of each director of the Company and each of the five named officers of the Company and the consolidated entity receiving the highest remuneration are: Superannuation Options Issued Contributions (A) $ $ Other Benefits $ NOTE DIRECTORS Executive Current Mr LH Ainsworth Former Mr JM Cowling Non-executive Current Mr SL Wallis Mr AR Amer Mr VB Matthews Former Mr JM Cowling The Company Current Mr DP Creary Mr ML Ludski Mr PW Walford Mr K Orchard Ms J Trembath Consolidated Current Mr DP Creary Mr ML Ludski Mr PW Walford Mr G Steiner Mr K Orchard (D) (D) (D) (D) (C) (B) (B) (B) (C) (B) Salary /Fees $ Bonus $ Total $ 200,000 100,000 - 9,000 - 30,000 12,500 230,000 121,500 50,000 50,000 50,000 8,333 - 4,500 4,500 750 9,735 - - 64,235 54,500 50,000 9,083 EXECUTIVE OFFICERS (Excluding Directors) 137,564 180,500 253,487 473,503 170,000 - 12,381 16,245 15,415 15,300 80,750 11,932 14,873 7,784 - 11,250 69,610 20,833 24,065 14,328 241,945 278,287 304,608 505,352 199,628 137,564 180,500 253,487 637,050 473,503 - 12,381 16,245 15,415 79,497 - 80,750 11,932 14,873 30,051 7,784 11,250 69,610 20,833 85,924 24,065 241,945 278,287 304,608 832,522 505,352 26 Directors’ and Senior Executives’ Remuneration (continued) Notes: (A) Details concerning share options are included in Notes 25, 26 and 28 to the financial statements. The fair value of options issued has been determined in accordance with the Australian Securities and Investments Commission (ASIC) ‘Guidelines to valuing options in annual Directors Reports’ dated 30 June 2004. The options were valued using a Black Scholes model with the valuations completed at the date the options were granted or shareholder approval received, where applicable. The key parameters used in the valuations are a risk free rate in the range of 5.66% to 5.84% per annum, a volatility factor in the range of 40% to 60% per annum, no dividends and an option term of 5 years. The fair value of these options has been allocated equally over the vesting period and the amount applicable to the current year has been included as remuneration in the table above. In accordance with Australian Accounting Standards these amounts are not required to be expensed in the Statement of Financial Performance. (B) Directors for the entire financial year ended 30 June 2005. Mr LH Ainsworth was appointed Executive Chairman on 21 August 2003. (C) Mr JM Cowling was a Director until 21 February 2005. He held the position of Executive Director from 1 September 2004 until retirement. (D) Mr DP Creary was appointed Chief Executive Officer on 15 February 2005. Mr PW Walford initially commenced with the Company on 24 August 2004 and was appointed Group General Manager - Global Sales on 16 March 2005. Options Options granted to Directors and Officers of the Company During or since the end of the financial year, the Company granted options for no consideration over unissued ordinary shares to the following directors and to any of the five most highly remunerated officers of the Company as part of their remuneration: OFFICERS The Company Mr DP Creary Mr PW Walford Mr ML Ludski 1,000,000 70,000 70,000 50,000 $1.00 $1.00 $0.50 $0.50 15 February 2010 31 August 2009 31 August 2009 31 August 2009 Number of Options Granted Exercise Price Expiry Date Included in the share options granted to Mr Creary were 500,000 share options which were only capable of being exercised on the achievement of short term performance hurdles for the financial year ended 30 June 2005. These performance hurdles were not met and 500,000 share options will lapse on 31 August 2005. All options were granted during the financial year. No options have been granted since the end of the financial year. Unissued shares under option At the date of this report unissued ordinary shares of the Company under option are: Expiry Date 7 December 2006 18 December 2006 25 November 2007 1 November 2008 1 April 2009 31 August 2009 15 February 2010 Exercise Price $1.00 $1.00 $1.15 $1.00 $0.50 $1.00 $0.50 $1.00 $0.50 $1.00 Number of Shares 1,340,000 4,000,000 900,000 200,000 100,000 75,000 75,000 585,000 930,000 1,000,000 27 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Directors’ Report (continued) Options (continued) Unissued shares under option (continued) The options above have vesting and performance conditions, which must be satisfied prior to any of the options being exercised. The vesting condition is set with reference to the anniversary of the issue date of the option. All options expire on the earlier of their expiry date or termination of the option holders’ employment unless otherwise approved by shareholders. The exceptions to this are that the third and final vesting date for the share options granted to former directors Mr JM O’Mahony, Mr JG Drews and to the financial advisor to the Initial Public Offering (refer Note 17). The share options in respect of former directors Messrs DC Hall, J Kehoe, AE Vrisakis and Mr JM O’Mahony have vested as approved by shareholders at the Annual General Meetings (AGM’s) of the Company held on 25 November 2002 and 18 November 2003. These options do not entitle the holder to participate in any share issue of the Company or any other body corporate. Shares issued on exercise of options There were no shares issued as a result of the exercise of options during or since the end of the financial year. Refer Notes 17, 25 and 26 to the financial statements for further information. Directors’ Interests The relevant interest of each director in the shares and rights or options over such instruments issued by the companies within the consolidated entity and other related bodies corporate as notified by the directors to the Australian Stock Exchange in accordance with S205G(1) of the Corporations Act 2001, at the date of the report is as follows: AINSWORTH GAME TECHNOLOGY LIMITED Ordinary Shares Current Mr LH Ainsworth Mr SL Wallis Mr VB Matthews Mr AR Amer 76,892,858 158,001 71,430 49,000 10,252,382 113,000 9,524 6,267 300,000 Convertible Notes Options Over Ordinary Shares Indemnification and Insurance of Officers Indemnification The Company has agreed to indemnify the current and former directors of the Company against all liabilities to another person (other than the Company or a related body corporate) that may arise from their position as directors of the Company and its controlled entities, except where the liability arises out of conduct involving a lack of good faith. The agreement stipulates that the Company will meet the full amount of any such liabilities, including costs and expenses. Insurance premiums Since the end of the previous financial year, the Company has paid insurance premiums in respect of directors’ and officers’ liability and legal expenses’ insurance contracts, for current and former directors and officers, including executive officers of the Company and directors, executive officers and secretaries of its controlled entities. The directors have not included details of the nature of the liabilities covered or the amount of the premium paid in respect of the directors’ and officers’ liability and legal expenses contracts, as such disclosure is prohibited under the terms of the contract. 28 Non-audit Services During the year KPMG, the Company’s auditor, has performed certain other services in addition to their statutory duties. The Board has considered the non-audit services provided during the year by the auditor and in accordance with written advice provided by resolution of the Audit Committee, is satisfied that the provision of those non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: • All non-audit services were subject to the corporate governance procedures adopted by the Company and have been reviewed by the audit committee to ensure they do not impact the integrity and objectivity of the auditor; and • The non-audit services provided do not undermine the general principles relating to auditor independence as set out in Professional Statement F1 Professional independence, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards. Details of auditor’s remuneration is included in Note 4 of the Financial Report Rounding Off The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, amounts in the financial report and directors’ report have been rounded off to the nearest thousand dollars, unless otherwise stated. Dated at Sydney this 25th day of August 2005. Signed in accordance with a resolution of the directors LH Ainsworth Director 29 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To: The Directors’ of Ainsworth Game Technology Limited (i) (ii) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. I declare that, to the best of my knowledge and belief in relation to the audit for the financial year ended 30 June 2005 there have been: KPMG Tony Nimac Partner Sydney 25th August 2005 KPMG, an Australian partnership is part of the KPMG International network. KPMG is a Swiss cooperative 30 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Statements of Financial Performance For the year ended 30 June 2005 CONSOLIDATED 2004 $’000 63,727 63,727 (36,239) 27,488 413 (11,611) (8,215) (5,230) (683) (25,739) 2,162 (40) 2,122 THE COMPANY 2004 $’000 63,727 63,727 (36,239) 27,488 413 (11,692) (8,215) (5,230) (683) (25,820) 2,081 2,081 2005 $’000 81,006 1,031 2 Cost of goods sold Gross profit Other revenues from ordinary activities Sales, service and marketing expenses Research and development expenses Administrative expenses Borrowing costs Other expenses from ordinary activities Share of net profit of associates accounted for using the equity method 23 2 82,037 (46,724) 35,313 433 (22,604) (10,318) (9,371) (2,679) (1,560) 203 (46,329) (Loss) / profit from ordinary activities before related income tax benefit / (expense) Income tax expense relating to ordinary activities Net (loss) / profit Non-owner transaction changes in equity Net exchange difference relating to self-sustaining foreign operations Total changes in equity from non-owner related transactions attributable to the members of the parent entity Basic earnings per ordinary share Diluted earnings per ordinary share 18 8 7 5(a) 19 (10,583) (57) (10,640) 2005 $’000 81,006 81,006 (46,604) 34,402 433 (20,468) (10,318) (10,075) (2,679) (1,744) (45,284) (10,449) (10,449) Note Revenue from sale of goods Revenue from rendering of services (10,632) ($0.072) ($0.072) 2,129 $0.016 $0.016 (10,449) 2,081 The statements of financial performance are to be read in conjunction with the notes to the financial statements set out on pages 34 to 73. 31 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Statements of Financial Position as at 30 June 2005 CONSOLIDATED 2004 $’000 2,443 30,496 17,612 688 51,239 2,436 18,217 2,000 90 22,743 73,982 15,601 1,702 40 917 18,260 15,280 199 15,479 33,739 40,243 72,807 7 (32,571) 40,243 THE COMPANY 2004 $’000 2,429 30,496 17,581 585 51,091 2.489 18,161 2,000 90 22,740 73,831 15,458 1,702 917 18,077 85 15,280 199 15,564 33,641 40,190 72,807 (32,617) 40,190 2005 $’000 752 44,188 35,578 790 81,308 7 10 11 12 9 5,218 2,203 18,656 3,067 606 29,750 111,058 13 14 16 25,399 193 79 1,685 27,356 13 14 16 49,441 562 50,003 77,359 33,699 17 18 19 76,895 15 (43,211) 33,699 2005 $’000 588 43,548 35,578 712 80,426 8,589 18,491 1,692 606 29,378 109,804 24,187 193 1,482 25,862 246 49,422 445 50,113 75,975 33,829 76,895 (43,066) 33,829 Note Current assets Cash assets Receivables Inventories Other Total current assets Non-current assets Receivables Investments accounted for using the equity method Property, plant and equipment Intangible assets Other Total non-current assets Total assets Current liabilities Payables Interest-bearing liabilities Current tax liabilities Provisions Total current liabilities Non-current liabilities Payables Interest-bearing liabilities Provisions Total non-current liabilities Total liabilities Net assets 6 7 8 9 Equity Contributed equity Reserves Accumulated losses Total equity The statements of financial position are to be read in conjunction with the notes to the financial statements set out on pages 34 to 73. 32 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Statements of Cash Flows For the year ended 30 June 2005 CONSOLIDATED 2004 $’000 THE COMPANY 2004 $’000 2005 $’000 2005 $’000 Note Cash flows from operating activities Cash receipts in the course of operations Cash payments in the course of operations Interest received Grants and subsidies Borrowing costs paid Net cash used in operating activities Cash flows from investing activities Payments for property, plant and equipment Proceeds from sale of non-current assets Payments for acquisition of equity investments Payment for controlled entities (net of cash acquired) Payments to controlled entities Payment for acquisition of business assets Net cash used in investing activities Cash flows from financing activities Proceeds from issue of convertible notes Proceeds from issue of shares Transaction costs from issue of shares / convertible notes Proceeds from borrowings Repayment of borrowings Hire purchase payments Net cash provided by financing activities Net (decrease) / increase in cash held Cash at the beginning of the financial year Effects of exchange rate fluctuations on the balances of cash held in foreign currencies Cash at the end of the financial year 24(a) 22(c) 22(b) 24(b) 61,618 (93,185) 209 163 (1,183) (32,378) 39,403 (56,677) 50 (218) (17,442) 60,961 (93,645) 209 163 (1,183) (33,495) 39,403 (56,751) 50 (218) (17,516) (1,628) 26 (1,500) (83) (1,604) (4,789) (959) 55 (58) (1,105) (2,067) (1,270) 26 (974) (1,604) (3,822) (899) 55 (58) (1,105) (2,007) 25,629 (1,085) 26,300 (15,000) (248) 35,596 (1,571) (2,443) (120) 752 13,473 (500) 14,700 (6,700) (116) 20,857 1,348 1,093 2 2,443 25,629 (1,085) 26,300 (15,000) (248) 35,596 (1,721) 2,429 (120) 588 13,473 (500) 14,700 (6,700) (116) 20,857 1,334 1,093 2 2,429 The statements of cash flows are to be read in conjunction with the notes to the financial statements set out on pages 34 to 73. 33 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Notes to the Financial Statements For the year ended 30 June 2005 Note 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Contents Statement of significant accounting policies Revenue from ordinary activities (Loss) / profit from ordinary activities before income tax expense Auditor’s remuneration Taxation Cash assets Receivables Inventories Other assets Investments accounted for using the equity method Property, plant and equipment Intangible assets Payables Interest-bearing liabilities Financing arrangements Provisions Contributed equity Reserves Accumulated losses Additional financial instruments disclosure Commitments Controlled entities Investments accounted for using the equity method Notes to the statements of cash flows Employee benefits Director and executive disclosures Segment information Earnings per share Contingent liability Regulatory matters Impact of adopting Australian equivalents to International Financial Reporting Standards Events subsequent to reporting date 34 1 Statement of significant accounting policies The significant accounting policies which have been adopted in the preparation of this financial report are: (a) Basis of preparation The financial report is a general purpose financial report which has been prepared in accordance with Accounting Standards, Urgent Issues Group Consensus Views, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. It has been prepared on the basis of historical costs and except where stated, does not take into account changing money values or fair values of assets. These accounting policies have been consistently applied by each entity in the consolidated entity and are consistent with those of the previous year. (b) Principles of consolidation Controlled entities The financial statements of controlled entities are included in the consolidated financial statements from the date control commences until the date control ceases. Associates Associates are those entities over which the consolidated entity exercises significant influence and which are not intended for sale in the near future. In the consolidated financial statements, investments in associates are accounted for using equity accounting principles. Investments in associates are carried at the lower of the equity accounted amount and recoverable amount. The consolidated entity’s equity accounted share of the associates’ net profit or loss is recognised in the consolidated statement of financial performance from the date significant influence commences until the date significant influence ceases. Other movements in reserves are recognised directly in consolidated reserves. Transactions eliminated on consolidation Unrealised gains and losses and inter-entity balances resulting from transactions with or between the controlled entities are eliminated in full on consolidation. Unrealised gains resulting from transactions with associates are eliminated to the extent of the consolidated entity’s interest. Unrealised gains relating to associates are eliminated against the carrying amount of the investment. Unrealised losses are eliminated in the same way as unrealised gains, unless they evidence an impairment. (c) Revenue recognition Revenues are recognised at fair value of the consideration received net of the amount of goods and services tax (GST) payable to the taxation authority. Exchanges of goods or services of the same nature and value without any cash consideration are not recognised as revenues. Sale of goods Revenue from the sale of goods is recognised (net of rebates, returns, discounts and other allowances) when control of the goods passes to the customer and it is probable that the economic benefits comprising the consideration will flow to the consolidated entity and the amount of revenue can be measured reliably. Rendering of services Revenue from rendering services is recognised when the service has been performed. Interest revenue Interest revenue is recognised as it accrues, taking into account the effective yield on the financial asset. Sale of non-current assets The gross proceeds of non-current asset sales are included as revenue at the date control of the asset passes to the buyer, usually when an unconditional contract of sale is signed. The gain or loss on disposal is calculated as the difference between the carrying amount of the asset at the time of disposal and the net proceeds on disposal (including incidental costs). (d) Goods and services tax Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the Australian Taxation Office (ATO) is included as a current asset or liability in the statement of financial position. Cash flows are included in the statements of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows. (e) Foreign currency Transactions Foreign currency transactions are translated to Australian currency at the rates of exchange ruling at the dates of the transactions. Amounts receivable and payable in foreign currencies at reporting date are translated at the rates of exchange ruling on that date. Exchange differences relating to amounts payable and receivable in foreign currencies are brought to account as exchange gains or losses in the statement of financial performance in the financial year in which the exchange rates change, except where: • Hedging specific anticipated transactions (see Note 1(f)); and • Relating to amounts payable or receivable in foreign currency forming part of a net investment in a self-sustaining foreign operation. In this case, the exchange difference, together with any related income tax expense/revenue, is transferred to the foreign currency translation reserve on consolidation. 35 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Notes to the Financial Statements For the year ended 30 June 2005 1 Statement of significant accounting policies (continued) (e) Foreign currency (continued) Translation of controlled foreign operations The assets and liabilities of foreign operations that are self-sustaining are translated at the rates of exchange ruling at reporting date. Equity items are translated at historical rates. The statements of financial performance are translated at a weighted average rate for the year. Exchange differences arising on translation are taken directly to the foreign currency translation reserve until the disposal, or partial disposal, of the operations. The balance of the foreign currency translation reserve relating to a foreign operation that is disposed of, or partially disposed of, is transferred to retained profits in the year of disposal. (f) Derivatives The consolidated entity is exposed to changes in interest rates and foreign exchange rates from its activities. The consolidated entity uses foreign exchange option contracts to hedge the foreign exchange risk when considered necessary. Derivative financial instruments are not held for speculative purposes. Hedges Anticipated transactions Transactions are designated as a hedge of the anticipated specific purchase or sale of goods or services, only when they are expected to reduce exposure to the risks being hedged, are designated prospectively so that it is clear when an anticipated transaction has or has not occurred and it is probable the anticipated transaction will occur as designated. Gains or losses on the hedge arising up to the date of the anticipated transaction, together with any costs or gains arising at the time of entering into the hedge, are deferred and included in the measurement of the anticipated transaction when the transaction has occurred as designated. Any gains or losses on the hedge transaction after that date are included in the statement of financial performance. The net amounts receivable or payable under forward rate agreements and the associated deferred gains or losses are recorded in the statement of financial position from the date of inception of the hedge transaction. When recognised the net receivables or payables are then revalued using the foreign currency rate current at reporting date. When the anticipated transaction is no longer expected to occur as designated, the deferred gains and losses relating to the hedged transaction are recognised immediately in the statement of financial performance. Net investment in foreign operation Foreign exchange differences relating to foreign currency transactions hedging a net investment in a self-sustaining foreign operation, together with any related income tax expense/revenue, are transferred to the foreign currency translation reserve on consolidation. Other hedges All other hedge transactions are initially recorded at the relevant rate at the date of the transaction. Hedges outstanding at reporting date are valued at the rates ruling on that date and any gains or losses are brought to account in the statement of financial performance. Costs or gains arising at the time of entering into the hedge are deferred and amortised over the life of the hedge. (g) Taxation The consolidated entity adopts the income statement liability method of tax effect accounting. Income tax expense/(benefit) is calculated on the profit/(loss) from ordinary activities adjusted for permanent differences between taxable and accounting income. The tax effect of timing differences, which arise from items being brought to account in different periods for income tax and accounting purposes, is carried forward in the statement of financial position as a future income tax benefit or a provision for deferred income tax. Future income tax benefits are not brought to account unless realisation of the asset is assured beyond reasonable doubt, or if relating to tax losses when realisation is virtually certain. Tax consolidation The Company is the head entity in the tax-consolidated group comprising all the Australian wholly-owned subsidiaries set out in Note 22. The implementation date for the tax-consolidated group was 1 July 2004. The head entity recognises all of the current and deferred tax assets and liabilities of the tax-consolidated group (after elimination of intragroup transactions). (h) Acquisitions of assets All assets acquired including property, plant and equipment and intangibles, other than goodwill, are initially recorded at their cost of acquisition at the date of acquisition, being the fair value of the consideration provided plus incidental costs directly attributable to the acquisition. When equity instruments are issued as consideration, their market price at the date of acquisition is used as fair value, except where the notional price at which they could be placed in the market is a better indication of fair value. Transaction costs arising on the issue of equity instruments are recognised directly in equity subject to the extent of proceeds received, otherwise expensed. Expenditure, other than research and development costs, is only recognised as an asset when the consolidated entity controls future economic benefits as a result of the costs incurred that are probable and can be measured reliably. Costs attributable to feasibility and alternative approach assessments are expensed as incurred. Research and development costs Research and development expenditure is expensed as incurred, except to the extent that its recoverability is assured beyond any reasonable doubt, in which case it is capitalised. 36 1 Statement of significant accounting policies (continued) (h) Acquisitions of assets (continued) Subsequent additional costs Costs incurred on assets subsequent to initial acquisition are capitalised when it is probable that future economic benefits in excess of the originally assessed performance of the asset will flow to the consolidated entity in future years. Costs that do not meet the criteria for capitalisation are expensed as incurred. (i) Use and revision of accounting estimates The preparation of the financial report requires the making of estimations and assumptions that affect the recognised amounts of assets, liabilities, revenues and expenses and the disclosure of contingent liabilities. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. (j) Receivables The collectibility of debts is assessed at reporting date and specific provision is made for any doubtful accounts. Trade and other debtors to be settled within 90 days are carried at amounts due. Term debtors are carried at amounts due when a market rate of interest is charged. Where a market interest rate is not charged on amounts not settled within 90 days, the amount receivable is discounted to present value. (k) Inventories Raw materials and stores, work in progress and finished goods are carried at the lower of cost allocated and net realisable value. Cost includes direct materials, direct labour, other direct variable costs and allocated production overheads necessary to bring inventories to their present location and condition, based on normal operating capacity of the production facilities. Manufacturing activities The cost of manufacturing inventories and work-in-progress are assigned on a first-in, first-out basis. Costs arising from exceptional wastage are expensed as incurred. Net realisable value Net realisable value is determined on the basis of each inventory line’s normal selling pattern. Expenses of marketing, selling and distribution to customers are estimated and are deducted to establish net realisable value. (l) Investments Controlled entities Investments in controlled entities are carried in the Company’s financial statements at the lower of cost and recoverable amount. Refer Note 1(n). Associates In the Company’s financial statements, investments in unlisted shares of associates are carried at the lower of cost and recoverable amount. (m) Leased assets Leases and hire purchase agreements under which the Company or its controlled entity assumes substantially all the risks and benefits of ownership are classified as finance leases. Other leases are classified as operating leases. Finance leases Leased assets are capitalised. A lease asset and a lease liability equal to the present value of the minimum lease payments are recorded at the inception of the lease. Lease liabilities are reduced by repayments of principal. The interest components of the lease payments are expensed. Contingent rentals are expensed as incurred. Operating leases Payments made under operating leases are expensed on a straight-line basis over the term of the lease, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. (n) Recoverable amount of non-current assets valued on cost basis The carrying amounts of non-current assets valued on the cost basis are reviewed to determine whether they are in excess of their recoverable amount at reporting date. If the carrying amount of a non-current asset exceeds its recoverable amount, the asset is written down to the lower amount. The write-down is expensed in the reporting period in which it occurs. Where a group of assets working together supports the generation of cash inflows, recoverable amount is assessed in relation to that group of assets. In assessing recoverable amounts of non-current assets the relevant cash flows have not been discounted to their present value. 37 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Notes to the Financial Statements For the year ended 30 June 2005 1 Statement of significant accounting policies (continued) (o) Depreciation and amortisation Complex assets The components of major assets that have materially different useful lives, are effectively accounted for as separate assets, and are separately depreciated. Useful lives All assets including intangibles, have limited useful lives and are depreciated/amortised using the straight-line method over their estimated useful lives, taking into account estimated residual values, with the exception of freehold land and finance lease assets which are amortised over the term of the relevant lease, or where it is likely the consolidated entity will obtain ownership of the asset, the life of the asset. Assets are depreciated or amortised from the date of acquisition. Depreciation and amortisation rates and methods are reviewed annually for appropriateness. When changes are made, adjustments are reflected prospectively in current and future periods only. Depreciation and amortisation are expensed, except to the extent that they are included in the carrying amount of another asset as an allocation of production overheads. The depreciation/amortisation rates for each class of asset are within the following ranges: 2005 % Buildings Leasehold improvements Plant and equipment Leased plant and equipment Intellectual property Goodwill Deferred expenditure (p) Payables Liabilities are recognised for amounts to be paid in the future for goods or services received. Trade accounts payable are normally settled within 60 days. (q) Employee benefits Wages, salaries and annual leave Liabilities for employee benefits to wages, salaries and annual leave expected to be settled within 12 months represent present obligations resulting from employees’ services provided up to the reporting date, calculated at undiscounted amounts based on wage and salary rates that the consolidated entity expects to pay as at reporting date including related on-costs. 2.5 10 5-40 7-27 12.5 5 - 12.5 12.5 - 20 2004 % 2.5 5-40 7-27 12.5 12.5 12.5 Long service leave The provision for employee benefits to long service leave represents the present value of the estimated future cash outflows to be made resulting from employees’ services provided up to reporting date. The provision is calculated using estimated future increases in wage and salary rates including related on-costs and expected settlement dates based on turnover history and is discounted using the rates attaching to national government securities at reporting date which most closely match the terms of maturity of the related liabilities. The unwinding of the discount is treated as long service leave expense. Employee option plans Where share options are issued to employees as remuneration for past services, the difference between fair value of the options issued and the consideration received, if any, from the employee is expensed. The fair value of the shares or options issued is recorded in contributed equity. Other options issued to employees are recorded in contributed equity at the fair value of the consideration received, if any. Transaction costs associated with issuing options are recognised in equity subject to the extent of the proceeds received, otherwise expensed. Other administrative costs are expensed. Bonus plans A liability is recognised for profit bonus plans when there is no realistic alternative, the benefit calculations are formally documented and determined before signing the financial report and past practice supports the calculation. Superannuation plan The consolidated entity contributes to defined contribution employee superannuation plans. Contributions are charged against income as they are made. (r) Provisions A provision is recognised when a legal, equitable or constructive obligation arises as a result of a past event and it is probable that a future sacrifice of economic benefits will be required to settle the obligation, the timing and amount of which is uncertain. If the effect is material, a provision is determined by discounting the expected future cash flows (adjusted for expected future risks) required to settle the obligation at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability, being risk free rates on government bonds most closely matching the expected future payments, except where noted below. The unwinding of the discount is treated as part of the expense related to the particular provision. (s) Share issue costs Transaction costs arising on the issue of equity instruments are recognised directly in equity as a reduction of the proceeds of the equity instruments to which the costs relate. 38 1 Statement of significant accounting policies (continued) (t) Earnings per share Basic earnings per share (“EPS”) is calculated by dividing the net profit/(loss) attributable to members of the parent entity for the reporting period, after excluding any costs of servicing equity (other than ordinary shares) by the weighted average number of ordinary shares of the Company. Diluted EPS is calculated by dividing the basic EPS earnings, adjusted by the after tax effect of financing costs associated with dilutive potential ordinary shares and the effect on revenues and expenses of conversion to ordinary shares associated with dilutive potential ordinary shares, by the weighted average number of ordinary shares and dilutive potential ordinary shares. (u) Interest-bearing liabilities Loans are recognised at the principal amount. Interest expense is accrued at the contracted rate and included in payables. (v) Intellectual property Intellectual property is carried at cost, being the fair value of consideration provided and is amortised over its estimated useful life, being eight years. (w) Borrowing costs Borrowing costs include interest, amortisation of ancillary costs incurred in connection with the arrangement of borrowings and finance charges in respect of hire purchase agreements. Borrowing costs are expensed as incurred. Ancillary costs incurred in connection with the arrangement of borrowings are amortised over their life. (x) Goodwill Goodwill represents the excess of the purchase consideration plus incidental costs over the fair value of the identifiable net assets acquired. For associates, the consolidated financial statements include the carrying amount of goodwill in the equity accounted investment carrying amounts. (y) Financial instruments issued Other financial instruments Where financial instruments, such as convertible notes issued by the Company, give rise to a contractual obligation to deliver cash to the holder, they are classified as liabilities to the extent of the obligation. Where financial instruments are redeemable at the option of the holder, redeemable at a fixed date or perpetual instruments with cumulative interest obligations, the proceeds received are classified as a liability and related distribution as interest expense. Where financial instruments are redeemable but either the holder or the Company has an option to convert them into ordinary shares of the Company, they are classified as compound instruments. The liability component is measured as the present value of the principal and interest obligations, discounted at the prevailing market rate for a similar liability that does not have an equity component. The residual of the net proceeds received on issuing the instrument is classified as equity. Interest expense on compound instruments is determined based on the liability component and includes the actual interest paid to holders. The liability accrues over the life of the instruments to the original face value if they are not previously converted. There are no dividends associated with the equity component. CONSOLIDATED 2005 $’000 2004 $’000 63,727 63,727 2005 $’000 81,006 81,006 THE COMPANY 2004 $’000 63,727 63,727 2 Revenue from ordinary activities Sale of goods revenue from operating activities Rendering of services revenue from operating activities Other revenues: From operating activities Interest - other parties Net foreign exchange gain Sundry Income From outside operating activities Gross proceeds from sale of non-current assets Total other revenues Total revenue from ordinary activities 26 433 82,470 55 413 64,140 26 433 81,439 55 413 64,140 209 198 50 308 209 198 50 308 81,006 1,031 82,037 39 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Notes to the Financial Statements For the year ended 30 June 2005 CONSOLIDATED 2005 $’000 2004 $’000 2005 $’000 THE COMPANY 2004 $’000 3 (Loss) / profit from ordinary activities before income tax benefit / (expense) (a) Individually significant expenses included in (loss) / profit from ordinary activities before income tax benefit / (expense) Restructuring expenses Discontinued merger negotiations Legal matters Provision for doubtful debt in respect of controlled entity (b) (Loss) / profit from ordinary activities before income tax benefit / (expense) has been arrived at after charging / (crediting) the following items: Depreciation of: Buildings Plant and equipment Amortisation of: Deferred expenditure Leasehold improvements Leased plant and equipment Intangible assets Total depreciation and amortisation Borrowing costs: Related parties - Borrowings - Interest on Convertible Notes Other parties - Finance charges on hire purchase agreements - Interest on Convertible Notes - Interest on deferred business acquisition settlement - Amortisation of deferred expenditure - Other interest costs 52 518 42 253 2,679 30 170 18 683 52 518 42 253 2,679 30 170 18 683 1,253 561 465 1,253 561 465 22 1 100 342 2,187 20 55 396 1,841 22 1 100 308 1,904 20 55 396 1,830 224 1,498 224 1,146 224 1,249 224 1,135 2,362 1,500 950 4,812 (100) (100) 880 1,500 950 704 4,034 (100) (100) 40 CONSOLIDATED 2005 $’000 2004 $’000 2005 $’000 THE COMPANY 2004 $’000 3 (Loss) / profit from ordinary activities before income tax benefit / (expense) (continued) (b) (Loss) / profit from ordinary activities before income tax benefit (expense) has been arrived at after charging / (crediting) the following items: (continued) Net bad and doubtful debts expense including movements in provision for doubtful debts Net foreign exchange loss/(gain) Net (gain) on disposal of non-current assets Operating lease rental expense: Minimum lease payments Research and development expenditure: Expenses as incurred 745 1,560 (4) 594 10,318 163 (308) (7) 224 8,215 702 1,744 (4) 486 10,318 163 (308) (7) 206 8,215 4 Auditor’s remuneration Audit services: Audit and review of the financial reports Other services: Other assurance services Transaction due diligence services Capital raising services 44,159 480,878 65,000 590,037 688,537 27,374 45,000 72,374 157,374 44,159 480,878 65,000 590,037 685,037 27,374 45,000 72,374 155,374 98,500 85,000 95,000 83,000 5 Taxation (a) Income tax (benefit) / expense Prima facie income tax (benefit) / expense calculated at 30% (2004: 30%) on the (loss) / profit from ordinary activities Change in income tax (benefit) / expense due to: Non-deductible expenses Research and development allowance Recovery of tax losses not previously brought to account Future income tax benefit not brought to account Income tax (benefit) / expense on (loss) / profit from ordinary activities 28 (581) 3,802 57 36 (532) (113) 40 28 (581) 3,688 36 (532) (128) (3,192) 649 (3,135) 624 41 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Notes to the Financial Statements For the year ended 30 June 2005 5 Taxation (continued) (b) Future income tax benefit not taken to account A potential future income tax benefit of $12,646,000 (2004: $11,045,000) attributable to tax losses and $1,401,000 (2004: $675,000) attributable to timing differences has not been recognised as an asset because recovery of tax losses is not virtually certain and recovery of timing differences is not assured beyond any reasonable doubt. The potential future income tax benefit will only be obtained if: (i) (ii) (iii) the relevant company derives future assessable income of a nature and an amount sufficient to enable the benefit to be realised; the relevant company and/or the consolidated entity continues to comply with the conditions for deductibility imposed by the law; and no changes in tax legislation adversely affect the relevant company and/or the consolidated entity in realising the benefit. (c) Dividend franking account There are no franking credits available to shareholders for future financial years. CONSOLIDATED 2005 $’000 2004 $’000 2,443 2005 $’000 588 THE COMPANY 2004 $’000 2,429 6 Cash assets Cash at bank and on hand 752 7 Receivables Current Trade debtors Less: Provision for doubtful trade debtors Other debtors Non-current Term debtors Loans to controlled entities Less: Provision for doubtful debt in respect of controlled entity 5,218 2,436 5,218 2,436 5,218 4,075 (704) 8,589 2,489 2,489 44,802 (964) 43,838 350 44,188 30,567 (219) 30,348 148 30,496 44,165 (921) 43,244 304 43,548 30,567 (219) 30,348 148 30,496 8 Inventories Current Raw materials and stores – at cost Less: Provision for obsolescence Finished goods – at cost Less: Provision for obsolescence Work in progress – at cost Stock in transit – at cost 24,432 (563) 23,869 10,067 (385) 9,682 875 1,152 35,578 11,833 (321) 11,512 5,347 (179) 5,168 932 17,612 24,432 (563) 23,869 10,067 (385) 9,682 875 1,152 35,578 11,833 (321) 11,512 5,316 (179) 5,137 932 17,581 42 CONSOLIDATED Note 2005 $’000 2004 $’000 2005 $’000 THE COMPANY 2004 $’000 9 Other assets Current Prepayments Deferred expenditure Non-current Deferred expenditure At cost Accumulated amortisation 916 (310) 606 125 (35) 90 916 (310) 606 125 (35) 90 390 400 790 688 688 312 400 712 585 585 10 Investments accoiunted for using the equity method Associates 23 2,203 - 11 Property, plant and equipment Freehold land and buildings At cost Accumulated depreciation 14,844 (630) 14,214 Leasehold improvements At cost Accumulated amortisation Plant and equipment At cost Accumulated depreciation Leased plant and equipment At capitalised cost Accumulated amortisation Total property, plant and equipment net book value Refer to Note 15 for details of security over freehold land and buildings. 610 (182) 428 18,656 435 (82) 353 18,217 610 (182) 428 18,491 435 (82) 353 18,161 8,299 (4,295) 4,004 6,537 (3,111) 3,426 8,054 (4,215) 3,839 6,470 (3,100) 3,370 11 (1) 10 11 (1) 10 14,844 (406) 14,438 14,844 (630) 14,214 14,844 (406) 14,438 43 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Notes to the Financial Statements For the year ended 30 June 2005 CONSOLIDATED 2005 $’000 2004 $’000 2005 $’000 THE COMPANY 2004 $’000 11 Property, plant and equipment Reconciliations (continued) Reconciliations of the carrying amounts for each class of property, plant and equipment are set out below: Freehold land and buildings Carrying amount at beginning of year Additions Depreciation Carrying amount at end of year Leasehold improvements Carrying amount at beginning of year Additions Amortisation Carrying amount at end of year Plant and equipment Carrying amount at beginning of year Additions Disposals Depreciation Carrying amount at end of year Leased plant and equipment Carrying amount at beginning of year Additions Amortisation Carrying amount at end of year 353 175 (100) 428 219 189 (55) 353 353 175 (100) 428 219 189 (55) 353 3,426 2,098 (22) (1,498) 4,004 3,597 1,023 (48) (1,146) 3,426 3,370 1,740 (22) (1,249) 3,839 3,597 956 (48) (1,135) 3,370 11 (1) 10 11 (1) 10 14,438 (224) 14,214 14,662 (224) 14,438 14,438 (224) 14,214 14,662 (224) 14,438 44 CONSOLIDATED Note 2005 $’000 2004 $’000 2005 $’000 THE COMPANY 2004 $’000 12 Intangible assets Intellectual property At cost Accumulated amortisation Goodwill At cost Accumulated amortisation 2,841 (480) 2,361 3,067 1,432 (267) 1,165 2,000 1,432 (446) 986 1,692 1,432 (267) 1,165 2,000 1,029 (323) 706 1,029 (194) 835 1,029 (323) 706 1,029 (194) 835 13 Payables Current Trade creditors Other creditors and accruals Revenue in advance Amount payable to director/shareholder controlled company Non-current Amount payable to controlled entity 246 85 11,474 12,059 72 1,794 25,399 9,705 5,207 136 553 15,601 11,436 10,885 72 1,794 24,187 9,703 5,066 136 553 15,458 14 Interest-bearing liabilities Current Hire purchase liabilities Amount payable for VGS acquisition Non-current Hire purchase liabilities Amount payable to director/shareholder controlled entity - secured Convertible notes 21 15 17 354 26,300 22,787 49,441 280 15,000 15,280 335 26,300 22,787 49,422 280 15,000 15,280 21 193 193 98 1.604 1,702 193 193 98 1,604 1,702 45 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Notes to the Financial Statements For the year ended 30 June 2005 CONSOLIDATED 2005 $’000 2004 $’000 2005 $’000 THE COMPANY 2004 $’000 15 Financing arrangements The consolidated entity has access to the following lines of credit: Total facilities available: Loan from director/shareholder controlled entity Letter of credit facility Facilities utilised at reporting date: Loan from director/shareholder controlled entity Letter of credit facility Facilities not utilised at reporting date: Loan from director/shareholder controlled entity Letter of credit facility 3,700 746 4,446 Loan facility and credit stand-by arrangements The loan facility is provided by an entity controlled by Mr LH Ainsworth, a director and shareholder of the Company. This facility is secured by a first debenture mortgage over the consolidated entity’s freehold land and buildings at 10 Holker Street Newington, NSW, which has a carrying amount of $14,214,000 as at 30 June 2005. Refer Note 11. Interest on the loan facility is charged at a rate more favourable than that which can be obtained from the consolidated entity’s bankers and at arms length in the open market. The weighted average interest rate on the loan facility at 30 June 2005 is 6%. Interest is payable monthly in arrears or otherwise as agreed between the parties. The loan facility is for an initial term of five years from 13 September 2002 thereafter repayment terms as negotiated between the parties. Letter of credit facility A letter of credit facility has been established with the consolidated entity’s bankers for $3,750,000. Draw downs against this facility of $3,004,000 at 30 June 2005 were included in trade creditors in Note 13. This facility is subject to annual review and is secured by a fixed and floating charge given by the Company. 5,000 338 5,338 3,700 746 4,446 5,000 338 5,338 26,300 3,004 29,304 15,000 1,462 16,462 26,300 3,004 29,304 15,000 1,462 16,462 30,000 3,750 33,750 20,000 1,800 21,800 30,000 3,750 33,750 20,000 1,800 21,800 46 CONSOLIDATED Note 2005 $’000 2004 $’000 2005 $’000 THE COMPANY 2004 $’000 16 Provisions Current Employee benefits Restructuring expenses Non-current Employee benefits Reconciliations Reconciliations of the Company amounts of each class of provision, except for employee benefits, are set out below: Restructuring expenses Carrying amount at beginning of year Provisions / (write-backs) made during the year Payments made during the year Carrying amount at end of year 960 (100) (860) 960 (100) (860) 25 562 199 445 199 25 1,685 1,685 917 917 1,482 1,482 917 917 17 Contributed equity Share capital Ordinary shares, fully paid Other contributed equity 19,714,717 (2004: Nil) Convertible notes - equity portion (b) 149,185,377 (a) Ordinary Shares Movements in ordinary share capital of the Company during the past two years were as follows: Date 1 July 2003 29 December 2003 29 December 2003 13 December 2004 31 December 2004 2 March 2005 30 June 2005 Details Opening balance Issued shares pursuant to rights issue Transaction costs from issue of shares Issued shares on consideration for acquisition Adjustment for GST on IPO costs Issued shares on consideration for acquisition Number of shares 115,000,000 32,860,377 1,200,000 125,000 149,185,377 $0.41 $1.07 $0.77 Issue price $’000 59,834 13,473 (500) 1,284 (134) 96 74,053 147,860,377 2,842 76,895 72,807 (a) 149,185,377 147,860,377 74,053 72,807 47 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Notes to the Financial Statements For the year ended 30 June 2005 17 Contributed equity (continued) (a) Ordinary Shares (continued) On 13 December 2004 the Company issued 1.2 million ordinary shares at a value of $1.07 per ordinary share based on the share price on that day, in full settlement for part of the assets and business of Bytecraft (NSW) Pty Ltd. This acquisition represented Bytecraft’s Sydney based gaming venue installation and maintenance business in New South Wales. On 2 March 2005 the Company issued 125,000 ordinary shares with a value of $0.77 per ordinary share based on the share price on that day, in part settlement for all of the issued shares in Bull Club Services Pty Ltd. The remaining settlement was $125,000 in cash. The financial advisor to the Initial Public Offering (“IPO”) received 2,300,000 share options following the listing of the Company on the Australian Stock Exchange on 17 December 2001. These share options entitle the financial advisor to one ordinary share for every share option held on exercise, with the exercise price being the Issue Price of the IPO, being $1.00, and have an exercise period of 5 years from the issue date of these options. No share options have been exercised during the financial year ended 30 June 2005. These share options have vested and may be exercised at any time during the exercise period and do not include any performance hurdles. Terms and conditions Holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders’ meetings. In the event of winding up of the Company, ordinary shareholders rank after creditors and are fully entitled to any proceeds on liquidation. (b) Convertible notes Movements during the year CONSOLIDATED 2005 $’000 Balance at beginning of year Equity portion of 19,714,717 convertible notes issued during the year Balance at end of year 2,842 2,842 2004 $’000 2005 $’000 2,842 2,842 THE COMPANY 2004 $’000 - On 20 December 2004 the company issued 19,714,717 convertible notes at an issue price of $1.30 per convertible note. The interest rate on the convertible notes is fixed at 8.0% per annum. Interest is payable semi-annually on each 30 June and 31 December until 31 December 2009, unless the convertible note is earlier redeemed or converted, in which case interest will be paid up until the date of such conversion or redemption. The first interest payment date is 30 June 2005 and interest accrues from the issue date. The conversion dates will occur on 31 December 2007 and at the maturity date on 31 December 2009. Conversion dates could also occur under certain trigger events as outlined in the Prospectus dated 22 November 2004. The Company will redeem the convertible notes on the maturity date unless the convertible notes are converted or redeemed earlier. The convertible notes will be redeemed for the issue price of $1.30 per convertible note. If converted, the note holder receives one ordinary share for each note held with the same voting rights as all other shareholders. The notes do not give their holders any voting rights at shareholders’ meetings. The convertible notes have been accounted for as compound financial instruments in accordance with accounting policy note 1(y). 48 17 Contributed equity (continued) (b) Convertible notes (continued) Terms and conditions These notes do not give their holders any voting rights at shareholders’ meetings, however, the Trustee for the notes has the right to veto any decision prejudicial to the note holders. In the event of winding up of the Company, ordinary shareholders rank after creditors and are fully entitled to any proceeds on liquidation. The proceeds received have been accounted for as follows: CONSOLIDATED Note Non-current interest-bearing liabilities Contributed equity 14 2005 $’000 22,787 2,842 25,629 2004 $’000 2005 $’000 22,787 2,842 25,629 THE COMPANY 2004 $’000 - 18 Reserves Foreign currency translation Movements during the year (a) Foreign currency translation Balance at beginning of year Exchange difference on net investment in foreign operations Balance at end of year 7 8 15 7 7 (a) 15 7 - Nature and purpose of reserve Foreign currency translation The foreign currency translation reserve records the foreign currency difference arising from the translation of self-sustaining foreign operations. Refer to accounting policy Note 1(e). 19 Accumulated losses Accumulated losses at the beginning of year Net (loss) / profit Accumulated losses at the end of the year (32,571) (10,640) (43,211) (34,693) 2,122 (32,571) (32,617) (10,449) (43,066) (34,698) 2,081 (32,617) 49 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Notes to the Financial Statements For the year ended 30 June 2005 20 Additional financial instruments disclosure (a) Interest rate risk The consolidated entity’s exposure to interest rate risk and the effective weighted average interest rate for classes of financial assets and financial liabilities is set out below. Fixed interest maturing in: Weighted average interest rate Floating interest rate $’000 1 year or less $’000 1 to 5 years $’000 more than 5 years $’000 Non-interest bearing $’000 Total $’000 Note 2005 Financial assets Cash assets Receivables Financial liabilities Payables Loan from director/shareholder Convertible notes Employee benefits Hire purchase liabilities 2004 Financial assets Cash assets Receivables Financial liabilities Payables Loan from director/shareholder Amount payable on business asset acquisition Employee benefits Hire purchase liabilities 13 14 14 16 14 4.5% 5.0% 7.0% 5.5% 8.5% 1,462 199 1,661 1,604 98 1,702 15,000 280 15,280 14,139 917 15,056 15,601 15,000 1,604 1,116 378 33,699 6 7 12.0% 3,505 3,505 1,898 1,898 2,443 27,529 29,972 2,443 32,932 35,375 13 14 14 16 14 6.0% 6.0% 8.0% 5.5% 8.2% 562 562 193 193 1,794 26,300 22,787 354 51,235 23,605 1,685 25,290 25,399 26,300 22,787 2,247 547 77,280 6 7 10.2% 17,695 17,695 4,284 4,284 752 27,427 28,179 752 49,406 50,158 50 20 Additional financial instruments disclosure (continued) (b) Foreign exchange risk The consolidated entity enters into forward foreign exchange option contracts to hedge a proportion of anticipated purchase and sale commitments denominated in foreign currencies (principally US dollars) expected in each month, within the following year subject to Board approved limits. The amount of anticipated future purchases and sales is forecast in light of current conditions in foreign markets, commitments from customers and experience. All sales and purchases from the first of each month are designated as being hedged until all hedge contracts are fully utilised. Notes 1(e) and 1(f) set out the accounting treatment for these contracts. The following table sets out the gross value to be received under foreign currency contracts, the weighted average contracted exchange rates and the settlement periods of outstanding contracts for the consolidated entity. CONSOLIDATED 2005 2004 Weighted average rate Sell US dollars Not later than one year 0.73 2005 $’000 2004 $’000 24,540 The net deferred costs on hedges of anticipated foreign currency and sales recognised in other creditors and accruals at Note 13 and the timing of their anticipated recognition as part of sales are: CONSOLIDATED Net gains/(losses) 2005 2004 $’000 $’000 Sell US dollars Not later than one year (c) Credit risk exposures Credit risk is the loss that would be recognised if counter parties failed to perform as contracted. Recognised financial instruments The credit risk on financial assets of the consolidated entity, which have been recognised on the statement of financial position, is the carrying amount, net of any provision for doubtful debts. The consolidated entity attempts to minimise concentrations of credit risk and undertakes to perform due diligence procedures on major new customers. Concentration of credit risk on trade and term debtors exists from customers. A customer in Russia owed 15% (2004: 39%) and a Mexican customer owed 22% (2004: 6%) of the total trade and term debtors at balance date. Unrecognised financial instruments Credit risk on derivative contracts which have not been recognised on the statement of financial position is minimised as counterparties are recognised financial intermediaries with acceptable credit ratings determined by a recognised ratings agency. (d) Net fair values of financial assets and liabilities Valuation approach Net fair values of financial assets and liabilities are determined by the consolidated entity on the following bases: Recognised financial instruments Monetary financial assets and financial liabilities not readily traded in an organised financial market are determined by valuing them at the present value of contractual future cash flows on amounts due from customers (reduced for expected credit losses) or due to suppliers. Cash flows are discounted using standard valuation techniques at the applicable on-market yield having regard to the timing of the cash flows. The carrying amounts of cash assets, trade debtors, other debtors, payables, convertible notes, hire purchase liabilities and employee benefits approximate net fair value. The fair value of the loan from a company controlled by a director/shareholder is $24,159,634 (2004: $13,493,673) with a carrying amount of $26,300,000 (2004: $15,000,000). Unrecognised financial instruments The valuation of financial instruments not recognised on the statement of financial position detailed in this note reflects the estimated amounts which the consolidated entity expects to pay or receive to terminate the contracts (net of transaction costs), or replace the contracts at their current market rates as at reporting date. This is based on independent market quotations and determined using standard valuation techniques. (240) 51 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Notes to the Financial Statements For the year ended 30 June 2005 CONSOLIDATED Note 2005 $’000 2004 $’000 2005 $’000 THE COMPANY 2004 $’000 21 Commitments Hire purchase payment commitments Hire purchase commitments are payable: Within one year One year or later and no later than five years Less: Future hire purchase finance charges Hire purchase liabilities provided for in the financial statements: Current Non-current Total hire purchase liability 14 14 193 354 547 98 280 378 193 335 528 98 280 378 237 374 611 (64) 547 125 305 430 (52) 378 231 357 588 (60) 528 125 305 430 (52) 378 The consolidated entity acquires plant and equipment under hire purchase agreements expiring from one to three years. Non-cancellable operating lease expense commitments Future operating lease commitments not provided for in the financial statements and payable: Within one year One year or later and no later than five years 428 261 689 355 294 649 280 280 284 128 412 The consolidated entity leases property under non-cancellable operating leases expiring from one to three years and generally provide the consolidated entity with a right of renewal at which time all terms are renegotiated. Leases comprise a base amount plus an incremental contingent rental. Contingent rentals are based on either movements in the Consumer Price Index or operating criteria. Employee remuneration commitments The consolidated entity has entered into employment contracts with certain employees. Those agreements contemplate an initial term of between three and five years, subject to rights of termination. Specified executives (excluding directors) Commitments under non-cancellable employment contract not provided for in the financial statements and payable: Within one year One year or later and no later than five years 594 1,386 1,980 661 2,203 2,864 594 1,386 1,980 661 2,203 2,864 52 22 Controlled entities (a) Particulars in relation to controlled entities Country of Incorporation Ordinary Shares Consolidated Entity Interest 2005 % Parent Company Ainsworth Game Technology Limited Controlled entities AGT Pty Ltd Ainsworth Game Technology Inc (USA) Ainsworth Game Technology (UK) Ltd Ainsworth International GmbH Ainsworth Game Technology (NZ) Limited AGT Service Pty Ltd AGT Service (NSW) Pty Ltd Bull Club Services Pty Ltd Australia 2004 % - Australia USA UK Austria New Zealand Australia Australia Australia 100 100 100 100 100 100 100 100 100 100 100 100 100 - (b) Acquisition of controlled entities During the financial year the consolidated entity purchased 100% of the voting shares of AGT Service (NSW) Pty Ltd and Bull Club Services Pty Ltd. Details of these acquisitions are as follows: CONSOLIDATED 2005 $’000 Consideration Cash acquired Shares issued in lieu of consideration Outflow of cash Fair value of net assets of entities acquired: Cash assets Receivables Inventories Property, plant and equipment Payables Hire purchase liabilities Employee entitlements provisions Goodwill on acquisition Consideration 42 279 73 102 (45) (21) (334) 96 1,409 1,505 1,505 (42) (1,380) 83 2004 $’000 2005 $’000 THE COMPANY 2004 $’000 - AGT Service (NSW) Pty Ltd and Bull Club Services Pty Ltd were acquired on 13 December 2004 and 2 March 2005 respectively. The operating results of the entities from these dates have been included in the consolidated operating profit. The entities perform venue maintenance services within New South Wales. For further details refer note 17. 53 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Notes to the Financial Statements For the year ended 30 June 2005 22 Controlled entities (continued) (c) Acquisition of business assets On 2 January 2003 the consolidated entity acquired the business and intellectual property of Victorian Gaming Systems Manufacturing Pty Ltd, a Victorian based gaming machine manufacturer and distributor for a total potential consideration of $3,268,000. The balance of the maximum possible purchase price of $2,709,000 was deferred of which $1,500,000 was only payable on achieving established performance criteria. This criterion has been achieved and goodwill of $1,432,000 was recorded. The balance of the purchase price of $1,604,000 was paid in the 30 June 2005 financial year. CONSOLIDATED Note 2005 $’000 2004 $’000 2005 $’000 THE COMPANY 2004 $’000 23 Investments accounted for using the equity method Share of net profits accounted for using the equity method included in the statement of financial performance - Associates (a) Investments in associates Details of investments in associates are as follows: Ordinary share Ownership Interest Investment carrying amount (a) 203 - - - Name J & A Machines Pty Ltd RE & R Baker and Associates Pty Ltd Principal Activities Service Service Reporting Date 30 June 30 June CONSOLIDATED AND THE COMPANY 2005 2004 % % 49 49 - CONSOLIDATED 2005 2004 $’000 $’000 1,964 239 2,203 - THE COMPANY 2005 2004 $’000 $’000 - 54 CONSOLIDATED 2005 $’000 2004 $’000 23 Investments accounted for using the equity method (continued) (a) Investments in associates (continued) Share of post-acquisition retained profits and reserves attributable to associates Retained profits Share of associates retained profits at beginning of year Share of associates net profits accounted for using the equity method Share of associates retained profits at end of year Movements in carrying amount of investments Carrying amount of investments in associates at beginning of year Investments in associates acquired during the year Share of associates net profit Carrying amount of investments in associates at end of year Contingent liabilities Share of associates contingent liabilities (i) Guaranteed bank facilities (ii) Retirement benefits payable on termination in certain circumstances to directors under service agreements Summary financial position of associates The consolidated entity’s share of aggregate assets and liabilities of associates is as follows: Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets - as reported by associates Adjustments arising from equity accounting: Goodwill (net of amortisation) Net assets - equity adjusted 1,558 2,203 367 550 917 259 13 272 645 100 2,000 203 2,203 203 203 - 180 - 55 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Notes to the Financial Statements For the year ended 30 June 2005 24 Notes to the statements of cash flows (a) Reconciliation of cash For the purpose of the statements of cash flows, cash includes cash on hand and at bank. Cash as at the end of the financial year as shown in the statements of cash flows is reconciled to the related items in the statements of financial position as follows: CONSOLIDATED Note Cash at bank and on hand (b) Reconciliation of (loss) / profit from ordinary activities after income tax to net cash used in operating activities (Loss) / profit from ordinary activities after income tax Add/(less) items classified as investing/ financing activities: Profit on sale of non-current assets Add/(less) non-cash items: Depreciation and amortisation Amounts set aside to provisions Increase in income taxes payable Share of associates Net exchange differences Net cash provided by / (used in) operating activities before change in assets and liabilities Change in assets and liabilities adjusted for effects of purchase of business during the financial year: (Increase)/decrease in trade receivables (Increase)/decrease in inventories (Increase)/decrease in other assets (Decrease)/increase in payables Net cash used in operating activities (16,940) (18,341) 192 9,189 (32,378) (27,236) (3,224) (322) 10,931 (17,442) (20,558) (18,445) 147 11,100 (33,495) (27,289) (3,193) (219) 10,870 (17,516) 2,440 1,990 39 (203) (100) (6,478) 1,841 (1,587) 40 2,409 2,157 2,665 (108) (5,739) 1,830 (1,589) 2,315 (4) (7) (4) (7) (10,640) 2,122 (10,449) 2,081 6 2005 $’000 752 2004 $’000 2,443 2005 $’000 588 THE COMPANY 2004 $’000 2,429 (c) Non-cash financing and investment activities During the year, the consolidated entity acquired plant and equipment by means of hire purchase agreements amounting to $175,000 (2004: $189,000). During the year the consolidated entity issued 1,325,000 ordinary shares to acquire 100% of the voting shares in AGT Service (NSW) Pty Ltd and Bull Club Services Pty Ltd. Refer note 17. 56 Note 2005 $’000 CONSOLIDATED 2004 $’000 2005 $’000 THE COMPANY 2004 $’000 25 Employee benefits Aggregate liability for employee benefits, including on-costs Current Non-current 16 16 1,685 562 2,247 917 199 1,116 1,482 445 1,927 917 199 1,116 2005 Number of employees Number of employees at year end 297 2004 231 2005 292 2004 228 Employee Share Option Plan The Company has in place an Employee Share Option Plan (“ESOP”) approved on 30 July 2001. To be eligible to participate in the ESOP the employee must be selected by the directors and reviewed by the Remuneration Committee. Options may be exercised within a five-year period, starting on the first anniversary of the issue of the options (subject to earlier exercise where a takeover offer or takeover announcement is made, or a person becomes the holder of a relevant interest in 50% or more of the Company’s voting shares). The ESOP provides for employees to receive options for no consideration. Each option is convertible to one ordinary share. There are no voting or dividend rights attached to the unissued ordinary shares. Voting and dividend rights will be attached to the unissued ordinary shares when the options have been exercised. The exercise price of the options is determined in accordance with the rules of the ESOP. The ability to exercise the options is conditional on the achievement of performance hurdles. Accordingly, the plan does not represent remuneration for past services. The vesting and performance conditions of these share options are as follows: Date First Anniversary of Grant Date Second Anniversary of Grant Date Third Anniversary of Grand Date Vesting Condition (% of Options vesting) 25% 25% 50% Performance Condition (VWAP* must equal or exceed) $1.00 $1.20 $1.40 * The performance conditions measure the volume weighted average price at which Shares traded on the Australian Stock Exchange (ASX) for the most recent 20 Business Days upon each of which any shares were traded on ASX within 60 business days immediately preceding the relevant vesting date of those Options. On 31 August 2004 1,885,000 share options were issued. Of these share options issued, 765,000 were at an exercise price of $1.00 and 1,120,000 at an exercise price of $0.50. During the financial year 180,000 share options at $1.00 and 190,000 at $0.50 expired due to cessation of employment. As at 30 June 2005 1,515,000 of these share options were outstanding to 45 employees, being 585,000 at $1.00 and 930,000 at $0.50. As the share options have yet to reach the performance hurdles, no options are available to be exercised or have vested at 30 June 2005. The Company previously issued 2,560,000 share options to 85 employees on 7 December 2001. These share options have an exercise price of $1.00 and expire on 7 December 2006. During the current period 375,000 share options have expired due to cessation of employment. The share options outstanding at 30 June 2005 are 1,340,000 attributable to 45 employees (2004: 1,715,000). As the share options have yet to reach the performance hurdles, no options are available to be exercised or have vested at 30 June 2005. The market value of shares under the above options at 30 June 2005 was $0.46. Superannuation plans The Company and controlled entity contribute to various defined contribution superannuation plans. The Company and controlled entity have a legally enforceable obligation to contribute to the plans. 57 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Notes to the Financial Statements For the year ended 30 June 2005 26 Director and executive disclosures Remuneration of specified directors and specified executives by the consolidated entity Remuneration levels are competitively set to attract and retain appropriately qualified and experienced directors and senior executives. The Remuneration Committee obtains independent advice on the appropriateness of remuneration packages, given trends in comparative companies both locally and internationally. Remuneration packages include a mix of fixed remuneration, including non-monetary benefits, performance-based remuneration, and equity-based remuneration. The remuneration structures explained below are designed to attract suitably qualified candidates, and to effect the broader outcome of increasing the consolidated entity’s net profit. Senior executives may receive cash bonuses based on the achievement of specific performance hurdles. The performance hurdles are a blend of the consolidated entity’s and individual performance results. There is no separate profit-share plan. Options are issued under the Employee Share Option Plan. The ability to exercise the options is conditional on the consolidated entity achieving the above mentioned performance hurdles. The Board considers that the above performance-linked remuneration structure is generating the desired outcome. The evidence for this is firstly, the very strong growth in the current year, and secondly, the performance-linked element of the structure appears to be appropriate because most but not all of the executives achieve a level of performance which qualifies them for bonuses and options. Total remuneration for all non-executive directors, last voted upon by shareholders at the 2000 AGM, is not to exceed $500,000 per annum. Directors’ base fees are presently up to $50,000 per annum. Non-executive directors do not receive bonuses nor were they issued options on securities during the year as the Directors’ Option Plan was suspended. Mr SL Wallis was granted share options under the Directors’ Option Plan in the 2003 financial year. Directors’ fees cover all main board activities and membership of committees. Specified executives have employment agreements in place with the consolidated entity. The terms of these employment agreements allow for termination benefits of between 1 – 6 months excluding those disclosed in Note 21 to the financial statements. The termination benefits within Note 21 are for non-cancellable employment agreements in excess of a 6 month notice period. Amounts may be payable in excess of the above subject to mutual agreement and negotiation between the parties. The following table provides the details of all directors of the Company (“specified directors”) and the five or more executives of the consolidated entity with the greatest authority (“specified executives”) and the nature and amount of the elements of their remuneration for the year ended 30 June 2005. Post Employment Non-monetary Superbenefits annuation Benefits $ $ Primary Salary & Fees $ Specified directors Non-executive Current Mr SL Wallis Mr AR Amer Mr VB Matthews Former Mr JM Cowling Mr J Kehoe Mr DC Hall Bonus $ Equity Value of options $ Other compensation Termination benefits (A) $ Other benefits $ Total (A) $ 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 50,000 50,000 50,000 37,179 50,000 42,885 8,333 42,885 12,500 12,500 - - 4,500 4,500 4,500 3,346 750 3,860 1,125 1,125 9,735 17,594 9,461 25,661 - - 64,235 72,094 54,500 40,525 50,000 42,885 9,083 46,745 23,086 39,286 58 26 Director and executive disclosures (continued) Remuneration of specified directors and specified executives by the consolidated entity (continued) Primary Salary & Fees $ Executive Current Mr LH Ainsworth Former Mr JM Cowling Mr PR James Total, all specified directors Specified executives Current Mr DP Creary Mr PW Walford Mr ML Ludski Mr K Orchard Mr G Steiner Former Mr SW Eeles Mr HW Zeidler Total, all specified executives 2005 2004 2005 2004 2005 2004 150,000 146,833 171,875 277,083 2,003,979 1,269,530 32,000 25,000 86,000 21,823 22,482 20,771 34,686 210,026 155,842 13,500 13,215 15,469 24,937 152,507 104,572 18,241 9,315 145,390 75,261 44,879 198,962 243,841 9,417 53,667 33,000 239,619 232,771 407,077 371,021 2,809,410 1,724,205 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 137,564 253,487 180,500 156,834 473,503 273,679 637,050 415,101 29,000 20,833 36,610 37,713 24,065 20,143 85,924 40,818 12,381 15,415 16,245 14,115 79,497 52,305 80,750 14,873 11,932 18,241 7,784 7,828 30,051 21,636 11,250 33,000 33,000 241,945 304,608 278,287 288,903 505,352 301,650 832,522 529,860 Bonus $ Post Employment Non-monetary Superbenefits annuation Benefits $ $ Equity Value of options $ Other compensation Termination benefits (A) $ Other benefits $ Total (A) $ 2005 2004 2005 2004 2005 2004 2005 2004 200,000 183,335 100,000 46,433 458,333 427,717 - - 9,000 4,643 18,750 18,599 9,735 52,716 555,743 555,743 30,000 30,000 12,500 42,500 30,000 230,000 213,335 121,500 606,819 529,318 1,084,775 The above amounts do not include insurance premiums paid or payable in respect of Directors’ and Officers’ liability insurance contracts as disclosure of such amounts is prohibited under the terms of the insurance contract. Note (A) Mr SW Eeles and Mr HW Zeidler ceased employment during the financial year and termination benefits include statutory entitlements of $44,879 and $33,016 respectively. 59 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Notes to the Financial Statements For the year ended 30 June 2005 26 Director and executive disclosures (continued) Remuneration of specified directors and specified executives by the consolidated entity (continued) Equity instruments All options refer to options over ordinary shares of Ainsworth Game Technology Limited, which are exercisable on a one-for-one basis. Options and rights over equity instruments granted as remuneration During the reporting period, the following options over ordinary shares were granted and vested during the current year under the plan: Number of options granted during the year Specified executives Mr DP Creary Mr ML Ludski Mr PW Walford 1,000,000 50,000 70,000 70,000 15/02/05 31/08/04 31/08/04 31/08/04 $1.00 $0.50 $1.00 $0.50 15/02/10 31/08/09 31/08/09 31/08/09 $0.23 $0.06 $0.05 $0.06 Number of options vested during the year Fair value per option Grant Date Exercise Price Expiry Date No options have been granted since the end of the financial year. The options were provided at no cost to the recipients. All options expire on the earlier of their expiry date or termination of the individual’s employment. In addition to a continuing employment service condition, the ability to exercise options is conditional on the consolidated entity achieving certain performance hurdles. Further details, including grant dates and exercise dates regarding options granted to executives are in note 25. Exercise of options granted as remuneration During the reporting period no shares were issued on the exercise of options previously granted. Option holdings The movement during the reporting period in the number of options over ordinary shares in Ainsworth Game Technology Limited held, directly, indirectly or beneficially, by each specified director and specified executive, including their personally-related entities, is as follows: Held at 1 July 2004 Specified directors Current Mr SL Wallis Specified executives Current Mr DP Creary Mr ML Ludski Mr K Orchard Mr G Steiner Mr PW Walford Former Mr HW Zeidler 200,000 (200,000) 250,000 150,000 300,000 1,000,000 50,000 140,000 1,000,000 300,000 150,000 300,000 140,000 300,000 300,000 Other Changes* Held at 30 June 2005 Vested and exercisable at 30 June 2005 Granted Exercised No options held by specified directors or specified executives are exercisable. *Other changes represent options that expired or were forfeited during the year. 60 26 Director and executive disclosures (continued) Remuneration of specified directors and specified executives by the consolidated entity (continued) Equity instruments (continued) Option holdings (continued) Included in the share options granted to Mr Creary were 500,000 share options which were only capable of being exercised on the achievement of short term performance hurdles for the financial year ended 30 June 2005. These performance hurdles were not met and 500,000 share options will lapse on 31 August 2005. Directors’ Option Plan At the 2003 AGM the Directors’ Option Plan was suspended in relation to any further issuing of share options. Detailed below are share options issued prior to the suspension of the Directors’ Option Plan. Messrs DC Hall, SL Wallis and J Kehoe or permitted nominees were each issued 300,000 share options under the Directors’ Option Plan. These share options were issued on 25 November 2002 for nil consideration and have an exercise price of $1.15 each. The options have an exercise period of five years and expire on 25 November 2007 or earlier should they cease employment with the company unless otherwise approved by shareholders. These share options have the same terms and conditions as those issued under the ESOP (refer note 25). Messrs DC Hall and J Kehoe were each issued 300,000 share options to replace the previously issued share options that lapsed on their respective resignations. These share options were approved by the shareholders at the 2003 AGM and are issued under the same terms and conditions of the options that were originally issued. As the share options have yet to reach the performance hurdles, no options are available to be exercised at 30 June 2005. The market value of shares under these options at 30 June 2005 was $0.46. Equity holdings and transactions The movement during the reporting period in the number of ordinary shares of Ainsworth Game Technology Limited held, directly, indirectly or beneficially, by each specified director and specified executive, including their personally-related entities is as follows: Held at 1 July 2004 Specified directors Current Mr LH Ainsworth Mr VB Matthews Mr SL Wallis Mr AR Amer Former Mr JM Cowling Specified executives Current Mr DP Creary Mr K Orchard Former Mr HW Zeidler 125,572 (125,572) 9,090 20,000 25,437 (17,000) 20,000 17,527 64,286 250,000 (314,286) 88,179,727 51,430 158,001 49,000 441,134 20,000 2,000 (250,000) (160,000) 88,210,861 71,430 160,001 49,000 Movement on exercise of options Held at 30 June 2005 Purchases Sales 61 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Notes to the Financial Statements For the year ended 30 June 2005 26 Director and executive disclosures (continued) Directors’ transactions with the Company or its controlled entities The consolidated entity leased premises in Queensland and associated plant and equipment from an entity controlled by Mr LH Ainsworth. During the year ended 30 June 2005, the consolidated entity paid rent of $94,580 (2004: $87,150) on normal commercial terms and conditions. Amounts owing to an entity controlled by Mr LH Ainsworth at 30 June 2005 are disclosed in Notes 13 and 14. Terms and conditions of loan amounts provided by an entity controlled by Mr LH Ainsworth are disclosed in Note 15. Interest paid and/or payable during the financial year amounted to $1,253,000 (2004:$528,000). Interest paid/payable during the financial year to Mr LH Ainsworth and an entity controlled by him for Convertible Notes held was $561,000 (2004: $Nil). This interest was under the same terms and conditions as all Convertible Note holders. Refer note 14. Mr LH Ainsworth received $230,000 (2004: $213,335) during the financial year for the provision of services under a consultancy agreement for his role as Executive Chairman. These services were in the ordinary course of business and on normal commercial terms and conditions. 27 Segment information (a) Business segments Primary reporting Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. The consolidated entity operates in one business segment, which is the design, development, manufacturing and distribution of gaming machines. (b) Geographical segments Secondary reporting In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of the assets. AUSTRALIA 2005 $’000 External segment revenue by location of customers Segment assets by location of assets Acquisitions of non-current assets * Europe includes Russia 2004 $’000 2005 $’000 AMERICAS 2004 $’000 2005 $’000 EUROPE * 2004 $’000 REST OF WORLD 2005 $’000 2004 $’000 CONSOLIDATED 2005 $’000 2004 $’000 23,521 110,479 3,688 22,762 73,572 2,388 31,378 82 44 8,346 69 - 17,835 434 31 22,622 289 67 9,303 63 26 9,997 52 - 82,037 111,058 3,789 63,727 73,982 2,455 28 Earnings per share Classification of securities as ordinary shares All securities on issue have been classified as ordinary shares and included in basic earnings per share. Classification of securities as potential ordinary shares Share options on issue have not been classified as potential ordinary shares as they are not dilutive. Earnings Earnings used in the calculation of basic and diluted earnings per share was a net profit of $10,640,000. 62 28 Earnings per share (continued) Weighted average number of shares used as the denominator The number of shares used in the calculation of basic and diluted earnings per share is 148,555,719. The following share options have not been included in the calculation of diluted EPS as they are not dilutive: • Issue date 7 December 2001 • Issue date 18 December 2001 • Issue date 25 November 2002 • Issue date 1 September 2003 • Issue date 1 November 2003 • Issue date 1 April 2004 • Issue date 31 August 2004 • Issue date 15 February 2004 1,340,000 4,000,000 900,000 100,000 300,000 150,000 1,515,000 1,000,000 Full details of these options are set out in Notes 17, 25 and 26. 29 Contingent liability The directors are of the opinion that a provision is not required in respect of the matters set out below, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement. Contingent liability considered remote Claim under Royalty Agreement On 5 May 2005 proceedings were commenced in the Federal Court of Australia against the Company over certain claims in connection with a Royalty Agreement. The Company is a party to a royalty agreement with SilkEarl Pty Limited (“SilkEarl”) dated 27 July 1999, as amended. The royalty agreement contains a licence of certain gaming machine technology for a period of 99 years. In the proceedings, claims are made for payments under the Royalty Agreement which are disputed by the Company and for damages in relation to alleged misleading and/or unconscionable conduct which are also denied by the Company. The Company has received legal and technical advice on the claims that have been made. A claim for immaterial amounts has been provided for by the Company. Additional claims for significant amounts have been made. The total amount of such additional claims are not quantified and are not capable of reliable measurement. Based on the information available to date, the directors have formed the opinion that the above claims have no foundation and will not succeed. If the Company were wrong in its view and the claims are successfully pursued against the Company, the Company may face a liability in an amount that would have a material adverse impact on the Company. The above matter is now proceeding in accordance with the timetable set by the court. Other litigation An individual who claims to represent a group of problem gamblers has filed an application in the Federal Court of Australia to obtain access to documents held by the Company and other respondents to that action. The application has also been made in respect of 19 other respondents, including State Governments, Gaming Machine Manufacturers and Industry Associations. The Company is awaiting further information from the applicant as to the basis for the application. The Company and the other respondents will not be required to respond until that further information has been provided. The applicant has also indicated that she may discontinue the application against some respondents, not including the Company. 63 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Notes to the Financial Statements For the year ended 30 June 2005 30 Regulatory Matters The manufacture and distribution of gaming machines and associated products are subject to extensive local and foreign laws, regulations and taxes. Many of these jurisdictions require licences, registrations, findings of suitability, permits, documentation and qualification and other forms of approval for manufacturers of gaming machines. The Company is the subject of an investigation by the Queensland Office of Gaming Regulation (“QOGR”) in relation to the Company’s Queensland Licence. The investigation relates to an obligation to notify the QOGR of certain product faults in approved gaming machines. If the QOGR were to make adverse findings on the Company’s conduct in relation to this matter a range of sanctions could be imposed on the Company and certain sanctions could have an adverse impact on the objectives and financial performance of the Company in future financial years. The Company is co-operating with the QOGR in relation to these matters. As a result of these matters the Company has sought to improve its compliance systems and the culture of compliance within the Company. In addition to the above, the Company has received notification that the appointment by the Company of the Chief Executive Officer breached an approval requirement of the Victorian Commission of Gaming Regulation (VCGR). The VCGR are also reviewing certain product related issues identified above. The Company is co-operating with the VCGR in relation to these matters. 31 Impact of adopting Australian equivalents to International Financial Reporting Standards For reporting periods beginning on or after 1 January 2005, the consolidated entity must comply with Australian equivalents to International Financial Reporting Standards (AIFRS) as issued by the Australian Accounting Standards Board. This financial report has been prepared in accordance with Australian accounting standards and other financial reporting requirements (Australian GAAP) applicable for reporting periods ended 30 June 2005. Transition management The Board has established a formal implementation project, monitored by the audit committee, to assess the impact of transition to AIFRS and to achieve compliance with AIFRS reporting for the financial year commencing 1 July 2005. The project is achieving its scheduled milestones and the consolidated entity is expected to be in a position to fully comply with the requirements of AIFRS for the 30 June 2006 financial year. Assessment and planning phase The assessment and planning phase generated a high level overview of the impacts of conversion to AIFRS on existing accounting and reporting policies and procedures, systems and processes, business structure and staff. This phase included: • High level identification of the key differences in accounting policies and disclosures that are expected to arise from adopting AIFRS; • Assessment of new information requirements affecting management information systems, as well as the impact on the business and its key processes; • Evaluation of the implications for staff, for example training requirements; and • Preparation of a conversion plan for expected changes to accounting policies, reporting structures, systems, accounting and business processes and staff training The assessment and planning phase is complete as at 30 June 2005. Design phase The design phase formulated the changes required to existing accounting policies and procedures and systems and processes in order to transition to AIFRS. The design phase included work on areas such as treasury operations, application of impairment requirements and transitional elections. The design phase incorporated: • Formulation of revised accounting policies and procedures for compliance with AIFRS requirements; • Identification of potential financial impacts as at the transition date and for subsequent reporting periods prior to adoption of AIFRS; • Development of revised AIFRS disclosures; • Formulation of accounting and business processes to support AIFRS reporting obligations; • Identification of required changes to financial reporting and business source systems; and • Development of training programs for staff. The design phase is complete as at 30 June 2005. 64 31 Impact of adopting Australian equivalents to International Financial Reporting Standards (continued) Implementation phase The implementation phase includes implementation of identified changes to accounting and business procedures, processes and systems and operational training for staff and enables the consolidated entity to generate the required reconciliations and disclosures of AASB 1 First Time Adoption of Australian Equivalents to International Financial Reporting Standards. This phase is complete as at 30 June 2005. Impact of transition to AIFRS The impact of transition to AIFRS, including the transitional adjustments disclosed in the reconciliations from current Australian GAAP to AIFRS, and the selection and application of AIFRS accounting policies are based on AIFRS standards that management expect to be in place, when preparing the first complete AIFRS financial report (being the half-year ending 31 December 2005). Only a complete set of financial statements and notes together with comparative balances can provide a true and fair presentation of the Company’s and consolidated entity’s financial position, results of operations and cash flows in accordance with AIFRS. This note provides only a summary, therefore, further disclosure and explanations will be required in the first complete AIFRS financial report for a true and fair view to be presented under AIFRS. There is a significant amount of judgement involved in the preparation of the reconciliations from current Australian GAAP to AIFRS, consequently the final reconciliations presented in the first financial report prepared in accordance with AIFRS may vary materially from the reconciliations provided in this Note. Revisions to the selection and application of the AIFRS accounting policies may be required as a result of: • Changes in financial reporting requirements that are relevant to the Company’s and consolidated entity’s first complete AIFRS financial report arising from new or revised accounting standards or interpretations issued by the Australian Accounting Standards Board subsequent to the preparation of the 30 June 2005 financial report; • Additional guidance on the application of AIFRS in a particular industry or to a particular transaction; and • Changes to the Company’s and consolidated entity’s operations. The rules for first time adoption of AIFRS are set out in AASB 1 First Time Adoption of Australian Equivalents to International Financial Reporting Standards. In general, AIFRS accounting policies must be applied retrospectively to determine the opening AIFRS balance sheet as at transition date, being 1 July 2004. The Standard allows a number of exemptions to this general principle to assist in the transition to reporting under AIFRS. The accounting policies note includes details of the AASB 1 elections adopted. The significant changes in accounting policies expected to be adopted in preparing the AIFRS reconciliations and the elections expected to be made under AASB 1 are set out below: (a) Property, plant and equipment Under AIFRS the gain or loss on the disposal of property, plant and equipment will be recognised on a net basis as a gain or loss rather than separately recognising the consideration received as revenue. For the Company and the consolidated entity an amount of $26,000 is expected to be reclassified from revenue to other expenses for the financial year ended 30 June 2005. (b) Business combinations As permitted by the election available under AASB 1, the classification and accounting treatment of business combinations that occurred prior to transition date have not been restated in preparing the opening AIFRS balance sheet. The assets and liabilities are then subject to the other requirements of AASB 1. Comparative period Business combinations that occurred on or after 1 July 2004 will be restated to comply with AIFRS. All business combinations will be accounted for by applying the purchase method. The expected adjustments in the consolidated entity are detailed below. No adjustments are expected for the Company. In these financial statements for the year ended 30 June 2005 prepared under Australian GAAP the excess of purchase consideration over the fair value of net assets acquired is recorded as goodwill on consolidation. Goodwill was amortised over 20 years from the date of acquisition, resulting in an amortisation charge of $211,000. Under AIFRS assets acquired in a business combination that meet the definition of an intangible asset must be recorded separately from goodwill. Such intangible assets either arising from contractual or legal rights or that are separable are to be amortised over the period of the expected future benefit. During the financial year ended 30 June 2005, the consolidated entity acquired two companies (refer note 22(b)). Management determined the fair value of the other intangible assets within these companies by reviewing the existence of other intangible assets and preparing a discounted cash flow analysis. This identified an intangible asset relating to customer contracts on the acquisition of a venue maintenance business of $1,223,000. 65 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Notes to the Financial Statements For the year ended 30 June 2005 31 Impact of adopting Australian equivalents to International Financial Reporting Standards (continued) Impact of transition to AIFRS (continued) (b) Business combinations (continued) The impact of the above is that $1,223,000 was transferred from goodwill to other intangible assets. This balance will be amortised from the date of acquisition over a period of 8 years, being the estimated period of expected future economic benefits. The amortisation charge under AIFRS for the year ended 30 June 2005 amounted to $76,000. (c) Intangible assets Goodwill Goodwill represents the difference between the cost of a business combination over the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. In respect of acquisitions prior to transition date, goodwill is expected to be included on the basis of its deemed cost, which represents the amount recorded under Australian GAAP, adjusted for reclassifications of other intangible assets not meeting the AIFRS recognition criteria. No reclassifications are expected. Goodwill will be stated at cost less any accumulated impairment losses. Goodwill will be allocated to cash generating units and tested annually for impairment (refer (f) for further details on impairment testing). Research and development Under Australian GAAP, research and development expenses are expensed as incurred. Under AIFRS, expenditure on development activities must be capitalised if the product or process is technically and commercially feasible and the consolidated entity has sufficient resources to complete the development. Capitalised development expenditure will be stated at cost less accumulated amortisation and impairment losses. On transition as at 1 July 2004, development expenditure meeting the above criteria for capitalisation that have been expensed previously under AGAAP are expected to be recognised as intangible assets and an adjustment of $5,964,000 is expected to be made to increase assets and decrease accumulated losses of the Company and consolidated entity at 1 July 2004. Development costs are being reviewed against the recognition criteria and tested for impairment. No impairment losses are expected. Comparative period The impact of the above accounting policy on the year ended 30 June 2005 is expected to be as follows: • Capitalised development costs to be amortised over the period of expected future economic benefits, being 5 years. The amortisation charge for the year amounted to $4,416,000; and • Development costs of $3,916,000 were capitalised as an asset as they met the designated recognition criteria detailed above. The net impact of the above adjustments would be expected to decrease earnings by $500,000 for the year ended 30 June 2005. Other intangible assets Other intangible assets acquired will be stated at cost less accumulated amortisation and impairment losses. On transition other intangible assets have been reviewed to ensure they are capable of recognition under AASB 138 Intangible Assets and tested for impairment. No reclassifications or impairment losses are expected. Amortisation Amortisation will be recognised on a straight-line basis over the estimated useful lives of the intangible assets, unless such lives are indefinite. Goodwill and intangible assets with an indefinite useful life will not be subject to amortisation but tested for impairment annually. Other intangible assets will be amortised from the date they are available for use. Changes in useful life on transition to AIFRS will be accounted for prospectively. The estimated useful lives at 1 July 2004 are as follows: AIFRS Capitalised development costs Goodwill 3-5 years Indefinite Current A GAAP Expensed 20 years The impact on the results for the year ended 30 June 2005 is expected to be an increase of $133,000 from the reversal of the goodwill amortisation for the consolidated entity. The impact of the amortisation of capitalised development costs is included above. 66 31 Impact of adopting Australian equivalents to International Financial Reporting Standards (continued) Impact of transition to AIFRS (continued) (d) Impairment Under current Australian GAAP the carrying amounts of non-current assets valued on a cost basis are reviewed at reporting date to determine whether they are in excess of their recoverable amount. If the carrying amount of a non-current asset exceeds its recoverable amount the asset is written down to the lower amount, with the write-down recognised in the income statement in the period in which it occurs. Where a group of assets working together supports the generation of cash inflows, recoverable amount is assessed in relation to that group of assets. In assessing recoverable amounts, the relevant cash flows have not been discounted to their present value. Under AIFRS, the carrying amount of the consolidated entity’s non-current assets, excluding deferred tax assets, goodwill and indefinite life intangible assets will be reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset will be tested for impairment by comparing its recoverable amount to its carrying amount. Goodwill, which is not amortised under AIFRS (refer (c)), and intangible assets that have an indefinite useful life are tested for impairment annually. If there is any indication that an asset is impaired (or for those tested annually), the recoverable amount will be estimated for the individual asset. If it is not possible to estimate the recoverable amount for the individual asset, the recoverable amount of the cash generating unit to which the asset belongs will be determined. An impairment loss will be recognised whenever the carrying amount of an asset, or its cash generating unit exceeds its recoverable amount. Impairment losses will be recognised in the income statement. There is no expected impact of this change in this standard at transition date or at 30 June 2005. (e) Taxation On transition to AIFRS the balance sheet method of tax effect accounting will be adopted, rather than the liability method applied currently under Australian GAAP. Under the balance sheet approach, income tax on the profit and loss for the year comprises current and deferred taxes. Income tax will be recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it will be recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at reporting date, and any adjustments to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences will not be provided for; goodwill for which amortisation is not tax deductible, the initial recognition of assets and liabilities that affect neither accounting or taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided will be based on the expected manner of realisation of the asset or settlement of the liability, using tax rates enacted or substantively enacted at reporting date. A deferred tax asset will be recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets will be reduced to the extent it is no longer probable that the related tax benefit will be realised. There is no expected impact of this change in this standard at transition date or at 30 June 2005. (f) Employee benefits Share based payments Under current Australian GAAP no expense is recognised for options issued to employees. Under AIFRS, the fair value of options granted must be recognised as an employee benefit expense with a corresponding increase in equity. The fair value will be measured at grant date taking into account market performance conditions only, and spread over the vesting period during which the employee becomes unconditionally entitled to the options. The fair value of options granted will be measured, taking into account the terms and conditions attached to the options. The amount recognised as an expense will be adjusted to reflect the actual number of options that vest except where forfeiture is due to market related conditions. For the financial year ended 30 June 2005, employee benefits expense and equity are expected to be increased by $213,000 in the consolidated entity and $213,000 in the Company representing the options expense for the period 67 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Notes to the Financial Statements For the year ended 30 June 2005 31 Impact of adopting Australian equivalents to International Financial Reporting Standards (continued) Impact of transition to AIFRS (continued) (g) Financial instruments Ainsworth Game Technology Limited expects to take advantage of the election in AASB 1 to not restate comparatives for AASB 132 Financial Instruments: Disclosure and Presentation, and AASB 139 Financial Instruments: Recognition and Measurement. There are no expected adjustments in relation to these standards for 1 July 2004 or the financial year ended 30 June 2005 as current Australian GAAP is expected to continue to apply. The entity has followed Australian GAAP in accounting for financial instruments within the scope of AASB 132 and AASB 139 as described in Note 1 Statement of significant accounting policies. Impact on future financial years A Company controlled by Mr LH Ainsworth has extended a loan of $26.3 million to the Company as at 30 June 2005 as disclosed in note 15 to the financial statements. Under Australian GAAP the face value of the loan is disclosed as a non-current liability. AIFRS requires that all financial assets and liabilities be recorded at fair value. , The fair value of the loan will be determined with reference to the interest rate that would have been charged on the loan had it been borrowed at a market rate and with a similar credit rating from an unrelated party. As the transaction is with Mr LH Ainsworth, a controlling shareholder of the Company, the loan is considered to be a transaction with an owner. In this case the difference between the face value of the loan and its fair value is classified as equity. The loan is subsequently measured as amortised cost using the effective interest rate method. The unwinding of the difference is recognised as interest expense over the expected repayment term. In addition, AIFRS requires transaction costs associated with the origination of the convertible notes to be included in the initial measurement of the financial liability. Accordingly, these transaction costs are offset against the convertible notes reducing total non-current liabilities. Under Australian GAAP these transaction costs were recorded as deferred expenditure in non-current assets. Under AIFRS the transaction costs are expensed using the effective interest rate method whereas under Australian GAAP the expense was amortised on a straight-line basis. The Company has yet to quantify the impact of this difference in the transitional balance sheet or on the 2005 financial year as disclosed later in this Note. Any difference between the two methods will be disclosed in the first time full AIFRS financial report for the half-year ending 31 December 2005. 68 31 Impact of adopting Australian equivalents to International Financial Reporting Standards (continued) Impact of transition to AIFRS (continued) Summary of transitional adjustments The following table sets out the expected adjustments to the statements of financial position of the Company and the consolidated entity at transition to AIFRS as at 1 July 2004 and for the AIFRS comparative period balance sheet as at 30 June 2005. Reconciliation of equity CONSOLIDATED 1 July 2004 AGAAP Transition impact $’000 $’000 AIFRS $’000 AGAAP $’000 CONSOLIDATED 30 June 2005 Transition impact $’000 AIFRS $’000 THE COMPANY 1 July 2004 AGAAP $’000 Transition impact $’000 AIFRS $’000 AGAAP $’000 THE COMPANY 30 June 2005 Transition impact $’000 AIFRS ’$000 Note ASSETS Current Assets Cash and cash equivalents Trade receivables Inventories Other current assets Total current assets Non-current assets Receivables Investments Property, plant & equipment Intangible assets Other Total non-current assets Total assets (b), (c) 2,443 30,496 17,612 688 51,239 - 2,443 30,496 17,612 688 51,239 752 44,188 35,578 790 81,308 - 752 44,188 35,578 790 81,308 2,429 30,496 17,581 585 51,091 - 2,429 30,496 17,581 585 51,091 588 43,548 35,578 712 80,426 - 588 43,548 35,578 712 80,426 2,436 18,217 2,000 90 22,743 73,982 5,964 5,964 5,964 2,436 18,217 7,964 90 28,707 79,946 5,218 2,203 18,656 3,067 606 29,750 111,058 5,597 5,597 5,597 5,218 2,203 18,656 8,664 606 35,347 116,655 2,489 18,161 2,000 90 22,740 73,831 5,964 5,964 5,964 2,489 18,161 7,964 90 28,704 79,795 8,589 18,491 1,692 606 29,378 109,804 5,643 5,643 5,643 8,589 18,491 7,335 606 35,021 115,447 69 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Notes to the Financial Statements For the year ended 30 June 2005 31 Impact of adopting Australian equivalents to International Financial Reporting Standards (continued) Summary of transitional adjustments (continued) Reconciliation of equity (continued) CONSOLIDATED 1 July 2004 AGAAP Transition impact $’000 $’000 LIABILITIES Current Liabilities Payables Interest bearing liabilities Current tax liabilities Provisions Total current liabilities Non-current liabilities Payables Interest bearing liabilities Provisions Total non-current liabilities Total liabilities Net Assets EQUITY Contributed equity Other equity Reserves Accumulated losses Total Equity 72,807 7 (32,571) 40,243 83 5,881 5,964 72,807 83 7 (26,690) 46,207 76,895 15 (43,211) 33,699 296 5,301 5,597 76,895 296 15 (37,910) 39,296 72,807 (32,617) 40,190 83 5,881 5,964 72,807 83 (26,736) 46,154 76,895 (43,066) 33,829 296 5,347 5,643 76,895 296 (37,719) 39,472 15,280 199 15,479 33,739 40,243 5,964 15,280 199 15,479 33,739 46,207 49,441 562 50,003 77,359 33,699 5,597 49,441 562 50,003 77,359 39,296 85 15,280 199 15,564 33,641 40,190 5,964 85 13,774 199 15,564 33,641 46,154 246 49,422 445 50,113 75,975 33,829 5,643 246 49,422 445 50,113 75,975 39,472 15,601 1,702 40 917 18,260 15,601 1,702 40 917 18,260 25,399 193 79 1,685 27,356 25,399 193 79 1,685 27,356 15,458 1,702 917 18,077 15,458 1,702 917 18,077 24,187 193 1,482 25,862 24,187 193 1,482 25,862 AIFRS $’000 AGAAP $’000 CONSOLIDATED 30 June 2005 Transition impact $’000 AIFRS $’000 THE COMPANY 1 July 2004 AGAAP $’000 Transition impact $’000 AIFRS $’000 AGAAP $’000 THE COMPANY 30 June 2005 Transition impact $’000 AIFRS $’000 70 31 Impact of adopting Australian equivalents to International Financial Reporting Standards (continued) Summary of transitional adjustments (continued) Reconciliation of loss for the financial year ended 30 June 2005 The following table sets out the expected adjustments to the statements of financial performance of the Company and the consolidated entity for the year ended 30 June 2005 CONSOLIDATED For the year ended 30 June 2005 AGAAP $’000 81,006 1,031 82,037 Cost of goods sold Gross profit Other revenues from ordinary activities (a) (46,724) 35,313 433 Transition Impact $’000 (26) AIFRS $’000 81,006 1,031 82,037 (46,724) 35,313 407 THE COMPANY For the year ended 30 June 2005 AGAAP $’000 81,006 81,006 (46,604) 34,402 433 Transition Impact $’000 (26) AIFRS $’000 81,006 81,006 (46,604) 34,402 407 NOTE Revenue from sale of goods Revenue from rendering of services Sales, service and marketing expenses Research and development expenses Administrative expenses Borrowing costs Other expenses from ordinary activities Share of net profit of associates accounted for using the equity method (a) (c) (c), (f) (22,604) (10,318) (9,371) (2,679) (1,560) 203 (46,329) (500) (80) 26 (554) (22,650) (10,818) (9,405) (2,679) (1,534) 203 (46,883) (20,468) (10,318) (10,075) (2,679) (1,744) (45,284) (500) (34) 26 (508) (20,468) (10,818) (10,109) (2,679) (1,718) (45,792) (Loss) / profit from ordinary activities before related income tax benefit / (expense) Income tax expense relating to ordinary activities Net (loss) / profit (10,583) (580) (11,163) (10,449) (534) (10,983) (57) (10,640) (580) (57) (11,220) (10,449) (534) (10,983) 71 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Notes to the Financial Statements For the year ended 30 June 2005 31 Impact of adopting Australian equivalents to International Financial Reporting Standards (continued) Summary of transitional adjustments (continued) The impact of the transition to AIFRS on retained earnings as at 1 July 2004 and 30 June 2005 is summarised below: CONSOLIDATED $’000 Total equity as at 1 July 2004 under AGAAP AIFRS reconciliation: - Increase in equity for employee share options - Recognition of expense for employee share options - Recognition of intangible asset for development expenditure Total equity as at 1 July 2004 under AIFRS 83 (83) 5,964 46,207 40,243 THE COMPANY $’000 40,190 83 (83) 5,964 46,154 Total equity as at 30 June 2005 under AGAAP AIFRS reconciliation: - Increase in equity for employee share options - Recognition of intangible asset for development expenditure 33,699 213 5,964 6,177 33,829 213 5,964 6,177 Adjustments to current year P&L - Recognition of expense for employee share options - Amortisation of intangible asset for development expenditure - Capitalisation of development expenses - De-recognition amortisation of goodwill on VGS acquisition - Amortisation of intangible asset for Bytecraft service contracts Accumulated losses adjustment as at 30 June 2005 under AIFRS Total Equity as at 30 June 2005 under AIFRS (213) (4,416) 3,916 179 (46) (580) 39,296 (213) (4,416) 3,916 179 (534) 39,472 72 32 Events subsequent to reporting date Funding Facilities Since 30 June 2005 the Company has amended the loan facility agreement with an entity controlled by Mr LH Ainsworth. The facility now available has been increased from $30 million to $40 million. The new terms of the facility are that effective 1 August 2005 the interest rate applicable on these loan funds has been increased and capped at 8.0% per annum. These terms are more favourable than those that could be achieved from the Company’s bankers and at arms length in the open market. All other terms and conditions are similar to those previously reported. 73 AINSWORTH GAME TECHNOLOGY LIMITED AND ITS CONTROLLED ENTITIES Directors’ Declaration 1. In the opinion of the directors of Ainsworth Game Technology Limited (“the Company”): (a) the financial statements and notes, set out on pages 31 to 73, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the financial position of the Company and the consolidated entity as at 30 June 2005 and of their performance, as represented by the results of their operations and their cash flows, for the year ended on that date; and (ii) complying with Accounting Standards in Australia and the Corporations Regulations 2001; 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. 2. The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Chief Executive Officer and the Chief Financial Officer for the financial year ended 30 June 2005. Dated at Sydney this 25th day of August 2005. Signed in accordance with a resolution of the directors: LH Ainsworth Director 74 Independent audit report to the members of Ainsworth Game Technology Limited Scope The financial report and directors’ responsibility The financial report comprises the statements of financial position, statements of financial performance, statements of cash flows, accompanying notes 1 to 32, and the directors’ declaration for both Ainsworth Game Technology Limited (the “Company”) and Ainsworth Game Technology Limited and its controlled entities (the “Consolidated Entity”), for the year ended 30 June 2005. The Consolidated Entity comprises both the Company and the entities it controlled during that year. 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. 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. 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. We performed procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001, Australian 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 and cash flows. 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 • assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made by the directors. 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. Audit opinion In our opinion, the financial report of Ainsworth Game Technology Limited is in accordance with: (a) the Corporations Act 2001, including: (i) giving a true and fair view of the Company’s and Consolidated Entity’s financial position as at 30 June 2005 and of their performance for the financial year ended on that date; and (ii) complying with Accounting Standards in Australia and the Corporations Regulations 2001; and (b) other mandatory professional reporting requirements in Australia. KPMG Tony Nimac Partner Sydney 25th August 2005 KPMG, an Australian partnership is part of the KPMG International network. KPMG is a Swiss cooperative 75 www.ainsworth.com.au 76 Corporate Directory Directors Executive Chairman Mr LH Ainsworth Non-Executive Directors Mr SL Wallis AO Mr AR Amer Mr VB Matthews Chief Executive Officer Mr DP Creary Company Secretary and Chief Financial Officer Mr ML Ludski Stock Exchange Listing The Company is listed on the Australian Stock Exchange. The Home Exchange is Sydney. CODE: AGI Website www.ainsworth.com.au Share Registry Computershare Investor Services Pty Limited Level 3, 60 Carrington Street Sydney NSW Australia 2000 Tel: 1300 855 080 (within Aust) +61 3 9415 4000 (outside Aust) Fax: +61 3 9473 2500 Auditor KPMG 10 Shelley Street Sydney NSW Australia 2000 Telephone: +61 2 9335 7000 Facsimile: +61 2 9299 7077 Other Information Ainsworth Game Technology Limited, incorporated and domiciled in Australia, is a publicly listed company limited by shares. AUSTRALIA Corporate and Head Office 10 Holker Street, Newington NSW Australia 2127 Tel: +61 2 9739 8000 Fax: +61 2 9737 9483 Queensland 29-31 Ereton Drive, Labrador QLD Australia 4215 Tel: +61 7 5573 1155 Fax: +61 7 5537 9311 South Australia Tower Gaming 223 Waymouth Street, Adelaide SA Australia 5000 Tel: +61 8 8211 9657 Fax: +61 8 8211 6700 Victoria 44-60 Fenton Street, Huntingdale VIC Australia 3166 Tel: +61 3 9543 2139 Fax: +61 3 9543 6561 NEW ZEALAND 37-39 Ireland Street Freemans Bay, Auckland New Zealand Tel: +64 9360 0564 Fax: +64 9360 5936 ASIA RGB Games 8 Green Hall, 10200 Penang, Malaysia Tel: +604 263 1111 Fax: +604 263 1188 SOUTH AFRICA Omega Gaming 88 Silverstone Crescent, Kyalami Business Park Midrand, South Africa Tel: +27 11 745 0777 Fax: +27 11 466 1038 EUROPE Friedhofgasse 19-21 8010 Graz, Austria Tel: +43 316 724 108 Fax: +43 316 724 198 THE AMERICAS 2881 E. Oakland Park Blvd FT. Lauderdale, FL 33306 USA Tel: +1 954 315 1720 Fax: +1 954 315 1732 www.ainsworth.com.au