AUSTOFIX GROUP LIMITED ABN 16 119 490 238 ANNUAL FINANCIAL REPORT 30 JUNE 2011
Corporate directory Directors Mark Balnaves Chairman Tony Ingman Greg Bittar Chief Executive Officer Mark Szolga Company Secretary Alex Porter Financial Controller Scott Blake Registered office 18 Kinkaid Avenue, North Plympton SA 5037 Share register Computershare Limited www.computershare.com Postal: GPO Box 242, Melbourne VIC 3001 Physical: Level 5, 115 Grenfell Street, Adelaide SA 5001 Phone: 1300 130 979 (outside Australia +61 3 9415 4331) Fax: 1800 783 447 (outside Australia +61 3 9473 2555) Website: www.investorcentre.com.au Auditor Solicitors Grant Thornton South Australian Partnership, Adelaide Johnson, Winter & Slattery, Adelaide Kelly & Co, Adelaide Bankers Securities exchange listings National Australia Bank, Adelaide shares are listed on the Australian Securities Exchange ASX code - AYX Website address www.austofix.com.au
Directors' report Directors' report Your Directors are pleased to present their report, together with the financial statements of the Group, being the Company and its controlled entities, for the financial year ended. Directors The following persons were Directors of during the whole of the financial year, unless otherwise stated, and up to the date of this report: M N Balnaves A M Ingman G J Bittar J Michaelis (resigned 21 September 11) Operating Results Continued investment in bringing a total hip replacement to market has contributed to recording a 2010/11 loss from continuing operations after tax of $580,461 up from $341,312 in 2009/10. Sales of the Company s total hip replacement product have occurred in 2011/12 and are expected to grow as markets are developed. Revenue was $1,603,805 comprising mainly sales of Austofix manufactured trauma products in Australia and international markets; The high Australian dollar reduced export sales in 2010/11 compared with 2009/10; Costs for 2010/11 were down by $780,000 compared with 2009/10. G L Driscoll (resigned 22 March 11) A C Andreyev (resigned 13 March 11) Company Secretary The following person was secretary of during the financial year, unless otherwise stated, and up to the date of this report: A R Porter (commenced 16 March 11) C Latham (resigned 16 March 11) Principal activities During the year the principal activities of the Group consisted of the design, manufacture and sale of orthopaedic trauma devices. There have been no significant changes in the nature of these activities during the year. Review of operations Company overview and strategy Austofix is an Australian orthopaedic device company that designs, develops and distributes orthopaedic implants. In 2010/11 the Company was focused on delivering a range of hip prostheses into the Australian market; and maintaining sales of Austofix trauma products. In 2011/12 we will continue this focus with particular emphasis on improving security of supply, reducing cost of goods sold and securing quality distribution personnel to drive sales in 2011/12 and beyond. The Directors note that: A number of the new total hip replacement prostheses have now been successfully implanted and surgeon users have provided positive feedback on the products; In 2010/11 three new Austofix products received private health rebates, taking the number of Austofix products with private health rebates in Total Hip replacement, Trauma and Spine to 68; The Company has the infrastructure and systems in place to underpin total hip replacement sales and to continue marketing trauma products; and In 2010/11 the Company sold products in all States of Australia and into 9 countries through our international network of distributors. Investing Activities The Company invested in the Austofix range of hip prostheses and Austofix trauma products during the year. During the year Austofix s investment in stock was $1,103,894 ($2,368,980 as at up from $1,265,086 as at 30 June 2010), with the majority of the increase comprising hip implants and instruments. Instruments for implanting Austofix products are capitalised as non-current inventories upon acquisition, as they are generally retained by Austofix and loaned (in accordance with normal industry practice) to the hospitals carrying out the implant procedures. There was also significant investment in research and development in the year in the amount of $1,132,890. These investing activities were funded by the issue of convertible notes to a value of $1,125,000, the issue of shares to the value of $105,000 and related party loans to the value of $270,000. The Company intends to seek shareholder approval to convert the majority of the convertible notes to equity at the Company AGM in November 2012. 5
Directors' report Financial Position The net assets of the consolidated entity rose by $111,514 to $3,919,640 at from $3,808,126 at 30 June 2010. Investment in product development, stock and instruments has been funded by the convertible notes detailed above. Upon the conversion of convertible notes the net asset position of the consolidated entity will rise by the value of the notes converted. The deferred income amounts in the statement of financial position (totaling $684,537 in current and non-current liabilities) relate to a grant received by the Company from the Commonwealth Government. The amounts required to be included in the statement of financial position as a liability reduce to $nil over a 5 year period ending in 2015. Austofix has approved bank facilities of $1,025,000 of which $414,000 was drawn as at. The amount available to be drawn is dependent upon the levels of specific assets held. Significant changes in the state of affairs The following significant changes in the state of affairs of the group occurred during the financial year: There was significant increase in stock holdings ($2,368,980 as at up from $1,265,086 as at 30 June 2010), with the majority of the increase comprising hip implants and instruments. The Directors are looking forward to an increase in revenue from the Group s hip products. Disclosure of further information regarding likely developments in the operations of the consolidated entity in future financial years and the expected results of those operations is likely to result in unreasonable prejudice to the consolidated entity. Accordingly this information has not been disclosed in this report. Environmental regulation The Group holds licences to operate the manufacturing processes required to produce its products. It is not subject to significant environmental regulation or reporting requirements. There have been no known significant breaches of the Group s licence conditions. Share options As at the date of this report there were 1,463,130 (2010: 2,113,410) unissued ordinary shares under option. Details are set out in note 25(c) and (d) and note 37 to the financial statements. 650,280 options have lapsed since the reporting date. The working capital finance facility with National Australia Bank (NAB) was utilised periodically through the year, being drawn on a needs basis; and The Company issued convertible notes to a value of $1,125,000 and shares to the value of $105,000; and The Company entered into related party loans to the value of $270,000. Dividends No dividends have been declared, paid or recommended during or since the end of the financial year. Matters subsequent to the end of the financial year Subsequent to the reporting date additional unsecured loans have been advanced by related parties to the Company in the amount of $240,000. The directors note the expected conversion of the majority of the $1,125,000 of convertible notes to equity, subject to shareholder approval, in November 2011. Likely developments and expected results of operations In 2011/12 we will continue our focus on improving security of supply and reducing cost of goods sold for our hip products, and securing quality distribution personnel to drive sales in 2011/12 and beyond. 6
Directors' report Information about the Directors and senior management Mark Neilson Balnaves BEc, LLb, MFin (London) Chairman - non-executive. Age 40. Experience and expertise Mr Mark Balnaves has over 15 years of advisory experience in financial and strategy consulting and is a Director of advisory firm Evans & Ayers. Mark chairs the Board of two other high growth private companies and has long-term advisory engagements for five private companies based in Melbourne and Adelaide. Mark has a strong track record of achieving sustained growth and shareholder value for his clients. Mark has a Masters in Finance from London Business School as well as undergraduate degrees in Economics and Law. Mark has been actively involved in structuring and repositioning Austofix since November 2004. His focus has been on attracting human and financial resources to the Company to ensure the Company can deliver on its Strategic Plan. Mark has been Chairman of Austofix since July 2006. Special responsibilities Chair of the Board. Anthony Mark Ingman MB.BS(Syd), FRACS, FAOrthA Non-executive Director. Age 70. Experience and expertise Dr Tony Ingman has 34 years of experience as an orthopaedic surgeon, both in private practice and as a Visiting Orthopaedic Surgeon to a number of hospitals. Products developed by Tony have been the subject of a number of academic papers published in the Journal of Bone and Joint Surgery, International Journal of the Care of the Injured and Australian and New Zealand Journal of Surgery. As the founder and current non-executive Technical Director of Austofix, Tony provides advice and assistance on the clinical and manufacturing aspects of new product design and development. Tony is a Fellow of the Royal Australasian College of Surgeons and the Australian Orthopaedic Association, and a member of Australian Standards Committee for Medical Devices. Special responsibilities Technical Director Member of Finance Committee. Chair of Finance Committee. Gregory John Bittar Masters in Finance (London) BEc, LLb(Hons II) Non-executive Director. Age 40. Experience and expertise Mr Greg Bittar was appointed as a non-executive director of the company on 26 March 2010. He is a former Executive Director of bankers Morgan Stanley and has extensive knowledge of capital markets and mergers and acquisitions, including both public market and private treaty transactions. He also has extensive relevant experience with major participants in the health industry, which will be critical for Austofix going forward. Greg has degrees in law and economics from the University of Sydney as well as a Masters in Finance from the London Business School. Special responsibilities Member of Finance Committee. Member of Capital Raising Committee. Jurgen Michaelis PhD, BSc (Hons), GradDipMktg Non-executive Director. Age 53. Resigned 22 September 2011 Experience and expertise Dr Jurgen Michaelis has more than 21 years experience as a senior executive in the international life science industry, having worked in Europe, Australia and New Zealand. He has raised more than $100 million in private equity and venture capital for biotechnology companies, as well as participated in the full lifecycle of technology development and commercialisation (including R&D facilitation and technology licensing). Jurgen is a Director and Chair of the Investment Committee of Terra Rossa Capital Pty Ltd which manages the $35 million South Australian Life Science Advancement Fund. In addition, he is the CEO of Bio Innovation SA, the South Australian Government s biotechnology industry development organisation. Jurgen holds a Bachelor of Science (Hon) in Biology, a Doctorate of Philosophy in Biochemistry and a Graduate Diploma Marketing Management. Jurgen has provided valuable guidance in identifying and focusing strategy around Austofix s core strengths and competencies, and positioning the Company within the broader bioscience sector. Special responsibilities Member of Finance Committee. Member of Capital Raising Committee 7
Directors' report Information about the Directors and senior management (continued) Andrew Carey Andreyev B.Comm, LL.M Non-executive Director. Age 39. Resigned 13 March 11 Experience and expertise Mr Andrew Andreyev has over 15 years of experience across a broad range of corporate, finance and legal disciplines. He has gained this experience in a number of different capacities, including as an accountant in public practice, as an executive with an investment bank (in structured finance and technology investment banking) and as a solicitor in both Australia and the United Kingdom. Andrew has a Masters in Tax and Investment Law from Melbourne University, as well as undergraduate degrees in Commerce and Law. Andrew has been involved in Austofix since November 2004. His key areas of contribution have been longer-term strategy definition, risk identification and mitigation, and organisational and operational structuring. Company Secretary: Alexander Robert Porter LLb GDLP - Age 23 Mr Alexander Porter was appointed to the role of Company Secretary on 16 March 2011. He has experience in the areas of corporate governance and company secretarial matters, mergers and acquisitions, legal structuring and taxation, and corporate fundraising. He has previously advised a diverse range of businesses, from small companies, to large widely held private companies and other public companies in his capacity as an Associate Lawyer at Andreyev Doman. During his time at Austofix, he has implemented new systems and procedures to ensure sound corporate governance. Directorships of other listed companies None of the Directors has held a directorship of any other listed company in the 3 years immediately before the end of the financial year. Interests in shares and options Geoffrey Laurence Driscoll MB.BS(Syd), FRCSED, FRCOG, FRANZCOG, MAICD Non-executive Director. Age 64. Resigned 22 March 2011 Experience and expertise Professor Geoff Driscoll brings to the Company a wealth of experience in major commercial operations of health businesses and the health sector in general. Based in Sydney, he sits on a number of private company and charitable boards and is a member of the Australian Institute of Company Directors. Professor Driscoll established numerous clinics (public and private) and was the initiator and founding Medical Director of IVF Australia. Chief Executive Officer: Mark Szolga MBA, BBus. Age 45 Experience and expertise Mr Mark Szolga brings to Austofix an expert background in commercialising and licensing innovation and developing businesses into people and profit driven organisations. He gained this experience as Managing Director of a leading commercialisation organisation with a life-science focus, Adelaide Research and Innovation, for the period prior to joining Austofix. Between 1988 and 2000, Mark worked for a number of international, sales driven organisations in Europe and the United States, including Zimmer, Oracle and Thorn EMI, focusing on roll-outs of new sales and distribution networks,. Mark has a Masters of Business Administration from the Imperial College of London and a Bachelor of Business. Mark commenced as CEO of Austofix on 1 March 2007. Interests in shares and options in the Company are set out in the notes to the financial statements. Directors attendance at meetings Meetings of Directors held during the financial year: Meetings attended Meetings held while a Director Mark Balnaves 25 25 Tony Ingman 21 25 Greg Bittar 22 25 Jurgen Michaelis 23 25 Andrew Andreyev 13 18 Geoff Driscoll 14 18 8
Directors' report Indemnifying Officers or Auditor During the financial year, paid a premium of $7,747 to insure the Directors, officers and secretaries of the Company and its controlled entities, and the senior executives of the Group. The liabilities insured are fidelity, crisis loss, OH&S defence / investigations costs, pecuniary penalties, pollution defence / investigation costs and publicity. Throughout the financial year the Company paid for a key person insurance policy to cover its Chief Executive Officer Mark Szolga against death, total permanent disability and trauma. Premiums were payable monthly at the rate of $435 per month. Proceedings on behalf of the Company No person has applied for leave of Court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purposes of taking responsibility on behalf of the Company for all or any part of those proceedings. The Company was not a party to any such proceedings during the year. Non-audit services The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor's expertise and experience with the Company and/or the Group are important. The Directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The nature and scope of non-audit services provided means that auditor independence was not compromised. During the year there were non-audit services provided by the current auditor of the parent entity (Grant Thornton South Australian Partnership). The services related to review and lodgement of FBT return and tax services at the fee of $4,150. Auditor's independence declaration The auditor s independence declaration for the year ended 30 June 2011 as required under section 307C of the Corporations Act 2001 has been received and can be found on page 17. 9
Directors' report Remuneration report (Audited) This Remuneration Report, which forms part of the Directors Report, sets out information about the remuneration of Austofix s Directors and senior executives in accordance with the requirements of the Corporations Act 2001 and its Regulations. It also provides the remuneration disclosures required by paragraphs Aus 25.4 to Aus 25.7.2 of AASB 124 Related Party Disclosures. For the purposes of this report Key Management Personnel (KMP) of the Group are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Company and the Group, directly or indirectly, including any Director (whether executive or otherwise) of the parent company, and includes the five executives in the Parent and the Group receiving the highest remuneration. For the purposes of this report, the term 'executive' encompasses the Chief Executive Officer, senior executives and secretaries of the Parent and the Group. Key Management Personnel The key management personnel of and the Group include the Directors as set out in the Directors Report above and the following executive officers who have authority and responsibility for planning, directing and controlling the activities of the entity: Mark Szolga Chief Executive Officer Ewen Laird Research and Development Director David Entwistle Director of Manufacturing Christine Mauriello National Sales Manager Scott Blake Financial Controller (commenced 7 March 2011) Remuneration Policy The Board of Directors of the Company is responsible for determining and reviewing remuneration arrangements for the Directors and executives. The Board of Directors assesses the appropriateness of the nature and amount of remuneration of executives on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality, high performing Director and executive team. The Corporate Governance Statement provides further information on the role of the Board. Remuneration Philosophy The performance of the Company depends upon the quality of its Directors and executives. To prosper, the Company must attract, motivate and retain highly skilled Directors and executives. To this end, the Company embodies the following principles in its remuneration framework: provide competitive rewards to attract high calibre executives; link executive rewards to shareholder value; have a significant portion of executive remuneration 'at risk'; and establish appropriate, demanding performance hurdles for variable executive remuneration. Remuneration Structure In accordance with best practice corporate governance, the structure of non-executive Director and executive remuneration is separate and distinct. Non-Executive Director Remuneration Objective The Board seeks to set aggregate remuneration at a level that provides the Company with the ability to attract and retain Directors of the highest calibre, whilst incurring a cost that is acceptable to shareholders. Structure The Constitution and the ASX Listing Rules specify that the aggregate remuneration of non-executive Directors shall be determined from time to time by a general meeting. The maximum aggregate remuneration is $220,000 per annum. The amount of aggregate remuneration sought to be approved by shareholders and the fee structure is reviewed annually. The Board considers the time commitment required as well as the fees paid to non-executive Directors of comparable companies when undertaking the annual review process. On appointment to the Board, all non-executive Directors enter into a service agreement with the Company in the form of a letter of appointment. The letter summarises the Board policies and terms, including compensation, relevant to the office of Director. Each non-executive Director did not receive a base fee in 2011 for being a Director of the Group, previously set at $30,000. An additional fee of $10,000 is also paid if the Director is the Chair of the Board, this was waived in 2011. These fees commenced from 1 March 2008 following the ASX listing. The payment of additional fees for serving as Chair recognises the additional time commitment required by non-executive Directors who serves in this capacity. The Chair is not present at any discussions relating to determination of his own remuneration. At the request of the Board of Directors all directors remuneration has been cancelled from 1 June 2010 to. 10
Directors' report Remuneration report (Audited) (continued) Non-executive Directors are encouraged by the Board to hold shares or options in the Company. The Company facilitates this through the Austofix Group Share Option Plan. Under the plan, non-executive Directors may be invited to accept an offer of options to acquire shares in the Company. The non-executive Directors do not receive retirement benefits, other than compulsory superannuation contributions, nor do they participate in any incentive programs. The remuneration of non-executive Directors for the years ended and 30 June 2010 is detailed in Table 1 and 2 respectively of this report. Executive Remuneration Objective The Group aims to reward executives with a level and mix of remuneration commensurate with their position and responsibilities within the Group so as to: reward executives for Group, business unit and individual performance against targets set by reference to appropriate benchmarks; Structure Executives are given the opportunity to receive their fixed (primary) remuneration in a variety of forms including cash and fringe benefits such as motor vehicles. It is intended that the manner of payment chosen will be optimal for the recipient without creating additional cost for the Group. The fixed remuneration component of executives is detailed in tables 1 and 2. Variable Remuneration Short Term Incentive (STI) Objective The objective of the STI program is to link the achievement of the Group's operational targets with the remuneration received by the executives charged with meeting those targets. The total potential STI available is set at a level so as to provide sufficient incentive to the executive to achieve the operational targets and such that the cost to the Group is reasonable in the circumstances. Structure align the interests of executives with those of shareholders; and ensure total remuneration is competitive by market standards. Structure In determining the level and make-up of executive remuneration, the Board of Directors engages external consultants as needed to provide independent advice. The Board of Directors has entered into a detailed contract of employment with the Chief Executive Officer and all senior executives. Details of these contracts are provided below. Remuneration consists of the following key elements: Fixed remuneration (base salary, superannuation and nonmonetary benefits); Variable remuneration, being o o short term incentive (STI); and long term incentive (LTI). The proportion of fixed remuneration and variable remuneration (potential short term and long term incentives) for each executive is set out in tables 1 and 2. Fixed Remuneration Objective Actual STI payments granted to each executive depend on the extent to which specific targets set at the beginning of the financial year are met. The targets consist of a number of Key Performance Indicators (KPIs) covering both financial and nonfinancial, corporate and individual measures of performance. Typically included are measures such as contribution to sales growth, meeting research and development milestones, staff retention, net profit after tax, customer service, risk management, product management, and leadership/team contribution. These measures were chosen as they represent the key drivers for the short term success of the business and provide a framework for delivering long term value. The Group has predetermined benchmarks that must be met in order to trigger payments under the STI scheme. On an annual basis, after consideration of performance against KPIs, the Board of Directors, in line with its responsibilities, determines the amount, if any, of the short term incentive to be paid to each executive. This process usually occurs within 3 months after the reporting date. The aggregate of annual STI payments available for executives across the Group is subject to the approval of the Board of Directors. Payments made are delivered as a cash bonus as soon as possible after the STI is approved by the Board of Directors. The STI payments may be adjusted up or down in line with under or over achievement against the target performance levels. This is at the discretion of the Board. Fixed remuneration is reviewed annually by the Chair. The process consists of a review of Company, business unit and individual performance, relevant comparative remuneration externally and internally and, where appropriate, external advice on policies and practices. As noted above, the Chair has access to external advice independent of management. 11
Directors' report Remuneration report (Audited) (continued) STI bonus for 2011 and 2010 financial years For the 2011 financial year, STI cash bonus of $NIL (including the compulsory superannuation element) vested to executives during the 2011 financial year. For the 2010 financial year, STI cash bonuses of $7,000 (including the compulsory superannuation element) vested to executives and were paid during the 2010 financial year. There were no forfeitures. The Board of Directors will consider the STI payments for the 2011 financial year in August 2011. The maximum STI cash bonus for the 2011 financial year is yet to be determined. The minimum amount of the STI cash bonus assuming that no executives meet their respective KPIs for the 2011 financial year is nil. There have been no alterations to the STI bonus plans since their grant date. Variable Remuneration Long Term Incentive (LTI) Objective The objective of the LTI plan is to reward executives in a manner that aligns remuneration with the creation of shareholder wealth. As such, LTI grants are only made to executives who are able to influence the generation of shareholder wealth and thus have an impact on the Group's performance. Structure LTI grants to executives are delivered in the form of share options under the Austofix Group Share Option Plan. Share options may be granted to executives at the discretion of the Board. The share options will vest over a period of 5 years. Executives are able to exercise the share options at any time after vesting before the options lapse. Options expire 10 years after the grant date. These options function as a team incentive: If option holders perform their duties well and that is reflected in the Company s share price then the benefits flow to the holders of the options. Where a participant ceases employment prior to the vesting of their share options, the share options are forfeited unless cessation of employment is due to death. In the event of a change of control of the Group, all options granted but not yet exercisable will become exercisable for a period of 90 days after which they shall lapse, unless the Company opts to buy or cancel the Options, in which case a payment will be made to the Option holder that amounts to the difference between the price offered by the acquirer and the exercise price attaching to the particular options. Table 3 provides details of LTI options granted and Table 4 shows the value of options granted, exercised and lapsed during the year. Employment Contracts Chief Executive Officer The CEO, Mr Mark Szolga, is employed under a rolling contract. The current employment contract commenced on 1 March 2007. Under the terms of the present contract: Mr Szolga receives fixed remuneration of $204,750 per annum, including compulsory superannuation. This was increased from $195,000 effective from 1 July 2008. Mr Szolga may resign from his position and thus terminate this contract by giving 6 months written notice. On resignation any unvested options will be forfeited. The Company may terminate this employment agreement by providing 6 months written notice or providing payment in lieu of the notice period (based on the fixed component of Mr Szolga's remuneration). On termination on notice by the Company, any LTI options that have vested or that will vest during the notice period will be released. LTI options that have not yet vested will be forfeited. The Company may terminate the contract at any time without notice if serious misconduct has occurred. Where termination with cause occurs the CEO is only entitled to that portion of remuneration that is fixed, and only up to the date of termination. On termination with cause any unvested options will immediately be forfeited. Other Executives All executives have rolling contracts. The Company may terminate the executive's employment agreement by providing 2 or 3 months written notice or providing payment in lieu of the notice period (based on the fixed component of the executive's remuneration). On termination on notice by the Company, any LTI options that have vested or that will vest during the notice period will be released. LTI options that have not yet vested will be forfeited. The Company may terminate the contract at any time without notice if serious misconduct has occurred. Where termination with cause occurs the executive is only entitled to that portion of remuneration that is fixed, and only up to the date of termination. On termination with cause any unvested options will immediately be forfeited. The Company prohibits executives from entering into arrangements to protect the value of unvested LTI awards. This includes entering into contracts to hedge their exposure to options or shares granted as part of their remuneration package. 12
Remuneration report (Audited) (continued) Key management personnel and other executives of Table 1: Remuneration for the year ended Non-executive Directors Cash salary and fees Longterm benefits Sharebased payments Directors' report Total Cash bonus Nonmonetary benefits Superannuation Retirement benefits $ $ $ $ $ $ $ $ $ M N Balnaves - Chairman - - - - - - 124 124 - A M Ingman - - - - - - 124 124 - A C Andreyev - - - - - - 124 124 - G Bittar - - - - - - - - - J Michaelis - - - - - - - - - G L Driscoll - - - - - - - - - Sub-total non-executive directors ### - - - - - - 372 372 - Other key management personnel M Szolga ^ # 190,289 - - 14,461 - - 28,259 233,009 - E Laird ^ 145,869 - - 13,128 - - 142 159,139 - D Entwistle ^ 95,000 - - 8,550 - - 71 103,621 - S Blake 33,639 - - 3,027 - - - 36,666 - C Latham ^ # * (resigned 16.3.11) 74,482 - - 34,498 - - 10,598 119,578 - C Mauriello ^ ## 128,440 - - 11,560 - - - 140,000 - Total key management personnel compensation Short-term employee benefits Post-employment benefits 667,719 - - 85,224 - - 39,442 792,385 - % performance related ^ denotes one of the 5 highest paid executives of the Company, as required to be disclosed under the Corporations Act 2001. # Options issued to Messrs Szolga, Latham were issued in 2007 and 2009 when the reference price for the underlying shares was 84 cents, whereas the other options were issued to KMP in September 2006 when the underlying share price was only 10 cents. This has a significant effect on the share-based payments component of remuneration set out above. * The options issued to Mr Latham lapsed after 16 April 2011 when he ceased to be employed by the company. ## Mrs Mauriello became a key management person on 20 April 2010 upon promotion to her present position. ### At the request of the Board of Directors all directors remuneration has been cancelled from 1 June 2010 to. 13
Directors' report Remuneration report (Audited) (continued) Table 2: Remuneration for the year ended 30 June 2010 Non-executive Directors Cash salary and fees Longterm benefits Sharebased payments Total Cash bonus Nonmonetary benefits Superannuation Retirement benefits $ $ $ $ $ $ $ $ $ M N Balnaves - Chairman 36,667 - - 3,300 - - 241 40,208 - A M Ingman - - - 29,975 - - 241 30,216 - A C Andreyev 27,500 - - 2,475 - - 241 30,216 - J Michaelis 27,725 - - 2,250 - - - 29,975 - G L Driscoll 27,500 - - 2,475 - - - 29,975 - G J Bittar (appointed 26 March 2010) - - - - - - - - - Sub-total non-executive directors 119,392 - - 40,475 - - 723 160,590 - Other key management personnel M Szolga ^ # 190,349 - - 14,461 - - 49,492 254,302 - E Laird ^ 135,600 - - 10,974 - - 298 146,872 - D Entwistle 95,000 - - 9,255 - - 149 104,404 - C Latham ^ # 107,040 4,545-49,786 - - 17,758 179,129 2.8% B Schoeman (to 12 April 2010) ^ # * 131,374 - - 11,824 - - 17,758 160,956 - C Mauriello (from 20 April 2010) ^ ## 104,835 1,818-9,921 - - - 116,574 1.7% Total key management personnel compensation Short-term employee benefits Post-employment benefits % performance related 883,590 6,363-146,696 - - 86,178 1,122,827 0.6% ^ denotes one of the 5 highest paid executives of the Company, as required to be disclosed under the Corporations Act 2001. # Options issued to Messrs Szolga, Latham and Schoeman were issued in 2007 and 2009 when the reference price for the underlying shares was 84 cents, whereas the other options were issued to KMP in September 2006 when the underlying share price was only 10 cents. This has a significant effect on the share-based payments component of remuneration set out above. * The options issued to Mr Schoeman lapsed after 30 June 2010 when he ceased to be employed by the company. ## Mrs Mauriello was an employee throughout both financial years ended 30 June 2009 and 2010 but only became a key management person on 20 April 2010 upon promotion to her present position. Details of options over ordinary shares in the Company provided as remuneration to each Director of and each of the key management personnel of the parent entity and the Group are set out in Table 3 below. When exercisable, each option is convertible into one ordinary share of. Further information on the options is set out in note 29 to the financial statements. 14
Directors' report Remuneration report (Audited) (continued) Table 3: Summary of options granted and vested during the year Name Directors of Number of options Number of options granted / (lapsed) Number of options vested (exercised) during the year during the year during the year 2011 2010 2011 2010 2011 2010 M N Balnaves - - 32,514 32,514 - (325,140) A M Ingman - - 32,514 32,514 - (325,140) A C Andreyev # (162,570) - 32,514 32,514 - (325,140) J Michaelis - - - - - - G L Driscoll - - - - - - G J Bittar - - - - - - Other key management personnel of the Group M Szolga - - 130,056 130,056 - - E Laird - - 65,028 65,028 - - D Entwistle - - 32,514 32,514 - - D Brammy # (162,570) - - - - - B Schoeman # (162,570) - - - - - C Latham # (162,570) - - 32,514 - - C Mauriello - - - - - - Total held by KMP (650,280) - 325,140 357,654 - (975,420) Held by others ** - (150,000) - 32,514 - - Total options on issue (650,280) (150,000) 325,140 390,168 - (975,420) ** Held by other Group staff and advisors. # Messrs Andreyev, Brammy, Schoeman, and Latham options lapsed when they resigned from the Company in 2011. In addition to information from the above table, the model inputs for options granted during the years ended 30 June 2007, 2008, 2009 and 2010 included: (a) Options are granted for no consideration and vest over the period from grant date to vesting date. (b) Vested options are exercisable for a period up to ten years from the original grant date. (c) Grant date: 22 September 2006 to 24 July 2007; share price at grant date: $0.10 to $1.50 depending on the time of grant of the options. (d) Grant date: 3 March 2009; share price at grant date was $0.84. (e) Expected price volatility of the Company s shares: 40% (2008-40%); expected dividend yield: 0% (2008-0%); risk-free interest rate: 5.7% (2008-5.7%). No options were granted during the year ended 30 June 2010 and 2011. 15
Directors' report Remuneration report (Audited) (continued) Shares under option Table 5: Summary of unissued ordinary shares under option to employees at the date of this report: Date options granted Expiry date Exercise price of shares Number under option Value per option at grant date $ $ 22 September 2006 21 September 2016 0.42 22 September 2006 21 September 2016 0.63 1 March 2007 28 February 2017 0.63 24 July 2007 23 July 2017 0.63 325,140 487,710 325,140 325,140 0.01 0.01 0.50 0.50 Total 1,463,130 The terms and conditions of each grant of options affecting remuneration in the previous, this or future reporting periods are set out in the table above, no options have lapsed since the reporting date. No option holder has any right under the options to participate in any other share issue of the Company or any other entity. Options granted under the plan carry no dividend or voting rights. When exercisable, each option is convertible into one ordinary share. The exercise price of options is determined at the time of granting. Shares issued on the exercise of options No shares of were issued during the year ended (2010: 975,420) on the exercise of options granted under the Austofix Group Share Option Plan. No further shares have been issued since that date. No amounts are unpaid on any of the shares. This report is made in accordance with a resolution of Directors. M N Balnaves Director Adelaide 29 September 2011 16
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Corporate Governance Statement Corporate governance statement The Austofix Group supports the principles of effective corporate governance and is determined to engage the highest standards of performance and accountability commensurate with the size of the Company and the resources available to it. Accordingly, the Board has adopted corporate governance practices designed to promote responsible management and conduct of the Company s business. The practices apply equally to the Company s wholly owned subsidiaries. The Directors are aware of their duties and responsibilities and have adopted a Code of Conduct to promote ethical and responsible decision making. A description of the Company's main corporate governance practices is set out below. All these practices, unless otherwise stated, were in place for the whole of the 2011 financial year. A review of the practises was conducted in September 2011 and an updated policy is now published on the Company website. The Board of Directors The Board operates in accordance with the broad principles set out in its charter, which is available from the investors corporate governance information section of the Company website at www.austofix.com.au. The charter details the Board s role, composition and responsibilities. Board composition The charter states that the Board supports the principle of having a majority of non-executive and independent Directors. However, it is mindful that in the early stages of the Company s development other competing priorities that may impact on the Board s structure could be of greater importance, in terms of increasing shareholder value, than the independence of Directors. There were a majority of non-executive Directors on the Board during the relevant financial year, including the Chair, who is elected by the Board. The Board s policy is to review its performance and composition on a regular basis to ensure that there is an appropriate balance of experience and skills to match the size, scope and nature of the Company s activities. When a vacancy arises, for whatever reason, or where it is considered the Board would benefit from the appointment of a Director with particular skills and experience, the Board s policy is to select potential candidates, with advice from an external consultant if necessary. The most suitable candidate is then appointed subject to election at the next general meeting of shareholders. Directors are appointed by rotation for three years after which they retire and may seek re-election by shareholders. It is the Board s intention to meet on a monthly basis. In addition, special or strategy meetings will be held at such other times as may be necessary to address specific significant matters that may arise. This occurred in relation to the relevant financial year. Board members Details of the members of the Board, their experience, expertise, qualifications, term of office and independent status are set out in the Directors Report under the heading ''Information on Directors''. There were five Directors (all non-executive Directors) at the beginning of the relevant financial year. There were three Directors at the date of signing the Directors Report. Chair and Chief Executive Officer (CEO) The Chair is responsible for leading the Board, ensuring Directors are properly briefed in all matters relevant to their role and responsibilities, facilitating Board discussions and managing the Board s relationship with the Company s senior executives. The CEO is responsible for implementing Group strategies and policies as determined by the Board. The Board charter specifies that these are separate roles to be undertaken by separate people. Performance assessment The remuneration of executive and non-executive Directors is reviewed by the Board with the exclusion of the Director concerned. The remuneration of management and employees is reviewed by the Board and approved by the Chair. Remuneration levels are determined by the Board on an individual basis at reasonable but competitive market rates, with the size of the Company dictating that individual assessment is more appropriate than formal remuneration policies. External advice on remuneration matters will be sought whenever it is deemed necessary. Details concerning the remuneration policy as it applies to Directors and other key management personnel of the Group are set out in the Remuneration Report in the Directors Report which precedes this Corporate Governance Statement. Nomination committee Austofix does not have a separate nomination committee. Being a smaller company, Austofix has included in its Board Charter the policy to review its performance and composition on a regular basis as well as seeking advice from an external consultant if necessary. Remuneration committee Austofix does not have a remuneration committee as its small size enables the Board to take on the responsibility for the roles that would otherwise rest with the remuneration committee. All matters which might properly be dealt with by special committees are subject to regular scrutiny at full Board meetings. The Board may, from time to time, constitute a committee to advise the Board. Audit committee Austofix has not been and is not listed on the S&P All Ordinaries Index and as such is not required to have an Audit Committee. The Board does understand the importance of integrity over the financial statements and independence of the external auditor. To this extent, the Board Charter dictates that the Board instigates internal procedures designed to provide reasonable assurance as to the reliability of financial reporting. 18
Corporate Governance Statement Corporate governance statement (continued) Finance Committee Austofix formed a Finance Committee after 30 June 2010 to focus on detailed financial analysis of the Austofix Group. It continues to meet regularly up to and including the date of the signing of the Directors Report. Capital Raising Committee As the Board of Austofix reduced in number over the relevant financial year, and due to the small size of the Company, a capital raising committee was not formed. The Company will consider whether or not to form a Capital Raising Committee in the future. Disclosures To ensure Austofix complies with the relevant ASX listing rule disclosure requirements, a continuous disclosure policy has been included in the corporate governance statement. This policy outlines the requirement to have a designated ASX communications officer. Duties of this officer include: communicating with ASX in relation to Listing Rule matters; ensuring that the Company complies with the continuous disclosure obligations; To improve the effectiveness of communication, the policy will be updated as and when appropriate to ensure that technological advances and additional features on the Company s website are utilised in the Company s communication with its shareholders and recognised in this policy. Risk assessment and management The Board acknowledges that a sound framework of risk oversight, risk management and internal control is fundamental to good corporate governance. It supports reliable financial reporting, compliance with relevant laws and regulations, and effective and efficient operations. The Company s process of risk management, including implementation of appropriate internal controls and compliance, is to: establish the Company s goals and objectives; design, implement and monitor strategies and policies to achieve the Company s goals and objectives; continually identify potential material business risks and measure their possible impact upon the achievement of the Company s goals and objectives; and formulate risk management strategies to manage identified risks and monitor/assess the performance of the risk management system. overseeing and co-ordinating disclosure of information to ASX, analysts, brokers, shareholders, the media and the public; and educating Directors, officers and employees on the Company s disclosure obligations, policies and procedures and raising awareness of the principles underlying continuous disclosure. To ensure accountability at a senior level, the policy prescribes the ASX Communications Officers to be the CEO and the Company Secretary. The Secretary will be the primary ASX Communications Officer for the purpose of administering notifications to the ASX. The ASX Communications Officer should be made aware of all proposed disclosures to the ASX in advance. Shareholder Communications Policy The role of Communications Officer extends to the Shareholder Communications Policy, included in the Corporate Governance Statement. This policy ensures the Company website will be updated with material released to the market as soon as practicable after confirmation of receipt by the ASX. The Company acknowledges that communicating with shareholders by electronic means, particularly through its website, is an efficient way of distributing information in a timely and convenient manner. To this end the Company has endeavored to provide links on its website to information relevant to shareholders. Furthermore, the Company may write a letter directly or publish a periodical newsletter to shareholders during a financial year to keep shareholders informed on a more frequent basis. The Board and the CEO are responsible for establishing the Company s goals and objectives and overseeing the establishment, implementation and review of the Company s material business risk management system. The CEO and the Company s senior executives are responsible for establishing and implementing the risk management system to identify, control and manage strategic, technical, operational and other material business risks. The CEO, Secretary and other senior executives meet regularly to discuss the achievement of the Company s goals and objectives. Any material risks would be tabled at these meetings and procedures are implemented to monitor and deal with these identified material risks. The CEO has undertaken to inform the Board of any new material risks and outline the actions that have been undertaken to manage such material risks. Code of Conduct The Board recognises that their primary responsibility is to the owners of the Company, its shareholders, while simultaneously having regard for the interests of all stakeholders of the Company and the broader community. Austofix has included a Code of Conduct in its Corporate Governance statement, a summary of which is included below. All Directors, staff, regular consultants and contractors, when acting on behalf of the Austofix Group, are expected to act with the utmost integrity and objectivity in their dealings with other parties, striving at all times to enhance the reputation and performance of the Company. 19
Corporate Governance Statement Corporate governance statement (continued) The Board accordingly encourages the following principles to be adhered to by all employees at all times. Employee in this context includes Directors, staff, and regular consultants and contractors when acting on behalf of the Company: act with and promote the highest standards of ethics and integrity in carrying out duties on behalf of the Company; respect and observe the laws and other regulations of Australia, complying at all times with the spirit as well as the letter of the law, particularly those within the communities in which the Company operates; commit to adherence to health and safety standards, both of products, through compliance with manufacturing and other best practice standards, and in the provision of safe employee work environments; where concerns arise, the Chairman, CEO or any Director should be advised before any decision is taken; respect the rights of employees of the Company; respect the rights of all shareholders, acknowledging that they are the owners of the Company; respect the rights of the Company s stakeholders, including its customers, suppliers end consumers and the broader community in which they operate; By promoting Director and employee ownership of shares, the Board hopes to encourage Directors and employees to become long-term holders of Company shares, aligning their interests with those of the Company. The Company adopted a new share trading policy in January 2011, which has been complied with up until the date of signing the Directors Declaration. A copy of that policy is on the Company s website. Independent of the above, Directors and other officers (including staff and regular consultants and contractors) should not deal in (buy or sell) the Company s shares when they are in possession of price-sensitive information that is not generally available to shareholders and the public and which information could induce shareholders or the public to deal in the Company s shares. No Director will deal in any of the Company s shares without first complying with the procedures set out in the share trading policy. The Company will release its half-yearly and annual reports to the ASX and the Australian Securities and Investments Commission (ASIC) in February and September of each year. Other announcements are made at times when the Board deems it appropriate in accordance with the Listing Rules and the Corporations Act. Any staff, officers, consultants or contractors who have any queries or concerns relating to the share trading policy will, in the first instance, comply with the provisions of that policy. never make improper use of knowledge, information, documents or other Company resources obtained in the course of employment with the Company. Information about the Company that is not publicly available (inside information) should not be used by employees for their private gain, or that of others; and when any real or perceived conflict of interest arises, when acting on behalf of the Company, advice should be sought from the Chairman, CEO or any Director. Share Trading Policy Directors, executives and other officers and employees cannot make use of information acquired through their position within the Company in order to make a profit for themselves. This general duty is supplemented by sections 182 and 183 of the Corporations Act 2001 which prohibits Directors, executives and other officers and employees from making improper use of their position to gain an advantage for themselves or for anyone else by dealing in the Company s shares where that information is not generally available to the public. This prohibition applies to all companies, whether listed on the Australian Securities Exchange ( ASX ) or not. Section 1043A of the Corporation Act provides a broader prohibition of insider trading. The essence of that provision is that a person who is in the possession of information that is not available to other shareholders or the public which, if other shareholders or the public were aware of such information it may induce them to deal in the Company s shares, then that person in possession of the information should not deal in the Company s shares. 20
Corporate Governance Statement Corporate governance statement (continued) Diversity Policy The Company did not have a formally documented diversity policy until September 2011. The reason for not having a formal policy was because the Company was not considering appointing significant new employees over the relevant financial year..for personal use only The diversity policy explains Austofix's: commitment to promoting a positive workplace culture and employment based on merit free from discrimination and harassment; the measures in place with regard to appointments, promotions and other opportunities; and the internal review process (which is to be conducted annually) of diversity within the Company. When the Board or CEO is considering an appointment, employment, promotion, termination or other career event in relation to an employee, Austofix (or its representatives) will consider: the merit for internal promotion, leadership development and flexible work arrangements with regard to the employee; qualifications and experience of the employee relevant to the career event; whether there is an opportunity to enhance the diversity of Austofix, with a particular focus on addressing the imbalance of gender at the senior executive and Board level; and any other value that Austofix thinks fit provided that such consideration is in the best interests of the shareholders of Austofix and is not discriminatory. There was one female senior executive but no female board members in Austofix at the date of signing the Directors Declaration. The current percentage of female workers in the Company as a proportion of the whole workforce was 37% at the date of signing the Directors Declaration. The diversity policy is available on the Company s website. 21
Consolidated statement of comprehensive income For the Financial Year Ended Note 2011 2010 $ $ Revenue 5 1,603,305 2,648,021 Cost of sales (1,025,099) (1,016,114) Gross profit 578,206 1,631,907 Other income 6 234,208 127,612 Expenses: Marketing, selling and distribution expenses (923,629) (1,300,443) Research and development expenses (80,366) (258,869) Occupancy expenses (90,439) (92,108) Share-based payments expenses (36,464) (86,250) Corporate expenses (211,320) (340,079) Administration expenses (344,711) (486,239) Other expenses - (68,534) Finance expenses (198,591) (70,651) (Loss) / profit before income tax 7 (1,073,106) (943,654) Income tax benefit 8 492,645 602,342 (Loss) / profit for the year (580,461) (341,312) Other comprehensive income Other comprehensive income for the year, net of tax - - Total comprehensive income for the year (580,461) (341,312) (Loss) / profit attributable to: Members of the parent entity (580,461) (341,312) Non-controlling interests - - (580,461) (341,312) Total comprehensive income attributable to: Members of the parent entity (580,461) (341,312) Non-controlling interests - - (580,461) (341,312) Earnings per share Cents Cents from continuing and discontinued operations: Basic earnings per share 35 (4.5) (3.0) Diluted earnings per share 35 (4.5) (3.0) The above statement of comprehensive income should be read in conjunction with the accompanying notes. 22