year in review our mission highlights ANNUAL REPORT 2005 healthy brands return healthy profits building great brands that people love

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1 ANNUAL REPORT 2005 year in review healthy brands return healthy profits our mission building great brands that people love highlights Bracks joins the Group Gazal Corporation Limited and its Controlled Entities ABN Autumn wears Honolulu by Kookaï

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3 contents WHO WE ARE 3 OUR MISSION, OUR CORE VALUES, OUR VISION 5 THE YEAR IN REVIEW 6 FINANCIAL CALENDAR 2005 PRELIMINARY FINAL REPORT AND DIVIDEND ANNOUNCEMENT RECORD DATE FOR FINAL DIVIDEND FINAL DIVIDEND PAYABLE ANNUAL REPORT AND NOTICE OF ANNUAL GENERAL MEETING MAILED TO SHAREHOLDERS ANNUAL GENERAL MEETING HALF YEAR END 25 AUGUST 23 SEPTEMBER 7 OCTOBER 27 OCTOBER 24 NOVEMBER 31 DECEMBER FINANCIAL SUMMARY 7 FINANCIAL REPORT 13 GROUP DIRECTORY 68 THE ANNUAL GENERAL MEETING OF SHAREHOLDERS OF GAZAL CORPORATION LIMITED WILL BE HELD AT THE J.S. GAZAL BUILDING, 3 7 McPHERSON STREET BANKSMEADOW ON 24 NOVEMBER, 2005 AT 11.30AM. A FORMAL NOTICE OF MEETING IS ENCLOSED WITH THIS ANNUAL REPORT SETTING OUT THE BUSINESS OF THE ANNUAL GENERAL MEETING. 1

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5 who we are THE GAZAL GROUP OF COMPANIES WAS FOUNDED BY THE LATE JOE GAZAL IN SYDNEY IN 1958 AS A SMALL COMPANY MANUFACTURING MEN S SHIRTS AND PYJAMAS. THE BUSINESS GREW QUICKLY AND SOON GAINED A REPUTATION AS A RELIABLE, CUSTOMER-FOCUSED CLOTHING SUPPLIER. The Group was first listed as a public company in 1973, which gave the Company the capital resources required for growth through its acquisitions and expansions. The 1970s and 1980s saw the Group capitalise on its strengths as a dependable, quality, volume supplier to the major national retail chains. When the import quota system was dismantled in the late 1980s, Gazal restructured its supply base and rationalised its domestic factories. The way of the future was clearly an international one, and the Gazal Group began to further develop its network of overseas suppliers and manufacturers. In 1993, the Group made a key strategic move to rationalise its unbranded business and make its national brands the main focus of the Company. Efforts and resources were concentrated on this direction and it proved a major turning point in the evolution and growth of the Gazal Group of Companies. From this point onwards the strength of the Group has come from developing existing brands and building new brands. Today we are directing our energies and resources towards ownership and licensing of national and international apparel brands that are within our core product categories. An important part of maintaining apparel brands is the process of effective inventory management, which lead the Gazal Group into factory outlet retailing in the early to mid 1990s. We have continued to steadily and selectively build our presence in this area. With our two formats of factory outlet models trading under Trade Secret stores and Brands United stores we now have 16 stores under these two formats and we continue to carefully look for opportunities as they arise. Today Gazal is positioned as one of the leading branded apparel companies listed on the Australian Stock Exchange, with this year s operating revenue of approximately $217 million, total assets of $154 million and total Group employees of 730 people. In line with our mission of building great brands that people love, we announced the acquisition in August 2005 of the Bracks Apparel Group. The Bracks business is the long-established market leader in men s pants and trousers in Australasia, famous for its renowned Bracks slacks. THESE PRODUCT CATEGORIES WILL COMPLEMENT GAZAL S SIGNIFICANT PRESENCE IN THE BUSINESSWEAR MARKET SEGMENT, WHICH INCLUDES OUR WELL-ESTABLISHED VAN HEUSEN BRAND. In recent years, the business has expanded its ranges to include men s suits, shirts and knitwear. In the acquisition, Gazal has acquired Bracks Australian business, which is headquartered in Silverwater, Sydney, as well as Bracks growing New Zealand business located in Auckland. The acquisition will take the Company into the additional product categories of men s casual and formal trousers and men s suits. These product categories will complement Gazal s significant presence in the businesswear market segment, which includes our well-established Van Heusen brand. Gazal is pleased to be able to add the well-respected Bracks brand name to its impressive portfolio of existing brands including Mambo, Maui and Sons, SMP, Nautica, Kenneth Cole, Trent Nathan, Van Heusen, Davenport, Calvin Klein, Lovable, Oroton, Crystelle, Playboy, Warners, Morrissey, Kookaï, Body Nancy Ganz, Bisley and Midford. TODAY WE ARE DIRECTING OUR ENERGIES AND RESOURCES TOWARDS OWNERSHIP AND LICENSING OF NATIONAL AND INTERNATIONAL APPAREL BRANDS THAT ARE WITHIN OUR CORE PRODUCT CATEGORIES. 3

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7 our mission Building great brands that people love is our focus and our passion our core values Customers First Delivery, performance and service Growth We chase business but it must be profitable Opportunity Every individual has every opportunity to succeed Recognition and Reward For effort and success Family and Relationships Personal with each other and customers Integrity We do what we say we re going to do our vision We are the leading specialist branded apparel group. We are profitable every year, focusing on maximising shareholder value over time. We serve our customers with industry best weekly replenishment order fulfillments, consistent quality, delivering on time and with service that exceeds their expectations. We are the market leader in operational efficiency across our brands. We continually invest in marketing our brands to ensure their success for the long-term. Our people are our competitive advantage. We will provide them with every opportunity to excel and achieve their full potential. As a result of our people reaching their potential, we will reach our potential. We acknowledge the contribution of our team by sharing with it the rewards of our success. We combine large company thinking with the values, execution, efficiency, flexibility and agility of a small family operation. We think long-term. 5

8 the year in review THE GAZAL CORPORATION LIMITED GROUP RECORDED AN AFTER TAX PROFIT OF $ MILLION FOR THE YEAR ENDED 30 JUNE THIS WAS AN INCREASE OF 15.2% ON THE PREVIOUS YEAR. EARNINGS PER SHARE (EPS) INCREASED BY 11.2% TO 20.9 CENTS PER SHARE. Earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 5.2% to $ million. EBITDA margin decreased slightly to 11.3% of sales compared to 11.8% of sales for the previous year. Whilst trading conditions in the first half of the financial year were buoyant, the second half trading results were impacted by the general economic slow-down and the late on-set of winter weather. Also as stated in the half yearly announcement, we invested in brand building activities by increased advertising and promotional expenditure, which continued through into the second half. The Company s key brands including Van Heusen, Nautica, Calvin Klein, Lovable, Midford and Bisley, all performed to expectation and we continue to project substantial growth potential for the Bisley workwear business. Mambo s results for the full year to 30 June 2005 were an improvement on the previous 12 months and management continues to work hard on delivering on our strategic objective to restore Mambo to its sales and profit potential with the medium to longer-term goal to build a truly global surf brand. The Group s overall inventory position improved at the end of the financial year with our closing stock value lower by $1.473 million than that at the same time last year to close at $ million on 30 June Improved inventory management and supply chain efficiencies have been and continue to be an extremely important priority for the Board and management. The Group s entry into tax consolidation resulted in a lower effective tax rate during the period under review. Despite this, however, timing issues resulted in actual Company income tax payments during the year being greater than the previous corresponding period by $2.355 million. This negatively impacted cash flows from operating activities. The Group s balance sheet and cash generation remains in a healthy position. BRACKS ACQUISITION On 25 August 2005, the Company announced it had acquired the Bracks Apparel Group (Bracks) effective from 22 August Founded in 1945, the Bracks business is the long-established market leader in men s pants and trousers in Australasia, famous for its renowned Bracks slacks. In recent years, the business has expanded its ranges to include men s suits, shirts and knitwear. In the acquisition, Gazal has acquired Bracks Australian business, which is headquartered in Silverwater, Sydney, as well as Bracks growing New Zealand business located in Auckland. We are pleased to be able to add the well-respected Bracks brand name to Gazal s impressive portfolio of existing brands. The acquisition will also take the Company into the additional product categories of men s casual and formal trousers and men s suits. These product categories will complement Gazal s significant presence in the businesswear market, which includes our well-established Van Heusen brand. It is expected that in the first 12 months of ownership the acquisition will be earnings per share positive. Management and the Board are continuing to review further strategic growth options with the assistance of Rothschild Australia and we are currently assessing several additional opportunities. 6 G A Z A L A N N U A L R E P O R T

9 financial summary DIVIDENDS The Directors declared a final dividend of 9 cents per share fully franked (final dividend 2004: 9 cents per share fully franked) taking the total dividend for the year to 16 cents per share fully franked (total dividends 2004: 15.5 cents per share fully franked). This is an increase of 3.2% on last year. The record date for determining shareholders entitlement for the final dividend is 23 September 2005 and the final dividend is payable on 7 October In line with our capital management initiatives, the second special dividend of 10 cents per share fully franked was paid in July 2005, to which the Company s Dividend Reinvestment Plan (DRP) was applied. Shareholders representing 17.2% of equity interests participated in the DRP. This resulted in a further 365,328 ordinary shares allotted at a price of $2.89 per ordinary share totalling $1.055 million equity reinvested in the Company out of the $6.124 million special dividend paid. The impact on EPS was negligible. The Directors would like to convey their appreciation to management and staff for their contribution to a year of excellent results for the Group. We also wish to thank you, our shareholders, for your continuing support. AT YEAR END 30 JUNE ($ 000 UNLESS INDICATED) CHANGE Trading Total operating revenues 216, , % Operating profit before interest, tax, depreciation and amortisation (EBITDA) 23,920 22, % Net profit after tax attributable to members of the parent entity 12,481 10, % Balance sheet Contributed equity attributable to members of the parent entity 90,082 93, % Total assets 153, , % Net debt bearing interest 34,453 34, % Per share Earnings undiluted (cents) % Dividend fully franked (cents) % Key ratios EBITDA to sales (%) Return on shareholders funds attributable to members of the parent entity (%) Net debt to total equity ratio (%) Interest cover (times) J.W. Blood Chairman 17.7 EBITDA ($ MILLIONS) PROFIT AFTER TAX ($ MILLIONS) DIVIDENDS (CENTS PER SHARE) M.J. Gazal Managing Director

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11 undercover WE RE NOT AFRAID TO TAKE THE HEAT IN THE HIGHLY COMPETITIVE INTIMATE APPAREL CATEGORIES. OUR INVESTMENT IN THE BRANDS AND OUR SUPPLY CHAIN MANAGEMENT HELPS PUT OUR UNDERWEAR ON TOP. 9

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13 overwear OUR DESIRE TO MAINTAIN AND BUILD ON OUR DOMINANT POSITION IN BUSINESS SHIRTS, CASUAL WEAR, SURFWEAR, SCHOOLWEAR AND WORKWEAR CATEGORIES IS WHAT KEEPS US WORKING IT. OUR VARIETY OF BRANDS ENSURES WE HAVE EVERY WORK AND PLAY OCCASION BUTTONED UP. 1 1

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15 Contents FOR THE 2005 FINANCIAL REPORT Directors Report DIRECTORS REPORT 13 STATEMENT OF CORPORATE GOVERNANCE PRACTICES 22 INDEPENDENT AUDIT REPORT 25 DIRECTORS DECLARATION 27 STATEMENT OF FINANCIAL PERFORMANCE 28 STATEMENT OF FINANCIAL POSITION 29 STATEMENT OF CASH FLOWS 30 NOTES TO THE FINANCIAL STATEMENTS 31 SHAREHOLDER INFORMATION 64 TOP 20 SHAREHOLDERS 65 FIVE YEAR FINANCIAL SUMMARY 66 GROUP DIRECTORY 68 Your Directors have pleasure in submitting their report for the year ended 30 June DIRECTORS The names and details of the Company s Directors in office during the financial year and until the date of this report are as follows. Directors were in office for this entire period unless otherwise stated. Names, Qualifications, Experience and Special Responsibilities John W. Blood Non-Executive Chairman Has had widespread experience in the textile and garment industry. He is presently a Director of Canning Vale Weaving Mills and Cotton Seed Distributors. He is a member of the Remuneration and Nomination and Audit Committees Michael J. Gazal BCOM Managing Director Joined the Gazal Group in 1986, after gaining experience in merchant banking and stockbroking. In November 1989 after the passing of Mr J.S. Gazal AM, his father and founding Chairman of the Gazal Group, he was appointed Chief Executive Officer and is responsible for the day-to-day management of the Group. David J. Gazal Executive Director Joined the Gazal Group in 1987, was appointed Director on 24 April 1999 and has performed a number of key roles within the Group since joining, including Group Divisional Manager of Surf and Casualwear and Managing Director of Mambo. Cameron O Reilly BA (Hons) OXON Non-Executive Director Formerly Chief Executive of APN News and Media Limited. He is a member of the Remuneration and Nomination and Audit Committees. During the past three years, Mr O Reilly has also served as a director of the following listed companies of which he is still a director: APN News and Media Limited Independent News and Media Plc Iress Market Technology Limited. Craig Kimberley Non-Executive Director The founder of the Just Jeans retail chain, he has had 30 years experience in the retail and apparel industries. Mr Kimberley was appointed to the Board on 28 January

16 Directors Report DIRECTORS continued Albert E. Harris Non-Executive Director During the past three years, Mr Harris has also served as a director of the following listed companies: APN News and Media Limited* Thakral Holdings Group* Metcash Trading Limited*. * Denotes current director. Mr Harris retired from the Board on 25 November David J. Fairfull Non-Executive Director During the past three years, Mr Fairfull has also served as a director of the following listed companies: Australian Pharmaceutical Industries Limited* New Hope Corporation Ltd* Stockland Corporation Limited* Stockland Trust Management Limited* Souls Private Equity Limited* SP Telemedia Ltd* Washington H Soul Pattinson Group* KH Foods Limited Clover Corporation Limited. * Denotes current director. Mr Fairfull retired from the Board on 25 November Company Secretary Peter J. Wood CA FICS Has been the company secretary of Gazal Corporation Limited for 18 years. Prior to holding this position, he held the role of Financial Controller of related Gazal companies for six years. Mr Wood has been a Chartered Accountant for over 25 years. DIRECTORS INTERESTS At the date of this report, the direct interests of the Directors in the shares and other equity securities of the Company and related bodies corporate are: Shares Relevant Options Relevant Directly Interest In Directly Interest In Director Held Shares Held Held Options Held J.W. Blood 250,000 93, M.J. Gazal 4,610,817 29,712,911 (1) 868,799 (2) - - D.J. Gazal 1,543,834 29,712,911 (1) 868,799 (2) 1,650,728 (3) - - A.C. O Reilly - 10, C. Kimberley - 16, M.J. Gazal and D.J. Gazal have a relevant interest in Gazal Corporation Limited shares held by a wholly owned subsidiary of Gazal Nominees Pty Limited (1) and directly by Gazal Nominees Pty Limited (2) as each of M.J. Gazal and D.J. Gazal have a 25% shareholding in Gazal Nominees Pty Limited. 3 D.J. Gazal has a relevant interest in Gazal Corporation Limited shares held by The David Gazal Family Company Pty Limited as trustee for the David Gazal Family Trust as D.J. Gazal has a 50% shareholding in The David Gazal Family Company Pty Limited. 14 GAZAL ANNUAL REPORT 2005

17 Directors Report DIRECTORS MEETINGS The names of Directors and members of Committees of the Board are outlined below. The attendances of the Directors at meetings of the Board and of its Committees were: Audit Remuneration and Board of Directors Committee Nomination Committee Attended Maximum Attended Maximum Attended Maximum Possible Possible Possible Attended Attended Attended J.W. Blood M.J. Gazal D.J. Gazal A.C. O Reilly C. Kimberley** A.E. Harris* D.J. Fairfull* * Retired 25 November ** Appointed 28 January PRINCIPAL ACTIVITIES The principal activities of the economic entity in the course of the financial year were the design, manufacture, importation, wholesale and retail of well known branded apparel and accessories. OPERATING RESULT The consolidated profit of the economic entity for the financial year ended 30 June 2005 after income tax and outside equity interest was $12,481,000. This represents a 15.2% increase on the 2004 result of $10,835,000. DIVIDENDS The following dividends of the economic entity have been paid, declared or recommended since the end of the preceding financial year: On Ordinary Shares $ Final fully franked dividend for 2004 (9c per share) as declared in the 2004 Directors report paid 5 October ,372,491 Special fully franked dividend (10c per share) as declared in the 2004 Directors report paid on 17 December ,979,461 Interim fully franked dividend for 2005 (7c per share) paid 4 April ,268,264 Final fully franked dividend for 2005 (9c per share) as recommended and declared by the Directors, payable 7 October ,544,691 Special fully franked dividend (10c per share) as recommended and declared by the Directors paid on 15 July ,124,235 15

18 Directors Report REVIEW OF OPERATIONS A review of operations of the economic entity and the results of those operations is contained in The year in review on page 6. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS There were no significant changes in the state of affairs of the economic entity that occurred during the financial year not otherwise disclosed in this report or in the consolidated financial statements. SIGNIFICANT EVENTS AFTER BALANCE DATE Other than the announcement that the Company has acquired the business of the Bracks Group of Companies effective from 22 August 2005, there are no other matters or circumstances that have arisen since 30 June 2005 that have significantly affected or may significantly affect the operations of the economic entity, the results of those operations or the state of affairs of the economic entity in subsequent financial years. LIKELY DEVELOPMENTS AND FUTURE RESULTS The Directors have excluded from this report any further information on the likely developments in the operations of the economic entity and the expected results of those operations in future financial years, as the Directors have reasonable grounds to believe that it would be likely to result in unreasonable prejudice to the economic entity. ENVIRONMENTAL REGULATION PERFORMANCE The economic entity s environmental obligations are regulated under both State and Federal Law. The Audit Committee monitors environmental obligations. The economic entity has a policy of at least complying, but in most cases exceeding its environment performance obligations. No environmental breaches have been notified by any government agency during the year ended 30 June SHARE OPTIONS Details of options granted to Directors or relevant officers as part of their remuneration are set out in the section of this report headed Directors and Officers Remuneration. Details of shares and interests under option, or issued during or since the end of the financial year due to the exercise of an option, are set out in Note 20 of the financial statements and form part of this report. INDEMNIFICATION OF OFFICERS Insurance arrangements established in the previous year concerning officers of the economic entity were renewed during An indemnity agreement has been entered into during the year between Gazal Corporation Limited and each of the Directors of the Company named earlier in this report. Under the agreement, the Company has agreed to provide reasonable protection for the Directors against liabilities, which may arise as a result of work performed in their respective capacities. As part of the above agreement, Gazal Corporation Limited paid an insurance premium in respect of a contract insuring each of the Directors of the Company named earlier in this report and each full-time executive officer, Director and Secretary of Gazal Corporation Limited and its controlled entities, against all liabilities and expenses arising as a result of work performed in their respective capacities, to the extent permitted by law. The terms of the above insurance policy prohibit disclosure of the nature of the risks insured or the premium paid. REMUNERATION REPORT This report outlines the remuneration arrangements in place for Directors and executives of Gazal Corporation Limited (the Company). Remuneration Philosophy The performance of the Company depends upon the quality of its Directors and executives and, to grow and 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 variable executive remuneration to financial and operational performance. Link executive rewards to shareholder value. 16 GAZAL ANNUAL REPORT 2005

19 Directors Report Remuneration and Nomination Committee The Remuneration and Nomination Committee of the Board of Directors is responsible for determining and reviewing compensation arrangements for the Directors, the Chief Executive Officer and the senior management team. The Remuneration and Nomination Committee assesses the appropriateness of the nature and amount of emoluments of such officers on a periodic basis by reference to relevant employment market conditions, with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality Board and executive team. 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 which provides the Company with the ability to attract and retain Directors of the highest calibre, whilst incurring a cost which is acceptable to shareholders. As part of an ongoing review of the Company s Corporate Governance policies and practices, the Board has decided to abolish the Non-Executive Director Retirement Allowance (in accordance with best market practice) and cease payments of this allowance to existing Non-Executive Directors effective from 30 June In order to compensate Non-Executive Directors for the future lack of retirement allowance and to ensure we maintain relativities with comparable Companies, we have sought advice on the level of remuneration necessary to attract and retain quality Non-Executive Directors. During the year, the fees payable to Non-Executive Directors were increased as part of an ongoing review, albeit within the pool of Directors fees previously approved by shareholders. Structure The Constitution and the Australian Stock Exchange (ASX) Listing Rules specify that the aggregate remuneration of Non-Executive Directors shall be determined from time to time by a general meeting. An amount not exceeding the amount determined is then divided between the Directors as agreed. The latest determination was at the Annual General Meeting held on 30 November 2001, when shareholders approved an aggregate remuneration of $500,000 per year. The amount of aggregate remuneration sought to be approved by shareholders and the manner in which it is apportioned amongst Directors is reviewed annually. The Board considers advice from external consultants as well as the fees paid to non-executive directors of comparable companies when undertaking the annual review process. Non-Executive Directors have long been encouraged by the Board to hold shares in the Company (purchased by the Director on market). It is considered good governance for directors to have a stake in the company whose board he or she sits. The Non-Executive Directors of the Company can participate in the Employee Share Option Plan. The remuneration of Non-Executive Directors for the period ending 30 June 2005 is detailed in the table on page 20 of this report. SENIOR MANAGER AND EXECUTIVE DIRECTOR REMUNERATION Objective The Company aims to reward executives with a level and mix of remuneration commensurate with their position and responsibilities within the Company and so as to: reward executives for Company, business unit and individual performance against financial and operating performance; link reward with the strategic goals and performance of the Company; and ensure total remuneration is competitive by market standards; align the interests of executives with those of shareholders. Structure In determining the level and make-up of executive remuneration, the Remuneration and Nomination Committee obtains independent advice when it thinks necessary on market levels of remuneration of comparable executives before the Committee makes its recommendations to the Board. The Remuneration and Nomination Committee considers it appropriate that employment contracts are entered into with the executive Directors and a number of the senior management. Details of the contracts with the executive Directors Messrs M.J. Gazal, the CEO, and D.J. Gazal are provided on page

20 Directors Report SENIOR MANAGER AND EXECUTIVE DIRECTOR REMUNERATION continued Remuneration consists of the following key elements: Fixed Remuneration Variable Remuneration 1. Short Term Incentive (STI); and 2. Long Term Incentive (LTI). The proportion of fixed remuneration and variable remuneration (potential short term and long term incentives) is established for each senior manager by the Remuneration and Nomination Committee. The table on page 20 details the variable component (%) of the five most highly remunerated senior managers. FIXED REMUNERATION Objective The level of fixed remuneration is set so as to provide a base level of remuneration which is both appropriate to the position and is competitive in the market. Fixed remuneration is reviewed annually by the Remuneration and Nomination Committee and the process consists of a review of companywide, business unit and individual performance, relevant comparative remuneration in the market and internal and, where appropriate, external advice on policies and practices. Structure Senior managers are given the opportunity to receive their fixed (primary) remuneration in a variety of forms including fringe benefits such as motor vehicles. It is intended that the manner of payment chosen will be optimal for the recipient without creating undue cost for the Company. The fixed remuneration component of the five most highly remunerated senior managers is detailed in the table on page 20. VARIABLE REMUNERATION SHORT TERM INCENTIVE (STI) Objective charged with meeting the divisional performance. The total potential STI provides sufficient incentive to the senior manager to achieve the divisional performance such that the cost to the Company is reasonable in the circumstances. Structure Actual STI payments granted to each senior manager depend mainly on the performance of their division. Operational measures cover mainly financial and some non-financial measures of performance. The usual measures include contribution to net profit before tax, risk management, product management, and leadership/team contribution. On an annual basis, after consideration of divisional performance, each executive is reviewed and STIs assessed including a short term incentive pool based on total Company performance, which is allocated to each executive who is deemed to have a positive impact on profitability. The aggregate of annual STI payments available for executives across the Company is subject to the approval of the Remuneration and Nomination Committee. Payments made are usually delivered as a cash bonus. VARIABLE PAY LONG TERM INCENTIVE (LTI) Objective The objective of the LTI plan is to reward senior managers in a manner which aligns this element of 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 a direct impact on the Company s performance. Structure LTI grants to executives are delivered in the form of share options administered under an Employee Share Option Plan (ESOP) previously approved by shareholders. Company Performance The current ESOP was intoduced in This plan does not include performance hurdles and is being reviewed. It is likely that a new ESOP will be introduced in the next few months which will include performance hurdles as part of best practice. The objective of the STI program is to link the achievement of the divisional and Company performance with the remuneration received by the executives 18 GAZAL ANNUAL REPORT 2005

21 Directors Report VARIABLE PAY LONG TERM INCENTIVE (LTI) continued Employment Contracts The CEO, Mr Michael J. Gazal, is employed under a contract. Mr Gazal s contract was renewed on 1 July 2004 and terminates on 30 June 2009, at which time the Company may choose to commence negotiations to extend or enter into a new employment contract. Under the terms of the contract: Mr Gazal may resign from his position and thus terminate the contract by giving three months written notice. On resignation, any options will be forfeited. of illness or if he is by reason of illness or incapacity permanently unable to perform his responsibilities and duties. In these circumstances, the Company may elect to provide payment in lieu of the notice period (based on the fixed component of Mr Gazal s remuneration). In addition, Mr David J. Gazal is also employed under a contract. The current contract continues on the basis of 12 months notice by either party. The contract also contains termination provisions which are similar to those under Mr Michael Gazal s contract described above. Certain executives have standard contracts which provide for termination payments of between six months and one month. The Company may terminate the contract by providing three months written notice in the event of extended absence by Mr Gazal by reason DIRECTORS AND EXECUTIVES REMUNERATION Details of the nature and amount of each element of the remuneration of each Director of the Company and each of the five executive officers of the Company and the consolidated entity receiving the highest emolument for the financial year, including those executives requiring disclosure under Accounting Standard AASB 1046 are as follows: Primary Post Employment Equity Other Total Non- Salary Cash monetary Retirement Directors and Fees Bonus Benefits Superannuation Benefits Options Other J.W. Blood , ,167 54, , , ,000 15, ,000 M.J. Gazal ,246-21,374 36, , , ,466-21,374 35, , ,070 D.J. Gazal , ,000-28, , , , ,000-26, , ,731 A.C. O Reilly , ,000 20, , , ,000 16, ,667 C. Kimberley** , ,917 9, , A.E. Harris* , , , , , ,000 D.J. Fairfull* , , , , , ,000 5, ,000 * Retired 25 November ** Appointed 28 January

22 Directors Report DIRECTORS AND EXECUTIVES REMUNERATION continued Primary Post Employment Equity Other Total Non- Salary Cash monetary Retirement Executives and Fees Bonus Benefits Superannuation Benefits Options Other C. Barnett , ,000-22,500-40,500 26, , , ,000-19,500-26,937 27, ,840 P. Lovegrove , ,476 17,842 19, , , , ,371 16,190 17,000-13,437 2, ,973 S. Paykel*** , , , , ,265 80,000-15,314-45, ,579 D. Coghlan ,000 78,500 5,963 20, , , ,000 73,500 5,963 18,000-13,437 1, ,232 D. Holmes , ,000 8,345 12, , , , ,000 15,172 11, , ,653 R. Gazal ,500 54,881-15, , , ,500 99,344-13,635-13,437 26, ,022 P. Burdekin ,416 30,000-11, , , , ,300-4, ,137 *** Resigned 25 November Other represents a termination payment on resignation of Ms Paykel. Notes The Company uses the fair value measurement provisions of AASB 1046 Director and Executive Disclosures for Disclosing Entities and the pending AASB 2 Share-based Payment prospectively for all options granted to Directors and relevant executives, which have not vested as at 1 July The fair value of such grants is being amortised and disclosed as part of Director and executive emoluments on a straight-line basis over the vesting period. No adjustments have been or will be made to reverse amounts previously disclosed in relation to options that never vest (i.e., forfeitures). From 1 July 2002, options granted as part of Director and executive emoluments have been valued using a binomial option pricing model, which takes account of factors including the option exercise price, the current level and volatility of the underlying share price, the risk-free interest rate, expected dividends on the underlying share, current market price of the underlying share and the expected life of the option. ROUNDING OF AMOUNTS The parent entity is a company of the kind specified in Australian Securities and Investments Commission class order 98/0100. In accordance with that class order, amounts in the financial statements and Directors Report have been rounded to the nearest thousand dollars unless specifically stated to be otherwise. 20 GAZAL ANNUAL REPORT 2005

23 Directors Report AUDITOR INDEPENDENCE AND NON-AUDIT SERVICES The Directors received the following declaration from the auditor of Gazal Corporation Limited. AUDITOR S INDEPENDENCE DECLARATION TO THE DIRECTORS OF GAZAL CORPORATION LIMITED In relation to our audit of the financial report of Gazal Corporation Limited for the financial year ended 30 June 2005, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct. Ernst & Young Garry Wayling Partner 22 September 2005 NON-AUDIT SERVICES The following non-audit services were provided by the entity s auditor, Ernst & Young. 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. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised. Ernst & Young Australia received or is due to receive the following amounts for the provision of non-audit services: Tax compliance services and corporate tax planning $82,684 Advice in respect to remuneration plan $16,017 $98,701 This report has been made in accordance with a resolution of the Directors. Signed for and on behalf of the Directors J.W. Blood Chairman M.J. Gazal Managing Director Dated at Sydney this 22nd day of September

24 Statement of Corporate Governance Practices The Board of Directors of Gazal Corporation Limited is responsible for the corporate governance of the consolidated entity. The Board guides and monitors the business and affairs of Gazal Corporation Limited on behalf of the shareholders by whom they are elected and to whom they are accountable. The format of the Corporate Governance Statement has changed in comparison to the previous year due to the introduction of the Australian Stock Exchange Corporate Governance Council s (the Council s) Principles of Good Corporate Governance and Best Practice Recommendations (the recommendations). In accordance with the Council s recommendations, the Corporate Governance Statement must now contain certain specific information and must disclose the extent to which the Company has followed the guidelines during the period. Where a recommendation has not been followed, that fact must be disclosed, together with the reasons for the departure. Gazal Corporation Limited s Corporate Governance Statement is now structured with reference to the Council s principles and recommendations, which are as follows: Principle 1. Lay solid foundations for management and oversight Principle 2. Structure the Board to add value Principle 3. Promote ethical and responsible decision making Principle 4. Safeguard integrity in financial reporting Principle 5. Make timely and balanced disclosure Principle 6. Respect the rights of shareholders Principle 7. Recognise and manage risk Principle 8. Encourage enhanced performance Principle 9. Remunerate fairly and responsibly Principle 10. Recognise the legitimate interests of stakeholders Gazal Corporation Limited s corporate governance practices have been in place all year and reviewed by the Directors throughout the year ended 30 June 2005 and are compliant with the Council s best practice recommendations, unless indicated otherwise in this report. The Board has received a signed declaration by the Chief Executive Officer and Chief Financial Officer in accordance with section 295A of the Corporations Act For further information on corporate governance policies adopted by Gazal Corporation Limited, refer to our website: STRUCTURE OF THE BOARD The skills, experience and expertise relevant to the position of Director held by each Director in office at the date of the annual report is included in the Directors Report on pages 13 and 14. Directors of Gazal Corporation Limited are considered to be independent when they are independent of management and free from any business or other relationship that could materially interfere with or could reasonably be perceived to materially interfere with the exercise of their unfettered and independent judgement. In the context of Director independence, materiality is considered from both the Company and individual Director perspective. Materiality determination is considered both quantitatively and qualitatively. An item is presumed to be quantitatively immaterial if it is less than 5% of the base amount. Qualitative factors considered include whether a relationship is strategically important, the competitive landscape, the nature of the relationship and the contractual or other arrangements governing it and other factors which point to the actual ability of the Director in question to shape the direction of the Company s loyalty. In accordance with the definition of independence above, and the materiality thresholds set, the following Directors of Gazal Corporation Limited are considered to be independent: Name Position J.W. Blood Chairman, Non-Executive Director A.C. O Reilly Non-Executive Director C. Kimberley Non-Executive Director There are procedures in place, agreed by the Board, to enable Directors, in furtherance of their duties, to seek independent professional advice at the Company s expense. The term in office held by each Director in office at the date of this report is as follows: Name Term in Office J.W. Blood 12 years M.J. Gazal 19 years A.C. O Reilly 3 years D.J. Gazal 6 years C. Kimberley 8 months For additional details regarding Board appointments, please refer to our website. 22 GAZAL ANNUAL REPORT 2005

25 Statement of Corporate Governance Practices THE REMUNERATION AND NOMINATION COMMITTEE The Board has established a remuneration and nomination committee, which meets at least annually, to ensure that the Board continues to operate within the established guidelines, including, when necessary, selecting candidates for the position of Director. The Remuneration and Nomination Committee comprises Non-Executive Directors. The remuneration for Remuneration and Nomination Committee meeting attendance is included in their annual fees. It is the Company s objective to provide maximum stakeholder benefit from the retention of a high quality Board and executive team by remunerating Directors and key executives fairly and appropriately with reference to relevant employment market conditions. To assist in achieving this objective, the Remuneration and Nomination Committee links the nature and amount of Executive Directors and officers emoluments to the Company s financial and operational performance. The expected outcomes of the remuneration structure are: Retention and motivation of key executives. Attraction of quality management to the Company. Performance incentives which allow executives to share the rewards of the success of Gazal Corporation Limited. For details on the amount of remuneration and all monetary and nonmonetary components for each of the five highest paid (non-director) executives during the year and for all Directors, refer to pages 16 to 20 of the Directors Report. In relation to the payment of bonuses, options and other incentive payments, discretion is exercised by the Board, having regard to the overall performance of Gazal Corporation Limited and the performance of the individual during the period. The Board is responsible for determining and reviewing compensation arrangements for the Directors themselves and the Chief Executive Officer and the Executive team. The Board has established a remuneration committee, comprising two Non-Executive Directors. Members of the remuneration committee throughout the year were: For details of Directors attendance at meetings of the Remuneration and Nomination Committee, refer to page 15 of the Directors Report. For additional details regarding the Remuneration and Nomination Committee, please refer to our website. AUDIT COMMITTEE The Board has established an Audit Committee, which operates under a charter approved by the Board. It is the Board s responsibility to ensure that an effective internal control framework exists within the entity. This includes internal controls to deal with both the effectiveness and efficiency of significant business processes, the safeguarding of assets, the maintenance of proper accounting records, and the reliability of financial information as well as non-financial considerations such as the benchmarking of operational key performance indicators. The Board has delegated the responsibility for the establishment and maintenance of a framework of internal control and ethical standards for the management of the consolidated entity to the Audit Committee. The Committee also provides the Board with additional assurance regarding the reliability of financial information for inclusion in the financial reports. All members of the Audit Committee are Non-Executive Directors. The members of the Audit Committee during the year were: J.W. Blood A.C. O Reilly D.J. Fairfull (Retired 25 November 2004). Recommendation 4.3 of Principle 4 of the Principles of Good Corporate Governance and Best Practice Recommendations indicates it is preferable to have at least three members on the Audit Committee. The Board of Gazal Corporation Limited believes that, given the size of the Company and the experience of the present members, two Audit Committee members is adequate. J.W. Blood A.C. O Reilly A.E. Harris (Retired 25 November 2004) D.J. Fairfull (Retired 25 November 2004). 23

26 Statement of Corporate Governance Practices AUDIT COMMITTEE continued Qualifications of Audit Committee Members J.W. Blood has significant experience in the management of Gazal Corporation Limited, having served as a Non-Executive Director of Gazal Corporation Limited for 12 years. He is also director of a number of companies where, as part of his role, he serves as a member on the Audit Committee. He is the Chairman of the Audit Committee. A.C. O Reilly has had extensive experience in the news media industry and currently holds a number of non-executive directorships in that industry. He has had experience in investment banking and holds a degree in economics from Oxford University. For details on the number of meetings of the Audit Committee held during the year and the attendees at those meetings, refer to page 15 of the Directors Report. PERFORMANCE The performance of the Board and key executives is reviewed regularly. The performance criteria against which Directors and executives are assessed are aligned with the financial and non-financial objectives of Gazal Corporation Limited. Directors whose performance is consistently unsatisfactory may be asked to retire. RISK MANAGEMENT AND INTERNAL CONTROLS Procedures have been established at the Board and executive management level to evaluate risk and the associated internal controls necessary to safeguard the assets and interests of Gazal Corporation Limited, and to ensure the integrity of reporting. These include accounting, financial reporting and internal control policies and procedures. DIRECTOR S DISCLOSURE Mr D.J. Fairfull, a Director, has advised the Company that he is an external consultant to, and prior to 1998, a director of Ernst & Young Corporate Finance Pty Limited, which may create a perceived conflict of interest; Mr Fairfull excuses himself from voting. 24 GAZAL ANNUAL REPORT 2005

27 Independent Audit Report TO MEMBERS OF GAZAL CORPORATION LIMITED SCOPE The Financial Report, Remuneration Disclosures, and Directors Responsibility The financial report comprises the statement of financial position, statement of financial performance, statement of cash flows, accompanying notes to the financial statements, and the directors declaration for Gazal Corporation Limited (the company) and the consolidated entity, for the year ended 30 June The consolidated entity comprises both the company and the entities it controlled during that year. The company has disclosed information about the remuneration of directors and executives ( remuneration disclosures ), as required by Accounting Standard AASB 1046 Director and Executive Disclosures by Disclosing Entities, under the heading remuneration report on pages 16 to 20 of the directors report, as permitted by the Corporations Regulations The directors of the company are responsible for preparing a financial report that gives a true and fair view of the financial position and performance of the company and the consolidated entity, and that complies with Accounting Standards in Australia, in accordance with the Corporations Act This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report. The directors are also responsible for the remuneration disclosures contained in the directors report. Audit Approach We conducted an independent audit of the financial report in order to express an opinion to the members of the company. Our audit was conducted in accordance with Australian Auditing Standards in order to provide reasonable assurance as to whether the financial report is free of material misstatement and the remuneration disclosures comply with Accounting Standard AASB 1046 and the Corporations Regulations 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, including compliance with Accounting Standards in Australia, 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 and whether the remuneration disclosures comply with Accounting Standard AASB 1046 and the Corporations Regulations 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 the additional disclosures; 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. We performed procedures to assess whether the substance of business transactions was accurately reflected in the financial report and the remuneration disclosures. These and our other procedures did not include consideration or judgement of the appropriateness or reasonableness of the business plans or strategies adopted by the directors and management of the company. Liability limited by the Accountants Scheme, approved under the Professional Standards Act 1994 (NSW). 25