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1 APPENDIX 4D / HALF-YEAR REPORT Appendix 4D / Half-Year Report Half-Year Ended 31 December Key Dates 29 February 2012 Announcement of Half-Year Profit to 31 December Announcement of Interim 2012 Dividend 13 April 2012 Record date for determining entitlement to Interim 2012 Dividend 7 May 2012 Payment of Interim 2012 Dividend 31 August 2012 Announcement of Full Year Profit to 30 June 2012 Announcement of Final 2012 Dividend Contents Company Information 1 Results for Announcement to the Market 2 Chairman s Report 3 Directors Report 12 Statement of Financial Position 15 Income Statement 16 Statement of Comprehensive Income 17 Statement of Changes in Equity 18 Statement of Cash Flows 20 Operating Segments 22 Notes to and forming part of the Financial Statements for the Half-Year Ended 31 December 27 Other Information 41 Directors Declaration 42 Independent Review Report 43 Company Information Registered Office: A1 Richmond Road Homebush West NSW 2140 Ph: Fax: Company Secretary: Mr Chris Mentis Share Registry: Boardroom Pty Limited Level 7, 207 Kent Street Sydney NSW 2000 Ph: Auditors: Ernst & Young Stock Exchange Listing: Harvey Norman Holdings Limited shares are quoted on the Australian Securities Exchange Limited ( ASX ) Solicitors: Brown Wright Stein 1

2 RESULTS FOR ANNOUNCEMENT TO THE MARKET Financial Highlights HY2010 Dec-09 HY Dec-10 HY2012 Dec-11 No. of franchised outlets in Australia No. of franchisees in Australia No. of company-operated stores Franchisee sales revenue 1 $2.78bn $2.74bn $2.58bn Company-operated sales revenue 2 $715.63m $804.13m $806.88m Other revenues and other income items $593.63m $590.38m $584.11m Earnings before interest and tax (EBIT) $253.10m $219.96m $188.12m Profit after tax and non-controlling interests $158.86m $131.67m $128.95m Net cash flows from operating activities $132.45m $93.52m $19.88m Basic earnings per share 14.95c 12.39c 12.14c Dividends per share (fully franked) 7.0c 6.0c 5.0c Net debt to equity ratio (%) 19.20% 25.12% 29.74% 1 Sales made by franchisees in Australia do not form part of the financial results of the consolidated entity. 2 Includes the Harvey Norman and Norman Ross branded company-operated stores in New Zealand, Ireland, Northern Ireland, Singapore, Malaysia, Slovenia and Croatia and the Clive Peeters and Rick Hart branded company-operated stores in Australia. 2

3 CHAIRMAN S REPORT Business Performance The discretionary retail sector in Australia has been marred by a combination of unprecedented challenges. The combination of intense competitive pressures and price deflation in certain key product categories, accentuated by the high Australian dollar, deteriorating economic confidence and a prudent consumer, has seen many retailers struggle to maintain margins in the fight for market share. Our diversified strategy of managing an integrated retail, franchise and property system has enabled us to mitigate some of these negative headwinds and allows us to build on an exceptionally strong net asset base to provide for future growth. Our balance sheet is robust and unique to that of our competitors. We have a property portfolio valued at $2.12 billion which provides strength and stability to our balance sheet. Property ownership offers a distinct advantage over our competitors as it provides us with a reliable income stream in an uncertain retail climate. We continue to maintain a conservative stance on debt levels. Whilst a sustained level of investment in our system is necessary to maintain and grow market share, our debt to equity ratio remains low at 35.12% and our net debt to equity ratio is 29.74%. Although retail trading conditions remain challenging, we have delivered a net profit after tax and non-controlling interests of $ million for the half-year ended 31 December compared to $ million for the previous half year, a decrease of $2.72 million or 2.1%. An integrated retail, franchise and property system is our diversified strategy to effectively compete in a difficult market. We have always touted the merits of a truly integrated retail, franchise and property system and the benefits of this multi-format system have never been as prevalent as in the last year. The key elements of our system are as follows: Investing in the growth and performance of our Franchising Operations segment: We believe that the franchise format of operating in Australia is the most viable option to endure the current downturn in the retail sector. We have approximately 700 franchisees operating as independent business owners within our franchise system. These independent business owners have access to a system that provides them with a well-established iconic brand, suitably located and well-maintained retail premises and access to supplier arrangements typically enjoyed by a large-scale retailer. This enables our franchisees to concentrate on running their retail business to generate solid margins and returns in the face of aggressive competition and severe price deflation. The result before tax of the franchising operations segment was $95.51 million for the half-year ended 31 December compared to a result of $ million for the preceding period, a reduction of 36.5%. Our franchisees are committed to driving sales growth and growing market share. However, retail gross profit margins have suffered due to the strength of the Australian dollar, price deflation in the AV/IT category and intense competitive pressures in the flat panel and computer hardware categories. These factors have reduced franchise fees received. A higher level of tactical support was required to assist the franchisees to manage a difficult environment. Our franchisees are well-positioned to take advantage of any uplift in discretionary spending in the local market. We will continue to invest in the ongoing development of our robust franchise system. A strong property portfolio: A strong property portfolio is an essential component of the Harvey Norman integrated retail and franchise system. Our consolidated property portfolio is valued at $2.12 billion as at 31 December. This represents 50% of our total asset base as at balance date. The result before tax generated by our property segments represents 42% of our consolidated profit before tax for the half-year ended 31 December. Our property segments delivered a strong result before tax of $68.77 million for the half-year ended 31 December compared to a result of $47.18 million for the previous period, an increase of 45.8%. Property related income has been increasing year on year and the combination of rental growth and stabilising capitalisation rates has delivered a net revaluation increment of $8.21 million for our Australian investment property portfolio and joint venture entities for the half-year ended 31 December. Our landmark development at Springvale, Victoria commenced trading in October. In Singapore, the world class showroom housing the flagship Space retail brand was officially opened in November and has received worldwide acclaim for its spectacular design. 3

4 CHAIRMAN S REPORT (CONTINUED) Improving retail operations in overseas markets and offshore expansion opportunities: In overseas markets our stores are company-operated. We are pleased with the performance of our retail operations in New Zealand. Despite the subdued state of the New Zealand economy, the retail stores in New Zealand delivered a solid result of $20.56 million before tax which is only a slight reduction of 0.5% from prior period. The 100% company-owned Space brand in Singapore and Malaysia is ideally placed for the growing prestige market in the Asia Pacific region. Our controlling investment interest in Pertama Holdings Limited is a platform for future growth and expansion of the Harvey Norman brand in Singapore and Malaysia. Financial Analysis and Commentary Net Profit After Tax and Non-Controlling Interests Net profit after tax and non-controlling interests was $ million for the half-year ended 31 December compared with $ million for the previous period, a decrease of $2.72 million or 2.1%. This decrease can be explained as follows: a reduction in the profitability of the franchising operations segment by $54.85 million or 36.5% before tax ($38.40 million after tax) due to lower franchise fees and a higher level of tactical support during the period; restructuring and closure costs associated with the restructure of the Clive Peeters and Rick Hart business during the period of $8.07 million before tax ($5.65 million after tax); a decline of $7.68 million before tax ($5.37 million after tax) in the market value of the listed public securities and dividends received by the consolidated entity; and the profit of $7.34 million before tax ($5.14 million after tax) recognised on the sale of a development property located in Mentone, Victoria in the previous period. The impact of the above decreases has been minimised by the following increases in profit: a reduction in the trading losses (excluding restructure and closure costs) incurred by the Clive Peeters and Rick Hart businesses during the period by $13.19 million before tax ($9.23 million after tax) as the businesses did not trade for the full six-month period following the closure of seven (7) stores and the conversion of eighteen (18) stores to Harvey Norman and Joyce Mayne franchised stores; the net property revaluation increment of $8.21 million before tax ($5.74 million after tax) recorded by the Australian investment property portfolio and joint venture entities for the current period compared to a net revaluation decrement of $4.98 million before tax ($3.49 million after tax) in the previous period, a difference of $13.19 million before tax ($9.23 million after tax); an increase of $10.18 million before tax ($7.12 million after tax) in rent received from franchisees and third party tenants; profit of $10.00 million before tax ($7.00 million after tax) recognised on the successful completion and opening of the Springvale development during the current period; and a reduction in the trading losses incurred in Ireland and Northern Ireland by $2.07 million before and after tax attributable to favourable foreign currency movements and the continued focus on operational efficiencies and cost control measures. The tax charge in the income statement was lower by $31.97 million for the half-year ended 31 December compared to prior period mainly attributable to: a reduction in profit before tax from $ million in the previous period to $ million in the current half, a decrease of $35.14 million translating to a reduction in our tax liability by approximately $10 million; the tax benefit recognised in the current half-year period of $12.29 million associated with the treatment of support payments provided to Harvey Norman Holdings (Ireland) Limited during 2010 and as agreed under the terms of an Advance Pricing Arrangement with the Australian Taxation Office dated 6 February 2012; and the tax benefit recognised in the current period of $7.25 million associated with the reversal of future tax liabilities previously recognised on certain pre-cgt properties. 4

5 CHAIRMAN S REPORT (CONTINUED) Review of the Franchising Operations and Retail Property Segments in Australia The Integrated Franchising and Property System in Australia: The integrated franchising and retail property system in Australia delivered a segment result before tax of $ million for the half-year ended 31 December compared to a result before tax of $ million for the comparative period, a reduction of $43.11 million or 20.7%. Integrated Franchising & Property Segment in Australia HY Dec-09 HY Dec-10 HY Dec-11 Franchising operations segment result before tax $186.79m $150.36m $95.51m Australian retail property segment result before tax $36.54m $58.21m $69.95m Total integrated franchising & Australian retail property segment result before tax $223.33m $208.57m $165.46m Franchising Operations Segment Margin & Key Statistics The franchising operations segment in Australia delivered a lower segment result before tax of $95.51 million for the half-year ended 31 December compared with a segment result of $ million for the previous period, a decrease of 36.5%. Sales revenue generated by independent franchisees amounted to $2.58 billion for the half-year to 31 December compared with $2.74 billion for the preceding period, a decline of 6.0%. This reduction has translated into a decrease in the profitability of the franchising operations segment. Revenue received from franchisees decreased from $ million in the previous period to $ million for the current half, a decrease of $24.33 million or 4.5%. Tactical support payments have increased during the current period to assist franchisees to effectively compete in their local markets. Franchisees continued to grow market share across key product categories. Franchisees remain well placed to take advantage of any improvement in discretionary retail spending by consumers. The franchising operations margin is calculated as the segment result before tax of the franchising operations segment over franchisee aggregate sales revenue. The franchising operations margin was 3.70% for the half-year ended 31 December compared to 5.48% for the half-year ended 31 December Franchising Operations Margin HY Dec 2009 HY Dec 2010 HY Dec No. of franchised outlets in Australia Franchising operations segment result before tax $186.79m $150.36m $95.51m Franchisee sales revenue 1 $2.78bn $2.74bn $2.58bn Franchising operations margin (%) 6.71% 5.48% 3.70% 1 Sales made by franchisees in Australia do not form part of the financial results of the consolidated entity. Retail sales in Harvey Norman, Domayne and Joyce Mayne complexes in Australia are made by independently owned franchised business entities that are not consolidated with the consolidated entity s results. Franchising Operations Segment Key Statistics: HY Dec 2009 HY Dec 2010 HY Dec Return on franchising operations equity (a) 24.81% 20.81% 13.13% Return on franchising operations assets (b) 13.96% 11.24% 7.03% $000 $000 $000 Revenue from franchising operations 505, , ,259 Franchising operations EBITDA 220, , ,875 (a) Calculated as: EBIT from Franchising Operations Franchising Operations Equity* [*equity allocated to franchising operations segment based on franchising operations assets as a proportion of total assets] (b) Calculated as: EBIT from Franchising Operations Franchising Operations Segment Assets (after eliminations) Australian Retail Property Segment Key Statistics The retail property segment in Australia is an ideal complement to the franchising operations segment. The existence of a robust property portfolio in Australia gives franchisees access to high-quality retail premises and a dynamic, cross-beneficial tenancy mix. 5

6 CHAIRMAN S REPORT (CONTINUED) Australian Retail Property Portfolio Statistics HY Dec 2009 HY Dec 2010 HY Dec Weighted average capitalisation rates 8.51% 8.73% 8.82% Average occupancy rates 96.37% 96.86% 97.64% Net property yield (a) 2.53% 3.79% 4.03% Return on equity (b) 4.49% 7.01% 7.54% Australian Retail Property Portfolio: $000 $000 $000 Australian retail property segment result 30,341 49,654 58,371 Australian retail property EBIT 36,536 58,214 69,950 Australian net revaluation increment / (decrement) (15,745) (4,980) 8,205 (a) Calculated as: EBIT from Australian Retail Property Segment Australian Retail Property Segment Assets (after eliminations) (b) Calculated as: EBIT from Australian Retail Property Segment Australian Retail Property Equity* [*equity allocated to Australian retail property segment based on Australian retail property assets as a proportion of total assets] Review of the Property Portfolio of the Consolidated Entity Total Property Portfolio of the Consolidated Entity Composition of the Consolidated Property Portfolio Composition of the Property Portfolio HY Dec 2009 $000 HY Dec 2010 $000 HY Dec $000 Investment properties 1,316,569 1,395,200 1,593,557 Investment properties under 86, ,879 70,018 construction Joint venture properties 190, , ,495 Owned land & buildings in New Zealand, Singapore & Slovenia 211, , ,292 Properties held for resale 20,229 17,626 26,651 The Harvey Norman property portfolio consists of Harvey Norman, Domayne and Joyce Mayne complexes in Australia, Harvey Norman and Norman Ross stores in New Zealand, properties located in Singapore, Harvey Norman stores in Slovenia, properties held under joint venture agreements and land and buildings in Australia for development and resale at a profit. Total Property Portfolio 1,825,330 1,977,531 2,116,013 Benefits of Property Ownership The ownership of a substantial property portfolio is an essential complement to the Harvey Norman brand and retail system. It enables shareholders to indirectly participate in the ownership of high-quality bulky goods retail and warehouse properties, geographically spread. Core properties within the portfolio comprise of bulky goods retail centres, stand-alone showrooms and warehouses. Property ownership is integral to the success of the integrated retail, franchise and property system and delivers the following benefits: The presence of Harvey Norman, Domayne or Joyce Mayne franchisees as anchor tenants in a complex is a key drawcard to attract superior national third-party tenants and dynamic local operators to co-locate within the same complex. This provides us with a distinct advantage in its ability to create a solid, dynamic and cross-beneficial tenancy mix in order to maximise the profitability of the retail property segment. Despite the softening retail sector, property ownership delivers a steady and reliable income stream in the form of rent charged to franchisees and complementary third-party tenants. A large property portfolio under management creates economies of scale, delivers operational cost efficiencies and enhanced negotiating power in the property sector. Breakdown of Owned and Leased Sites 31 December Number of Owned Sites Number of Leased Sites * Total Australia: Franchised complexes New Zealand Slovenia Croatia Ireland & Northern Ireland Asia TOTAL * leased from external parties 6

7 CHAIRMAN S REPORT (CONTINUED) Geographic Spread This diagram displays the geographic spread of the franchised Harvey Norman ( HN ), Domayne ( DM ) and Joyce Mayne ( JM ) franchised complexes in the Australian market, the Harvey Norman and Norman Ross ( NR ) branded companyoperated stores in New Zealand, Ireland, Northern Ireland, Singapore, Malaysia, Slovenia and Croatia as at 31 December. Acquisitions, New Complex and Store Openings, Closures and Conversions Store Openings Due to Conversions from the Clive Peeters and Rick Hart brands In August, we announced that we would restructure the Clive Peeters and Rick Hart businesses. By the end of August, we had closed seven (7) Clive Peeters and Rick Hart retail sites. In September we commenced the conversion process to convert the remaining eighteen (18) Clive Peeters and Rick Hart stores to the franchised model. Eighteen (18) new franchised complexes were opened pursuant to this conversion. Sixteen (16) stores were converted to the Harvey Norman brand format and two (2) stores were converted to the Joyce Mayne brand format. Franchised Complex Openings, Conversions and Closures Three (3) new franchised Harvey Norman complexes, located at Ballina (NSW), Springvale (VIC) and Atherton (QLD) commenced trading during the current period. One (1) new franchised Domayne complex commenced trading at the landmark Springvale development. During the period we closed one (1) Joyce Mayne complex located at Alexandria (NSW). There were 216 franchised complexes in Australia as at 31 December under the following brand names: Harvey Norman 185 Domayne 16 Joyce Mayne 15 Company-Operated Store Openings and Closures in Offshore Markets During the period, we entered into the Croatian market with our first store opening at Zagreb, the capital of Croatia, in October. One (1) new store was opened in Maribor, Slovenia s second largest city, in October bringing the total number of stores in Slovenia to five (5). The flagship Space showroom located in Bencoolen Street, Singapore, was officially opened in November following extensive redesign and restoration work by WOHA Architects. There were no other store openings or closures in other overseas markets. There are thirty-one (31) stores in total in New Zealand under the Harvey Norman and Norman Ross brand names. There are thirteen (13) Harvey Norman stores in Singapore and seven (7) Harvey Norman stores in Malaysia. We remain committed to our company-operated stores in Ireland and Northern Ireland with fourteen (14) and two (2) Harvey Norman stores respectively. There were 73 company-operated stores located in offshore markets as at 31 December. 7

8 CHAIRMAN S REPORT (CONTINUED) Review of the Company-Operated Retail Segments Restructure and Closure of the Clive Peeters and Rick Hart Stores and Brand Names In August we advised the market of our intention to restructure the Clive Peeters and Rick Hart businesses and to cease trading under the impaired brand names. By the end of August, we had closed four (4) former Clive Peeters stores and three (3) former Rick Hart stores. The remaining thirteen (13) Clive Peeters stores and five (5) Rick Hart stores were converted to Harvey Norman and Joyce Mayne franchised operations. We believed that the converted sites would be a more viable business operation under a franchised model rather than their previous format. The conversion process was carried out over an eight week period commencing in September. We incurred minimal conversion costs to transform the stores from the former brands to the Harvey Norman and Joyce Mayne trademarks. The former head offices of Clive Peeters and Rick Hart, located in Melbourne and Perth respectively, were closed in November. We incurred restructuring and closure costs of $8.07 million before tax mainly attributable to redundancy and termination costs, fixed asset write-downs and onerous lease costs for the closed sites. This is less than the expected closure costs previously estimated and reported in August of approximately $10.00 million before tax. We will continue to review the results of the eighteen (18) converted sites in detail over the coming months to ensure a smooth transition to the franchise system and to align KPI s with that of a franchise business model. The franchise fees received from the converted sites will now form part of our franchising operations segment. Summary of the Clive Peeters & Rick Hart Restructure Clive Peeters Victoria Queensland Bendigo Closed 21/08/11 Aspley Converted to HN 25/09/11 Braybrook Converted to HN 23/10/11 Bundaberg Converted to JM in Oct 2010 Coburg Converted to HN 23/10/11 Burleigh Waters Converted to HN 2/10/11 Dandenong Closed 21/08/11 Loganholme Converted to HN 2/10/11 Malvern Closed 21/08/11 Macgregor Converted to HN 2/10/11 Moorabbin Converted to HN 16/10/11 Mackay Converted to JM 18/09/11 Mornington Converted to HN 16/10/11 Maroochydore Converted to HN 25/09/11 Richmond Converted to HN 9/10/11 Maryborough Converted to HN in Sep 2010 Ringwood Converted to HN 9/10/11 Morayfield Converted to JM 18/09/11 Thomastown Closed 21/08/11 Tasmania New South Wales Moonah Converted to HN in April Mt. Druitt Converted to HN in Aug 2010 Rick Hart Western Australia Belmont Converted to HN 12/09/11 O Connor Closed 21/08/11 Joondalup Converted to HN 5/09/11 Osborne Park Converted to HN 12/09/11 Mandurah Closed 21/08/11 Victoria Park Converted to HN 5/09/11 Midland Converted to HN 12/09/11 Osborne Park Seconds Closed 21/08/11 Sales and Profit Performance of the Former Clive Peeters and Rick Hart Stores Consolidated sales revenue for the half-year ended 31 December was $ million for the Clive Peeters and Rick Hart brands, under the company-operated retail model. Consolidated sales revenue for the preceding period was $ million. The increase of $9.65 million can be attributed to the closing-down sales of the seven (7) closed stores in August and sale of inventory to the Harvey Norman and Joyce Mayne franchisees upon conversion to the franchised model during September and October. Excluding restructuring and closure costs of $8.07 million before tax, the trading loss incurred by the Clive Peeters and Rick Hart businesses amounted to $7.48 million before tax. This is a reduction from $20.67 million of losses incurred in the previous period. 8

9 CHAIRMAN S REPORT (CONTINUED) Sales and Profitability of the Overseas Controlled Entities New Zealand Sales revenue from the New Zealand company-operated stores decreased by $NZ13.34 million (decrease of 3.5%) due to a combination of natural disasters and the challenging retail climate in New Zealand. Upon translation into Australian dollars, the decrease in sales revenue was $10.75 million (decrease of 3.7%). This decrease is due to a 0.1% devaluation in the New Zealand dollar relative to the Australian dollar. The retail segment result in New Zealand was $20.56 million for the half-year ended 31 December compared to $20.68 million for the previous half year, a decrease of 0.6%. The decrease in local currency was 0.4%. New Zealand s challenging retail environment was further exacerbated by store closures in Christchurch arising from the earthquakes. The New Zealand operations are robust, being the market leader across all major product categories. Ireland and Northern Ireland Sales revenue from the company-operated stores in Ireland increased by 4.22 million (increase of 5.8%) from million in the previous half year to million for the half-year ended 31 December. Upon translation into Australian dollars, sales revenue increased by $1.10 million (increase of 1.1%). The lower increase was due to a 4.4% decline in the Euro relative to the Australian dollar. Sales revenue from the two company-operated stores in Northern Ireland decreased by 0.23 million (decrease of 3.8%) from 6.15 million in the previous half year to 5.92 million for the half-year ended 31 December. Upon translation into Australian dollars, sales revenue decreased by $1.06 million (decrease of 10.4%) due to a 6.9% decline in the UK Pound Sterling relative to the Australian dollar. The segment result for the operations in Ireland and Northern Ireland was a trading loss of $15.71 million for the half-year ended 31 December compared to a loss of $17.78 million for the preceding half year. The loss was reduced by $2.07 million or 11.6% due to the combination of an appreciation in the Australian dollar relative to the Euro and the implementation of operational efficiencies by management that have effectively controlled costs. With growth in market share and strong brand awareness across Ireland and Northern Ireland, the operations are well positioned to take advantage of any improvements in macroeconomic conditions. Ireland reported a loss of 9.84 million for the half-year ended 31 December compared to a loss of million in the previous half year, a reduced loss of 9.3% in local currency. The Irish loss in Australian dollars improved on the previous year by 13.4%. Northern Ireland reported a loss of 1.64 million for the half-year ended 31 December compared to a loss of 1.55 million in the previous half year, a deterioration of 6.0% in local currency. In Australian dollars however, there was a 1.3% improvement in the Northern Ireland segment result. The Board remains committed to the operations in Ireland and Northern Ireland for the long-term. 9

10 CHAIRMAN S REPORT (CONTINUED) Sales and Profitability of Overseas Controlled Entities (continued) Asia Sales revenue from controlled entity Pertama Holdings Limited, Singapore and trading as Harvey Norman, increased by $S5.74 million (increase of 2.6%). Upon translation into Australian dollars, sales actually decreased by $0.71 million (decrease of 0.4%). There was a devaluation of 2.9% in the Singapore dollar relative to the Australian dollar. The Harvey Norman branded stores in Singapore and Malaysia continue to grow market share and outperform competitors. The segment result in Asia was $3.80 million in the half year ended 31 December compared to $3.41 million in the previous half year, an increase of 11.3%. The increase in local currency was 14.6%. We are pleased with the performance of the Harvey Norman branded stores in Singapore and Malaysia, and the plan is to increase the Harvey Norman brand in the Malaysian market. The investment in the 100% company-owned Space brand in Singapore and its relocation to the recently redeveloped worldclass showroom in Bencoolen Street, Singapore will position it to take advantage of growth in demand for premium furniture within this key global market. Slovenia and Croatia Sales revenue from the company-operated stores in Slovenia and Croatia increased by 4.06 million (increase of 15.1%) relative to the previous half year. This increase is mainly attributable to the sales revenue recorded by the 2 new stores at Maribor in Slovenia and Zagreb in Croatia that commenced trading in October and a full half-year s trading of the Novo Mesto store that opened in October Upon translation into Australian dollars, the increase in sales was $A3.77 million (increase of 10.0%). The retail segment result in Slovenia and Croatia was $0.80 million for the half-year ended 31 December compared to $3.80 million for the previous half year, a decrease of 78.9%. Slovenia reported a profit of 1.43 million for the half-year ended 31 December compared to a profit of 2.71 million in the previous half year, a reduction in local currency of 47.4%. In its first three months of trading, Croatia reported a loss of HRK 6.25 million. Despite the challenging economic conditions in Europe, the retail business in Slovenia continues to be robust and growing market share. With the opening of the store in Maribor, Slovenia s second largest city and located in the country s north east region, the existing 5 stores cover a wide geographic area of Slovenia. The deterioration in the segment result can be attributed to store opening costs associated with the first Croatian store. Other Non-Franchised Retail The non-franchised retail segment consists of the retail trading operations in Australia which are controlled by the consolidated entity and does not include any operations of Harvey Norman franchisees. Sales revenue for the other non-franchised retail segment was $57.40 million for the half-year ended 31 December compared to $59.01 million for the previous year, a decrease of 2.7%. The segment result for the non-franchised retail segment was a profit of $4.97 million for the current period compared to a profit of $3.67 million in the prior half, an improvement of $1.30 million or 35.3%. 10

11 CHAIRMAN S REPORT (CONTINUED) Outlook and Other Outlook Our Omni channel strategy is designed to seamlessly integrate the customer experience across all channels. We interact and transact through our website, physical stores, kiosks, marketing, social media, mobile devices, smart televisions, networked appliances and gaming devices, distribution centres and home services. They are all integrated channels. We are neither just physical stores or just online. Our enhanced supply chain controls and improved inventory program should reduce the working capital requirements of the franchisees. Our strategy is clear and continues to be underpinned by a strong asset base. The Australian franchising operations segment continues to see strength from the furniture and bedding categories. We also continue to see positive growth in the home appliances category on the back of the growth in the home renovation market. The audio visual and information technology categories will continue to be challenged in the next 6 months. We are confident that our on-line transactional strategy, which we launched in late in Australia and New Zealand, will produce incremental revenue to the existing franchisee and company-operated stores. The Space Asia Hub in Singapore opened in November and is performing to expectations. Our upgraded store in Kuala Lumpur opens in April The Space brand is ideally placed for the growing prestige market in Asia Pacific. Positive results are expected to continue in New Zealand despite upheaval caused by natural disasters and intense competition. Our Irish business continues to improve and outperform the Irish market although the economic environment remains very challenging. With the opening of our Maribor and Zagreb stores we are positioned for growth in Slovenia and Croatia in the year ahead. Our property portfolio continues to be a key asset base of the company. We are adding to this asset base with the construction of a 32,600m 2 homemaker centre at Maroochydore in Queensland. It is scheduled to open in October The balance sheet of the company remains strong through conservative fiscal management. The low debt to equity ratio with tangible property assets in excess of $2.12 billion has the company well positioned to manage the core business within the respective territories and take advantage of opportunities in the future. Equity Consolidated equity as at 31 December was $2.26 billion compared to $2.19 billion at 31 December 2010 an increase of $72.62 million or 3.3%. Of the total equity of $2.26 billion, an amount of $29.10 million (December 2010: $46.05 million) is attributable to non-controlling interests mainly relating to Pertama Holdings Limited, Singapore. The reduction of $16.95 million in equity relating to non-controlling interests is due to the on-market acquisitions during the period totalling 12,592,150 shares in Pertama Holdings Limited, Singapore by Harvey Norman Singapore Pte Limited, a wholly-owned subsidiary of Harvey Norman Holdings Limited. We also acquired a further 24.9% shareholding in a retail controlled entity in Australia during the period. Consolidated equity was diluted by $14.70 million due to the consideration paid in excess of the carrying value of the noncontrolling interest. Dividend The recommended interim dividend is 5.0 cents per share fully franked (December 2010: 6.0 cents per share fully franked). This interim dividend will be paid on 7 May 2012 to shareholders registered at 5:00 pm on 13 April No provision has been made in the Statement of Financial Position for this recommended interim dividend. I would like to thank my fellow directors, Harvey Norman employees, franchisees and their staff for their continuing efforts and loyalty. G. HARVEY Chairman Sydney, 29 February

12 DIRECTORS REPORT The directors of Harvey Norman Holdings Limited (the Company ) submit their report for the half-year ended 31 December. Unless otherwise indicated, all directors (collectively termed the Board ) held their position as a director throughout the entire financial period and up to the date of this report. Directors Gerald Harvey Executive Chairman Kay Lesley Page Director and Chief Executive Officer John Evyn Slack-Smith Director and Chief Operating Officer David Matthew Ackery Director Chris Mentis Director and Chief Financial Officer Michael John Harvey Non-Executive Director Ian John Norman Non-Executive Director Christopher Herbert Brown Non-Executive Director Kenneth William Gunderson-Briggs Non-Executive Director Graham Charles Paton AM Non-Executive Director Committee Membership As at the date of this report, the Company had an Audit Committee, a Remuneration Committee and a Nomination Committee. Members acting on the committees of the board during the half year were: Audit Committee: G.C. Paton AM (Chairman) C.H. Brown K.W. Gunderson-Briggs Remuneration Committee: C.H. Brown (Chairman) K.W. Gunderson-Briggs G.C. Paton AM Nomination Committee: C.H. Brown (Chairman) K.W. Gunderson-Briggs G.C. Paton AM Principal Activities The principal activities of the consolidated entity are that of an integrated retail, franchise and property enterprise including: Franchisor; Sale of furniture, bedding, computers, communications and consumer electrical products in Australia, New Zealand, Slovenia, Croatia, Ireland and Northern Ireland; Property investment; Lessor of premises to Harvey Norman franchisees and other third parties; Media placement; and Provision of consumer finance and other commercial advances. The consolidated entity holds a controlling interest in Pertama Holdings Limited ( Pertama ). Shares in Pertama are listed on the Stock Exchange of Singapore. The principal activities of Pertama are retail sales of furniture, bedding, computers, communications and consumer electrical products in Singapore and Malaysia. Review of Group Operations The total equity of the consolidated entity for the half-year ended 31 December increased over the previous corresponding period due to the following: A higher property revaluation increment recorded for the period; Profit attributable to increased rental income; A lower loss generated by Clive Peeters and Rick Hart; The tax benefit recognised in the current period associated with the treatment of support payments provided to Harvey Norman Holdings (Ireland) Limited; and The tax benefit recognised in the current period associated with the reversal of future tax liabilities previously recognised on certain pre-cgt properties. 12

13 DIRECTORS REPORT (CONTINUED) Significant Changes in the State of Affairs In the opinion of the directors, there were no significant changes in the state of affairs of the consolidated entity that occurred during the half-year ended 31 December. Significant Events After Balance Date There have been no circumstances arising since balance date which have significantly affected or may significantly affect: the operations; the results of those operations; or the state of affairs of the entity or consolidated entity in future financial years. Dividends The directors recommend a fully franked interim dividend of 5.0 cents per share. This interim dividend will be paid on 7 May 2012 to shareholders registered at 5:00 pm on 13 April No provision has been made in the Statement of Financial Position for this recommended interim dividend. Corporate Governance The Company is committed to good corporate governance and disclosure. The Company has substantially adopted the ASX Corporate Governance Council's "Principles of Good Corporate Governance and Best Practice Recommendations" for the entire financial period, unless otherwise stated. 13

14 DIRECTORS REPORT (CONTINUED) Auditor Independence The directors received the following declaration from the auditors of Harvey Norman Holdings Limited. Auditor s Independence Declaration to the Directors of Harvey Norman Holdings Limited In relation to our review of the financial report of Harvey Norman Holdings Limited for the half-year ended 31 December, 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 Katrina Zdrilic Partner Sydney 29 February 2012 Liability limited by a scheme approved under Professional Standards Legislation. This report has been made in accordance with a resolution of directors. G. HARVEY K.L. PAGE Chairman Chief Executive Officer Sydney Sydney 29 February February

15 STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER NOTE C O N S O L I D AT E D December June December 2010 $000 $000 $000 Current Assets Cash and cash equivalents 26(a) 122, , ,921 Trade and other receivables 5 1,294,667 1,065,232 1,192,482 Other financial assets 6 30,868 41,229 38,000 Inventories 7 280, , ,722 Other assets 8 35,219 21,040 38,324 Intangible assets Total current assets 1,764,125 1,627,344 1,761,845 Non-Current Assets Trade and other receivables 10 13,804 14,538 16,639 Investments accounted for using equity method , , ,630 Other financial assets 11 7,325 8,294 9,331 Property, plant and equipment , , ,233 Investment properties 13 1,663,575 1,601,601 1,544,079 Intangible assets 14 61,293 58,294 36,021 Deferred income tax assets 25,364 22,481 22,520 Total non-current assets 2,461,704 2,376,665 2,293,453 Total Assets 4,225,829 4,004,009 4,055,298 Current Liabilities Trade and other payables , , ,708 Interest bearing loans and borrowings , , ,757 Income tax payable 10,558 7,366 34,972 Other liabilities 17 1,666 1,603 2,721 Provisions 18 24,626 25,235 25,005 Total current liabilities 1,075, ,376 1,113,163 Non-Current Liabilities Interest-bearing loans and borrowings , , ,016 Provisions 20 6,751 9,675 9,947 Deferred income tax liabilities 203, , ,864 Other liabilities 21 15,811 16,978 19,131 Total non-current liabilities 888, , ,958 Total Liabilities 1,964,028 1,775,548 1,866,121 NET ASSETS 2,261,801 2,228,461 2,189,177 Equity Contributed equity , , ,610 Reserves 23 6,538 32,621 39,019 Retained profits 24 1,966,558 1,901,350 1,844,503 Parent entity interests 2,232,706 2,193,581 2,143,132 Non-controlling interests 25 29,095 34,880 46,045 TOTAL EQUITY 2,261,801 2,228,461 2,189,177 The above Statement of Financial Position should be read in conjunction with the accompanying notes. 15

16 INCOME STATEMENT FOR THE HALF-YEAR ENDED 31 DECEMBER NOTE C O N S O L I D AT E D December December 2010 $000 $000 Sales revenue 2 806, ,128 Cost of sales (601,877) (588,742) Gross profit 205, ,386 Revenues and other income items 2 584, ,378 Distribution expenses (5,468) (4,063) Marketing expenses (204,630) (213,629) Occupancy expenses (111,167) (113,052) Administrative expenses (255,667) (247,555) Other expenses from ordinary activities (26,445) (18,800) Finance costs 3 (24,653) (21,349) Share of equity accounted entities: - Share of net profit of joint venture entities (a) 2, 27 6,086 11,138 - Share of joint venture property revaluation (a) 3, 27 (3,698) 158 Profit before income tax 163, ,612 Income tax expense (32,637) (64,608) Profit after tax 130, ,004 Attributable to: Owners of the parent 128, ,669 Non-controlling interests 1,886 2, , ,004 Earnings Per Share: Basic earnings per share (cents per share) cents cents Diluted earnings per share (cents per share) cents cents Dividends per share (cents per share) 5.0 cents 6.0 cents The above Income Statement should be read in conjunction with the accompanying notes. (a) The total share of net profit of joint venture entities, including the share of joint venture property revaluation, was $2.39 million before tax for the half-year ended 31 December (December 2010: $11.30 million before tax). 16

17 STATEMENT OF COMPREHENSIVE INCOME FOR THE HALF-YEAR ENDED 31 DECEMBER C O N S O L I D AT E D December December 2010 $000 $000 Profit for the period 130, ,004 Other comprehensive income Foreign currency translation (6,209) (24,763) Net fair value (losses)/gains on available-for-sale investments (599) 359 Cash flow hedges: - (Loss)/gain taken to equity (15,481) 3,056 - Transferred realised gains/(losses) to other income 99 (56) - Transferred to Statement of Financial Position (2) (1) Fair value revaluation of land and buildings Income tax on items of other comprehensive income 3,029 (1,168) Other comprehensive income for the period (net of tax) (18,346) (21,738) Total comprehensive income for the period 112, ,266 Total comprehensive income attributable to: - Owners of the parent 110, ,568 - Non-controlling interests 2,204 (2,302) 112, ,266 The above Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 17

18 STATEMENT OF CHANGES IN EQUITY FOR THE HALF-YEAR ENDED 31 DECEMBER Attributable to Equity Holders of the Parent Contributed Equity Retained Profits Asset Revaluation Reserve Foreign Currency Translation Reserve Available for Sale Reserve Cash Flow Hedge Reserve Employee Equity Benefits Reserve Acquisition Reserve Noncontrolling Interest TOTAL EQUITY $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 At 1 July 259,610 1,901,350 66,557 (35,934) 2,327 (864) 7,452 (6,917) 34,880 2,228,461 Other comprehensive income: Revaluation of land and buildings - - (799) (799) Reverse expired or realised cash flow hedge reserves Currency translation differences (6,527) (6,209) Fair value of interest rate swaps (10,774) (10,774) Fair value of forward foreign exchange contracts (62) (62) Fair value of available for sale financial assets (599) (599) Other comprehensive income - - (799) (6,527) (599) (10,739) (18,346) Profit for the period - 128, , ,833 Total comprehensive income for the period - 128,947 (799) (6,527) (599) (10,739) - - 2, ,487 Shareholder equity contribution ,500 1,500 Change in control of controlled entities (4,467) (4,467) Acquisition of non-controlling interest (7,779) - (7,779) Cost of share based payments Dividends paid - (63,739) (3,692) (67,431) Distribution to members (1,330) (1,330) At 31 December 259,610 1,966,558 65,758 (42,461) 1,728 (11,603) 7,812 (14,696) 29,095 2,261,801 18

19 STATEMENT OF CHANGES IN EQUITY FOR THE HALF-YEAR ENDED 31 DECEMBER (CONTINUED) Attributable to Equity Holders of the Parent Contributed Equity Retained Profits Asset Revaluation Reserve Foreign Currency Translation Reserve Available for Sale Reserve Cash Flow Hedge Reserve Employee Equity Benefits Reserve Non-controlling Interest TOTAL EQUITY $000 $000 $000 $000 $000 $000 $000 $000 $000 At 1 July ,610 1,787,196 68,980 (20,107) 1,354 (1,201) 7,392 53,987 2,157,211 Other comprehensive income: Revaluation of land and buildings Reverse expired or realised cash flow hedge reserves (1) - - (1) Currency translation differences (20,126) (4,637) (24,763) Transfer realised gains on interest rate swaps to other income (56) - - (56) Fair value of forward foreign exchange contracts (25) - - (25) Fair value of interest rate swaps , ,164 Fair value of available for sale financial assets Other comprehensive income (20,126) 359 2,082 - (4,637) (21,738) Profit for the period - 131, , ,004 Total comprehensive income for the period - 131, (20,126) 359 2,082 - (2,302) 112,266 Change in control of controlled entity (342) (342) Cost of share based payments Reversal of share based payments (360) - (360) Dividends paid - (74,362) (4,198) (78,560) Distribution to members (1,100) (1,100) At 31 December ,610 1,844,503 69,564 (40,233) 1, ,094 46,045 2,189,177 19

20 STATEMENT OF CASH FLOWS FOR THE HALF-YEAR ENDED 31 DECEMBER NOTE C O N S O L I D AT E D December December 2010 $000 $000 Cash Flows from Operating Activities Inflows/(Outflows) Net receipts from franchisees A 406, ,493 Receipts from customers B 774, ,879 Payments to suppliers and employees C (1,097,373) (1,121,965) Distributions received from joint ventures D 6,894 25,876 GST paid E (18,700) (9,319) Interest received 4,276 3,650 Interest and other costs of finance paid F (24,351) (21,267) Income taxes paid (33,387) (67,952) Dividends received 1,243 1,251 Cash flows from operating activities prior to consumer finance related cash flows 19,318 92,646 Consumer finance related cash flows: Consumer finance loans granted by the consolidated entity (506) (769) Proceeds of sale of consumer finance loans Repayments received from consumers on consumer finance loans granted by the consolidated entity Consumer finance related cash flows Net Cash Flows from Operating Activities 26(b) 19,876 93,520 Cash Flows from Investing Activities Payment for purchases of property, plant and equipment and intangible assets G (79,189) (93,575) Payment for the purchase of investment properties G (50,211) (125,828) Proceeds from sale of property, plant and equipment 922 3,650 Payment for the purchase of other investments - (4) (Payments) / proceeds from units in unit trusts (118) 4 Payments for purchase of equity investments H (2) (5,189) Proceeds from sale of listed securities 7,095 - Loans repaid from / (granted to) other entities 5,079 (5,495) Payment for purchase of shares in a controlled entity I (11,971) - Net Cash Flows Used In Investing Activities (128,395) (226,437) Cash Flows from Financing Activities Proceeds from Syndicated Loan Facility J 129, ,508 Dividends paid (63,739) (74,362) Proceeds of loans from directors and other persons 4,535 1,906 Proceeds from borrowings J 6,878 3,481 Net Cash Flows From Financing Activities 77, ,533 Net Decrease in Cash and Cash Equivalents (31,003) (17,384) Cash and Cash Equivalents at Beginning of the Period 118, ,910 Cash and Cash Equivalents at End of the Period 26(a) 87,726 83,526 20

21 STATEMENT OF CASH FLOWS FOR THE HALF-YEAR ENDED 31 DECEMBER (CONTINUED) Commentary to the Statement of Cash Flows: <A> Total revenue received from franchisees decreased from $ million for the previous half year to $ million for the half-year ended 31 December, a decrease of $24.33 million or 4.5% (refer note 2). Cash flows from operating activities are also affected by movement in franchisee working capital loans receivable as at 31 December relative to the previous reporting period, being 30 June. The aggregate amount of loans advanced to franchisees as at 31 December exceeded the aggregate amount of loans advanced to franchisees as at 30 June by $ million. A major reason for the increase was due to the computer franchisees purchasing an additional $35 million of computer hardware and Digital SLR inventory in the second quarter of the 2012 financial year to cater for the component shortage as a result of the Thailand floods. This brought forward purchases from the January and February 2012 period. Franchisee loans receivable are typically higher in December to assist franchisees in acquiring stock and other working capital to cater for significantly increased sales volumes during the Christmas trading period. Accordingly, net receipts from franchisees decreased by $77.78 million compared to the previous corresponding period. <B> Sales revenue to external customers derived by company-operated stores decreased for the half-year ended 31 December relative to the previous corresponding period due to the closure of seven (7) Clive Peeters and Rick Hart stores and the conversion of the remaining eighteen (18) Clive Peeters and Rick Hart stores to the franchised model during the current period. The sale of Clive Peeters and Rick Hart inventory upon conversion to the franchised model was made via several working capital advances to franchisees and not settled in cash. The reductions were offset by the opening of two (2) new stores in offshore markets located in Maribor, Slovenia and Zagreb, Croatia. <C> <D> <E> <F> <G> <H> <I> <J> The decrease in payments to suppliers and employees is due to the closure of seven (7) Clive Peeters and Rick Hart stores and the conversion of the remaining eighteen (18) Clive Peeters and Rick Hart stores to the franchised model during the current period. The consolidated entity continues to focus on inventory management and controlling operating costs in the face of a difficult retail climate. The decrease in distributions received from joint venture entities is because the prior half-year balance included proceeds received from the sale of a development property located in Mentone, Victoria. Net GST payments increased by $9.38 million in the half-year ended 31 December compared to the prior period. The previous half-year contained higher GST input tax credits (cash inflows) resulting from increased real property acquisitions and developments. Interest and other costs of finance paid increased by $3.08 million due to the increase in the Syndicated Facilities utilised in Australia and the increase in commercial bill facilities utilised by overseas controlled entities. Payments for the purchases of property, plant and equipment, intangible assets and investment properties decreased by $90.00 million relative to the previous corresponding period. Higher payments in the prior period were attributable to several significant property acquisitions including the At Home Centre at Penrith, the new development under construction at Springvale, Victoria, the Space Asian showroom in Singapore and the acquisition of plant and equipment assets from the former owners of Clive Peeters and Rick Hart. The decrease in payments for the purchase of equity investments is because the prior half-year balance included capital contributions required for a mining camp joint venture in Queensland of $4.76 million. During the current half-year, the consolidated entity acquired an additional 12,592,150 shares in Pertama Holdings Limited, Singapore for a total purchase consideration of $6.19 million. The consolidated entity also acquired a further 24.9% interest in a controlled entity for a total purchase consideration of $5.78 million. The utilised Syndicated Facility increased to $ million during the half-year ended 31 December to fund operating activities. 21