REDFLEX - THE LEADING GLOBAL TRAFFIC ENFORCEMENT COMPANY

Transcription

1 REDFLEX - THE LEADING GLOBAL TRAFFIC ENFORCEMENT COMPANY REDFLEX HOLDINGS LIMITED ANNUAL REPORT 2012

2 REDFLEX HOLDINGS LIMITED - ABN Directors Max Findlay - Chairman Graham Davie - Chief Executive Karen Finley - Executive Ian Davis Rob Debernardi Michael McConnell Company Secretary Marilyn Stephens Registered Office 31 Market Street, South Melbourne,Victoria, Australia 3205 Principal Places of Business Australia 31 Market Street, South Melbourne, Victoria, Australia 3205 Redflex Holdings Limited Phone: Redflex Traffic Systems Pty Ltd Phone: USA N 23rd Avenue, Phoenix, Arizona 85085, USA Redflex Traffic Systems Inc Phone: Share Register Computershare Investor Services 452 Johnston Street, Abbotsford Victoria, Australia 3067 Phone: Redflex Holdings Limited shares are listed on ASX (Australian Stock Exchange) Code RDF Solicitors Baker & McKenzie 181 William Street, Melbourne,Victoria, Australia 3000 Minter Ellison 525 Collins Street, Melbourne, Victoria, Australia 3000 Auditors Ernst & Young 8 Exhibition Street, Melbourne, Victoria, Australia 3000

3 CONTENTS FINANCIAL PERFORMANCE SUMMARY 1 CHAIRMAN S REPORT 3 CHIEF EXECUTIVE OFFICER S REPORT 5 DIRECTORS REPORT 14 REMUNERATION REPORT 23 CORPORATE GOVERNANCE STATEMENT 36 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 44 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 45 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 46 CONSOLIDATED STATEMENT OF CASH FLOWS 47 NOTES TO FINANCIAL STATEMENTS 48 DIRECTOR S DECLARATION 99 INDEPENDENT AUDITOR S REPORT 100 AUDITOR S OPINION 101 ASX ADDITIONAL INFORMATION 102 ANNUAL REPORT 2012 I

4 This page has been intentionally left blank II REDFLEX HOLDINGS LIMITED

5 FINANCIAL PERFORMANCE SUMMARY PROFITABLE PERFORMANCE FROM OPERATIONS Revenue ($M) Earnings before interest, taxation, depreciation and amortisation ($M) non IFRS measure* Operating profit after tax ($M) Weighted average number of shares (million) Basic earnings per share (cents) Earnings per share based on earnings before interest, tax, depreciation and amortisation (cents) non IFRS measure* FINANCIAL POSITION Current assets ($M) Non-current assets ($M) Current liabilities ($M) Non-current liabilities ($M) Shareholders equity ($M) *Refer to page 5 for year on year comparison where EBITDA is reconciled to Net Profit Before Tax. ANNUAL REPORT

6 In the Middle East over 250 fixed red-light and speed systems have been delivered to date with further deliveries planned.

7 CHAIRMAN S REPORT IT HAS BEEN EENAGO GOOD YEAR, IN WHICH THE COMPANY HAS DELIVERED A RECORD RESULT, WITH NET PROFIT AFTER TAX OF $151 $15.1 MILLION, AN INCREASE OF 47% OVER THE PREVIOUS YEAR. CHAIRMAN S REPORT RT Dear Shareholders On behalf of the directors ofre Redflex dflexiam pleasedto present ent the Annual Report for rth the financial year. It has been a good overall l year, in nw which the company yha has delivered ed a record result, with Net tprofit After Tax of $15.1 million, an increase of f47% over the previous year. It was pleasing to declare a fully franked dividend dend of 5 cents per share for the second half, payable able on 4 th October This, in conjunction ctio n with the interim dividend, dend, resulted ed in dividends idends for the year being 8 cents per share fully ly franked. Redflex dflexhas maintained ned its key position in the global l photo enforcement industry, and dhas had dco considerable success in its pursuit of international national business opportunities ties in FY12. In the US, growth has been en constrained due to the difficult environment nment that continues nues there and a high level el of public opposition ositio towards photo enforcement generally, despite e the ede demonstrated ted benefits in lives saved and improved safety on the roads. Strong EBITDA and dca cash flow from operations have been characteristics of the US based business. s In international marketsw we executed on the large contracts ts we ewere awarded in Saudi Arabia and the United Arab Emirates, and dha have pursued opportunities in a number of other countries. Our contract in Malaysia, to supply camera systems, stem back office processing, and support services is under way and will continue for ra number of years into the future. ure. We have continued dto work with most state egovernments in Australia to further enhance photo enforcement systems stems for road safety across the nation. Key elements of our strategy remain to reduce business risks, to diversify the business further into related areas, and to further reduce sunk capital costs of fixed camera installations. The acquisition of the Smart Bus business in the US has opened broader opportunities in a new market which appears to be very promising. Your rcompany is in a very strong cash position, with net debt of about $2 million at the end of June, down from $32 million in the prior year. Bank debt has been reduced to US$15 million in August and we expect to be debt free by the end of the 2013 financial year, unless there is a compelling acquisition opportunity. Recently, Graham Davie announced his retirement after 23 years with the company, including 10 years as CEO. I, together with the rest of the board wish to thank him for his contribution to the growth and development of Redflex. His successor, Bob DeVincenzi has commenced with Redflex, and we look forward to working with him and seeing the results of his efforts as Group CEO in the year ahead. On behalf of my fellow directors, I thank all staff for their contributions and achievements over the year, and I also thank shareholders for their ongoing support. Max Findlay Chairman ANNUAL REPORT

8 A significant achievement was the contract signing for the supply of camera systems, back-office software and related services for the Automated Enforcement System (AES) project in Malaysia.

9 CHIEF EXECUTIVE OFFICER S REPORT REDFLEX HOLDINGS REVIEW OF OPERATIONS Redflex continues to maintain its key position in the global traffic safety industry, and has delivered further growth in the USA and in its international markets. The results for the year show revenue growth, strong profitability and strong recurring cash flows. Revenue for the group was $146.3 million, an increase of 4.7% on the previous year. Net profit before tax was $21.3 million, an increase of 62% over the previous year, and EBITDA* was $48.8 million, an increase of 12.5% over the previous year. These results were achieved despite an adverse average AU$/US$ exchange rate movement of 4.4% over the year. Key contributors for the year have been: Delivery of major projects in the Middle East; Continuing growth generally of the international business with contributions from all of its market segments; and The international business, while strong, is subject to peaks and troughs of project based work and to timing variability in major projects with international customers. There has been an increase in the level of long term recurring revenue through service contracts and maintenance, which goes some way to smoothing the variability. *Refer to reconciliation below Year on year comparison A comparison of underlying performance for FY11 and FY12 is as follows. The results were realised in the context of an adverse exchange rate movement of 4.4% against the US$. The results here do not show the exchange rate impact. Underlying result (non IFRS measure) FY2012 FY2011 $ 000 $ ,770 45,813 Sale process costs 0 2,481 EBITDA (non IFRS measure) 48,770 43,332 Depreciation 22,252 24,162 Amortisation 3,245 2,287 Interest 1,957 3,754 Net profit before tax 21,316 13,129 Strategic Direction The key elements of the strategic direction of the company are: Reduction of risk in the business, particularly in the USA where Redflex currently assumes almost all of the risks in shared programs. Maximisation of revenue from existing, renewed and new contracts. Investigation of new sources of revenue from existing customers. Diversification of the businesses into related areas. A specific focus on reducing the capital costs of camera systems and improving operational efficiencies through technology development. Financial Resources The company has facilities with a syndicate of Australian banks comprising a US$70 million facility available for capital growth and a working capital facility of $8 million to fund requirements for bonding and guarantees for the Australian/International business. At 30 June 2012, the bank debt had been reduced to $24.6 million (US$25 million), down $14.3 million (US$15 million) from the prior year. Net debt at 30 June stood at $2.0 million. Following further repayment of $9.6 million (US$10 million) in the FY13 year to date, bank debt has been reduced to $15 million (US$15 million). Over the course of FY13 we expect to reduce debt to zero, in the absence of growth opportunities requiring capital. The reduction of debt highlights the strong cash flow from operations that the company continues to deliver. Dividends During the FY12 financial year, a final (annual) dividend of 5 cents per share fully franked was paid in November The first semi-annual dividend of 3 cents per share fully franked was paid in March. Directors have declared a final dividend of 5 cents per share fully franked to be paid in October. ANNUAL REPORT

10 Our non-intrusive red-light project started with pilot installations in Phoenix, Sydney, Melbourne and Perth and we have now begun a full roll-out in the USA.

11 CHIEF EXECUTIVE OFFICER S REPORT USA OPERATIONS Smart Bus Acquisition REDFLEX Student Guardian, a new product for school bus-arm photo enforcement, was introduced in FY12 to address the safety needs of children on school buses. Video tracking is used to capture offences by vehicles passing a stationary bus. Redflex currently has 10 pilot school bus programs operating in 6 states. In May, Redflex acquired SBL Investments, LLC and Americore Enterprises, LLC, the leading providers of automated school bus arm photo enforcement in the United States. SBL and Americore offer the Smart Bus Live system, a dedicated on-bus photo enforcement system. The acquisition, when combined with the existing Student Guardian product, positions Redflex as a premier provider of school bus safety photo enforcement technology. The transaction involved an initial payment of $4.4 million with further payments of up to $3.0 million over 4 years subject to meeting financial performance measures (see note 5). The Smart Bus Live system is currently deployed by 15 school districts in six states. 10 states currently allow the use of school bus arm enforcement technology and at least 10 others are considering legislation which would authorise its use. Contract Renewals During FY2012, 52 contracts with 479 approaches were renewed at a renewal rate of 83%. Of those that were not renewed, the majority were in: Albuquerque NM, where the city council reversed the ordinance allowing for local photo enforcement; Tempe AZ where the contract expired; and Los Angeles County where program revenue had decreased significantly. During FY2013 we expect 51 contracts to come due for renewal representing 754 approaches. Chicago, IL, with 384 approaches represents half of the approaches currently forecast for renewal. New Contracts Despite economic headwinds in the USA, 21 new contracts were signed during FY12. New contracts include: Rosell, NJ Socorro, TX Stony Plain, Alberta Petersburg, VA Bel-Ridge, MO Vestavia Hills, AL Richmond, VA Clearwater, FL Kissimmee, FL Charlack, MO Isle of Wight, VA Camden, NJ Hackensack, NJ Calgary, Alberta Glendale Heights, IL Burlington, NJ Bloomfield NJ Jacksonville, FL * Jackson, TN* Irondale, AL Vinita Park, MO Fairview, OR Lawnside, NJ *Includes contracts signed recently in FY13. Jacksonville is the largest city in the Florida market. Jackson, TN was previously supported by a Redflex competitor. In addition, 2 US-based contracts were awarded for the supply and integration of equipment and processing solutions: An open road tolling application with the Transportation Corridor Agency, an agency formed under California legislation to construct and operate toll roads across Orange County, California. Portable overweight and oversized vehicle enforcement systems with the Washington D.C Metropolitan Police Department. These contracts do not contain significant recurring revenues as is the case with the majority of the USA business. The contracts will be fulfilled by Redflex Australia. Installations The total number of installed systems at 30 June 2012 was 2,010 in the USA. While the construction team added 180 new systems in the USA in FY12 it also removed 131. The number of dark approaches averaged 114 in FY12, compared to an average of 100 during FY11, due in part to the loss of Albuquerque, NM. The number of installed systems includes cameras that may not be generating revenues for reasons including: warning periods; delays in going live; legislative issues; road work; terminations, pending removals or maintenance actions. ANNUAL REPORT

12 Redflex continue to operate the NSW Roads and Maritime Services (NSW RMS) Interim Mobile Program which has been successful in reducing the road toll and is a part of the NSW Government s $170 million road safety campaign.

13 CHIEF EXECUTIVE OFFICER S REPORT USA OPERATIONS - CONTINUED The construction pipeline includes a higher percentage of intersections on state roadways compared to previous years, creating longer delays in obtaining construction permits and resulting in delays in completing planned new approaches. Marketing Communication Strategies Redflex works with its clients to help build public awareness around the safety issues that affect their communities, particularly relating to red light running, speeding, moving violations involving school buses and children, stop sign running and rail road crossing safety. We attempt to educate public officials, elected officials and the general public about how technology can be used to deter preventable motor vehicle and pedestrian related injuries. The tools that are used include print advertising, trade shows, websites, third party research, social media and customer forums. Redflex actively supports the Traffic Safety Coalition, a national grassroots organization focused on promoting the merits of various traffic safety technologies, including photo enforcement. The Traffic Safety Coalition, founded in 2009, has a roster of over 70 third-party organizations interested in promoting traffic safety including hospitals, bicycle and pedestrian groups, and municipal police departments. Redflex uses its network of advisors and municipal customers, as well as third party supporters involved with the Traffic Safety Coalition to defeat the efforts of state legislators who introduce bills that either seek to limit or remove traffic safety enforcement technologies while concurrently promoting new laws or amendments to existing law that enhance the efficiency and stability of road safety enforcement programs. Legal Environment The level of litigation industry-wide, while still significant, continues to decrease due to Redflex s successful efforts resulting in positive rulings in the majority of suits. The standard types of lawsuits filed contain challenges on a constitutional or administrative basis including claims involving due process, right to privacy, requirement of private investigators licenses and city enabling ordinance issues. In addition, Redflex has received claims seeking relief for alleged violations of prevailing wage laws. REDFLEX INTERNATIONAL OPERATIONS It has been another strong year for the Australian-based Redflex International business. Major orders have been won along with the achievement of important milestones. Malaysia Legislative Environment Redflex continues to lead the industry in proactively seeking to enable and improve the statutory framework for road safety programs as well as defending against adverse developments that may arise. Redflex is supporting the filing of bills in many current markets and in certain new states seeking enablement and enhancements for red light and speed road safety cameras, as well as for photo enforcement of school bus arm infractions. Redflex also supported the passage of legislation allowing speed based photo enforcement in park and school zones in Chicago, Illinois. Furthermore, positive reform legislation was passed in Virginia and Washington which should support industry initiatives and growth in each state. Redflex continues to face challenges raised through local voter initiatives and referendums. In FY12, citizen initiatives caused the termination of several Redflex contracts, including the Albuquerque contract. A significant achievement was the contract signing for the supply of camera systems, back-office software and related services for the Automated Enforcement System (AES) project in Malaysia. The award of this contract came after extensive competitive trials run by the Ministry of Transport, the Government of Malaysia s agency responsible for the implementation of this project. For Redflex, the contract is worth over $50 million and we are providing state-of-the-art speed enforcement technology with 450 fixed speed cameras, 140 mobile cameras, extensive enterprise back-office software, and implementation services. Redflex has established a Malaysian office in Kuala Lumpur and is ramping up to support the program. After the supply and commissioning of the systems, Redflex has ongoing maintenance contracts for the 5 year term. ANNUAL REPORT

14 Our Saudi Arabian operation received a high commendation in the category of Changing Driver Behaviour for Road Safety.

15 CHIEF EXECUTIVE OFFICER S REPORT REDFLEX INTERNATIONAL OPERATIONS - CONTINUED Saudi Arabia Abu Dhabi Our Saudi Arabian operation received a high commendation in the category of Changing Driver Behaviour for Road Safety. The award was presented at the Gulf Traffic conference in Dubai, which is the major tradeshow and conference for the Middle East region. June 2012 saw another milestone in Saudi Arabia with the go-live for our new main Violation Processing Centre located in Dammam, the major city of the Eastern Province. From this centre, we provide backoffice infringement processing services for the Eastern Province, including the cities of Dammam, Khobar and Dhahran; Aseer Province, including the cities of Abha, Khamis Mushait and Ahad Rufaidah; and the region of Tabuk. This new centre services an increasing number of tickets arising from more fixed cameras coming online. The original interim processing centre will be updated to be used as a back-up centre. 90 mobile systems and over 250 fixed red-light and speed systems have been delivered to date with further deliveries planned. The fixed systems operate in sets; a rear camera captures an image of the number plate of the offending vehicle, and the front camera captures an image of the offending driver s face. The mobile systems are being progressively upgraded to Redflex dual radar technology. United Kingdom We have been awarded a Highways Agency Digital Enforcement Compliance System (HADECS) contract in the United Kingdom. This was a significant win for Redflex, as the systems are to be deployed on highways across the UK. Variable message signs are used on the highways to change the speed limit to maximise vehicle throughput based on traffic conditions and this enables the current infrastructure to carry significantly more vehicles without the need for the expensive construction of additional lanes. Enforcement is a key component of these systems, as the traffic flow is only improved if drivers follow the dynamic speed limits displayed in realtime by the system. We have delivered over 170 non-intrusive camera systems, powered by a mixture of solar and mains powered uninteruptable power supply, for the Abu Dhabi Police. A back-office infringement processing centre is up and running. We have designed and developed new enclosures to match the contemporary architecture of the surrounding streets in modern cities. Ireland Forty-four vehicles are now operational in Ireland for the GoSafe project which Redflex operates as a Consortium partner with Spectra (Ireland) and Egis Projects SA (France). The GoSafe project is an outsourced enforcement camera program for the Irish Police Force, and comprises mobile cameras, our Digital Camera Management System (to manage the camera cars remotely), and our Image and Infringement Processing System (IIPS) to adjudicate the infringements. Two local Redflex staff are on site to support the project in Ireland. GoSafe has expressed interest in the expanded features of the IIPS back-office system, with potential for offering increased outsourcing services to the Irish Police. Vietnam Vietnam is an exciting new market for Redflex. We have supplied 10 units of our latest compact, lightweight mobile Radarcam systems for the Vietnam Road Safety Project. Intellectual Property Redflex acquired the software intellectual property of Transtoll Pty Ltd, a global provider of hardware and software systems to the tolling market. Synergies exist with our current enforcement camera technologies, particularly automatic number plate recognition (ANPR). Redflex won its first tolling contract recently, whereby next generation tolling technology was purchased for trial purposes by the Transportation Corridor Agencies in California. ANNUAL REPORT

16 CHIEF EXECUTIVE OFFICER S REPORT REDFLEX INTERNATIONAL OPERATIONS - CONTINUED New South Wales We continue to operate the NSW Roads and Maritime Services (NSW RMS) Interim Mobile Program which has been successful in reducing the road toll and is a part of the NSW Government s $170 million road safety campaign. We provide and operate six in-car mobile cameras with back-office pre-verification services. The NSW Government Roads Minister recently announced that the Mobile Speed Camera Program will be expanded from the current 930 to 7,000 deployment hours per month by July The expansion of speed enforcement activities will be coupled with more conspicuous vehicle markings and advance warning signs. We await the release of the tender for the larger mobile program. Our long association with the NSW RMS continues with the provision of a range of camera systems. While we continue to supply and install safety cameras within metropolitan Sydney, we also upgraded the Vehicle Exhaust Emission System installed in the M5 tunnel. This system is used for the detection of heavy vehicles that emit excessive levels of exhaust smoke. The upgrade features a chain of high definition video cameras that improve the overall system performance and capture rates. The systems also contain Automatic Number Plate Recognition technology to detect vehicles of interest and will have the ability to enforce vehicles illegally travelling in barred lanes. When an incident occurs in the tunnel the variable message signs above the lane indicate the closure of the lane with a red cross. For safety reasons, drivers are required to move out of the barred lanes. Where drivers ignore the sign, the system can be configured to take an infringement photograph for enforcement purposes. Additionally, we performed full upgrades at 30 red-light and speed sites to align them with our latest technology. South Australia In South Australia, we continue to supply safety cameras to the Department of Planning, Transport & Infrastructure. In FY12, we installed twenty-eight redlight and speed cameras and four rail systems. This range of camera systems forms part of our ongoing contract with DPTI and the South Australian Police, for the supply of enforcement cameras until The South Australian Police have accepted our trial point-topoint system which is now operating as a demonstration site. Northern Territory Our contact with the Northern Territory Government continues with the installation and maintenance of eighteen cameras. Twelve are located in Darwin, two in Alice Springs with the balance to be installed at still to be determined intersections in Darwin. This contract, which involves the running of a back-office processing centre, collecting payments on behalf of the Government and assisting their Fines Recovery Unit, has been extended for another year. Redflex has installed point-to-point (time over distance) speed enforcement systems for the NSW RMS, and maintains its position as the market leader and innovator of this technology. Numerous gantry mounted systems to detect excessive speeds now monitor heavy vehicles on major NSW highways. Victoria We continue to work closely with the Victorian Department of Justice. We have recently been awarded the CityLink Tunnel contract to provide enforcement systems in the Burnley and Domain Tunnels. The systems interface to the variable speed limit signs in the tunnel to enforce the active speed limit. Western Australia We have experienced a rewarding year with new major back-office releases to our important customers. First was the upgrade to the Western Australia Police s Image and Infringement Processing System (IIPS) which was a major step given the size of the system. We were awarded a new support contract for the next 3 years with two 2-year extension options. This will consolidate our on-going relationship with the Western Australia Police and provide a platform to improve our service in the coming years. We also received orders for 17 additional red-light and speed camera systems. 12 REDFLEX HOLDINGS LIMITED

17 CHIEF EXECUTIVE OFFICER S REPORT REDFLEX INTERNATIONAL OPERATIONS - CONTINUED Queensland In mid-2011, the IIPS back-office system went live for the Queensland Police Service. This was a major upgrade from the former Redflex back-office system which had been in use for well over a decade. Subsequently, we implemented the processing of point-to-point infringements into the system. This important component was successfully deployed at the end of November. RESEARCH AND DEVELOPMENT Our ongoing commitment to research and development has helped us to maintain our position at the forefront of an ever-changing market. Non-intrusive red light Our non-intrusive red-light project started with pilot installations in Phoenix, Sydney, Melbourne and Perth and we have now begun a full roll-out in the USA. A mapping radar solution is already deployed commercially in point-to-point installations, removing the need for inroad sensors and sunk construction costs. Automatic Number Plate Recognition OUTLOOK FOR THE 2013 FINANCIAL YEAR As a matter of policy, the company does not put out financial forecasts. However, the following comments give a qualitative view of the conditions that are expected to affect the business during FY13: Despite ongoing difficult economic circumstances in the USA, we expect to continue to grow the installed base of cameras and sign further new contracts; Legislative and legal challenges will continue in the US, but the indications are that they are not getting worse, and may be improving; The international business, while strong, is subject to peaks and troughs of project based work and to timing variability in major projects with international customers. There has been an increase in the level of long term recurring revenue through service contracts and maintenance, which goes some way to smoothing the variability; We expect to achieve strong cash flow generation and expect to repay all bank debt during FY13 in the absence of alternative capital demands; and We will focus on capital management options, including the possibility of further acquisitions. THANKS Thanks go to all of those people and organisations who have contributed to Redflex over the past year. Thank you to our staff for their commitment and dedication, to our customers, suppliers, shareholders, financiers and advisers for their ongoing support, and to my fellow board members for their energy and commitment. Our new video Automatic Number Plate Recognition system will be deployed in a tolling trial project in California, USA. This system can be used to read a number plate, and compare it against a database. Up to four plate-reading cameras and a scene camera can be connected together over a network. Using new Redflex technology, the system incorporates high definition video and a LED infrared off-set flash. Dual Ranging Radar The Dual Ranging Radar System is now commercially mature and has been successfully included in our product range. The system was a major contributor to our success in winning the HADECS contract in the United Kingdom. Graham Davie Chief Executive Officer 25 September 2012 ANNUAL REPORT

18 DIRECTORS REPORT Your directors submit 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 the entire period unless otherwise stated. MAXWELL FINDLAY B.EC(POL) NON-EXECUTIVE CHAIRMAN Mr Findlay has over 20 years experience in marketing and general management roles in the industrial and manufacturing industries in Australia and internationally. From 1990 to 2008 Mr Findlay was managing director of Programmed Maintenance Services Ltd where he successfully grew the company from $50 million to $850 million in sales. Prior to joining Programmed Maintenance Services, Mr Findlay s experience included 11 years with Australian Consolidated Industries, 3 years with Smith & Nephew and 5 years with James Sephton Plastics. He currently serves on the Board of EVZ Limited as Chairman, and as a director of SMEC Holdings Limited, Skilled Group Limited and The Royal Children s Hospital. Mr Findlay was previously a director of TSV Limited. Mr Findlay chairs the board and also serves on the Audit and Risk Management Committee and the Remuneration Committee. GRAHAM DAVIE B.SC, GRAD DIP MIL AV CHIEF EXECUTIVE OFFICER Mr Davie has been the Chief Executive Officer of the Redflex Group since 2002 and previously held the position of Managing Director of the Redflex Communications business since He has had ten years experience with the RAAF in engineering design and development, maintenance engineering, software development and support, specification of major systems, and project management. His expertise also includes airborne avionics, flight simulation, avionics automatic test equipment, air traffic control communications and control systems, airport information display systems, and development of graphics software and system support. During the last three years Mr Davie has not been a director of any other listed public company. Mr Davie has announced his retirement effective from 30 September IAN DAVIS LLB (HONS) NON-EXECUTIVE DIRECTOR Mr Davis is a senior partner and previously National Chairman of International law firm Minter Ellison. He has acted for a number of major listed public companies in analysing and reporting on key matters of corporate governance relevant to boards and has acted in the ASX listing of numerous companies, either for the company or the underwriter. He has had extensive involvement in commercial enterprises in Asia, particularly China and Japan and has advised Australian corporates and investors in formulating business strategies for Asia, including acting for them in their joint ventures, supply arrangements and transactions. Mr Davis is Chairman of MaxiTrans Industries Limited since it became publicly listed in 1995 and Chairman of the Produce and Grocery Industry Code Administration Committee since its inception in Mr Davis was nonexecutive Chairman of UCMS Group Ltd from November 2006 to August 2009, and is a former non-executive Chairman and a former non-executive director of a number of publicly listed and private companies. Mr Davis serves on the Audit and Risk Management Committee and the Remuneration Committee. 14 REDFLEX HOLDINGS LIMITED

19 DIRECTORS REPORT ROBIN DEBERNARDI NON-EXECUTIVE DIRECTOR Mr Debernardi is a prominent businessman who has had significant success in a diverse range of businesses. His achievements include the creation of a product range within the horticultural industry, which continues to boast household name recognition decades later. Mr Debernardi has enjoyed further successes in the arena of commercial and rural property development in Victoria and Queensland. He brings substantial experience in assisting companies involved in high growth phases of their development. Mr Debernardi chairs the Remuneration Committee and also serves on the Audit and Risk Management Committee. During the last three years Mr Debernardi has not been a director of any other listed public company. MICHAEL MCCONNELL BA (ECON), MBA NON-EXECUTIVE DIRECTOR Mr McConnell was appointed to the Board on 2 August Mr McConnell has served as the Chief Executive Officer of Collectors Universe since March From 1994 to 2007, he served as a Managing Director of Shamrock Capital Advisors where he was involved in 34 principal investment transactions of over $2.7 billion in value in both public and private companies. The investments spanned a variety of industries, including media, entertainment, software, radio broadcasting, cable distribution, basic materials, chemicals, and consumer products, in companies domiciled globally. Mr McConnell has served on numerous public and private company boards in the US, Australia, New Zealand and Ireland. Mr McConnell received his BA in economics from Harvard University in 1988 and his MBA degree from the Darden School of the University of Virginia in He is a member of the Board of Governors of the microfinance organisation Opportunity International, an Elder of La Canada Presbyterian Church, and a former director of the La Canada Educational Foundation. Mr McConnell chairs the Audit and Risk Management Committee. Mr McConnell is also a non-executive director of Paperlinx Limited. He is also a director of Collectors Universe Inc and was previously a director of MRV Communications Inc until January During the last three years Mr McConnell has not been a director of any other listed public company KAREN FINLEY MBA CHIEF EXECUTIVE OFFICER, REDFLEX TRAFFIC SYSTEMS INC Ms Finley is President and CEO of Redflex Traffic Systems Inc in Phoenix, Arizona. She was appointed to that position in 2005 having started with Redflex as director of operations in 1998 when the company had only three USA contracts. She has extensive knowledge of the business, its competitors and the markets in which it operates, and has successfully ushered the business through enormous expansion. Before joining Redflex, Ms Finley was director of corporate services for Scott the Center for Creative Leadership in San Diego. During the last three years Ms Finley has not been a director of any other listed public company. ANNUAL REPORT

20 DIRECTORS REPORT DIRECTORS INTERESTS IN THE SHARE CAPITAL OF THE COMPANY As at the date of this report, the interests of the directors in the share capital of Redflex Holdings Limited were: Number of Relevant Interests over Ordinary Shares Number of Performance Rights over Ordinary Shares Max Findlay 0 0 Graham Davie 1,840, ,479 Ian Davis 45,000 0 Rob Debernardi 3,171,783 0 Michael McConnell 0 0 Karen Finley 323, ,910 COMPANY SECRETARY Marilyn Stephens has been the Company Secretary of Redflex Holdings Limited since it listed on ASX in 1997, and prior to that she was the Company Secretary and Administration Manager of various companies within the Redflex Group for nine years. DIVIDENDS Directors have declared a final dividend in respect of FY2012 of 5.0 cents per share fully franked (2011: 5.0 cents fully franked). This final fully franked dividend will be paid on 4 October A fully franked interim 2012 dividend of 3.0 cent was paid on 26 March Cents $ 000 Final dividend recommended on ordinary shares 5.0 5,517 Interim dividend paid in the year 3.0 3,311 Final dividend declared post balance sheet date and not provided for within FY2012 Final dividend for FY2011 shown as recommended in the 2011 financial report. These amounts were not recognised as a liability in FY2011 but brought to account in financial year ,517 PRINCIPAL ACTIVITIES The principal activities during the financial year of entities within the consolidated entity were: Provision of road safety camera programs including red light and speed photo enforcement systems and back office processing services for jurisdictions within the USA by Redflex Traffic Systems lnc; and Manufacture and supply of traffic cameras and back office processing systems and provision of associated services to international markets outside of North America, by Redflex Traffic Systems Pty Ltd. 16 REDFLEX HOLDINGS LIMITED

21 DIRECTORS REPORT OPERATING AND FINANCIAL REVIEW GROUP OVERVIEW Redflex Holdings Limited commenced operation in 1995 and has been listed on ASX (Australian Securities Exchange) since The company s vision is to enhance public safety through innovative technologies. A particular focus of the company is to provide red-light and speed photo enforcement solutions. The Group comprises two main subsidiaries Redflex Traffic Systems Inc, based in the USA, that primarily focuses on the large North American market, and Redflex Traffic Systems Pty Ltd that focuses on the international market outside of the North American region. A Build Own Operate Maintain (BOOM) business model prevails in the USA where Redflex provides a comprehensive range of services to customers on a fully outsourced basis, with revenue flowing over contract terms of typically three to five years with optional extension periods. The international business comprises a mix of product sales, support contracts and BOOM contracts. PERFORMANCE INDICATORS Management and the board monitor the Group s overall performance, from implementation of the mission statement and strategy plan through to the performance of the Group against operating plans and financial budgets. The board, together with management, has identified key performance indicators (KPIs) that are used to monitor performance. Key management personnel regularly monitor KPIs. Directors review performance against the KPIs at each monthly board meeting enabling all directors to actively monitor the Group s performance. DYNAMICS OF THE BUSINESS Redflex continues to maintain its key position in the global traffic safety industry. The Group has delivered further growth in the international markets and in the USA despite continuing difficult economic circumstances in that country. The Group s results for the year show revenue growth, strong profitability, and strong cash generation. Management believes the results of the Group show that it has taken the appropriate steps to ensure it is in a strong position to exploit future opportunities. Recurring cash flows are strong and, in the absence of growth opportunities requiring capital, places the company in a position to reduce debt to zero in FY2013. OPERATING RESULTS FOR THE YEAR The Group s net profit from operations after income tax is $15,107,000 (2011: $10,290,000). Revenue from operations was $146.3 million (2011: $139.8 million), up 4.7% from the previous year. The net profit before tax of $21.3 million compared to $13.1 million in the previous financial year. Cash generation from the business remains strong with net debt of approximately $2.0 million at 30 June Results of continuing operations are as follows: REVENUE First half Second half Change Operating Segments $000 $000 $000 $000 % North American Traffic business 46,941 45,552 92,493* 102,936* (10.1) Australian/International Traffic business 27,573 26,252 53,825 36, Head Office interest income Revenue 74,515 71, , , *includes sales of $3.4 million to Canada (2011: $10.4 million) ANNUAL REPORT

22 DIRECTORS REPORT EARNINGS BEFORE INTEREST, TAX, DEPRECIATION AND AMORTISATION (EBITDA) NON IFRS MEASURE First half Second half $ 000 $ 000 $ 000 $ 000 Traffic business 26,972 25,033 52,005 48,637 Head Office costs (1,871) (1,364) (3,235) (2,824) Potential sale transaction costs (2,481) EBITDA non IFRS measure 25,101 23,669 48,770 43,332 NET PROFIT BEFORE TAX First half Second half $ 000 $ 000 $ 000 $ 000 Traffic business 14,226 11,989 26,215 19,187 Impairment of plant and equipment (1,421) (779) (2,200) (1,548) Head Office costs (1,881) (818) (2,699) (2,029) Potential sale transaction costs (2,481) Net profit before tax 10,924 10,392 21,316 13,129 NET PROFIT AFTER TAX FROM OPERATIONS First half Second half $ 000 $ 000 $ 000 $ 000 Net profit after tax 7,159 7,948 15,107 10,290 SHAREHOLDER RETURNS The Group is pleased to report that return to shareholders, both through dividends and capital growth, has started to reflect the many initiatives put in place by management. This is reflected in the significant improvement in most financial measures for the current year Basic earnings per share (cents) Net tangible asset backing per share (cents) Return on assets (%) Return on equity (%) Interest bearing debt/equity ratio (%) Available franking credits ($ 000) 2,356 4,757 5,931 7,839 7,808 4, REDFLEX HOLDINGS LIMITED

23 DIRECTORS REPORT REVIEW OF FINANCIAL CONDITIONS LIQUIDITY AND CAPITAL RESOURCES The statement of cash flows illustrates that there was an increase in cash and cash equivalents in the year ended 30 June 2012 of $5.6 million (2011: decrease of $20.9 million). The increase in cash flow compared to the prior year is caused by a number of factors. Operating activities generated $55.9 million of net cash in-flows. Cash flows used in investing activities of $27.6 million reflect the installation of 180 red light and speed enforcement cameras in the USA. Cash flows from financing activities show a net decrease of $23.3 million, of which $14.3 million (US$15 million) was for repayment of borrowings, and $9 million paid to shareholders as fully franked dividends. ASSET AND CAPITAL STRUCTURE $ 000 $ 000 Debts Interest bearing borrowings (24,219) (37,365) Cash at bank and at hand and restricted cash 22,162 16,543 Net debt (2,057) (20,822) Total equity 114, ,217 Total capital employed 112,082 83,395 Gearing (%) 1.8% 20.0% The Group s level of gearing is within the limits that the board considers prudent and that the Group s bankers consider acceptable. Shares issued during the year No shares were issued during the year. No performance rights vested during FY2012. During the previous financial year, 334,842 shares were issued in respect of the vesting of performance rights pertaining to executive remuneration, details of which are shown within the Remuneration Report. Issue of performance rights Obligations for future share-based payments arise in relation to performance rights awarded during the year as remuneration entitlements for executives. Details are shown within the Remuneration Report. PROFILE OF DEBTS The Group s major funding is a revolving credit facility. At 30 June 2012, the bank debt had been reduced to $24.6 million (US$25 million), down $14.3 million (US$15 million) from the prior year. During the year the company renewed its facilities with the syndicate of Australian banks and at the date of this report has a $71.1 million (US$70 million) facility available for capital growth, together with a working capital facility of $8 million to fund bonds and guarantees for the Australian/International business. The facility matures on 1 October CAPITAL EXPENDITURE Under the terms of most contracts undertaken by the North American Traffic business, the company is required to fund all equipment and costs for camera system installations. With 180 new camera systems installed during the year, the company incurred capital expenditure of $16.3 million (US$16.0 million). This reflects the adverse movement of approximately 4.4% in the AU$/US$ exchange rate between the opening and closing rates. Redflex Traffic Systems Inc owns the capital assets located at intersections, and it derives recurring revenue streams from either (i) fixed or variable monthly rentals that are based on red light and/or speed ticket infringements paid or issued, or (ii) monthly fixed fees. TREASURY POLICY The Group s treasury function is coordinated by Redflex Holdings Limited which is responsible for managing currency risks and finance facilities. It operates within policies set by the board which is responsible for ensuring management s actions are in line with Group policy. Transaction hedging is undertaken by using foreign exchange contracts and hedges where significant exposures exist. Translation effects are not hedged. In line with Group policy, interest rate exposures are not hedged. ANNUAL REPORT

24 DIRECTORS REPORT RISK MANAGEMENT The Group takes a proactive approach to risk management. Through the Audit and Risk Management Committee the board is responsible for ensuring that risks, and also opportunities, are identified on a timely basis and that activities are aligned with objectives. The board regularly monitors operational and financial performance against budgets and other key performance measures. The board reviews and receives advice on operational and financial risks. Appropriate risk management strategies are developed to mitigate the significant identified risks of the business. The board has a number of mechanisms in place to ensure that management s objectives and activities are aligned with the risks identified by the board including: Board approval of a strategic plan which encompasses the Group s vision, mission and strategy and is designed to meet stakeholders needs and manage business risk; and Implementation of board approved operating plans and budgets and board monitoring of progress against these budgets, including the establishment and monitoring of key performance indicators of both a financial and non-financial nature. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS There were no significant changes in the State of Affairs other than the acquisition of Smart Bus described in Note 5. SIGNIFICANT EVENTS AFTER THE BALANCE DATE Apart from the retirement of Mr Graham Davie as Group Chief Executive Officer effective from 30 September 2012, and the appointment of Mr Robert DeVincenzi as the new Group Chief Executive Officer (described in Section 8 of the Remuneration Report), there were no other significant events subsequent to year end and prior to the date of this report that have not been dealt with elsewhere in this report. LIKELY DEVELOPMENTS AND EXPECTED RESULTS The company has a number of key performance indicators which include an increase in the number of camera systems installed in the USA, and an objective to renew around 85% of contracts that come up for renewal after running their full terms. Despite ongoing difficult economic circumstances in the USA, we expect to continue to grow the installed base of cameras and sign further new contracts. The international business, while strong, is subject to peaks and troughs of project based work and to timing variability in major projects with international customers. We expect to achieve strong cash flow generation and to repay all bank debt during FY2013 in the absence of alternative capital demands. ENVIRONMENTAL REGULATION AND PERFORMANCE The directors are not aware of any breaches of environmental legislation or regulations to which the Group is subject. SHARE OPTIONS At the date of this report there are 3 million options on issue. Mr DeVincenzi, as part of his remuneration as Group Chief Executive Officer, is entitled to subscribe for 3 million Redflex shares. The exercise price is based on the 90 day VWAP prior to the relevant pricing date, namely 10 September 2012, 1 July 2013, 1 July 2014 and 1 July 2015, being 750,000 options on each occasion. Each tranche generally vests on a one third basis on the date which is one year, two years and three years after the relevant pricing date, with one half subject to the satisfaction of time based criteria namely continuing to be the Chief Executive Officer, and one half subject to the satisfaction of performance criteria set by the Redflex board. Each option expires 7 years after vesting if they haven t expired earlier. UNISSUED SHARES At the date of this report there are 2,898,500 performance rights on issue. At 30 June 2012 there were 2,769,177 (2011: 2,164,515). Shares issued as a result of performance rights vesting No shares were issued during the year in respect of the vesting of performance rights pertaining to executive remuneration. Please refer to the Remuneration Report. 20 REDFLEX HOLDINGS LIMITED

25 DIRECTORS REPORT INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS The company has agreed to indemnify the current directors of the company: Max Findlay, Ian Davis, Rob Debernardi, Michael McConnell, Graham Davie and Karen Finley and the Company Secretary and all executive officers of the company and any related body corporate, against any liability that may arise from their positions within the company. Redflex Holdings Limited, being the ultimate parent company, paid premiums in respect of directors and officers liability insurance during the financial year. The contract of insurance does not include details of premiums paid in respect of individual officers of the company and prohibits disclosure of the amount of the premium paid. During the year or since the end of the year the company has not indemnified nor agreed to indemnify any auditor of the company or any related entity against a liability that may arise in their capacity as an auditor. DIRECTORS MEETINGS Directors meetings held and attended during the year ended 30 June 2012, and up to the date of this report were: Board Audit and Risk Management Remuneration Committee Committee Number of meetings held Number of meetings attended Max Findlay Graham Davie 29 Ian Davis Rob Debernardi Karen Finley 27 Michael McConnell All directors were eligible to attend all meetings held, except for Mr McConnell who was appointed on 2 August 2011 and was eligible to attend 25 Board meetings. COMMITTEE MEMBERSHIP At the date of this report the company has an Audit and Risk Management Committee, a Remuneration Committee, and a Nomination Committee which comprises the full board. Members acting on the committees of the board during the year were: Audit and Risk Management Remuneration Nomination Michael McConnell, Chair Rob Debernardi, Chair Full board Ian Davis Ian Davis Max Findlay Max Findlay Rob Debernardi ROUNDING The amounts contained in this report and in the financial report have been rounded to the nearest $1,000 (where rounding is applicable) under the option available to the company under ASIC Class Order 98/100. AUDITOR INDEPENDENCE The directors received the declaration on the following page from the auditor of Redflex Holdings Limited. This auditor s declaration forms part of the Directors Report. NON AUDIT SERVICES From time to time non-audit services are provided by the company s auditor, Ernst & Young. The directors are satisfied that the provision of any 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. Total non-audit, remuneration related services provided by Ernst & Young in FY2012 amounted to $36,485. ANNUAL REPORT