+

PACIFIC BRANDS REPORT + ACCOUNTS 2006 RPACIFIC BRANDS LIMITED AND AITS CONTROLLED ENTITIES ABN 64 106 773 059

234,638 Pairs of underwear

PACB0006 – Annual Report 2006 – Proof 7a – 06/09/06 The Ball Group Investor and brand communications Tel: +61 3 9600 3499 Fax: +61 3 9600 3477 158,904 Pairs of socks

B Pacifi c Brands 63,013 Pairs of shoes

Report+Accounts 2006 1 68,493 Outerwear garments 43,836 Kilograms of foam

2 Pacifi c Brands 63,347 Pairs of hosiery 41,095 Square metres of carpet underlay

Report+Accounts 2006 3 13,699 Golf balls

10,959 Pillows

4 Pacifi c Brands 1,027 Mattresses

12,035 Tennis balls

Report+Accounts 2006 5 234,638 Pairs of underwear

158,904 Pairs of socks

68,493 Outerwear garments

63,347Pairs of hosiery

63,013 Pairs of shoes

43,836 Kilograms of foam

41,095 Square metres of carpet underlay

13,699 Golf balls

12,035 Tennis balls …EV E

10,959 Pillows

1,027Mattresses

6 Pacifi c Brands V ERYDAY All over Australia and New Zealand people not only wear our brands but they sleep in our brands. They play sport in our brands. They go to work in our brands. They dress their children in our brands. Virtually every aspect of their lifestyle incorporates our brands. Every day. Every week. Every month.

That’s the power of everyday essential brands. A strategic platform for building shareholder value.

Report+Accounts 2006 7 Annual Report 2006 Highlights 2006

Over the last fi nancial year we have delivered a steady fi nancial performance while continuing to build a strongly branded business and the platform for future growth. • Net sales revenue $1,624.9 million, up 6.8% on previous year • $192.3 million EBITDA, up 1.3% • $173.0 million EBIT, down 0.9% • $101.2 million net profi t after tax, up 0.3% • Earnings per share of 20.1 cents, unchanged • $80.0 million net operating cash fl ow, up 6.5% • Announcement of an on market share buy-back of up to $75 million

8 Pacifi c Brands Financial results for 2006

2006 20051 Change $m $m %

Branded net sales 1,509.0 1,381.1 9.3 Unbranded net sales 115.9 140.6 (17.6) Total net sales 1,624.9 1,521.7 6.8 Gross margin2 680.2 630.3 7.9 EBITDA 192.3 189.8 1.3 EBIT 173.0 174.6 (0.9) EBIT margin 10.6% 11.5% NPAT 101.2 100.9 0.3 Earning per share (cents per share)3 20.1 20.1 – Dividends declared per share (cents per share)4 15.0 15.0 –

1 Restated to refl ect changes to the Australian equivalent to International Financial Reporting Standards (AIFRS). 2 Includes other income but excludes interest. 3 This has been calculated from an issued capital base of 503,000,003 fully paid ordinary shares. 4 Interim and fi nal dividend – both franked to 100% for Australian residents, on tax paid at 30%.

Five years fi nancial comparison ($ million)

1,600 200 200 80

1,500 75 160

1,400 150 70 120 1,300 65 80 1,200 100 60

40 1,100 55

1,000 50 0 50 ’02 ’03 ’04 ’05 ’06 ’02 ’03 ’04 ’05 ’06 ’02 ’03 ’04 ’05 ’06 Sales EBITA Sales EBITA Gross Operating Cash fl ow Cost of Doing Business to (Gross operating cash fl ow post Gross Margin % capital expenditure, but before net (Costs include freight, distribution, fi n ancing costs and income tax) IT, sales and marketing, advertising and administration)

Report+Accounts 2006 9 Annual Report 2006

Pacifi c Brands since the fl oat and was instrumental Chairman’s letter in helping us move forward as a public company. Her advice and counsel have been invaluable. On behalf of my fellow directors and the shareholders, I would like to take this opportunity to thank Helen for her considerable contribution during her time on the board of Pacifi c Brands. We wish her all the best.

The Board is in the process of recruiting another The very strong consumer brands of Pacifi c Brands non-executive director with suitable experience to comprise the cornerstone of our success and are the complement the backgrounds of our other directors. ongoing basis for our business model. The 2006 fi nancial As a member of the community, it is important to Pacifi c year saw a period of fl uctuating consumer confi dence Brands to contribute and be involved in broader ways including the impact of rising fuel costs, interest rate than just as an employer. Not only do we support our increases and most recently tax changes. All of which employees individual involvement, we continue to look affected the retail landscape. We have continued to focus for ways to enhance the company’s commitment. During on the fundamentals that make Pacifi c Brands a good the year we strengthened our long standing relationships business and this enabled the business to generate a with the Breast Cancer Network of Australia and solid performance for the year. developed new partnerships with the Prostate Cancer We believe that a sharp focus on brands and products Foundation of Australia and the Brotherhood of that meet the essential, everyday needs of our consumers St Laurence. across all our markets and channels gives us a sustainable We look forward to the year ahead and believe that competitive advantage. We describe further our main the business will deliver an improved performance. capabilities later in this report including the importance Our strong dividend yield will continue to make Pacifi c of leveraging our scale and the ongoing achievement of Brands an attractive investment for our shareholders. operational effi ciencies in all areas of our business. We have a good management team who has led us Our strategy is supported by a disciplined approach to skilfully through the last year and has positioned us well fi n ancial management. The business continues to generate for the future. On behalf of everyone at Pacifi c Brands, strong cash fl ows and has a robust balance sheet. Our thank you for your loyalty and continued support. well documented strategy has been to supplement organic growth with strategically relevant, well priced, earnings accretive acquisitions. We were pleased to add four new businesses in the current year, with the most notable being Sheridan. Pacifi c Brands will continue to use its balance sheet strength appropriately, whether it be investing in Pat Handley our existing businesses, acquiring new ones or pursuing Chairman capital management initiatives, such as the share buy- Pacifi c Brands Limited back announced in August 2006.

Helen Lynch – our Deputy Chairman has decided she will not be standing for re-election at the Annual General Meeting in October. Helen has dedicated herself to

10 Pacifi c Brands ‘ The strength of Pacifi c Brands ensured the achievement of a solid fi nancial performance in a more uncertain business environment. The results are consistent with our record year for the previous fi nancial period.’

Report+Accounts 2006 11

Annual Report 2006

12 Pacifi c Brands ‘At Pacifi c Brands, we have a unique relationship with our consumers by providing them with brands they respect and products they use each and every day. We will continue to develop and enhance our relationship with our consumers.’

have the number one (or two) brand in each category CEO’s report within our portfolio. We will continue to grow our brands through extensive consumer research, relevant and timely advertising campaigns and targeted marketing. Leveraging our scale and best practice As a large business, Pacifi c Brands can and will do more to leverage our scale across all areas of our operations from product development and manufacture right through to In the 2006 fi nancial year, we produced a steady net distribution and on to the retailer’s shelf. We have identifi ed profi t after tax and improved operating cash fl ow in a areas of excellence across the Group and are working hard very competitive market. Even though a continued focus to spread ‘best practice’ from business to business, and on the fundamentals of the business enabled us to brand to brand. We are looking into ways to maximise generate solid results, they did not meet the high operational effi ciencies. As a result, several key strategic expectations that we had set ourselves. initiatives are currently under way to achieve these objectives – including but not exclusive to logistics and technology. To put us in a stronger position to increase earnings growth for next year, we have developed and now Managing the brand portfolio established new processes, systems and targets. There We regularly assess our existing brands for their contribution is a stronger focus on big campaigns and tighter ranges and relevance, and will continue to supplement organic in our key brands. So far we are on track for growth. growth through the active pursuit of relevant, well priced acquisitions. During the year we completed the acquisitions The business model of Sheridan, Arthur Ellis (Homewares New Zealand and Our business model is simple: Everwarm Survival businesses), Peri and Foam Products • developing, building and maintaining strong Australia. There are still many opportunities. We have a consumer brands successful track record in making earnings accretive ‘bolt- • leveraging the Pacifi c Brands scale across all our on’ acquisitions. We also have strict fi nancial and strategic functions for economy and effi ciency, and disciplines in our review process of these opportunities. • making strategic acquisitions to further enhance We will only acquire when it makes good business sense. our portfolio of businesses. Operating performance Our brands are the leaders Footwear continues to deliver excellent results, generating Our brands are our major asset and key to our ongoing another year of EBIT growth, up 13.7% to a new record success. We have some of the most recognised high. This was driven primarily by the strength of our everyday essential brands in Australian and New Zealand brand portfolio which includes Clarks, Dunlop, Grosby, households. Consumer loyalty has made several of our Hush Puppies, Merrell and Pierre Fontaine. brands and products national icons. Bonds – our Outerwear & Sport has returned a positive earnings growth biggest brand was included in the Top 10 most of 8.3%. The operating group has continued to focus on recognised brands in Australia this year. brand development opportunities in the core categories of work, surf, school and sporting apparel and building Our focus on profi table, branded sales means that we our major brands of KingGee and Everlast. can generate stronger returns and better margins for our shareholders. We are category leaders. Our aim is to

Report+Accounts 2006 13

Annual Report 2006

Sales by operating group Sales by geographical location

Underwear/Hosiery Australia Outerwear/Sport NZ Home comfort Rest of world Footwear Other

Sales by customer channel Branded sales

Department stores Branded Discount department stores Unbranded Supermarkets International Speciality/Independents/Other

Acquisitions drove a net sales growth of 45.3% for Home Our people make the difference Comfort. Each of the four acquisitions made during the Having the right people is vital for the ongoing success year were integrated into this operating group. The most of Pacifi c Brands. We work hard to recruit and retain notable was Sheridan which provided the opportunity to them. During this past challenging year, we have made gain a leadership position in the premium bed linen considerable changes to ensure we are well positioned category. Sheridan has been a fantastic addition to Home for future growth. At this time, I want to say thank-you Comfort and the overall Pacifi c Brands business. Since to all of our 8,000 hard working people who make acquisition, we have restructured the business, reviewed Pacifi c Brands a great company. its product ranges, reinvigorated its marketing initiatives and improved its sourcing. We expect it to be a strong We are now seeing the benefi ts of the management contributor to earnings in the FY07 fi nancial year. changes and initiatives made in December 2005. Stephen Tierney, Group General Manager Operations – is driving The most diffi cult area was Underwear & Hosiery where the day-to-day activities of each operating group. Stephen we saw a decline in sales and EBIT. But, it fi nished the Audsley has brought an operational perspective to the role year more strongly after a particularly diffi cult fi rst half. To of Chief Financial Offi cer and Sue Morphet has worked correct this, we have now have adopted more consistent hard to amalgamate the Underwear & Hosiery team into processes, particularly in supply and distribution and in a single group, focussing more strongly on category new product introduction. Based on consumer insights, management and range development. we have reviewed our marketing effectiveness as well as our ranges. The momentum that was gained towards the Outlook end of this fi nancial year has continued and we believe Pacifi c Brands is confi dent about 2007. We are committed the business is back on track to return to growth in the to the strategy of building and strengthening our next fi nancial year. relationships with consumers. The business fundamentals remain strong and we have made the internal changes Innovation, an imperative to evolve with the changing market. The benefi ts of the To remain competitive – we must innovate. In today’s acquisitions made in the 2006 fi nancial year will fl ow market, change is the only consistency. We need fl exibility through to earnings growth in 2007 and we should see to meet the changing needs of the market. Customers an improvement in the Underwear & Hosiery operating will always demand more from us – shorter lead times, group and the ongoing benefi ts from improved sourcing smaller order sizes and new product ranges. As we can and cost management. We have some great new products change, we can take these demands and turn them into being launched – and our everyday essential brands advantages. We believe that we are in a great position to continue to go from strength to strength. service our customers well and to work more closely with them in the future. We are strengthening our commitment to Asia. More than 1,000 of our people are based in Hong Kong and China with nearly 200 of them dedicated to sourcing and quality. Many decision makers have been moved closer to manufacturing and sourcing to improve our speed to Paul Moore Chief Executive Offi cer market. We have excellent relationships with both local Pacifi c Brands Limited and offshore suppliers and are the largest sourcer of products in our categories. We continue to work with our suppliers to review their capabilities and working practices.

14 Pacifi c Brands Process Brands OUR WELL PLANNED, WELL CLEAR, POWERFUL AND EXECUTED INITIATIVES DIFFERENTIATED TO LEVERAGE CATEGORY LEADERS, EFFICIENCIES AND EITHER NUMBER STRENGTHS ACROSS ONE OR TWO IN THE ORGANISATION THEIR CATEGORY

Products + People QUALITY COMPETITIVE PRODUCTS THAT ADVANTAGE COMES DRIVE REPEAT FROM EXPERTISE – WE BUSINESS AND HAVE HIGHLY TALENTED, STRONG EARNINGS, CREATIVE PEOPLE YEAR AFTER YEAR WHO UNDERSTAND BRANDS

If you know Pacific Brands you know we are a company with a clearly articulated brand-driven strategy. Over the following pages we take a look at why our strong and powerful business model delivers competitive advantages. Our performance shows it. Our capabilities prove it.

Report+Accounts 2006 15

Annual Report 2006

The advantage of scale. Pacifi c Brands use the benefi ts of its large size to lower our cost base, improve our speed to market and deliver products to customers in the most effi cient manner. We manufacture, source and deliver in excess of 160,000 different products (including sizes, styles and colours), selling over 250 million units a year across a number of distribution channels. While leveraging our scale is vital, we will maintain fl e xibility in our processes to meet the continually evolving requirements of our customers and consumers.

Scale +

1616 PaPacificifi c c BrandsBrands Strong consumer brands are our number one focus and our most important asset. Our commitment to building leadership brands has never been greater. We are custodians of some of Australia’s greatest brands and take their development very seriously. As a measure of our success, many of our brands have been in the Australian marketplace for a very long time: Chesty Bonds for over 90 years, Dunlop Volleys for 80, Holeproof Explorers for more than 30, Tontine for 50 and KingGee has just had its 80th birthday.

Focus+

ReporReport+t+AccountsAccounts 2006 2006 1717 Annual Report 2006

Culture is about combining the right people to drive the business. That’s what makes success and is why Pacifi c Brands is a great place to work. We offer our 8,000 employees the opportunity to work with outstanding brands in everyday essential product categories. Our aim is to attract and develop the best people, offer ongoing development opportunities and provide the right environment for them to realise their maximum potential.

Culture +

18 Pacifi c Brands Innovative products are the cornerstone of our relationship with the consumer. We believe that brands become great through great products. Innovative product introduction will continue to generate consumer demand for years to come. Innovation also encompasses our ability to remain fl exible to meet the changing retail landscape with new technology, fabric, materials, processes and delivery.

Innovation +

Report+Accounts 2006 19

Annual Report 2006

Building and maintaining strong relationships are essential. Great relationships are required at all levels and in all areas of the business, with suppliers, customers, consumers and within our own teams. We have been sourcing from Asia for over 50 years and have well established, long term strategic relationships with many key suppliers. We have partnership agreements with world class sourcing, freight and distribution companies. Our most important relationship is with the millions of individual consumers who trust, rely and depend on Pacifi c Brands broad range of products.

Relationships +

20 Pacifi c Brands Efficiency is maximising the potential in all operating groups. We strive to do things smarter and better, being faster to market and dealing with rapidly changing conditions. It’s effi ciency in time and money to deliver superior products within each category. Given our scale, effi ciencies in one group can be trapped and then shared and translated into other operating groups. We will achieve effi ciencies in sourcing and manufacture, consistency of quality, decision making, new product introduction guidelines, inventory control, day to day business operations and more.

Effi ciency +

Report+Accounts 2006 21

Annual Report 2006 Business overview

Financial Highlights • Total net sales $1,624.9 million, up 6.8% on last year and branded sales up 9.3%

• $173.0 million EBIT, down 0.9%

• $101.2 million net profi t after tax, up 0.3%

• Earnings per share at 20.1 cents unchanged

• $80.0 million net operating cash fl ow, up 6.5%

Review of operations The Group enters into interest rate swaps to mitigate the risks associated with the fl o ating interest rates on its borrowings. It also enters forward foreign exchange contracts to hedge purchase commitments denominated in foreign currencies, principally US dollars.

Pacifi c Brands faced some challenges in a diffi cult Review of Cash Flows Pacifi c Brands generated $80.0 million trading environment. The business fi nished the in net operating cash fl ow during the year. This was an increase year more strongly after a tight fi rst half, generating of 6.5% over the previous year. Cash fl ow was impacted by returns that were consistent with the prior year. higher interest and tax payments. During the year, the Group made several strategic, Cash was used during the year to pay dividends of value enhancing acquisitions which resulted in $75.5 million. The Group maintained a positive cash balance positive branded sales growth and have provided of $94.0 million at the end of the fi nancial year. a strong platform for the future. Impact of Legislative Changes For reporting periods Tax The effective tax rate on earnings was 26.3% beginning on or after 1 July 2005, Pacifi c Brands has complied which was below the rate of 28.9% for the year ended with the Australian equivalents to International Financial 30 June 2005. The effective rate was lower as a result Reporting Standards (AIFRS) as issued by the Australian of clarifi cation of some tax issues from prior years. Accounting Standards Board. Comparative results for the 2005 Interest Net interest expense was $35.5 million, fi n ancial year have been restated for the impact of changes in up from $32.6 million. Net interest increased as a result the accounting standards. None of the adjustments affected the of acquisitions but a strong interest cover of 4.9 times cash fl ow of the Group. Full details of the changes are disclosed was maintained. in Note 32 to the fi nancial statements on page 99.

Dividends Pacifi c Brands declared a fi nal dividend of 7.5 cents per share which represents an unchanged full year dividend of 15.0 cents. Dividends are fully franked in Australia and it is expected that in future years they will continue to be fully franked.

Pacifi c Brands is committed to a high payout ratio of net profi t after tax and this year’s dividend represents a 74.6% payout which is approximately the same as in the previous fi n ancial year.

Review of Financial Position During the year, the net assets of Pacifi c Brands increased marginally. Net intangible assets increased by $70.2 million, as a result of the acquisitions made during the year.

The debt to equity ratio at 30 June 2006 was 39.6%, up from 30.7% at 30 June 2005. This was the result of the increase in net debt from funding of acquisitions.

22 Pacifi c Brands Underwear & Hosiery+ Financial performance 2006 2005 % Change Branded net sales ($ millions) 560.6 581.6 (3.6) Net sales ($ millions) 610.8 647.5 (5.7) EBIT ($ millions) 87.6 99.6 (12.0) Underwear & Hosiery fi nished the year more strongly after a particularly diffi cult fi rst half. Momentum returned in the EBIT to net sales (%) 14.3 15.4 last quarter. The restructuring in December 2005 to form one Underwear & Hosiery group has enabled a greater focus on its brand portfolio with a stronger approach to category management and ‘big’ brand initiatives. Underwear & Hosiery is the largest operating group in Pacifi c Brands controlling the key brands of Bonds, Berlei, Holeproof, Jockey, Rio and Razzamatazz. Highlights include: • Strengthened position in the men’s underwear and intimates categories • Bonds continued success as Pacifi c Brands number one brand overall • Bonds was recognised in the Top 10 Australian brands – the only apparel brand to make the list1 • Key product innovations – launch of Bonds seamfree undies for men, relaunch of Rio, Voodoo footless tights launched and Jockey shapewear developed • Berlei maintained its number one brand position in department stores • Berlei partnership with the Australian Institute of Sport to revolutionise the sports bra. What we are doing • Underwear & Hosiery is adopting more consistent processes, particularly in supply and distribution and new product introduction • Continuing its ongoing review of marketing effectiveness based on consumer insights to ensure the maintenance of brand leadership in a highly competitive environment • Using the strength of its brands to stand out in the cluttered underwear market, focusing on good quality core ranges and being the truly everyday brands for its consumers. 1 Brands Asset Valuater study conducted by agency George Patterson Y&R covering 1,245 brands.

Report+Accounts 2006 23

Annual Report 2006 Business overview

Outerwear & Sport • Continued growth at Everlast across both footwear and + apparel ranges with expansion of sporting apparel range into New Zealand.

What we are doing • Continuing to focus the brand development strategy in Outerwear & Sport had positive earnings growth for the core categories of workwear, surfwear, schoolwear the year led by KingGee, Everlast and Repco bikes. and sporting apparel categories While the casual outerwear market remained competitive, • Using icon sporting personalities such as Michael Clarke the benefi ts of changes to its sourcing and continued in cricket and Liz Ellis in netball efforts to rationalise the supplier base contributed to • Continuing to review its sourcing strategy and leveraging the performance improvement. its international relationships across the sporting equipment market. Highlights include: • Successful repositioning of the bicycle business drove Financial performance strong sales growth – particularly for the Repco Cycles and Malvern Star brands 2006 2005 % Change • Launch of the Bike Hub store concept provided Branded net sales ($ millions) 227.7 232.3 (2.0) increased support to independent bike dealers Net sales ($ millions) 249.0 253.9 (1.9) • Growth in workwear category with sales growth in the EBIT ($ millions) 22.3 20.6 8.3 contract clothing business for KingGee, winning several EBIT to net sales (%) 9.0 8.1 large corporate accounts • Successful launch of KingGee workcool campaign • Transfer of KingGee product sourcing from Fiji to China

24 Pacifi c Brands Home comfort+ • Tontine celebrated its 50th anniversary • Offi cial provider of beds, mattresses and bedding accessories to the Melbourne 2006 Commonwealth Games Athletes Village • The introduction and rollout of lean manufacturing practices.

Home Comfort acquired four complementary businesses What we are doing during the year: Sheridan, Peri, Homewares New Zealand • Pursuing market strength in all bed related categories and Foam Products Australia (FPA). With the successful by developing the unique ‘Whole of Bedroom’ value integration of market-leader Sheridan into the operating proposition to retailers and consumers group, Home Comfort now has a leading presence in all • Improving Sleepmaker’s market position across all categories of bed related products (bedding, linen and bedding categories with an ongoing focus on product accessories). development such as airbed technologies • Introducing ‘Lean Manufacturing’ systems and processes Other highlights include: as the cornerstone for continued effi ciency gains • Successful re-ranging and re-launch of Sheridan • Pursuing growth in the commercial business. including the ‘Ultra Soft’ towel • Foam production upgrades (through the acquisition Financial performance of FPA) in the growing Queensland market 2006 2005 % Change • Continued strong performance in Foams despite the impact of rising chemical prices Branded net sales ($ millions) 432.2 294.7 46.7 • Continued growth in Dunlop Flooring Net sales ($ millions) 448.6 308.8 45.3 • Tontine brand leveraging marketing synergies through Fairydown New Zealand EBIT ($ millions) 36.5 33.3 9.6 • Growth in Esprit bed linen EBIT to net sales (%) 8.1 10.8

Report+Accounts 2006 25

Annual Report 2006 Business overview

Footwear • Over six million pairs picked and packed through + the Altona distribution centre.

What we are doing • Continuing to focus on key brands to maximise their relevance to the target consumers Footwear delivered excellent results driven by the strength • Strengthening relationships with key suppliers through of the brand portfolio across Clarks, Dunlop, Grosby, Hush the execution of joint process improvements Puppies, Merrell and Pierre Fontaine. Category development • Innovating supply chain processes to maintain and grow and product innovation continue to drive success. customer service levels (eg continued development of Brandsnet) Highlights include: • Integrating Sachi into the Women’s fashion business • Exceptional year for sporting footwear – supported by in Melbourne the ‘Legends In The Backyard’ campaign with Andrew • Investing in attracting and retaining the best talent. Gaze, Liz Ellis and Pat Rafter • Solid profi t growth from optimising the product mix and Financial performance supply chain effi ciencies 2006 2005 % Change • Continued success of the Dunlop Volley – now over 26 million pairs sold Branded net sales ($ millions) 249.1 233.8 6.5 • Strong growth in Grosby’s range of women’s comfort shoes Net sales ($ millions) 277.0 272.7 1.6 • Launch of the Clark’s Platinum concept store programme EBIT ($ millions) 35.7 31.4 13.7 within specialist outlets EBIT to net sales (%) 12.9 11.5 • Brand extensions and increased distribution of Merrell’s outdoor footwear

26 Pacifi c Brands Corporate Social Breast Cancer Network of Australia (BCNA) We continued to strengthen our commitment to the BCNA, having formed Responsibility a three year partnership in 2005, to assist with raising awareness of measures for early detection of breast cancer. Along with the fi nancial support, we provide a ‘My Care Kit’ for women recovering from breast surgery. The kit contains At Pacifi c Brands, we have a commitment to a specially designed Berlei crop top bra. ethical, responsible and sustainable conduct in all of our operations for all our stakeholders including Prostate Cancer Foundation of Australia (PCFA) In 2006, shareholders, our employees, our customers, to complement our existing partnership with Breast Cancer suppliers and the wider community. Network of Australia, we embarked on a partnership with PCFA. Conscious of the statistics regarding prostate cancer, In keeping with our commitment to brands and values, we challenged ourselves to help raise awareness of this we aim to deliver: disease. We sell over 27 million pairs of men’s undies each • a safe, healthy, fair and rewarding workplace year and, along with the PCFA, we have devised a simple • ethical business practices of which consumers and awareness message for the swing tags on men’s underwear. employees can be proud This will be phased in over the next year. • innovative, reliable and trusted products Brotherhood of St Laurence In line with our strategy of • policies and practices that minimise any impact assisting children and families in need, as well as cancer on our environment. sufferers, we have formed a partnership with the Brotherhood Community Investment of St Laurence who distribute excess stock to those in need. We have an ongoing commitment to our community We aim to expand this partnership in the coming year. investment program, Brands for Good. Our program World Vision Australia We continue to partner World Vision involves a number of strategic partnerships with Australia by funding Indonesian workers in Aceh to assist with community organisations with the aim of making a the rebuilding efforts following the December 2004 tsunami. positive contribution to our community. Green Label Accreditation Dunlop Flooring’s range of carpet The aim of Brands for Good is to actively support cushion was accredited by the Carpet and Rug Institute (CRI) the communities we are part of, in our major cities and in the USA under its Green Label programme for Indoor Air also at a site level around Australia and New Zealand. Quality. This was a fantastic achievement as the demand for Our Board and CEO actively encourage the program environmentally sound products is growing and compliance and our employees are very involved in an increasing with the programme is a benchmark set by the Green Building number of worthwhile activities to build community. Council of Australia. We measure our Brands for Good community investment via the London Benchmarking Group.

Report+Accounts 2006 27 Board of Directors

Pat Handley Paul Moore Helen Lynch AM Chairman, Independent Non-Executive Chief Executive Offi c er, Executive Director Deputy Chairman, Independent BA (Econ), MBA (Finance) Age 61 BEcon, Age 55 Non-Executive Pat has been Chairman of Pacifi c Brands Paul joined Pacifi c Brands in 1979. Within Age 63 Limited since incorporation in December two years, he was appointed General Helen joined the Board of Pacifi c Brands 2003 and was Chairman of its predecessor, Manager of Adidas Australia (previously Holdings Pty Ltd in November 2003 and Pacifi c Brands Holdings Pty Ltd, since part of Pacifi c Brands) and since that time brings extensive experience as a non- December 2001. has held various leadership roles across executive director of companies in the Pat brings with him over 30 years of all of Pacifi c Brands’ operations. Prior to retail and fi nancial services industries. international fi n ancial services experience. joining Pacifi c Brands, Paul held various Helen was appointed to the Board of Pat was appointed a director of Vantage marketing roles at The Gillette Company Pacifi c Brands Limited in February 2004. Private Equity Growth Limited in 2005. He and Petersville Sleigh Limited. Helen is currently a director of Westpac has previously been an Executive Director In August 1999, Paul was appointed to the Banking Corporation (since 1997). and Chief Financial Offi cer of Westpac role of Managing Director of Pacifi c Brands She is Chairman of Westpac Staff Banking Corporation, Chairman and Chief (then a division of Pacifi c Dunlop Limited) Superannuation Plan Pty Limited. Executive Offi cer of Country Savings Bank where he has facilitated the development Previously, Helen was a director of (USA), Chief Financial Offi cer of BancOne of a group-wide business strategy, which Southcorp Limited (1996 to 2005) and Corporation (USA) and a director of included the acquisition of synergy- Coles Myer Ltd (1995 to 2004) and Suncorp-Metway Limited, AMP Limited generating businesses. In November 2001, Chair of OPSM Group Limited and (2003 to 2004) and HHG plc. he was appointed Chief Executive Offi cer Sydney Symphony Holdings Limited. In addition, Pat is currently a strategic and an executive director of Pacifi c Brands Helen has had 35 years experience at adviser to PricewaterhouseCoopers and Holdings Pty Ltd. Paul was appointed to Westpac Banking Corporation, including Chairman of the Advisory Board of the Board of Pacifi c Brands Limited in membership of its executive team, before Nomura Securities. December 2003. retiring in 1994. In addition Helen is a member of the external advisory boards of The Caliburn Partnership and of Mallesons Stephen Jacques Lawyers.

28 Pacifi c Brands Stephen Tierney Maureen Plavsic Andrew Cummins Group General Manager Operations, Director, Independent Non-Executive Director, Independent Non-Executive Executive Director Age 50 BEng (Hons), MBA (Stanford), GradDip (Bus Studies), BComm, CA, Age 48 Maureen joined the Board of Pacifi c Brands MIEAust, Age 57 Stephen joined Pacifi c Brands in 1990 as Limited in May 2004, bringing a wealth of Andrew joined the Board of Pacifi c Brands Group Accountant after an 11 year career with experience in advertising, media buying and Holdings Pty Ltd in November 2001, bringing Touche Ross & Co (now KPMG) specialising brand marketing. with him many years of experience as a senior in fi nance, taxation and accounting. executive in prominent Australian and international Maureen is currently a trustee of National public companies. Andrew was appointed to the Stephen was appointed to the role of Gallery of Victoria and was appointed as Board of Pacifi c Brands Limited in February 2004. Chief Financial Offi cer in December 1998. In a director of Macquarie Radio Network December 2005, he was appointed to the role Limited in 2005. Maureen has previously Currently, Andrew is Chairman of the Advisory of Group General Manager, Operations where been a director of Seven Network Limited Board of CVC Asia Pacifi c Limited. Previously, he is responsible for the day to day operations (1998 to 2003) and Opera Australia. Andrew has been Chairman of Amatek Holdings for all the Operating Groups. In November Maureen previously spent 14 years in Limited, a director of Affi nity Health Limited (2003 2001, he was appointed an executive director various executive roles at the Seven – 2005), Tech Pacifi c Holdings, Inchcape plc, of Pacifi c Brands Holdings Pty Ltd. Stephen Network including fi ve years as a Board Strategy Director of Elders IXL Limited/Foster’s was appointed to the Board of Pacifi c Brands member. Her roles at the Seven Network Brewing Group Limited and Chief Executive of Limited in December 2003. In addition to his included Chief Executive of Broadcast Elders Investments Limited. Andrew also spent role as Group General Manager, Operations, Television and prior to that Director of Sales nine years with McKinsey & Company. Stephen is responsible for the Outerwear & and Corporate Marketing. Maureen also Sport operating group. held various roles in the advertising industry John Grover Max Ould including a senior regional media role at Legal Counsel & Company Secretary Director, Independent Non-Executive Unilever for nearly three years. LLB, BComm, FCIS, Age 44 BEcon, Age 59 John was appointed to the position of Max joined the Board of Pacifi c Brands Legal Counsel & Company Secretary in Holdings Pty Ltd in September 2003, bringing December 2003 having held the same role leadership expertise in the consumer goods with the Company’s predecessor, Pacifi c industry. Max was appointed to the Board of Brands Holdings Pty Ltd, since December Pacifi c Brands Limited in February 2004. 2001. Prior to joining Pacifi c Brands, he Max is currently a director of Foster’s Group held senior corporate legal roles with Ansell Limited (since 2004), The Australian Gas Limited (formerly Pacifi c Dunlop Limited) Light Company (since 2004) and Chairman and RTZ Limited formerly CRA Limited), of Goodman Fielder Limited (since 2006). which followed an eight year career with Max has considerable experience in the major Australian law fi rm, Freehills. Australian food industry, including previous roles as Managing Director of the East Asiatic Company, Chief Executive Offi cer of Peters Foods and Managing Director of National Foods Limited from 1996 to 2003.

Report+Accounts 2006 29 Senior management

Our people are fundamental to our success. 1. Stephen Audsley 2. Sue Morphet Without the right people – we cannot deliver on Chief Financial Offi cer Group General Manager, our strategy. We are building a high performance Stephen joined Pacifi c Brands in 1991 Underwear & Hosiery culture with the right talent, the right culture, the after 13 years in various consumer Sue joined Pacifi c Brands in 1996 as right leadership and the right structure goods companies, including Southcorp General Manager, Tontine having had and Nissan. extensive experience gained in both and processes. the food and textile industries. In his 15 years with the Company, Our values are the foundation for our culture: Stephen has worked across a number In 1999, Sue was appointed to the Accountability – do what you say, take responsibility of operating groups including Footwear role of General Manager, Bonds and in and Outerwear & Sport, prior to his 2003, also became responsible for The Action – make it happen, focus on solutions appointment as Group General Manager, Berlei Group. In December 2005, the Courage – speak up and be counted, challenge Underwear & Hosiery in 2002. In underwear and hosiery businesses were Innovation – to lead the way. Explore, dare to try December 2005, he was appointed consolidated into one overall Underwear Chief Financial Offi cer. He is responsible & Hosiery operating group. Sue is now Integrity – is non-negotiable, if in doubt ‘ask’ for Group corporate development, responsible for this expanded operating Performance – be the best you can be, investor relations, information technology, group which includes Bonds, Berlei, commit and deliver fi n ancial services and treasury. Holeproof, Jockey, Rio and Clothing New Zealand. Speed – be there fi rst, do it, don’t wait Unity – work as one winning team, collaborate.

7

6 5 3 30 Pacifi c Brands 3. Malcolm Ford 5. Mary Keely 7. Tom Dalianis Group General Manager, Footwear General Manager, People and Performance General Manager, Integrated Services Malcolm joined Pacifi c Brands in 1991 after Mary joined Pacifi c Brands in 1999, after Tom joined Pacifi c Brands in 1989 and 20 years in product development, sales, spending six years in senior human resources has held senior roles in the business marketing and general management within roles at Coca-Cola Amatil and prior to across Information Technology. He was the footwear industry. that Westpac. appointed to his current role in 2005. He runs the integrated services group which is Malcolm has been instrumental in developing Mary’s role encompasses performance responsible for accounting services, accounts a successful, strongly branded and category management, safety, health and environment, payable, accounts receivable, payroll and focussed footwear business, with the corporate social responsibility, community information technology across the Group. acquisition of brands including Clarks, investment, employee relations, learning and Hush Puppies, Sachi and Merrell’s. development, remuneration and benefi ts, 8. Karl Railton–Woodcock recruitment and organisational development. Group Corporate Development Manager Ian Barton 4. Karl joined Pacifi c Brands in April 2006. Mark Daniel Group General Manager, Home Comfort 6. Prior to this he has held senior positions Ian joined Pacifi c Brands in 1978 in a fi nancial General Manager, Supply Chain internationally and domestically in strategy role at Adidas. He has spent 13 years as a Mark joined Pacifi c Brands in 2002. Mark has and business development across many Financial Controller across several parts of worked both domestically and internationally industry sectors including consumer goods the business including Adidas and Holeproof. in supply chain and manufacturing with and retail. companies such as Coca-Cola Amatil, Ian spent some time as General Manager Coles Myer, Dairy Farmers and Linfox. Karl is responsible for corporate strategy Pacifi c Brands Clothing New Zealand and was and mergers & acquisitions. appointed to his current role in 2002. This year His role encompasses the sourcing, logistics his operating group has been strengthened and inventory management across the by the acquisitions of Sheridan, Actil, Peri and Company both domestically and internationally. Fairydown and Foam Products Australia. His key focus is on leveraging scale across the supply chain and building fl exibility into the business.

4

1 2 8 31

Annual Report 2006 Corporate Governance Statement

Pacifi c Brands’ directors and management are committed to 2 Board appointment and composition conducting the Company’s business ethically and in accordance It is the Board’s policy that there should be a majority of independent, with high standards of corporate governance. Good corporate non-executive directors. That is, the majority of directors should be governance structures encourage companies to create value for free from any business or other relationship that could materially shareholders through sensible risk taking, but provide accountability compromise their independent judgement. As an additional safeguard and control systems commensurate with the risks involved. in preserving independence, the policy requires that the offi ce of This statement describes Pacifi c Brands’ approach to corporate Chairman be held by an independent, non-executive director. governance. The Board believes that the Company’s policies and Specifi cally, the Board considers a director to be independent practices comply in all substantial respects with the Australian where he or she is not, and was not within the last three years, Stock Exchange (ASX) Corporate Governance Council’s a member of management and is free of any business or other Principles of Good Corporate Governance and Best Practice relationship that could materially interfere with, or could reasonably Recommendations. A checklist summarising this is found in be perceived to materially interfere with, the director’s ability to act section 17 of this Corporate Governance Statement. in the best interests of the Company. The Board will consider the Copies of the main policies of corporate governance adopted materiality of any given relationship on a case by case basis and by the Company can be found on the Company’s website at has adopted materiality guidelines to assist it in this regard. www.pacifi cbrands.com.au. Under the Board’s materiality guidelines, the following interests are regarded as, prima facie, material: 1 Role and responsibilities of the Board • a holding of 5% or more of the Company’s shares; or The Board is committed to maximising performance, generating • an affi liation with a business which accounts for 5% or more appropriate levels of shareholder value and fi nancial return, of the revenue or expenses of the Company. and sustaining a stable of recognisable and successful brands. However, ultimately the Board will make a qualitative assessment In conducting business in line with these objectives, the Board is of any factors or considerations which may, or might reasonably concerned to ensure that the Company is properly managed to be perceived to, materially interfere with the director’s ability to protect and enhance shareholder interests, and that the Company, act in the best interests of the Company. The Board reviews the its directors, offi cers and employees operate in an appropriate independence of each director in light of interests disclosed to environment of corporate governance. Accordingly, the Board has the Board from time to time and at least once a year. Directors adopted corporate governance policies and practices designed to are required to promptly disclose to the Board interests in promote responsible management and conduct of the Company. contracts, other directorships or offi ces held, possible related party The Board (together with management) regularly reviews these policies transactions and sales or purchases of the Company’s shares. and practices to ensure the Company maintains or improves its The Board is currently made up of seven directors, the Company’s corporate governance standards in a changing environment. two executive directors and fi ve independent non-executive directors. The Board has ultimate responsibility for establishing policies Details of the directors as at the date of this Annual Report, including regarding the business and affairs of the Company for the benefi t their qualifi cations and experience, are set out on pages 28 and 29 of its shareholders and other stakeholders. The Board’s key of the Annual Report. responsibilities include appointing, and reviewing the performance In making recommendations to the Board regarding the appointment of, the Chief Executive Offi cer, ensuring executive and Board of directors, the Nomination and Remuneration Committee periodically succession planning, approving budgets and strategic plans, assesses the appropriate mix of skills, experience and expertise evaluating the performance of the Company against strategies required by the Board and assesses the extent to which the required and business plans, approving the Company’s risk management skills and experience are represented on the Board. Nominations for strategy and monitoring its effectiveness, approving signifi cant appointment are then approved by the Board as a whole. An induction acquisitions or divestments, overseeing relations with shareholders program is provided for new members of the Board. and approving accounting policies and annual accounts. Under the Company’s Constitution and the Australian Stock The Board delegates management of the Company’s resources to Exchange (‘ASX’) Listing Rules, all directors other than the Chief senior management, under the leadership of the Chief Executive Executive Offi cer are subject to shareholder re-election every three Offi cer, to deliver the strategic direction and goals agreed between years. It is the Board’s current policy that, in general, directors do senior management and the Board. A key function of the Board is not hold offi ce beyond a maximum term of nine years. to monitor the performance of senior management in this function. The Board’s charter can be found on the Company’s website at The Company’s Constitution requires directors to hold a minimum www.pacifi cbrands.com.au. number of shares in the Company as determined by the Board from time to time, which is currently 500 shares, so that directors’ interests are aligned with those of shareholders. Directors’ shareholdings are shown on page 39 of the Annual Report.

32 Pacifi c Brands Annual Report 2006

3 Board processes The committee’s charter was amended in April 2006 to require all independent directors to be members of the committee (previously, The Board currently schedules nine meetings per year. In addition, the committee was comprised of a majority of independent the Board meets whenever necessary to deal with specifi c matters directors). The purpose of this change was to allow the Board requiring attention between the scheduled meetings. During the to delve more deeply into issues, without formal Board meetings 2006 fi nancial year, the Board met 12 times. Extraordinary meetings being burdened with discussions of technical compliance and other take place at such other times as may be necessary to address any issues. The committee’s charter also requires that the chairman of specifi c signifi cant matters that may arise. the Board must not chair the committee. The current members The table on page 39 of the Annual Report shows the number of of the committee are: Board meetings held in the 2006 fi nancial year and the attendance • Max Ould (Chair); of each director. • Andrew Cummins; The agenda for meetings is prepared by the Company Secretary in conjunction with the Chairman and Chief Executive Offi cer, with • Pat Handley; periodic input from the Board. Comprehensive Board papers are • Helen Lynch; and distributed to directors in advance of scheduled meetings. Board • Maureen Plavsic. meetings take place both at the Company’s head offi ce and at Details of the committee members’ qualifi cations are set out key operating sites, on a rotational basis, to assist the Board in on pages 28 and 29 of the Annual Report. its understanding of operational issues. The committee is scheduled to meet fi ve times in the 2007 To assist the Board in the execution of its responsibilities, the Board fi n ancial year. The table on page 39 of this report shows the has established an Audit, Business Risk and Compliance Committee number of committee meetings held in the 2006 fi nancial year and a Nomination and Remuneration Committee. Any issues of and the attendance of each director. corporate governance which are not dealt with specifi cally by either committee are the responsibility of the full Board. The Chief Financial Offi cer and the Company’s auditor have standing invitations to attend meetings of the committee. 4 Audit, Business Risk and Compliance Committee Other members of management may also attend meetings of the committee by invitation. The committee has access to fi nancial The Audit, Business Risk and Compliance Committee monitors and and legal advisers, in accordance with the Board’s general policy. reviews the effectiveness of the Company’s controls in the areas of operational and balance sheet risk, legal and regulatory compliance 5 Nomination and Remuneration Committee and fi nancial reporting. The Nomination and Remuneration Committee is responsible The committee discharges these responsibilities by: for matters relating to succession planning, recruitment and • overseeing the adequacy of the controls established by senior the appointment and remuneration of the directors and the management to identify and manage areas of potential risk and Chief Executive Offi cer. The committee also oversees succession to safeguard the assets of the Company; planning, selection and appointment practices and remuneration • overseeing the Company’s relationships with the external auditor, guidelines for other management and employees. audit independence and the external audit function; and The responsibilities of the committee include: • evaluating the processes in place to ensure that accounting • assessing Board composition, strategic function and size; records are properly maintained in accordance with statutory • establishing processes for the review of the performance of requirements and that fi nancial information provided to investors individual non-executive directors, the Board as a whole and and the Board is accurate and reliable. the operation of Board committees; A copy of the committee’s charter is available on the Company’s • overseeing the effectiveness of the Board, its committees and website at www.pacifi cbrands.com.au. individual directors; The committee has also adopted a policy on the provision of non-audit • overseeing the selection and appointment practices for non- services and the rotation of external audit personnel. Subject to some executive directors and senior management of the Company; limited exceptions, unless the committee determines otherwise, the auditor is prohibited from providing valuation and fairness opinions, • developing succession plans for the Board and overseeing internal audit services, advice on deal structuring, tax planning advice, the development of succession planning in relation to the IT systems services, executive recruitment services, material human Chief Executive Offi cer and senior management; resources functions or legal services or from acting as a broker, • making recommendations to the Board on the Chief Executive promoter or underwriter. The policy also requires the partner managing Offi cer’s remuneration (including short and long term incentive the Company’s audit to be rotated within fi ve years from the date of plans); and appointment. A copy of this policy is also available on the Company’s website at www.pacifi cbrands.com.au.

Report+Accounts 2006 33

Annual Report 2006

Corporate governance statement continued

5 Nomination and Remuneration Committee 7 Access to information and independent advice (continued) Each director has the right of access to all relevant Company • reviewing and approving recommendations from the information and to the Company’s senior management, external Chief Executive Offi cer on total levels of remuneration, advisers and auditors. Directors may also seek independent and performance targets, for senior executives reporting professional advice at the Company’s expense. Any director to the Chief Executive Offi cer. seeking such advice is required to make a formal request to the Chairman. Where the Chairman wishes to seek independent advice, In making recommendations to the Board regarding the he must make a formal request to the Chair of the Audit, Business appointment of directors, the committee periodically assesses the Risk and Compliance Committee. Any advice so received must be appropriate mix of skills, experience and expertise required on the made available to all other directors. Pursuant to a deed executed Board and assesses the extent to which the required skills and by the Company and each director, a director also has the right experience are represented on the Board. to have access to all documents which have been presented The committee may obtain information from, and consult with, to meetings of the Board or to any committee of the Board or management and external advisers, as it considers appropriate. otherwise made available to the director whilst in offi ce. This right A copy of the committee’s charter is available on the Company’s continues for a term of seven years after ceasing to be a director website at www.pacifi cbrands.com.au. or such longer period as is necessary to determine relevant legal The committee’s charter was amended in April 2006 to require all proceedings that commenced during that term. independent directors to be members of the committee (previously, the committee was comprised of a majority of independent 8 Risk management directors). The purpose of this change was to allow the Board as The Company is committed to the proper identifi cation and a whole to delve more deeply into issues outside of formal Board management of risk. The Company has in place a process to meetings. The current members of the committee are: identify and measure business risk, including regular review of • Helen Lynch (Chair); results from its risk identifi cation procedures. The Audit, Business • Andrew Cummins; Risk and Compliance Committee is charged with oversight of this process. • Pat Handley; The Board receives regular reports about the fi nancial condition and • Max Ould; and operational results of the Company. The Chief Executive Offi cer and • Maureen Plavsic. Chief Financial Offi cer provide formal statements to the Board that The General Manager, People and Performance and the Chief in all material respects: Executive Offi cer have standing invitations to attend meetings • the Company’s fi n ancial statements present a true and fair view of the committee on an ex-offi cio basis. of the Company’s fi nancial condition and operational results and The committee is scheduled to meet fi ve times in the 2007 fi nancial comply with relevant accounting standards; and year. The table on page 39 of the Annual Report shows the number • the risk management and internal compliance and control systems: of committee meetings held in the 2006 fi nancial year and the (a) are sound, appropriate and operating effi ciently and attendance of each director. effectively; and 6 Review of Board performance (b) implement the policies adopted by the Board. The Company regularly undertakes reviews of its risk management The performance of the Board is reviewed bi-annually by the procedures which include implementation of a system of internal Board with the assistance of the Nomination and Remuneration sign-offs to ensure not only that the Company complies with its legal Committee and an external adviser. The performance of the Board obligations but that the Board, and ultimately shareholders, can take will next be formally reviewed during the 2007 fi nancial year. comfort that an appropriate system of checks and balances is in The evaluation process includes a review of: place regarding those areas of the business which present fi nancial • the Board’s membership and the charters of the Board and or operating risks. In addition, in the 2006 fi nancial year the Audit, its committees; Business Risk and Compliance Committee initiated an external review • Board processes and its committees’ effectiveness in of the Company’s risk management practices which did not reveal any supporting the Board; and material issues of concern in relation to the Company’s risk management • the performance of the Board and its committees. practices. In addition, a review of each director’s performance is also The committee reviews the appropriateness of the framework undertaken by the Chairman, after consultation with the other adopted by the Company for managing operational risk issues directors, prior to a director standing for re-election. This occurred and action plans to strengthen and improve risk control practices. during 2006 in respect of the proposed re-election of Mr M.G. Ould.

34 Pacifi c Brands Annual Report 2006

Details of the Company’s policies relating to interest rate aware of information that should be considered for release to management, foreign exchange risk management and credit the market. The Company Secretary is the person responsible for risk management are included in Notes 1 and 23 to the fi nancial communication with the ASX and NZX. A copy of the Company’s statements for the 2006 fi nancial year. Continuous Disclosure Policy may be found on the Company’s The Company has also adopted a code of conduct which sets website at www.pacifi cbrands.com.au. out the Company’s commitment to maintaining the highest level of integrity and ethical standards in all business practices. The code 10 Trading in shares by directors and employees of conduct sets out for all directors, management and employees, The Company has adopted guidelines for dealing in securities the standards of behaviour expected of them, and the steps that which provide a summary of prohibited conduct in relation to should be taken in the event of uncertainty or a suspected breach dealings in securities under the Corporations Act 2001 and the by a colleague. The code of conduct is discussed in more detail Securities Markets Act 1988 (NZ). The guidelines also establish a in section 11 of this statement. best practice procedure in relation to directors’, management’s and employees’ dealings in the Company’s shares. 9 Continuous disclosure and keeping Subject to the overriding restriction that persons may not deal in shares shareholders informed while they are in possession of material price-sensitive information, The Company aims to ensure that shareholders are well informed of directors, management and employees will only be permitted to all major developments affecting the state of affairs of the Company. deal in shares during certain ‘window periods’, being within 31 days To achieve this, the Company has implemented the following following release of the Company’s full and half year fi nancial results procedures: and the holding of the Company’s Annual General Meeting. Outside of these periods, directors, management and employees must receive • shareholders can gain access to information about the clearance from the person stated in the guidelines for any proposed Company, including media releases, key policies, annual reports dealing in shares, with such clearance only to be granted in exceptional and fi nancial accounts, and the terms of reference of the circumstances. In New Zealand, any dealing in the Company’s shares Company’s Board committees through the Company’s website must receive clearance from the Company Secretary. at www.pacifi cbrands.com.au or by writing to the Company Secretary at the Company’s registered offi ce address; Except in circumstances of special hardship, with the Chairman’s approval, employees may not buy and sell the Company’s shares • all relevant announcements made to the market and any related within a three month period. information are posted on the Company’s website as soon as they have been released to the ASX and New Zealand Stock A copy of the Company’s Guidelines for Dealing in Securities is Exchange (‘NZX’); and available on the Company’s website at www.pacifi cbrands.com.au. • the Company encourages full participation of shareholders at its Annual General Meeting to ensure a high level of 11 Ethical standards accountability and discussion of the Company’s strategy The Board believes it is important to provide employees with a and goals. The Company also invites the external auditor to clear set of values that emphasise a culture encompassing strong attend its Annual General Meeting and be available to answer corporate governance, sound business practices and good ethical shareholder questions about the conduct of the audit, and the conduct. Accordingly, the Company adopted a code of conduct preparation and content of the auditor’s report. which outlines how the Company expects directors and employees The Company’s commitment to keeping shareholders fully informed to behave and conduct business in a range of circumstances. is embodied in the Company’s Shareholder Communications Policy, In particular, the code requires: a copy of which can be found on the Company’s website at • awareness of, and compliance with, laws and regulations relevant www.pacifi cbrands.com.au. to the Company’s operations including environmental laws and The Company is fully aware of the obligations under the the Trade Practices Act 1974 and equivalent overseas legislation; Corporations Act 2001, and the ASX and NZX listing rules, to keep • all business transactions to be conducted solely in the best the market fully informed of information which is not generally interests of the Company and for directors and employees to avoid available and which may have a material effect on the price or value situations where their personal interest could confl ict with interests of the Company’s securities. The Company has adopted a policy of the Company or create the appearance of a confl ict of interest.; which establishes procedures to ensure that directors and • employees and directors to protect any Company assets under management are aware of, and fulfi l their obligations, in relation their control and not to use Company assets for personal to the timely disclosure of material price-sensitive information. purposes, without prior Company approval; Information must not be selectively disclosed prior to being • employees and directors to respect the privacy of others and announced to the ASX and NZX. Directors and senior management comply with the Company’s privacy policy; and must notify the Company Secretary as soon as they become

Report+Accounts 2006 35

Annual Report 2006

Corporate governance statement continued

11 Ethical standards (continued) buildings and structures on land, the emission of substances to water, land and atmosphere, the emission of noise and odours, • employees and directors not to disclose or use in any the treatment and disposal of waste, and the investigation and improper manner confi dential information about the Company, remediation of soil and groundwater contamination. its customers or affairs. A copy of the code of conduct is available on the Company’s The Company has procedures in place designed to ensure website at www.pacifi cbrands.com.au. compliance with all environmental regulatory requirements. In particular, the Company has developed a system, known as the Employees are encouraged to bring to the attention of their ‘Brandsafe Environmental Management System’, for identifying and manager, their People and Performance Manager or members assessing the environmental hazards which arise from its activities of senior management any behaviour or activity occurring in the and effectively managing those risks by applying sound practices for business which they believe to be inappropriate or inconsistent with the prevention of pollution and disposal and minimisation of waste. the Company’s code of conduct. For those employees who are concerned about directly raising such matters with their superiors, the Company has established a ‘freecall’ telephone line to enable 14 Non-executive director remuneration employees to report matters of concern on a confi dential basis. Non-executive directors are paid an annual fee for their service The service, known as ‘Faircall’, is operated by an independent third on the Board and all Board committees within the maximum party to ensure that calls can be made in total confi dence. Callers aggregate sum for such directors approved from time to time may also elect to remain anonymous. The third party reports on each by shareholders (currently, $1,000,000 per annum). The Board call to the General Manager, People and Performance. A summary policy for determining the nature and amount of remuneration paid of all calls and the subsequent actions undertaken are periodically to non-executive directors, and the relationship between such reported to the Nomination and Remuneration Committee. Under policy and performance, are discussed in detail in section 2 of the the provisions of the Company’s whistleblower protection policy, Remuneration Report which forms part of the Directors’ Report. any reported improper conduct will be investigated while protecting Section 2 of the Remuneration Report details the remuneration the confi dentiality of the identity of the whistleblower. of non-executive directors in relation to the 2006 fi nancial year. The Company also has in place an Occupational Health and Safety Policy which outlines the methods and practices that the Company 15 Remuneration of executive directors and requires to be observed to provide a working environment which senior executives is free, as far as practicable, from risk of injury or disease for the The remuneration of senior executives, and the performance targets Company’s employees, visitors and contractors. Occupational health for senior executives reporting to the Chief Executive Offi cer, are and safety key performance indicators are reported to the Board on reviewed by the Nomination and Remuneration Committee (the a regular basis, to assist the Board in monitoring compliance with the composition of which is discussed in section 5 of this statement). Company’s Occupational Health and Safety Policy. This committee is also responsible for both reviewing and making recommendations to the Board on the remuneration for the Chief 12 Code of conduct for suppliers Executive Offi cer, including short term and long term incentives. The Company is committed to ethical and responsible conduct in The Board policy, adopted by the Board upon the recommendation all of its operations, and respect for the rights of all individuals and of the Nomination and Remuneration Committee, for determining the environment. The Company expects these same commitments the nature and amount of remuneration paid to executive directors to be shared by all suppliers of its products and seeks to enforce and senior executives, and the relationship between such policy this policy through a formal code of conduct, which includes: and performance, are discussed in detail in section 3 of the • not using child labour; Remuneration Report which forms part of the Directors’ Report. • not using any forced or involuntary labour; and Section 3 of the Remuneration Report details the remuneration of • providing employees with a safe and healthy workplace in executive directors and senior executives in relation to the 2006 compliance with all applicable laws and regulations. fi n ancial year including a discussion of fi xed remuneration, short The Company periodically conducts audits of its suppliers and term incentives and long term incentive components. in the event that a supplier is unable or unwilling to achieve compliance, the Company reserves the right to terminate or 16 NZX corporate governance rules suspend the relevant supply contract. The following statement is included in compliance with NZX Listing Rule 5.1.6(d). 13 Environment The Company notes that the ASX corporate governance rules and The Company’s operations are subject to environmental laws principles (‘ASX corporate governance rules’) may materially differ from and regulations, the details of which vary depending upon the NZX’s corporate governance rules and principles in the NZX Corporate jurisdiction in which the operation is located. These environmental Governance Best Practice Code. Details of the ASX corporate laws and regulations control the use of land, the erection of governance rules are available on the ASX website at www.asx.com.au.

36 Pacifi c Brands Annual Report 2006

17 ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations

ASX Principle Reference1 Compliance Principle 1: Lay solid foundations for management and oversight 1.1 Formalise and disclose the functions reserved to the board and those delegated to management. 1 Comply

Principle 2: Structure the board to add value 2.1 A majority of the board should be independent directors. 2 Comply 2.2 The chairperson should be an independent director. 2 Comply 2.3 The roles of chairperson and chief executive offi cer should not be 2 Comply exercised by the same individual. 2.4 The board should establish a nomination committee. 5 Comply 2.5 Provide the information indicated in Guide to reporting on Principle 2. 1, 2, 5, 7, Board Members Comply (pages 28 and 29), Directors’ Report (page 39)

Principle 3: Promote ethical and responsible decision making 3.1 Establish a code of conduct to guide the directors, the chief executive offi c er (or equivalent), the chief fi nancial offi cer (or equivalent) and any other key executives as to: 3.1.1 the practices necessary to maintain confi dence in the company’s integrity; and 3.1.2 the responsibility and accountability of individuals for reporting 11 Comply and investigating reports of unethical practices. 3.2 Disclose the policy concerning trading in company securities by 10 Comply directors, offi cers and employees. 3.3 Provide the information indicated in Guide to reporting on Principle 3. 10, 11 Comply

Principle 4: Safeguard integrity in fi nancial reporting 4.1 Require the chief executive offi cer (or equivalent) and the chief fi nancial 8 Comply offi c er (or equivalent) to state in writing to the board that the company’s fi nancial reports present a true and fair view, in all material respects, of the company’s fi nancial condition and operational results and are in accordance with relevant accounting standards. 4.2 The board should establish an audit committee. 4 Comply 4.3 Structure the audit committee so that it consists of: 4 Comply • only non-executive directors; • a majority of independent directors; • an independent chairperson, who is not chairperson of the board; and • at least three members. 4.4 The audit committee should have a formal charter. 4 Comply 4.5 Provide the information indicated in Guide to reporting on Principle 4. 4, Directors’ Report (page 39) Comply

Principle 5: Make timely and balanced disclosure 5.1 Establish written policies and procedures designed to ensure compliance 9 Comply with ASX Listing Rule disclosure requirements and to ensure accountability at a senior management level for that compliance. 5.2 Provide the information indicated in Guide to reporting on Principle 5. 9 Comply

1 All references are to sections of this Corporate Governance Statement unless otherwise stated.

Report+Accounts 2006 37

Annual Report 2006

Corporate governance statement continued

17 ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations (continued)

ASX Principle Reference1 Compliance Principle 6: Respect the rights of shareholders 6.1 Design and disclose a communications strategy to promote effective 9 Comply communication with shareholders and encourage effective participation at general meetings. 6.2 Request the external auditor to attend the annual general meeting and 9 Comply be available to answer shareholder questions about the conduct of the audit and the preparation and content of the auditor’s report.

Principle 7: Recognise and manage risk 7.1 The board or appropriate board committee should establish policies 8 Comply on risk oversight and management. 7.2 The chief executive offi cer (or equivalent) and the chief fi nancial offi cer (or equivalent) should state to the board in writing that: 7.2.1 the statement given in accordance with best practice recommendation 4.1 (the integrity of fi nancial statements) is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the board; and 7.2.2 the company’s risk management and internal compliance and 8 Comply control system is operating effi ciently and effectively in all material respects. 7.3 Provide the information indicated in Guide to reporting on Principle 7. 4, 8 Comply

Principle 8: Encourage enhanced performance 8.1 Disclose the process for performance evaluation of the board, 5, 6 Comply its committees and individual directors, and key executives.

Principle 9: Remunerate fairly and responsibly 9.1 Provide disclosure in relation to the company’s remuneration policies to Remuneration Report Comply enable investors to understand (i) the costs and benefi ts of those policies and (ii) the link between remuneration paid to directors and key executives and corporate performance. 9.2 The board should establish a remuneration committee. 5 Comply 9.3 Clearly distinguish the structure of non-executive directors’ remuneration Remuneration Report Comply from that of executives. 9.4 Ensure that payment of equity based executive remuneration is made in Remuneration Report Comply accordance with thresholds set in plans approved by shareholders. 9.5 Provide the information indicated in Guide to reporting on Principle 9. 5, 14, 15, Directors’ Report Comply (page 39) and Remuneration Report

Principle 10: Recognise the legitimate interests of stakeholders 10.1 Establish and disclose a code of conduct to guide compliance with 11 Comply legal and other obligations.

1 All references are to sections of this Corporate Governance Statement unless otherwise stated.

38 Pacifi c Brands Annual Report 2006 Directors’ Report

The directors of Pacifi c Brands Limited (the ‘Company’) present their report together with the fi nancial report of the Company and its controlled entities (collectively the ‘consolidated entity’) for the year ended 30 June 2006 and the auditor’s report thereon. The information set out below is to be read in conjunction with the Remuneration Report set out on pages 43 to 54 which forms part of this Directors’ Report.

Directors The directors of the Company during the fi nancial year and up to the date of this report are: R.P. Handley, Chairman A.D. Cummins H.A. Lynch, Deputy Chair P. R . Moore, Chief Executive Offi cer M.G. Ould M.A. Plavsic S.J. Tierney, Group General Manager, Operations. Particulars of directors’ age, qualifi cations and other listed company directorships, experience and special responsibilities are detailed on pages 28 to 29 of the Annual Report.

No offi c ers are former auditors No offi cer of the consolidated entity has been a partner of an audit fi rm or a director of an audit company that is or was an auditor of the consolidated entity during the 2006 fi nancial year.

Directors’ interests in share capital The relevant interest of each director in the share capital of the Company as at the date of this report is as follows: Fully paid Performance ordinary shares rights* R.P. Handley 1,366,173 A.D. Cummins 147,899 H.A. Lynch 84,091 P. R . Moore 1,320,001 625,000 M.G. Ould 73,892 M.A. Plavsic 44,145 S.J. Tierney 400,001 375,000

* Details of the terms and conditions of issue of the performance rights granted to Mr Moore and Mr Tierney are set out on pages 47 to 50 in this Directors’ Report.

Directors’ meetings The number of directors’ meetings (including meetings of committees of directors) and number of meetings attended by each of the directors of the Company during the 2006 fi nancial year are: Board Audit, Business Risk Nomination and and Compliance Committee Remuneration Committee Director Held1 Attended2 Held1 Attended2 Held1 Attended2 R.P. Handley 12 12 5 5 H.A. Lynch 12 12 5 5 P. R . Moore 12 12 S.J. Tierney 12 9 A.D. Cummins 12 12 5 5 5 5 M.G. Ould 12 12 5 5 M.A. Plavsic 12 12 5 5

1 This column shows the number of meetings held during the period the director was a member of the Board or committee. 2 This column shows the number of meetings attended.

Report+Accounts 2006 39

Annual Report 2006

Directors’ report continued

State of affairs Review and results of operations In the opinion of the directors, there were no signifi cant changes in A review of the operations of the consolidated entity during the the state of affairs of the consolidated entity that occurred during 2006 fi nancial year and of the results of those operations is the fi nancial year under review. contained on pages 22 to 26 of the Annual Report. All comparative results for the 2005 fi nancial year, have been Principal activities restated for the impact of changes in the accounting standards. The principal activities of the consolidated entity during the course For reporting periods beginning on or after 1 July 2005, the of the 2006 fi nancial year were the manufacturing, sourcing, consolidated entity had to comply with Australian equivalents to marketing and distribution of everyday essential brands across the International Financial Reporting Standards (AIFRS) as issued by underwear, socks, hosiery, intimate apparel, footwear, pillows, bed the Australian Accounting Standards Board. linen, bedding and sporting goods markets. All products are sold Signifi cant changes under these standards, which were applicable predominantly throughout the Asia-Pacifi c region. The consolidated to the Company, include: entity also markets and distributes underwear, intimates and • goodwill is no longer amortised but continues to be tested footwear in the United Kingdom, Europe and the United States. annually for impairment; There has been no signifi cant change in the nature of principal • the fair value of performance rights granted must be activities during the year. recognised and expensed as an employee benefi t; The Company’s key strategies established to drive future • where leases have fi xed rental increases, these increases must shareholder value include: be expensed on a straight line basis over the term of the lease; • building brand leadership through advertising, marketing, and product development and innovation; • software assets developed for internal use are capable of • leveraging scale across sourcing, logistics and technology recognition as intangible assets (previously classifi ed as plant to drive operational effi ciencies; and and equipment). • portfolio management through strategic acquisitions. These strategies have been applied to drive branded sales growth Dividends and demonstrate the power of ‘Everyday Essential Brands’. An interim dividend of 7.5 cents per share, amounting to The Company’s brands are its number one asset. The Company $37.7 million was paid on 3 April 2006. is focused on branded sales, margin and earnings growth. The directors have declared a fi nal dividend of $37.7 million to be In the 2007 fi nancial year, the Company will continue to focus paid at the rate of 7.5 cents per share on 503,000,003 ordinary on earnings growth and profi t improvement via: shares. The dividend is expected to be paid on 2 October 2006 • profi table, branded sales growth; to shareholders on the register at the record date of 1 September 2006. This dividend will be fully franked at the 30% corporate tax • brand investment through relevant advertising; rate in Australia. • innovative product development based on consumer insight; • category planning; Events subsequent to reporting date • continued emphasis on gross profi t improvement; There has not arisen in the interval between the end of the fi nancial • integration of acquisitions made during the 2006 fi nancial year; year and the date of this report, any item, transaction or event that • leveraging of scale across the total business; has signifi cantly affected, or may signifi cantly affect, the operations of the consolidated entity, the results of those operations, or • building fl e xibility and speed into the supply chain to meet the the state of affairs of the consolidated entity, in future fi nancial changing needs of the marketplace; periods, other than that on 23rd August 2006, the directors • management of working capital and cash fl ow; and approved a capital management initiative, whereby the Company • execution of strategically sound, value enhancing acquisitions. may purchase up to $75.0 million of its own shares, on market, The business had a stronger fi nish to a challenging year and is over the ensuing 12 month period. The fi nancial impact of this anticipated to return to growth in the 2007 fi nancial year. announcement has not been refl ected in this Annual Report. Disclosure of information relating to developments in the business

strategies and prospects for the consolidated entity for future fi n ancial years which would not, in the opinion of the directors, be unreasonably prejudicial to the consolidated entity is contained in the Chairman’s Review and the Chief Executive Offi cer’s Report to Shareholders and the Review of Operations.

40 Pacifi c Brands Annual Report 2006

Likely developments auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for Likely developments in the operations of the consolidated entity and the following reasons: the expected results of those operations are covered generally in the Review of Operations on pages 22 to 26 of the Annual Report. • all non-audit services were subject to the corporate governance procedures adopted by the Company and have Further information as to likely developments in the operations been reviewed by the Audit, Business Risk and Compliance of the consolidated entity and the expected results of those Committee to ensure they did not impact the integrity and operations in subsequent fi nancial periods has not been included objectivity of the auditor; and in this report because disclosure would be likely to result in unreasonable prejudice to the consolidated entity. • the non-audit services provided do not undermine the general principles relating to auditor independence as set out in Non-audit services Professional Statement F1 Professional Independence, as they did not involve reviewing or auditing the auditor’s own work, During the 2006 fi nancial year, KPMG, the Company’s auditor, acting in a management or decision making capacity for the performed certain other services in addition to its statutory duties. Company, acting as an advocate for the Company or jointly The Board has considered the non-audit services provided sharing risks and rewards. during the fi nancial year by the auditor and in accordance with A copy of the auditor’s independence declaration as required written advice provided by resolution of the Audit Business under section 307C of the Corporations Act 2001 is included Risk and Compliance Committee, is satisfi ed that the provision on page 55 in this report. of those non-audit services during the fi nancial year by the

Details of the amounts paid to the auditor of the Company, KPMG, and its related practices for audit and non-audit services provided during the fi nancial year are set out below: Consolidated 2006 2005 $ $ Statutory audit: Auditors of the Company – audit and review of fi nancial reports (KPMG Australia) 1,065,000 1,040,000 – audit and review of fi nancial reports (overseas KPMG fi rms) 230,000 195,000 1,295,000 1,235,000 Services other than statutory audit: Other assurance services – other assurance services (KPMG Australia) 12,695 65,148 – other assurance services (overseas KPMG fi rms) 7,036 36,510 Other services – taxation compliance services (KPMG Australia) 210,070 131,765 – taxation compliance services (overseas KPMG fi rms) 20,043 24,987 249,844 258,410

Report+Accounts 2006 41

Annual Report 2006

Directors’ report continued

Indemnifi cation and insurance of offi cers Environmental regulation In accordance with the Company’s Constitution, the Company The consolidated entity’s operations are subject to environmental has agreed to indemnify every person who is, or has been, an laws and regulations, the details of which vary depending upon the offi cer of the Company or its controlled entities against any liability jurisdiction in which the operation is located. These environmental (including reasonable legal costs) incurred by the person as such laws and regulations control the use of land, the erection of an offi cer of the Company or its controlled entities, to the extent buildings and structures on land, the emission of substances to permitted by law and subject to the restrictions in section 199A of water, land and atmosphere, the emission of noise and odours, the Corporations Act 2001. Indemnifi ed offi c ers are the directors the treatment and disposal of waste, and the investigation and and secretaries of the Company or its controlled entities. During remediation of soil and groundwater contamination. the fi nancial year, there were no claims made against any offi cer of The consolidated entity has procedures in place designed to the Company which would invoke the above indemnity. ensure compliance with all environmental regulatory requirements. In addition, the Company has entered into standard form deeds of The directors are not aware of any material breaches of indemnity with all of its current directors against all liabilities which environmental regulations during the fi nancial year. they may incur in the performance of their duties as directors of the Company, except liability to the Company or a related body Rounding off corporate, liability for a pecuniary penalty or compensation under The Company is of a kind referred to in Australian Securities and the Corporations Act 2001, and liability arising from conduct Investments Commission Class Order 98/100 dated 10 July 1998 involving a lack of good faith. (as in force on 30 June 2006) and in accordance with that Class The Company holds a directors’ and offi cers’ liability insurance Order, amounts in the fi nancial report and this Directors’ Report policy on behalf of current and former directors and offi cers of have been rounded off to the nearest thousand dollars, unless the Company and its controlled entities. The period of the policy otherwise stated. extends from 1 December 2005 to 30 November 2006 and the premium was paid on 6 February 2006. Due to confi dentiality obligations and undertakings of the policy, no further details in respect of the premium or policy can be disclosed.

42 Pacifi c Brands Annual Report 2006 Directors’ Report – Remuneration Report

1 Company performance The remuneration of executives is based on both the achievement of internal performance hurdles set at the beginning of the fi nancial year and the achievement of market based performance hurdles. Full details of the Company’s short term and long term incentive programs are found in sections 2 and 3 of this report. As reported on page 9, the consolidated entity generated $173.0 million in EBIT for the year ended 30 June 2006 and a net operating profi t after tax of $101.2 million, which was slightly higher than the prior year’s amount of $100.9 million. Even though this represented a steady performance in a tight retail market, it was not suffi cient to satisfy the performance requirements associated with either the short term or long term incentives and accordingly, no incentives were paid or vested. The following table sets out various measures of the performance of the Company since its listing on the Australian and New Zealand stock exchanges in April 2004, the majority of which are measures of the consequences of Company performance on shareholder wealth:

2006 20051 20042 Net sales revenue ($m) 1,624.9 1,521.7 363.4 EBIT ($m) 173.0 174.6 29.5 NPAT3 101.2 100.9 11.8 EPS (cents)4 20.1 20.1 2.3 Dividends per share (cents) 15.0 15.0 3.5 Year end share price ($) 2.15 2.27 2.67 Return of capital ($m) 0 0 0 TSR (%)5 (3.6) (4.8) 6.8

1 The measures of fi nancial performance for the 2005 fi nancial year have been restated in accordance with AIFRS. 2 The measures of fi nancial performance for 2004 relate to the period since the Company’s incorporation on 12 December 2003, with trading commencing on 6 April 2004, through to 30 June 2006. 3 Net operating profi t after tax. 4 Earnings per share have been calculated based on an issued share capital of 503,000,003 ordinary shares. 5 TSR or total shareholder return is, broadly, a measure of the return to shareholders provided by movements in the Company’s share price plus any dividends paid or declared in respect of the relevant fi nancial period and reinvested in Company shares, expressed as a percentage of investment

A fully franked fi nal dividend of 7.5 cents has been declared. Board within the maximum aggregate amount of $1,000,000 per This results in a fully franked 15.0 cent full year dividend which annum, as disclosed in the Company’s prospectus lodged with represents a 74.6% payout ratio to shareholders. the Australian Securities and Investments Commission as part of the Company’s initial public offering in April 2004. The maximum 2 Non-executive directors’ remuneration aggregate amount which can be paid to non-executive directors was set above the level required to meet current requirements to A. Board policy on remuneration provide the Board with scope to appoint additional directors in the The disclosures in this section relate to the remuneration for future, or adjust fees as duties and responsibilities change. The fees the Company’s non-executive directors who are regarded as paid to non-executive directors are set at levels which refl ect both ‘key management personnel’ for the purpose of Australian the responsibilities of, and the time commitments required from, Accounting Standard AASB 124. each director to discharge their duties. In that regard, it should be The focus of the Board is on long term strategic direction and noted that all non-executive directors are currently members of the overall performance of the Company. As a consequence all Board committees in order to be informed on all issues which non-executive director remuneration is not directly related to short are considered by the committees and which may come before term results but is, through participation in the Non-Executive the full Board. The remuneration of the non-executive directors is Director Share Plan (see discussion below), related to long term not directly linked to the performance of the Company, so as to performance. maintain their independence and impartiality. Non-executive directors’ do not have formal service agreements The Nomination and Remuneration Committee makes with the Company. Their tenure with the Company is governed by recommendations to the Board on the total level of remuneration the Company’s Constitution and the Australian Stock Exchange of the Chairman and other non-executive directors, including any Listing Rules, which provide that all non-executive directors’ additional fees payable to directors for membership of Board are subject to shareholder re-election every three years. Non- committees. The Chairman is not present at discussions relating executive directors’ fees, including committee fees, are set by the to his own remuneration.

Report+Accounts 2006 43

Annual Report 2006

Directors’ report – remuneration report continued

In setting fee levels, the Nomination and Remuneration Committee incurred in the discharge of their duties in accordance with rule takes into account: 8.3(e) of the Company’s Constitution. • the Company’s existing remuneration policies; The Board, through the auspices of the Nomination and • independent remuneration consultants’ advice; Remuneration Committee, reviews annually its approach to non- • fees paid by comparable companies; and executive director remuneration to ensure it remains in line with • the level of remuneration necessary to attract and retain general industry practice and refl ects proper compensation for directors of appropriate experience, qualifi cations and time duties undertaken. commitment. In order to better align the interests of non-executive directors and Details of the membership of the Nomination and Remuneration shareholders, in terms of long term performance, a minimum of 25% Committee and its responsibilities are set out in section 5 of the of each non-executive director’s annual fee must be taken in the form Corporate Governance Statement. of shares in the Company pursuant to the terms of the Non-Executive The aggregate fees paid to the non-executive directors, including Director Share Plan. The plan enables non-executive directors to elect the Chairman, during the 2006 fi nancial year were $720,000, to apply up to 100% of their fees in acquiring shares in the Company. unchanged from the 2005 fi nancial year. It is not proposed to The Non-Executive Director Share Plan is not a performance based increase the fees paid to the non-executive directors in the 2007 share plan. Nor is it intended as an incentive component of non- fi n ancial year. executive director remuneration. Shares acquired under the Non- The Company does not currently pay additional fees for Executive Director Share Plan must, in general, be held for the period membership of the Board’s committees. the director holds offi ce as a director. Superannuation contributions are made on behalf of the non- Shares will usually be purchased on-market at the prevailing market executive directors in accordance with the Company’s statutory price by applying an amount equal to the amount of fees a non- superannuation obligations. The sum of $720,000 in respect of executive director has elected to sacrifi ce to acquire shares. Shares directors’ fees is inclusive of superannuation contributions. are acquired monthly at the end of each calendar month. Directors are also entitled to be reimbursed for all business related The Board has determined that retirement benefi ts are not payable expenses, including travel on Company business, as may be to non-executive directors upon their retirement.

B. Remuneration Details of non-executive directors’ remuneration for the 2006 fi nancial year are set out in the following table: Short term payments Post Total3 employment Superannuation Cash Shares1 contributions2 $ $ $ $ R.P. Handley (Chairman) 2006 166,858 62,500 20,642 250,000 2005 166,858 62,500 20,642 250,000 A.D. Cummins 2006 43,830 52,500 8,670 105,000 2005 43,830 52,500 8,670 105,000 H.A. Lynch (Deputy Chair) 2006 95,115 42,500 12,385 150,000 2005 85,115 52,500 12,385 150,000 M.G. Ould 2006 64,617 36,300 9,083 110,000 2005 64,617 36,300 9,083 110,000 M.A. Plavsic 2006 70,080 26,250 8,670 105,000 2005 70,080 26,250 8,670 105,000 Total 2006 440,500 220,050 59,450 720,000 2005 430,500 230,050 59,450 720,000

1 Relates solely to the purchase of shares under the Non-Executive Director Share Plan. 2 Superannuation contributions made on behalf of Non-Executive directors to satisfy the Company’s obligations under applicable Superannuation Guarantee Charge legislation. 3 Amounts disclosed for remuneration of directors exclude insurance premiums paid by the consolidated entity in respect of directors’ and offi cers’ liability insurance contracts which covers, among others, current and former directors of the Company. Due to confi dentiality obligations and undertakings of the policy, the premium paid cannot be disclosed. No amount has been allocated to the individuals covered by the insurance policy as, based on all available information, the directors believe that no reasonable basis for such allocation exists.

44 Pacifi c Brands Annual Report 2006

3. Executive director and senior executive and mix of remuneration for comparable roles in comparable remuneration companies. The disclosures in this section relate to the remuneration for Alignment of executive remuneration with the Company’s business key management personnel of both the Company and the strategy is achieved through both short and long term incentives. consolidated entity (being those persons with authority and Key fi nancial and strategic value drivers are identifi ed, targets set, responsibility for planning, directing and controlling the activities and rewards provided on their achievement. Value drivers include, of the Company during the fi nancial year) other than the non in the case of short term incentives, net profi t after tax (‘NPAT’) executive directors. This group of executives includes the fi ve growth and the achievement of specifi ed strategic objectives and, most highly remunerated executives of the Company and the in the case of long term incentives, relative total shareholder return consolidated entity during the fi nancial year. (‘TSR’) and earnings per share (‘EPS’) growth. The Board believes that the balance between fi xed and A. Board policy on remuneration performance related components of remuneration, as summarised The Board and the Nomination and Remuneration Committee below, refl ects market conditions and the ability of the relevant believe that the performance of the Company depends on the executives to drive the performance of the Company. The Board quality of its people. The Board has adopted a remuneration policy believes that a company’s remuneration policy needs to be which assists the Company to achieve its business strategy and contemporary and as such must be capable of adjustment over objectives and has the following objectives: time to refl ect changes in market conditions. • ensuring alignment of executive remuneration with the short The mix of short and long term incentives varies with each and long term objectives as set out in the Company’s strategic executive’s business focus. As much of the Company’s business business plans endorsed by the Board; is subject to short quarterly cycles, it follows that many executives • providing a common interest between employees and will have a balance between short term and long term incentives. shareholders by linking the rewards that accrue to Financial results are verifi ed by reference to the Company’s management to the creation of value for shareholders; audited accounts. Relative TSR performance is verifi ed by external • being competitive in the markets in which the Company advisers. The achievement of performance objectives is assessed operates in order to attract, motivate and retain high calibre by the Chief Executive Offi cer for direct reports, and verifi ed by employees; and the Board, while the Board assesses whether or not the Chief • being fully costed on a ‘cost to company’ basis including all Executive Offi cer has met his performance objectives. applicable fringe benefi ts and other taxes. The relative proportion of executive directors and senior The Nomination and Remuneration Committee obtains management’s total remuneration packages that is performance independent advice from external specialists on the level based is set out in the table below:

% of total target remuneration (annualised) Fixed Performance remuneration based remuneration Total performance Short term Long term based incentives incentives remuneration Chief Executive Offi cer 33% 39% 28% 67% Group General Manager, Operations 35% 27% 38% 65% Other senior executives1 41% 18% 41% 59%

1 Percentages based on average remuneration for the relevant executives assuming incentives fully vest.

Report+Accounts 2006 45

Annual Report 2006

Directors’ report – remuneration report continued

B. Fixed remuneration Targets for each objective are determined by the Chief Executive The terms of employment for all executive management contain Offi cer (and, in the case of the Chief Executive Offi cer by the a fi xed remuneration component comprising base salary, Board) according to the roles and responsibilities of the relevant superannuation and motor vehicle (or motor vehicle allowance). executive. The Company utilises the Hay points rating system to value The actual amount of any STI award is determined based on individual roles. achievement of annual performance conditions. Performance is Longer serving employees receive defi ned benefi t superannuation tested at the end of each fi nancial year. as a legacy from the previous ownership of Pacifi c Brands. The The payment of a STI to the Chief Executive Offi cer is subject cost of providing their superannuation benefi t varies with each to the discretion of the Board notwithstanding achievement of individual’s salary level and years of membership of the plan. the performance hurdles. Similarly, in the case of all other senior Longer serving employees will attract greater superannuation executives the payment of any STI is subject to the discretion of costs than more recent employees. This plan has been closed the Chief Executive Offi cer, in consultation with the Board, to take to new members for several years. Newer employees receive a account of the overall level of performance of the senior executive. superannuation benefi t that allows them to control and vary their The employment contracts for the Chief Executive Offi cer and contribution levels above the mandated statutory minimum on a Group General Manager, Operations, provide that a percentage salary sacrifi ce basis. of any STI to which they may become entitled is to be applied The executive directors and most of the executives for whom to acquiring shares (‘Deferred Shares’). Specifi cally, the Chief remuneration is disclosed are members of the defi ned benefi t plan. Executive Offi cer is required to apply half of any annual incentive Hence, the expense associated with their superannuation benefi t to acquiring Deferred Shares, while the Group General Manager, refl ects most individuals’ relatively long periods of service. Operations is required to apply one third of any incentive towards Executive fi xed remuneration is reviewed annually, with effect from the acquisition of Deferred Shares. The executives may elect to 1 July each year. apply a greater percentage of any incentive to acquiring shares which are subject to the ‘restriction’ condition described below. C. Short term incentives (‘STI’) Both executive directors and all other members of the senior In the case of the Chief Executive Offi cer and the Group General executive team participate in a STI program which involves linking Manager, Operations, the Deferred Shares are subject to a specifi c targets (predominantly fi nancial) with the opportunity to vesting period of two years, based on service, from the date of earn cash and deferred share Incentives based on a percentage allocation. Once acquired the Deferred Shares are held on trust, of the executive’s base salary. In respect of the 2006 fi nancial year, subject to a further restriction on dealing for a period of three the Chief Executive Offi cer had the opportunity to earn a bonus years after the date of allocation of the Deferred Shares. If the equivalent to 150% of his base salary. In the case of the Group executive is terminated for cause prior to the end of the two year General Manager, Operations, in respect of the 2006 fi nancial year, vesting period, any entitlement to the Deferred Shares ceases. If the opportunity was to earn a bonus equivalent to 100% of his the employment of the executive ceases in other circumstances, base salary. In relation to other Australian members of the senior the executive will, in general, be entitled to receive their Deferred executive team, the opportunity generally comprised an amount Shares. Deferred Shares allocated under this arrangement will equal to between 50% and 75% of their base salary for target generally be acquired on-market. The balance of any annual performance. incentive award will be paid to the executive in cash. Payment of executive STI is conditional on group net profi t after The employment contracts of certain other senior executives also tax (‘NPAT’) growth of 5% or more (after STI payments) over the provide for one third of any annual incentive to which they become prior year. This is a threshold criterion which must be satisfi ed entitled to be applied in acquiring Deferred Shares, however, before the payment of any STI can be contemplated. Additional there is no vesting period, nor are there any restrictions as to the performance requirements, including in some cases NPAT growth disposal of the Deferred Shares allocated to these executives targets in excess of 5%, may need to be met for a senior executive (other than the Company’s policy on dealing in securities in to be entitled to the maximum STI incentive. As the threshold the Company). criterion was not met in the 2006 fi nancial year, no STI payment was awarded to any senior executive. Individual performance requirements in addition to the overarching NPAT requirement are related to individual fi nancial and non- fi n ancial objectives. The specifi ed objectives must represent outcomes that can extend the Company’s sustainable profi t growth over time. These may vary with the individual executive and his/her responsibilities and can include fi nancial, operational, acquisition, divestment, investment, and workforce capability goals.

46 Pacifi c Brands Annual Report 2006

Current STI programs relevant to executive directors and senior executives Nature of short Date of grant Percentage Percentage Future Minimum Maximum term incentive of STI of STI not fi n ancial years total value total value arrangement payable awarded that STI of STI ($) of STI ($) (%) (%) (F’06 bonus) will be payable Executive directors P. R . Moore, Cash bonus in respect 24/02/2004 0% 100% Not $0 $1,350,000 Chief Executive Offi cer of 2006 fi nancial year1 applicable Cash bonus in respect 24/02/2004 0% 100% Not $0 $1,004,345 of 2005 fi nancial year1 applicable S.J. Tierney, Cash bonus in respect 24/02/2004 0% 100% Not $0 $400,000 Group General Manager, of 2006 fi nancial year1 applicable Operations Cash bonus in respect 24/02/2004 0% 100% Not $0 $362,044 of 2005 fi nancial year1 applicable Senior executives S.W. Audsley, Cash bonus in respect 01/07/2005 0% 100% Not $0 $243,750 Chief Financial Offi cer of 2006 fi nancial year1 applicable Cash bonus in respect 21/07/2005 0% 100% Not $0 $150,000 of 2005 fi nancial year1 applicable I.C. Barton, Cash bonus in respect 01/07/2005 0% 100% Not $0 $150,000 Group General Manager, of 2006 fi nancial year applicable Home Comfort Cash bonus in respect 21/07/2005 0% 100% Not $0 $127,500 of 2005 fi nancial year applicable M.S. Daniel, Cash bonus in respect 01/07/2005 0% 100% Not $0 $162,500 General Manager, of 2006 fi nancial year applicable Supply Chain Cash bonus in respect 21/07/2005 0% 100% Not $0 $162,500 of 2005 fi nancial year applicable M.J. Ford, Cash bonus in respect 01/07/2005 0% 100% Not $0 $162,500 Group General Manager, of 2006 fi nancial year applicable Footwear Cash bonus in respect 21/07/2005 36% 64% Not $0 $127,500 of 2005 fi nancial year applicable M.E. Keely, Cash bonus in respect 01/07/2005 0% 100% Not $0 $130,000 General Manager, of 2006 fi nancial year applicable People & Performance Cash bonus in respect 21/07/2005 0% 100% Not $0 $130,000 of 2005 fi nancial year applicable S.M. Morphet, Cash bonus in respect 01/07/2005 0% 100% Not $0 $243,750 Group General Manager, of 2006 fi nancial year1 applicable Underwear & Hosiery Cash bonus in respect 21/07/2005 0% 100% Not $0 $150,000 of 2005 fi nancial year applicable

1 As discussed on page 46, the bonus arrangements for the Chief Executive Offi cer and the Group General Manager, Operations and certain senior executives require a certain percentage of any bonus paid to the relevant individual to be applied to acquiring shares in the Company.

D. Long term incentives (‘LTI’) The Company’s LTI plans are currently comprised of a The Company’s LTI arrangements are designed to link executive performance rights plan (‘PRP’) introduced in 2004 as part of the reward with the key performance drivers which underpin sustainable Company’s initial public offering, giving an entitlement to shares growth in shareholder value. Participation in the LTI arrangements on satisfaction of the performance requirements Grants are is only offered to executives who are able to infl uence the generally made annually to ensure there is a balance between generation of shareholder wealth and thus have a direct impact the achievement of short term objectives and longer term goals. on the Company’s performance against the relevant performance To date, no shares have vested under any of the LTI grants. hurdles. In addition, the Board believes that the appropriateness The rules of the PRP provide that the Board may determine a price of LTI arrangements cannot be viewed in isolation, but must be that is payable upon allocation of a share following vesting of a considered in the context of the total array of possible remuneration performance right, or that no amount is payable upon allocation of a elements which may be provided to senior executives, taking share once a performance right vests. In respect of the performance account of the remuneration practices of competitor companies. rights granted and performance rights proposed to be granted in

Report+Accounts 2006 47

Annual Report 2006

Directors’ report – remuneration report continued

2006, the Board has determined that no amount is payable by the TSR and EPS based performance measures (adopted in respect of relevant executive on vesting of their initial grant of rights. the 2005 grant of performance rights and the proposed 2006 grant Eligible executives (including the executive directors, as disclosed of performance rights), the Board determined that TSR alone did in the Company’s prospectus lodged with the Australian Securities not always refl ect the long term value created by senior executives and Investments Commission as part of the Company’s initial public in the measurement period. The Board believes that, collectively, offering in April 2004) were granted performance rights in 2004. TSR and EPS performance is better correlated with executive Vesting was based on relative TSR performance against the individual performance over time. TSRs of the companies comprising the ASX 100 index at that time. The 2004 and 2005 grants were divided into tranches TSR is, broadly, a measure of the return to shareholders provided by corresponding to performance measurement periods of one year, movements in the Company’s share price plus any dividends paid or two years, three years and four years. Any unvested tranche declared in respect of the relevant fi nancial period and reinvested in in any period is held over and subject to retesting against the Company shares, expressed as a percentage of investment. performance criteria in following periods. No further grants of performance rights are proposed to be made under the rules The use of a TSR based hurdle was regarded by the Company as applicable to the 2004 and 2005 grants. appropriate as it: It is proposed the 2006 grant of performance rights will also be • ensures an alignment between comparative shareholder return subject to EPS and relative TSR performance hurdles, however, and reward for the executive; the hurdle requirements are to be varied from the 2005 grant in • provides an external market performance measure in respect of the manner detailed below. share price growth and dividend; and The proposed 2006 grant will have the performance requirements • measures and rewards the extent to which shareholder returns are tested once at the end of the 2009 fi nancial year. The directors generated relative to the performance of those companies with believe that a single performance period of three years will focus which the Company competes for capital, customers and talent. executives on the continual execution of sustainable high growth At the 2005 Annual General Meeting of the Company’s strategies. In addition, it will focus executives on achieving specifi c shareholders approved a grant of performance rights to the results within a single time frame. It is also believed by the Board executive directors. A similar grant of performance rights was to be a performance requirement which is easier to communicate also made to other eligible senior executives. Half of this grant of and understand for both the relevant senior executives and performance rights is subject to an EPS growth hurdle. The other external stakeholders. half of this grant is subject to a relative TSR hurdle. The maximum percentage of remaining and proposed performance In moving from a purely TSR based measure (which formed the rights that may vest, subject to performance, in any one year are basis of the 2004 grant of performance rights), to a combination of set out in the table below:

Maximum % Maximum % Maximum % of proposed Vesting date of 2004 grant of 2005 grant 2006 grant 1 July 2007 60%1 35%1 0% 1 July 2008 40% 25% 0%

1 July 2009 Not applicable 40% 100% Maximum 100% 100% 100%

1 The percentage of performance rights which may vest on 1 July 2007 under both the 2004 and 2005 grants includes a certain percentage of the performance rights granted which did not vest on 1 July 2006 and which therefore carried forward to the next possible vesting date.

Each year, the Board reviews and if necessary refi nes the peer • at least 20 in number; and group for performance comparison. The 2004 grant used a • either side of the Company in the market capitalisation, such that comparison group of the Australian Stock Exchange’s (‘ASX’) the Company’s market capitalisation at the start of the performance 100 largest companies by market capitalisation and the 2005 period approximates the median of the comparison group. comparison group was composed of a basket of 72 companies The companies that meet this criteria compete with the Company selected from the ASX 200 as comparable yield stocks. for customers’ spending, while representing alternatives to current The proposed comparison group for the 2006 grant will require and potential investors in the competition for capital in this sector. peer companies to be: Although comparator companies may change the Board expects • ASX listed; to consistently apply the above peer selection criteria for future • in the consumer staples and discretionary sectors; grants of performance rights.

48 Pacifi c Brands Annual Report 2006

A summary table of comparator companies for unvested performance rights is provided in the table below. 2004: 2005: 2006: ASX 100 Highest yield companies in ASX 200 Consumer staples and discretionary companies All companies ABC Learning Centres Limited, Adelaide Brighton Limited, ABC. Learning Centres Limited, Austereo comprising the Adsteam Marine Limited, Alesco Corporation Limited, Amcor Group Limited, Amalgamated Holdings ASX 100 at Limited, Ansell Limited, Aristocrat Leisure Limited, Austereo Limited, APN News & Media Limited, the start of the Group Limited, Australian Gas Light Company (The), Australian AWB Limited, Billabong International performance Pharmaceutical Industries Limited, AWB Limited, Baycorp Limited, Burns Philp & Company Limited, period. Advantage Limited, Billabong International Limited, BlueScope David Jones Limited, Futuris Corporation Steel Limited, Boral Limited, Bradken Limited, Brambles Limited, Flight Centre Limited, GUD Industries Limited, Burns Philp & Company Limited, Coates Holdings Limited, Harvey Norman Hire Limited, Cochlear Limited, Coles Myer Limited, Colorado Holdings Limited, JB Hi-Fi Limited, Group Limited, Corporate Express Australia Limited, Crane Just Group Limited, Metcash Limited, Group Limited, CSL Limited, CSR Limited, David Jones Southern Cross Broadcasting Limited, Limited, DCA Group Limited, Downer EDI Limited, Flight Centre Seek Limited, Seven Network Limited, Limited, Foodland Associated Limited, Foster’s Group Limited, STW Communications Group Limited, GRD Limited, GUD Holdings Limited, Gunns Limited, GWA Ten Network Holdings Limited, Tattersall’s International Limited, Harvey Norman Holdings Limited, Hills Limited, UNiTAB Limited, West Australia Industries Limited, Housewares International Limited, Invocare Newspapers Holdings Limited. Limited, JB Hi-Fi Limited, Just Group Limited, McGuigan Simeon Wines Limited, Metcash Limited, MYOB Limited, Nufarm Limited, OAMPS Limited, OneSteel Limited, Orica Limited, Origin Energy Limited, Pacifi c Brands Limited, Pacifi ca Group Limited, PaperlinX Limited, Promina Group Limited, Qantas Airways Limited, Repco Corporation Limited, Ridley Corporation Limited, Rinker Group Limited, Seven Network Limited, Sigma Company Limited, Sims Group Limited, Smorgon Steel Group Limited, Sonic Healthcare Limited, Spotless Group Limited, STW Communications Group Limited, Tabcorp Holdings Limited, Ten Network Holdings Limited, Toll Holdings Limited, UNiTAB Limited, United Group Limited, Wattyl Limited, Wesfarmers Limited and Woolworths Limited.

The Company’s performance is given a percentile ranking having regard to its TSR performance compared with the TSR performance of other companies in the relevant comparator group. This is done in respect of each grant of performance rights. The TSR performance conditions in relation to the 2004, 2005 and proposed 2006 grants of performance rights are:

Percentage of shares available in Target given year that vests The Company’s annual TSR is less than the median TSR of the comparator companies 0% The Company’s annual TSR equals or exceeds performance of the median TSR 50% of the comparator companies The Company’s annual TSR ranks in third quartile of the comparator companies Pro rata between 50% and 100% (2% increase for each higher ranking) The Company’s annual TSR ranks in fourth quartile of the comparator companies 100% As noted above, the EPS growth requirement was introduced in 2005 for half of the performance rights and is a requirement in relation to the proposed grant of performance rights for 2006. The Company applied this performance requirement because: • as an absolute measure, it provides management with a performance goal over which they can directly exert some control; • it provides a very good ‘line of sight’ between the actions of senior executives and the Company’s results; and • it is directly correlated with shareholder returns, so complements the relative TSR performance requirement.

Report+Accounts 2006 49

Annual Report 2006

Directors’ report – remuneration report continued

EPS performance requirements are reviewed prior to each year’s requirements under the proposed 2006 grant in comparison to allocation of performance rights. The range of EPS growth refl ects the 2005 grant recognise both the reality of likely business cycle the Company’s view of what is a reasonable target value. For the conditions as well as the signifi cant upside potential the Company proposed 2006 grant, the EPS compound growth requirement has for further earnings growth. will start at 8.0%, but will not allow full vesting unless EPS growth EPS performance requirements for each grant are shown in the reaches 12.0%. The Board believe the changes in the EPS growth table below:

Percentage of shares in tranche available in Proposed 2006 performance given year that vests 2005 performance rights EPS target rights EPS target 0% The Company’s compound EPS growth (tested over The Company’s 3 year compound EPS growth 1, 2, 3 and 4 years) is less than 8.5% is less than 8.0% 25% The Company’s compound EPS growth (tested over The Company’s 3 year compound EPS growth 1, 2, 3 and 4 years) equals 8.5% equals 8.0% Pro rata between The Company’s compound EPS growth (tested over The Company’s 3 year compound EPS growth 25% and 100% 1, 2, 3 and 4 years) is between 8.5% and 10.5% is between 8.0% and 12% 100% The Company’s compound EPS growth (tested over The Company’s 3 year compound EPS growth 1, 2, 3 and 4 years) equal to or exceeding 10.5% equal to or exceeding 12%

In relation to the 2004 and 2005 grants of performance rights, Performance rights will lapse in accordance with the terms of grant performance conditions were tested at the end of the 2006 if performance hurdles are not achieved or if participants resign fi n ancial year. Based on the EPS growth and the relative TSR of prior to the completion of required vesting periods. the Company for the 2006 fi nancial year, no performance rights Where a participant leaves the Company as a result of death, vested on 1 July 2006 under either grant. The next testing of the disability, retrenchment, or other reason with the approval of the performance hurdles in respect of the 2004 and 2005 grants will Board, subject to performance hurdles being met, the Board may occur on 30 June 2007. determine the extent to which performance rights granted to the In the case of the 2004 and 2005 grants of performance rights, participant vest. executives are not entitled to trade in shares allocated on vesting In the event of a takeover for the Company, performance rights of the performance rights until the earlier to occur of: may, at the discretion of the Board, vest on a pro rata basis in • three years after the date of grant of the shares allocated on accordance with an assessment of performance on the same vesting; or performance criteria, but with the performance period pro rated to • 12 months following the date of cessation of employment with the date of the takeover offer. the consolidated entity. A discussion of the Company’s performance, specifi cally against In the case of the proposed 2006 grant of performance rights, the Company’s earnings and the consequences of the Company’s executives are not entitled to trade in shares allocated on vesting performance on shareholder wealth in the period from 2 April 2004 of the performance rights until the earliest to occur of: to 30 June 2004 and the 2005 and 2006 fi nancial years, is set out in section 1 of this report. • a request from the relevant executive to the Board to release the holding lock; or Vesting of rights • 10 years after the date of grant of the shares allocated on Details of the number of performance rights which have been vesting; or granted and the extent (if any) to which they have vested are set out in the table following. The Company values and discloses all • six months following the date of cessation of employment with performance rights granted under the PRP in accordance with the consolidated entity. relevant Australian Accounting Standards. While the shares are restricted from trading, the Company’s Guidelines for Dealing in Securities prohibit executives from entering into a transaction to limit the economic risk of such shares, whether through a derivative, hedge or other similar arrangement without the prior written approval of the Chief Executive Offi cer or the Board. To date no such approval has been sought or given.

50 Pacifi c Brands Annual Report 2006

Equity grants made to executive directors and senior executives2 Nature of compensation/ Effective Percentage Percentage Future Minimum Maximum instrument granted date of of grant of grant fi n ancial years total value total value grant paid/vested forfeited that grant will of grant of grant1 (%) (%) be payable ($) ($) Executive directors P. R . Moore, 500,000 performance rights 01/07/2004 Nil Nil 2007 – 2008 Nil 800,000 Chief Executive Offi cer 125,000 performance rights 01/07/2005 Nil Nil 2007 – 2009 Nil 168,750 S.J. Tierney, 300,000 performance rights 01/07/2004 Nil Nil 2007 – 2008 Nil 480,000 Group General Manager, 75,000 performance rights 01/07/2005 Nil Nil 2007 – 2009 Nil 101,250 Operations Senior executives S.W. Audsley 250,000 performance rights 01/07/2004 Nil Nil 2007 – 2008 Nil 400,000 62,500 performance rights 01/07/2005 Nil Nil 2007 – 2009 Nil 84,375

I. C. Barton 200,000 performance rights 01/07/2004 Nil Nil 2007 – 2008 Nil 320,000 50,000 performance rights 01/07/2005 Nil Nil 2007 – 2009 Nil 67,500 M.S. Daniel 200,000 performance rights 01/07/2004 Nil Nil 2007 – 2008 Nil 320,000 M.J. Ford 200,000 performance rights 01/07/2004 Nil Nil 2007 – 2008 Nil 320,000 50,000 performance rights 01/07/2005 Nil Nil 2007 – 2009 Nil 67,500 M.E. Keely 200,000 performance rights 01/07/2004 Nil Nil 2007 – 2008 Nil 320,000 50,000 performance rights 01/07/2005 Nil Nil 2007 – 2009 Nil 67,500 S.M. Morphet 250,000 performance rights 01/07/2004 Nil Nil 2007 – 2008 Nil 400,000 62,500 performance rights 01/07/2005 Nil Nil 2007 – 2009 Nil 84,375

1 The notional value of performance rights as at the date of their grant has been determined in accordance with AASB 124 applying AASB 2 Valuation Guidelines and Guidance Note GN510 issued by the Institute of Actuaries of Australia (further details of the valuation methodology can be found in Note 28 (b) to the fi nancial statements). The notional value in respect of the grant having an effective date of 1 July 2004 is $1.60 per share. The notional value in respect of the grant having an effective date of 1 July 2005 is $1.35 per share. 2 A total of 2,500,000 performance rights were granted under the 2004 issue of performance rights and to date none of these performance rights have vested. A total of 525,000 performance rights were granted under the 2005 issue of performance rights and to date none of these performance rights have vested. The terms and conditions attached to the 2004 and 2005 performance rights grants are set out on pages 95 and 96 in this Annual Report.

Report+Accounts 2006 51

Annual Report 2006

Directors’ report – remuneration report continued

During the fi nancial year, the Company has not granted any options or rights in addition to the performance rights granted on TBA (and summarised in the previous table). The following table set out details of any movement in performance rights currently on issue to the Chief Executive Offi cer, Group General Manager, Operations and senior executives and the number of performance rights held by such persons during the reporting period. Number and value of performance rights held by executive directors and senior executives Vested at 30/06/2006 Balance at Granted Exercised Lapsed/ Balance at Aggregate Vested and Vested Total 01/07/2005 forfeited 30/06/2006 value total at exercisable but not vested 30/06/2006 exercisable Executive Directors P. R . Moore Number 500,000 125,000 Nil Nil 625,000 Nil Nil Nil Value $800,000 $168,750 $968,750 S.J. Tierney Number 300,000 75,000 Nil Nil 375,000 Nil Nil Nil Value $480,000 $101,250 $581,250 Senior Executives S.W. Audsley Number 250,000 62,500 Nil Nil 312,500 Nil Nil Nil Value $400,000 $84,375 $484,375 I.C. Barton Number 200,000 50,000 Nil Nil 250,000 Nil Nil Nil Value $320,000 $67,500 $387,500 M.S. Daniel Number 200,000 Nil Nil Nil 200,000 Nil Nil Nil Value $320,000 $320,000 M.J. Ford Number 200,000 50,000 Nil Nil 250,000 Nil Nil Nil Value $320,000 $67,500 $387,500 M.E. Keely Number 200,000 50,000 Nil Nil 250,000 Nil Nil Nil Value $320,000 $67,500 $387,500 S.M. Morphet Number 250,000 62,500 Nil Nil 312,500 Nil Nil Nil Value $400,000 $84,375 $484,375 Total – senior directors and executives Number 2,100,000 475,000 Nil Nil 2,575,000 Nil Nil Nil Value $3,360,000 $641,250 $4,001,250

E. Service agreements The remuneration and other terms of employment for the Chief at the end of the fi nancial year. The Board similarly reviews the Executive Offi cer, Group General Manager, Operations and the objectives of the other senior executives. Performance against those senior executives are formalised in service agreements. Each criteria is reviewed by the relevant senior executive’s manager. of these agreements provides for the payment of a fi xed annual General information regarding the duration of the agreement, the remuneration component comprising of a base salary, car allowance periods of notice required to terminate the agreement and the and superannuation contributions, the provision of performance termination payments provided for under the service agreements related cash bonuses (as disclosed on pages 46 and 47 in this are summarised in the discussion below. Further specifi c report), and participation in the Company’s employee long term information relating to the terms of the Service Agreements of the incentive scheme (as disclosed on pages 47 to 50 in this report). Chief Executive Offi cer, the Group General Manager, Operations Each year, the Board agrees criteria for the evaluation of the Chief and the executives of the Company and the consolidated entity Executive Offi cer and reviews performance against those criteria with the highest remuneration are set out in the table on page 53.

52 Pacifi c Brands Annual Report 2006

Duration of service agreement Exchange, the Company will be deemed to have terminated the The Chief Executive Offi cer and the Group General Manager, employment of the Chief Executive Offi cer and will be liable to Operations are employed under fi xed term agreements of fi ve make compensation payments. years and three years respectively. Under the terms of the service Upon termination of employment for any reason, the Chief agreements, each executive’s employment will terminate on the Executive Offi cer and the Group General Manager, Operations are expiry date of the agreement unless terminated earlier or renewed. both prohibited from engaging in any activity that would compete All other senior executives are employed under agreements that with the Company for a period of one year, in order to protect the are ongoing unless terminated by either party. Company’s business interests. In order to ensure that the restraint Notice periods and payments on termination is enforceable by the Company, both the Chief Executive Offi cer The service agreements provide for termination payments to and the Group General Manager, Operations are entitled to an be made in certain circumstances. In particular, the Company amount equal to one year of their fi xed annual remuneration as at may terminate the employment of the Chief Executive Offi cer, the time of termination of their employment. The Company makes Group General Manager, Operations or any of the other senior provision for employee benefi ts in accordance with applicable executives on giving three months notice. The Company may Australian Accounting Standards. make a payment in lieu of notice not to exceed one year’s fi xed Sign-on payments annual remuneration plus a pro rata part of the current STI (cash No payment was made to the Chief Executive Offi cer, the Group bonus), based on the performance of the relevant executive General Manager, Operations or any of the other senior executives against the annual target applicable at that time. In general, the of the Company and the consolidated entity before they took offi ce Chief Executive Offi cer, Group General Manager, Operations and as part consideration for them agreeing to hold offi ce. other executives must give the Company at least three months Summary of specifi c terms notice of resignation. In the event that the Chief Executive Offi cer The major provisions of the service agreements of the Chief ceases to be the most senior executive in the consolidated entity Executive Offi cer and the senior executives of the Company and or the Company ceases to be listed on the Australian Stock the consolidated entity with the highest remuneration are as follows:

P.R. Moore S.J. Tierney S.W. Audsley I.C. Barton M.S. Daniel M.J. Ford M.E. Keely S.M. Morphet Chief Group General Executive Manager, Offi c er Operations Date of agreement 24/02/2004 24/02/2004 03/03/2004 03/03/2004 03/03/2004 03/03/2004 03/03/2004 03/03/2004 Term of agreement 5 years 3 years 1 year 1 year 1 year 1 year 1 year 1 year Renewal of agreement Not applicable Not applicable Automatic Automatic Automatic Automatic Automatic Automatic extension of extension of extension of extension of extension of extension of agreement agreement agreement agreement agreement agreement on 1 year on 1 year on 1 year on 1 year on 1 year on 1 year anniversary anniversary anniversary anniversary anniversary anniversary of agreement of agreement of agreement of agreement of agreement of agreement

Report+Accounts 2006 53

Annual Report 2006

Directors’ report – remuneration report continued

F. Remuneration paid and other specifi c disclosures Details of the remuneration paid to the Chief Executive Offi cer, the Group General Manager, Operations and each of the six named executives of the Company and the consolidated entity with the highest remuneration during the 2006 fi nancial year are set out in the following table. All values are in Australian dollars unless otherwise stated. Remuneration for 2006 fi nancial year Chief Executive Offi cer, Group General Manager Operations and other senior executives of the Company and the consolidated entity Short term employee benefi ts Post employment benefi ts Share based Termination Total payments benefi ts Fixed Fees Incentive Non- Super- Retire- Other Performance salary1 payments monetary annuation ment rights2 benefi ts3 benefi ts payments $ $ $ $ $ $ $ $ $ $ P. R . Moore, 2006 1,066,968 46,357 206,788 323,259 1,643,372 Chief Executive Offi cer 2005 696,230 46,357 160,729 302,053 1,205,369 S.J. Tierney, 2006 421,002 31,350 94,034 193,955 740,341 Group General Manager, 2005 362,044 31,350 84,204 181,232 658,830 Operations S.W. Audsley, 2006 307,975 64,007 59,487 161,629 593,098 Chief Financial Offi cer 2005 320,483 30,772 57,951 151,027 560,233 I.C. Barton, 2006 320,665 30,250 70,200 129,303 550,418 Group General Manager, 2005 277,108 30,250 60,725 120,821 488,904 Home Comfort M.S. Daniel 2006 331,929 31,623 29,100 103,750 496,402 General Manager, 2005 304,099 25,000 28,125 120,821 478,045 Supply Chain M.J. Ford, 2006 343,512 4 5 ,808 36,350 75,200 129,303 630,173 Group General Manager, 2005 261,408 36,350 60,538 120,821 479,117 Footwear M.E. Keely 2006 254,448 25,000 60,800 129,303 469,551 General Manager, 2005 228,991 23,333 52,007 120,821 425,152 People & Performance S.M. Morphet, 2006 292,251 97,098 54,451 161,629 605,429 Group General Manager, 2005 312,795 62,667 57,835 151,027 584,324 Underwear & Hosiery Group Total remuneration – senior executives 2006 3,338,750 4 5 ,808 362,035 650,060 1,332,131 5,728,784 2005 2,763,158 286,079 562,114 1,268,623 4,879,974

1 Includes movements in annual leave and long service leave provisions. 2 To the extent required by the Australian Accounting Standards, remuneration includes a proportion of the notional value of equity compensation granted or outstanding during the fi nancial year. The notional value of equity instruments which do not vest during the reporting period is required to be determined as at the grant date and is progressively allocated over the vesting period. The amount included as remuneration is not related to or indicative of the benefi t (if any) that individual executives may ultimately realise should the equity instruments vest. The notional value of performance rights as at the date of their grant has been determined in accordance with AASB 124 applying AASB 2 Valuation Guidelines and Guidance Note GN510 issued by the Institute of Actuaries of Australia. The notional value in respect of the grant having an effective date of 1 July 2004 is $1.60 per share. The notional value in respect of the grant having an effective date of 1 July 2005 is $1.35 per share. None of the Chief Executive Offi cer’s, Group General Manager, Operation’s or other senior executives’ remuneration for the fi nancial year ended 30 June 2006 consisted of performance rights which vested in the relevant executive. 3 Amounts disclosed for remuneration of senior executives exclude insurance premiums paid by the consolidated entity in respect of directors’ and offi cers’ liability insurance contracts which cover current and former directors and offi cers, including, among others, the named senior executives. Due to confi dentiality obligations and undertakings of the policy, the premium paid cannot be disclosed No amount has not been allocated to the individuals covered by the insurance policy as, based on all available information, the directors believe that no reasonable basis for such allocation exists.

54 Pacifi c Brands Annual Report 2006

G. Audit of remuneration report This Remuneration Report has been audited in conjunction with the audit of the Financial Statements forming part of the Annual Report.

Dated at Melbourne this 23rd day of August 2006.

Signed in accordance with a resolution of the directors:

Pat Handley Paul Moore Chairman Director

Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001

To: the Directors of Pacifi c Brands Limited

I declare that, to the best of my knowledge and belief, in relation to the audit for the fi nancial year ended 30 June 2006 there have been: • no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and • no contraventions of any applicable code of professional conduct in relation to the audit.

KPMG Don Pasquariello Partner Melbourne, 23rd day of August 2006

Report+Accounts 2006 55 Annual Report 2006

Financial Report to Shareholders

Income Statements

for the year ended 30 June 2006 Consolidated The Company Note 2006 2005 2006 2005 $’000 $’000 $’000 $’000 Sales revenue 2 1,624,878 1,521,724 – – Cost of sales (961,912) (908,480) – – Gross profi t 662,966 613,244 – – Other income 2 17,189 17,099 77,500 62,422 Freight and distribution expenses (111,906) (97,146) – – Sales, marketing and advertising expenses (288,005) (257,954) – – Information technology expenses (21,510) (19,537) – – Administrative expenses (85,719) (81,022) (3,226) (4,301) Results from operating activities 173,015 174,684 74,274 58,121 Financial income 2,174 1,839 100 287 Financial expenses (37,717) (34,471) – – Net fi nancing costs 3 (35,543) (32,632) 100 287 Profi t before income tax (expense)/benefi t 137,472 142,052 74,374 58,408 Income tax (expense)/benefi t 5 (36,106) (41,037) 459 750 Profi t for the year 101,366 101,015 74,833 59,158 Profi t attributable to minority interest 22 (155) (113) – – Profi t attributable to equity holders of the parent 20 101,211 100,902 74,833 59,158

Basic and diluted earnings per share Ordinary shares 6 20.1 cents 20.1 cents

The Income Statements are to be read in conjunction with the Notes to the Financial Statements set out on pages 62 to 104.

56 Pacifi c Brands Annual Report 2006

Financial Report to Shareholders

Balance Sheets

as at 30 June 2006 Consolidated The Company Note 2006 2005 2006 2005 $’000 $’000 $’000 $’000 Current assets Cash and cash equivalents 8 94,025 101,106 487 2,365 Trade and other receivables 9 211,402 191,435 26,076 23,106 Inventories 10 296,501 255,396 – – Other current assets 11 7,064 7,339 – 2 Total current assets 608,992 555,276 26,563 25,473

Non-current assets Trade and other receivables 9 214 – 1,203,714 1,203,714 Property, plant and equipment 12 167,086 152,297 – – Intangible assets 13 1,297,330 1,227,069 – – Deferred tax assets 14 32,185 31,847 5,964 9,061 Other non-current assets 11 1,979 5,441 – – Total non-current assets 1,498,794 1,416,654 1,209,678 1,212,775 Total assets 2,107,786 1,971,930 1,236,241 1,238,248

Current liabilities Trade and other payables 15 126,782 115,486 140 22 Interest-bearing loans and borrowings 16 1,642 638 – – Income tax payable 3,903 10,189 8,585 11,231 Provisions 17 54,705 53,648 – 384 Total current liabilities 187,032 179,961 8,725 11,637

Non-current liabilities Trade and other payables 15 9,983 11,106 – – Interest-bearing loans and borrowings 16 601,643 491,926 – – Provisions 17 10,522 11,022 – – Total non-current liabilities 622,148 514,054 – – Total liabilities 809,180 694,015 8,725 11,637 Net assets 1,298,606 1,277,915 1,227,516 1,226,611

Equity Issued capital 18 1,220,446 1,220,446 1,220,446 1,220,446 Reserves 19 (6,806) (1,345) 3,075 1,510 Retained earnings 20 80,202 54,484 3,995 4,655 Total equity attributable to equity holders of the parent 1,293,842 1,273,585 1,227,516 1,226,611 Minority interest 22 4,764 4,330 – – Total equity 1,298,606 1,277,915 1,227,516 1,226,611

The Balance Sheets are to be read in conjunction with the Notes to the Financial Statements set out on pages 62 to 104.

Report+Accounts 2006 57 Annual Report 2006

Financial Report to Shareholders

Cash Flow Statements

for the year ended 30 June 2006 Consolidated The Company Note 2006 2005 2006 2005 $’000 $’000 $’000 $’000 Cash fl ows from operating activities Cash receipts from customers 1,535,692 1,442,267 – 766 Cash paid to suppliers and employees (1,377,484) (1,291,179) (7,593) (22,314) Dividends received – – 77,500 62,417 Income taxes paid (37,862) (31,277) (7,623) (8,174) Reimbursements received from tax consolidated entities – – 11,231 11,141 Interest paid (34,240) (31,741) – – Interest received 2,313 1,701 100 287 Net cash from operating activities 27(b) 88,419 89,771 73,615 44,123

Cash fl ows from investing activities Proceeds from sale of property, plant and equipment 1,457 1,920 – – Payments for controlled entities (net of cash acquired) 26 (64,702) (5,611) – – Payments for acquisition of businesses (net of cash acquired) 26 (15,216) (6,492) – – Acquisition of property, plant and equipment (21,598) (18,903) – – Net cash from investing activities (100,059) (29,086) – –

Cash fl ows from fi nancing activities Lease payments (1,945) (770) – – Dividends paid by parent (75,493) (55,344) (75,493) (55,344) Repayment of borrowings (28,675) – – – Proceeds from borrowings 111,804 396 – – Net cash from fi nancing activities 5,691 (55,718) (75,493) (55,344) Net (decrease)/increase in cash and cash equivalents (5,949) 4,967 (1,878) (11,221) Cash and cash equivalents at the beginning of the year 101,106 97,723 2,365 13,586 Effects of exchange rate fl uctuations on cash held (1,132) (1,584) – – Cash and cash equivalents at the end of the year 27(a) 94,025 101,106 487 2,365

The Cash Flow Statements are to be read in conjunction with the Notes to the Financial Statements set out on pages 62 to 104.

58 Pacifi c Brands Annual Report 2006

Financial Report to Shareholders

Consolidated Statements of Changes in Equity

for the year ended 30 June 2006 Issued Retained Equity Foreign Hedge Total equity Minority Total capital earnings compen- currency reserve attributable interest equity sation translation to equity reserve reserve holders of the parent $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 Balance at 1 July 2004 1,220,446 8,926 – 1,693 – 1,231,065 4,677 1,235,742 Foreign exchange translation differences – – – (4,548) – (4,548) (460) (5,008) Total expense for the period recognised directly in equity – – – (4,548) – (4,548) (460) (5,008) Profi t for the year – 100,902 – – – 100,902 113 101,015 Total recognised income/ (expense) for the year – 100,902 – (4,548) – 96,354 (347) 96,007 Dividends recognised during the year – (55,344) – – – (55,344) – (55,344) Share based payments – – 1,510 – – 1,510 – 1,510 Balance at 30 June 2005 1,220,446 54,484 1,510 (2,855) – 1,273,585 4,330 1,277,915 Change in accounting policy application of AASB 132 and AASB 139 – refer Note 33 – – – – (2,781) (2,781) – (2,781) Restated balance at 1 July 2005 1,220,446 54,484 1,510 (2,855) (2,781) 1,270,804 4,330 1,275,134 Movement in foreign currency hedge reserve – – – – 3,117 3,117 – 3,117 Foreign exchange translation differences – – – (7,362) – (7,362) 279 (7,083) Total (expense)/income for the period recognised directly in equity – – – (7,362) 3,117 (4,245) 279 (3,966) Profi t for the year – 101,211 – – – 101,211 155 101,366 Total recognised income/ (expense) for the year – 101,211 – (7,362) 3,117 96,966 434 97,400 Dividends recognised during the year – (75,493) – – – (75,493) – (75,493) Share based payments – – 1,565 – – 1,565 – 1,565 Balance at 30 June 2006 1,220,446 80,202 3,075 (10,217) 336 1,293,842 4,764 1,298,606

The Consolidated Statements of Changes in Equity are to be read in conjunction with the Notes to the Financial Statements set out on pages 62 to 104.

Report+Accounts 2006 59 Annual Report 2006

Financial Report to Shareholders

Company Statements of Changes in Equity

for the year ended 30 June 2006 Issued Retained Equity Total capital earnings compen- equity sation reserve $’000 $’000 $’000 $’000 Balance at 1 July 2004 1,220,446 841 – 1,221,287 Profi t for the year – 59,158 – 59,158 Total recognised income for the year – 59,158 – 59,158 Dividends recognised during the year – (55,344) – (55,344) Cost of share based payments – – 1,510 1,510 Balance at 30 June 2005 1,220,446 4,655 1,510 1,226,611

Balance at 1 July 2005 1,220,446 4,655 1,510 1,226,611 Profi t for the year – 74,833 – 74,833 Total recognised income for the year – 74,833 – 74,833 Dividends recognised during the year – (75,493) – (75,493) Cost of share based payments – – 1,565 1,565 Balance at 30 June 2006 1,220,446 3,995 3,075 1,227,516

The Company Statements of Changes in Equity are to be read in conjunction with the Notes to the Financial Statements set out on pages 62 to 104.

60 Pacifi c Brands Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements

For the year ended 30 June 2006 Note 1 Signifi cant accounting policies 62 2 Revenue and other income 72 3 Other expenses 72 4 Auditors’ remuneration 73 5 Income tax expense/(benefi t) 74 6 Earnings per share 75 7 Segment reporting 75 8 Cash and cash equivalents 77 9 Trade and other receivables 78 10 Inventories 78 11 Other assets 78 12 Property, plant and equipment. 79 13 Intangible assets 80 14 Recognised deferred tax assets and liabilities 81 15 Payables 82 16 Interest-bearing loans and borrowings 82 17 Provisions 83 18 Contributed equity 83 19 Nature of reserves 84 20 Retained earnings 84 21 Dividends 84 22 Minority interest 85 23 Additional fi n ancial instruments disclosure 86 24 Commitments 89 25 Controlled entities 90 26 Acquisitions 91 27 Notes to the statements of cash fl ows 92 28 Employee benefi ts 92 29 Key management personnel disclosures 97 30 Non-key management personnel disclosures 99 31 Events subsequent to reporting date 99 32 Explanation of transition to AIFRSs 99 33 Changes in accounting policy 104

Report+Accounts 2006 61 Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 1 Signifi cant accounting policies

Pacifi c Brands Limited (the ‘Company’) is a company domiciled (December 2004) and AASB 2005-3 Amendments to Australian in Australia. The consolidated Financial Report of the Company Accounting Standards (June 2005) amending AASB 119 Employee for the year ended 30 June 2006 comprises the Company and its Benefi ts (either July or December 2004). controlled entities (together referred to as the ‘consolidated entity’). The following AASBs and amendments were available for This Financial Report was authorised for issue by the directors on early adoption but have not been applied by the company and 23 August 2006. consolidated entity in these fi nancial statements:

(a) Statement of compliance • AASB 7 Financial Instruments: Disclosures (August 2005) The Financial Report is a general purpose fi nancial report which has replacing the presentation requirements of fi nancial instruments been prepared in accordance with Australian Accounting Standards in AASB 132 Financial Instruments: Presentation. AASB 7 is (‘AASBs’), adopted by the Australian Accounting Standards Board applicable for annual reporting periods beginning on or after and the Corporations Act 2001. International Financial Reporting 1 January 2007 Standards (‘IFRSs’) form the basis of AASBs adopted by the • AASB 2005-9 Amendments to Australian Accounting Australian Accounting Standards Board, and for the purpose of Standards (September 2005) requires that liabilities arising from this report are called Australian equivalents to IFRSs (‘AIFRSs’) to the issue of fi nancial guarantee contracts are recognised in the distinguish from previous Australian Generally Accepted Accounting balance sheet. AASB 2005-9 is applicable for annual reporting Principles (‘GAAP’). periods beginning on or after 1 January 2006 • AASB 2005-10 Amendments to Australian Accounting This is the consolidated entity’s fi rst fi nancial report prepared Standards (September 2005) makes consequential in accordance with AASBs, being AIFRSs, and AASB 1 First- amendments to AASB 132 Financial Instruments: Presentation, time Adoption of Australian Equivalents to International Financial AASB 101 Presentation of Financial Statements, AASB 114 Reporting Standards has been applied. An explanation of how the Segment Reporting, AASB 117 Leases, AASB 133 Earnings transition to AIFRSs has affected the reported balance sheet and per Share, AASB 139 Financial Instruments: Recognition fi n ancial performance of the consolidated entity and the Company and Measurement, AASB 1 First-time Adoption of Australian is provided in Note 32. This Note includes reconciliations of equity Equivalents to International Financial Reporting Standards, and profi t or loss for comparative years reported under previous AASB 4 Insurance Contracts, AASB 1023 General Insurance Australian GAAP to those reported for those years under AIFRSs. Contracts and AASB 1038 Life Insurance Contracts, arising (b) Basis of preparation from the release of AASB 7 Financial Instruments: Disclosures. This Financial Report is presented in Australian dollars. AASB 2005-10 is applicable for annual reporting periods This Financial Report is prepared on the historical cost basis except beginning on or after 1 January 2007 that derivative fi nancial instruments are stated at their fair value. • AASB 2004-3 Amendments to Australian Accounting Standards (December 2004) amending AASB 1 First-time The Company is of a kind referred to in Australian Securities and Adoption of Australian Equivalents to International Financial Investment Commission (‘ASIC’) Class Order 98/100 dated 10 Reporting Standards (July 2004), AASB 101 Presentation of July 1998 (updated by CO 05/641 effective 28 July 2005 and Financial Statements and AASB 124 Related Party Disclosures CO 06/51 effective 31 January 2006) and in accordance with • AASB 2005-1 Amendments to Australian Accounting that Class Order, amounts in this Financial Report and Directors’ Standards (May 2005) amending AASB 139 Financial Report have been rounded off to the nearest thousand dollars, Instruments: Recognition and Measurement unless otherwise stated. • AASB 2005-4 Amendments to Australian Accounting Standards The preparation of a fi nancial report in conformity with AASBs (June 2005) amending AASB 139 Financial Instruments: requires management to make judgements, estimates and Recognition and Measurement, AASB 132 Financial Instruments: assumptions that affect the application of policies and reported Presentation, AASB 1 First-time Adoption of Australian Equivalents amounts of assets and liabilities, income and expenses. The to International Financial Reporting Standards (July 2004), estimates and associated assumptions are based on historical AASB 1023 General Insurance Contracts and AASB 1038 experience and various other factors that are believed to be Life Insurance Contracts reasonable under the circumstances, the results of which form the • AASB 2005-5 Amendments to Australian Accounting Standards basis of making the judgements about carrying values of assets (June 2005) amending AASB 1 First-time Adoption of Australian and liabilities that are not readily apparent from other sources. Equivalents to International Financial Reporting Standards Actual results may differ from these estimates. These accounting (July 2004), and AASB 139 Financial Instruments: Recognition policies have been consistently applied by each entity in and Measurement the consolidated entity. The consolidated entity has elected to early adopt the following revised accounting standards: AASB 119 Employee Benefi ts

62 Pacifi c Brands Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 1 Signifi cant accounting policies (continued)

(b) Basis of preparation (continued) (c) Principles of consolidation • AASB 2005-6 Amendments to Australian Accounting Standards Controlled entities (June 2005) amending AASB 3 Business Combinations Controlled entities are entities controlled by the Company. Control • AASB 2006-1 Amendments to Australian Accounting exists when the Company has the power, directly or indirectly, to Standards (January 2006) amending AASB 121 The Effects govern the fi nancial and operating policies of an entity so as to of Changes in Foreign Exchange Rates (July 2004) obtain benefi ts from its activities. In assessing control, potential • UIG 4 Determining whether an Arrangement contains a Lease voting rights that presently are exercisable or convertible are • UIG 8 Scope of AASB 2. taken into account. The fi nancial statements of controlled entities The initial application of AASB 7 Financial Instruments: Disclosures are included in this Financial Report from the date that control (August 2005) and AASB 2005-10 Amendments to Australian commences until the date that control ceases. Accounting Standards (September 2005) is not expected to Transactions eliminated on consolidation have an impact on the fi nancial results of either the Company or Intragroup balances, and any unrealised gains and losses or the consolidated entity as the standard and the amendment are revenues and expenses arising from intragroup transactions, concerned only with disclosures. are eliminated in preparing the consolidated fi nancial statements. The initial application of AASB 2005-9 Amendments to Australian Unrealised losses are eliminated in the same way as unrealised Accounting Standards (August 2005) could have an impact on the gains, but only to the extent that there is no evidence of impairment. fi n ancial results of the Company and the consolidated entity as the amendment could result in liabilities being recognised for fi nancial (d) Revenue recognition guarantee contracts that have been provided by the Company and Revenues are recognised at fair value of the consideration the consolidated entity. However, the quantifi cation of the impact received, net of the amount of goods and services tax (‘GST’) is not known or reasonably estimable in the current year as an payable to the relevant taxation authority. exercise to quantify the fi nancial impact has not been undertaken Sale of goods by the Company and the consolidated entity to date. Revenue from the sale of goods (net of returns, discounts and Except for the change in accounting policy relating to classifi cation allowances) is recognised in the Income Statement when the signifi cant and measurement of fi nancial instruments (refer Note 33), the risks and rewards of ownership have been transferred to the buyer. accounting policies set out below have been applied consistently No revenue is recognised if there are signifi cant uncertainties regarding to all years presented in these fi nancial statements. They also have recovery of the consideration due, the costs incurred or to be incurred been applied in preparing an opening AIFRS balance sheet at cannot be measured reliably, there is a risk of return of goods or there 1 July 2004 for the purposes of the transition to AASBs – AIFRSs, is continuing management involvement with the goods as required by AASB 1. The impact of the transition from previous Dividends Australian GAAP to AIFRSs is explained in Note 32. Where Dividend revenue is recognised net of any franking credits. relevant, the accounting policies applied to the comparative year Revenue from distributions from controlled entities is recognised by have been disclosed if they differ from the current year policy. the Company when they are declared by the controlled entities. The accounting policies have been applied consistently throughout Dividends received out of pre-acquisition reserves are eliminated the consolidated entity for purposes of this Financial Report. against the carrying amount of the investment and are not recognised in revenue.

Other income Government grants Revenue from government grants is recognised when the consolidated entity has complied with the conditions attaching to the grant and has reasonable assurance that the grant will be received. Sale of non-current assets The profi t on disposal of non-current assets is included in other income of the consolidated entity and is brought to account at the date control of the asset passes to the buyer, usually when an unconditional contract of sale is signed. The gain or loss on disposal is calculated as the difference between the carrying amount of the asset at the time of the disposal and the net proceeds on disposal.

Report+Accounts 2006 63 Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 1 Signifi cant accounting policies (continued)

(e) Net fi n ancing costs Tax consolidation Net fi nancing costs comprise interest payable on borrowings The Company and its wholly-owned Australian resident entities calculated using the effective interest rate method, interest receivable have formed a tax consolidated group with effect from April 2004 on funds invested and gains and losses on hedging instruments that and are therefore taxed as a single entity from that date. The head are recognised in the Income Statement (refer Note 1(v)). Borrowing entity within the tax consolidated group is Pacifi c Brands Limited. costs are expensed as incurred and included in net fi nancing costs. Current tax expense/income, deferred tax liabilities and deferred Interest income is recognised in the Income Statement as it accrues, tax assets arising from temporary differences of the members of using the effective interest rate method. the tax consolidated group are recognised in the separate fi nancial statements of the members of the tax consolidated group using (f) Goods and services tax the ‘group allocation’ method consistent with UIG 1052 Tax Revenues, expenses and assets are recognised net of the Consolidation Accounting. amount of GST, except where the amount of GST incurred is not recoverable from the relevant taxation authorities. In these Any current tax liabilities (or assets) and deferred tax assets arising circumstances, the GST is recognised as part of the cost of from unused tax losses of the subsidiaries is assumed by the acquisition of the asset or as part of an item of the expense. head entity in the tax-consolidated group and are recognised as amounts payable (receivable) to (from) other entities in the Receivables and payables are stated with the amount of GST included. tax-consolidated group in conjunction with any tax funding The net amount of GST recoverable from, or payable to, the relevant arrangement amount (refer below). taxation authority is included as a current asset or liability in the balance sheet. Nature of tax funding arrangements and tax sharing agreements The members of the tax consolidated group have entered into a Cash fl ows are included in the cash fl ow statement on a gross tax funding arrangement which sets out the funding obligations basis. The GST components of cash fl ows arising from investing of members of the tax consolidated group in respect of tax and fi nancing activities which are recoverable from, or payable to, amounts. The tax funding arrangements require payments the relevant tax authority are classifi ed as operating cash fl ows. to/from the head entity equal to the current tax liability/(asset) (g) Income tax assumed by the head entity and any tax-loss deferred tax asset Income tax on the profi t or loss for the years presented comprises assumed by the head entity. current and deferred tax. Income tax is recognised in the Income The members of the tax consolidated group have also entered into Statement except to the extent that it relates to items recognised a tax sharing agreement. The tax sharing agreement provides for directly in equity, in which case it is recognised in equity. the determination of the allocation of income tax liabilities between Current tax is the expected tax payable on the taxable income for the entities should the head entity default on its tax payment the year, using tax rates enacted or substantially enacted at the obligations. No amounts have been recognised in the fi nancial balance sheet date, and any adjustment to tax payable in respect statements in respect of this agreement as payment of any of previous years. amounts under the tax sharing agreement is considered remote.

Deferred tax is provided using the tax balance sheet method, (h) Earnings per share providing for temporary differences between the carrying amounts of Basic earnings per share is calculated by dividing the profi t assets and liabilities for fi nancial reporting purposes and the amounts attributable to equity holders of the parent for the reporting used for taxation purposes. The following temporary differences are period, after excluding any costs of servicing, by the weighted not provided for: goodwill, the initial recognition of assets or liabilities average number of ordinary shares of the Company, adjusted that affect neither accounting nor taxable profi t, and differences for any bonus issue. relating to investments in controlled entities to the extent that they will probably not reverse in the foreseeable future. The amount of (i) Receivables deferred tax provided is based on the expected manner of realisation Current period policy or settlement of the carrying amount of assets and liabilities, using tax Trade and other receivables are stated at their amortised cost less rates enacted or substantively enacted at the balance sheet date. impairment losses (refer Note 1(n)). A deferred tax asset is recognised only to the extent that it is probable Comparative period policy that future taxable profi ts will be available against which the asset can Trade debtors are recognised as at the date goods are shipped to be utilised. Deferred tax assets are reduced to the extent that it is no the customer and are principally on 30 day terms. The collectibility longer probable that the related tax benefi t will be realised. of debts is assessed at reporting date and specifi c allowance is made when collection is no longer probable.

64 Pacifi c Brands Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 1 Signifi cant accounting policies (continued)

(j) Inventories Operating leases Inventories are carried at the lower of cost and net realisable Payments made under operating leases are expensed on a value. Cost includes direct materials, direct labour, other direct straight line basis over the term of the lease, except where an variable costs and allocated production overheads necessary to alternative basis is more representative of the pattern of benefi ts bring inventories to their present location and condition, based on to be derived from the leased property. normal operating capacity of the production facilities. Depreciation and amortisation Manufacturing activities Items of property, plant and equipment are depreciated over their The costs of manufacturing inventories and work in progress are estimated useful lives as set out below. assigned on a fi rst-in, fi rst-out basis. Costs arising from exceptional Depreciation and amortisation are calculated on a straight line wastage are expensed as incurred. basis so as to write off the cost of each item of property, plant and Net realisable value equipment, excluding land, over its estimated useful life. Net realisable value is determined on the basis of each inventory The expected useful lives, in the current and comparative periods, line’s normal selling pattern. Expenses of marketing, selling and are as follows: distribution to customers are estimated and are deducted to • freehold buildings: 40 years; establish net realisable value. • leasehold improvements: life of lease; and Obsolete and slow moving stocks are allowed for, to ensure the • owned and leased plant and equipment: 3 to 10 years. inventories are recorded at net realisable value where such value is below cost. The residual value, the useful life and the depreciation method applied to an asset are reassessed at least annually. (k) Investments (m) Intangible assets Controlled entities Brandnames Investments in controlled entities are carried in the Company’s The carrying value of brandnames is reviewed at least at each fi n ancial statements at the lower of cost and recoverable amount reporting date to determine whether it is in excess of its recoverable (refer Note 1(n)). amount. (l) Property, plant and equipment If the carrying amount exceeds its recoverable amount, the asset is Owned assets written down to the lower amount, through a charge to the Income Items of property, plant and equipment are stated at cost Statement. less accumulated depreciation and impairment (refer Note No amortisation is allowed for against the carrying value of these 1(n)). The cost of self-constructed assets includes the cost of brandnames on the basis that the lives of these assets are materials, direct labour, the initial estimate, where relevant, of the considered indefi nite at this point in time, as they are not currently costs of dismantling and removing the items and restoring the associated with products which are likely to become commercially site on which they are located, and an appropriate proportion or technically obsolete. of production overheads. Software Leased assets Software that is acquired by the consolidated entity is stated Leases under which the consolidated entity assumes substantially at cost less accumulated amortisation and impairment losses. all the risks and benefi ts of ownership are classifi ed as fi nance Amortisation is charged to the Income Statement on a straight-line leases. Other leases are classifi ed as operating leases. basis over the estimated useful life.

Finance leases A lease asset and a lease liability equal to fair value of the leased property or if lower the present value of the minimum lease payments determined at the inception of the lease. Lease liabilities are reduced by repayments of principal. The interest components of the lease payments are expensed. Contingent rentals are expensed as incurred.

Report+Accounts 2006 65 Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 1 Signifi cant accounting policies (continued)

(n) Impairment from historical experience adjusted for any effects of conditions The carrying amounts of the consolidated entity’s assets, other existing at each balance date. than inventories (refer Note 1(j)) and deferred tax assets (refer The recoverable amount of other assets is the greater of their Note 1(g)), are reviewed at each reporting date to determine fair value less costs to sell, and value in use. In assessing value whether there is any indication of impairment. If any such indication in use, the estimated future cash fl ows are discounted to their exists, the asset’s recoverable amount is estimated (refer Note 1(n)(i)). present value using a pre-tax discount rate that refl ects current For goodwill and assets that have an indefi nite useful life, the market assessments of the time value of money and the risks recoverable amount is estimated annually. specifi c to the asset. For an asset that does not generate An impairment loss is recognised whenever the carrying amount of largely independent cash infl ows, the recoverable amount an asset or cash generating unit exceeds its recoverable amount. is determined for the cash generating unit to which the Impairment losses are recognised in the Income Statement asset belongs. unless the asset has previously been revalued, in which case (ii) Reversals of impairment the impairment loss is recognised as a reversal to the extent of Impairment losses, other than in respect of goodwill, are that previous revaluation with any excess recognised through reversed when there is an indication that the impairment loss the Income Statement. may no longer exist and there has been a change in the Impairment losses recognised in respect of a cash generating unit estimate used to determine the recoverable amount. are allocated fi rst to reduce the carrying amount of any goodwill An impairment loss in respect of a held-to-maturity security or allocated to the cash generating unit (group of units) and then, receivable carried at amortised cost is reversed if the subsequent to reduce the carrying amount of the other assets in the unit increase in recoverable amount can be related objectively to an (group of units) on a pro rata basis. event occurring after the impairment loss was recognised. Goodwill and indefi nite-lived intangible assets were tested for An impairment loss in respect of an investment in an equity impairment at 1 July 2004, the date of transition to AIFRSs, even instrument classifi ed as available-for-sale is not reversed through though no indication of impairment existed. the Income Statement. If the fair value of a debt instrument When a decline in the fair value of an available-for-sale fi nancial classifi ed as available-for-sale increases and the increase can be asset has been recognised directly in equity and there is objectively related to an event occurring after the impairment loss objective evidence that the asset is impaired, the cumulative was recognised in the Income Statement, the impairment loss shall loss that had been recognised directly in equity is recognised in be reversed, with the amount of the reversal recognised in the the Income Statement even though the fi nancial asset has not Income Statement. been derecognised. The amount of the cumulative loss that is An impairment loss in respect of goodwill is not reversed. recognised in the Income Statement is the difference between In respect of other assets, an impairment loss is reversed if the acquisition cost and current fair value, less any impairment there has been a change in the estimates used to determine the loss on that fi nancial asset previously recognised in the recoverable amount. Income Statement. An impairment loss is reversed only to the extent that the asset’s (i) Calculation of recoverable amount carrying amount does not exceed the carrying amount that would The recoverable amount of the consolidated entity’s receivables have been determined, net of depreciation or amortisation, if no carried at amortised cost is calculated as the present value of impairment loss had been recognised. estimated future cash fl ows, discounted at the original effective interest rate (i.e. the effective interest rate computed at initial (iii) Derecognition of fi nancial assets and liabilities recognition of these fi nancial assets). Receivables with a short A fi nancial asset (or, where applicable, a part of a fi nancial asset duration are not discounted. or part of a group of similar fi nancial assets) is derecognised when: Impairment of receivables is not recognised until objective • the rights to receive cash fl ows from the asset have expired; evidence is available that a loss event has occurred. Signifi cant • the Company and consolidated entity retain the right to receive receivables are individually assessed for impairment. Impairment cash fl ows from the asset, but have assumed an obligation to testing of signifi cant receivables that are not assessed as pay them in full without material delay to a third party; or impaired individually is performed by placing them into portfolios of signifi cant receivables with similar risk profi les and undertaking a collective assessment of impairment. Non-signifi cant receivables are not individually assessed. Instead, impairment testing is performed by placing non-signifi cant receivables in portfolios of similar risk profi les, based on objective evidence

66 Pacifi c Brands Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 1 Signifi cant accounting policies (continued)

(n) Impairment (continued) Long service leave (iii) Derecognition of fi nancial assets and liabilities (continued) The provision for employee benefi ts to long service leave • the Company or consolidated entity have transferred their represents the present value of the estimated future cash outfl ows rights to receive cash fl ows from the asset and either (a) have to be made by the consolidated entity resulting from employees’ transferred substantially all the risks and rewards of the asset, services provided up to the reporting date. or (b) have neither transferred nor retained substantially all the The provision is calculated using expected future increases in risks and rewards of the asset, but have transferred control wage and salary rates including related on-costs and expected of the asset. settlement dates based on turnover history and is discounted A fi nancial liability is derecognised when the obligation under using the rates attaching to national government bonds at the liability is discharged, cancelled or expired. When an existing reporting date which most closely match the terms of maturity fi n ancial liability is replaced by another from the same lender on of the related liabilities. The unwinding of the discount is treated substantially different terms, or the terms of an existing liability are as long service leave expense substantially modifi ed, such an exchange or modifi cation is treated Superannuation plans as a derecognition of the original liability and the recognition of a The consolidated entity contributes to various defi ned benefi t and new liability. The difference in the respective carrying amounts is defi ned contribution superannuation plans. Employer contributions recognised in the Income Statement. to these plans are recognised as an expense as they are made. (o) Payables Defi ned benefi t plans Current period policy The consolidated entity’s net obligation in respect of defi ned Trade and other payables are stated at their amortised cost. benefi t superannuation plans is calculated separately for each plan by estimating the amount of future benefi t that employees have Comparative period policy earned in return for their service in the current and prior years; that Trade and other payables are recognised for amounts to be paid benefi t is discounted to determine its present value, and the fair in the future for goods and services received. Trade liabilities are value of any plan assets deducted. normally settled on terms up to 60 days. The discount rate is the yield at the balance sheet date on national (p) Interest-bearing loans and borrowings government bonds that have maturity dates approximating to the Current period policy terms of the consolidated entity’s obligations. The calculation is Interest-bearing loans and borrowings are recognised initially at performed by a qualifi ed actuary using the projected unit credit fair value less attributable transaction costs. Subsequent to initial method. recognition, interest-bearing loans and borrowings are stated at When employee benefi ts under the plan are improved, the amortised cost with any difference between cost and redemption proportion of the increased benefi t relating to past service value being recognised in the Income Statement over the period by employees is recognised as an expense in the Income of the loans or borrowings on an effective interest rate basis. Statement on a straight line basis over the average period until the benefi ts become vested. To the extent that the benefi ts Comparative period policy vest immediately, the expense is recognised immediately in Bank loans are carried at their principal amount, subject to set-off the Income Statement. arrangements. Interest expense is accrued at the contracted rate and included in other creditors and accruals. Where the calculation results in a net benefi t to the consolidated entity, the recognised asset is limited to the net total of any (q) Employee benefi ts unrecognised past service costs and the present value of any Wages, salaries and annual leave future refunds from the plan or reductions in future contributions Liabilities for employee benefi ts for wages, salaries and annual to the plan. leave represent the present obligations resulting from employees’ Actuarial gains and losses that arise subsequent to 1 July 2004 services provided up to the reporting date. The provisions have in calculating the consolidated entity’s obligation in respect of a been calculated at undiscounted amounts based on expected plan, to the extent that any cumulative unrecognised actuarial wage and salary rates that the consolidated entity expects to pay gain or loss exceeds 10 per cent of the greater of the present as at reporting date and include related on-costs, such as workers’ value of the defi ned benefi t obligation and the fair value of plan compensation insurance and payroll tax. assets, that portion is recognised in the Income Statement over the expected average remaining working lives of the active employees participating in the plan. Otherwise, the actuarial gain or loss is not recognised.

Report+Accounts 2006 67 Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 1 Signifi cant accounting policies (continued)

(r) Share based payments (t) Accounting for acquisitions The Company has introduced a number of share plans pursuant to Business combinations which senior executives and directors may acquire shares. The fair Business combinations prior to 1 July 2004 value of performance rights granted is recognised as an employee Goodwill is included on the basis of its deemed cost, which expense with a corresponding increase in equity. The fair value is represents the amount recorded under previous Australian measured at grant date and spread over the period during which GAAP. The classifi cation and accounting treatment of business the employees become unconditionally entitled to the performance combinations that occurred prior to 1 July 2004 have not been rights. The fair value of the performance rights granted is measured reconsidered in preparing the consolidated entity’s opening AIFRS using a Monte-Carlo simulation model, taking into account the Balance Sheet at 1 July 2004. terms and conditions upon which the options were granted. The Business combinations since 1 July 2004 amount recognised as an expense is adjusted to refl ect the actual All business combinations are accounted for by applying the number of performance rights that vest except where forfeiture is purchase method. Goodwill represents the difference between only due to share prices not achieving the threshold for vesting. the cost of the acquisition and the fair value of the net identifi able (s) Provisions assets acquired. A provision is recognised when there is a legal, equitable or Goodwill is stated at cost less any accumulated impairment losses. constructive obligation as a result of a past event and it is probable Goodwill is allocated to cash generating units and is no longer that a future sacrifi ce of economic benefi ts will be required to settle amortised but is tested annually for impairment (refer Note 1(n)). the obligation, the timing or amount of which is uncertain. Negative goodwill arising on an acquisition is recognised directly If the effect is material, a provision is determined by discounting in the Income Statement. the expected future cash fl ows (adjusted for expected future (u) Foreign currency risks) required to settle the obligation at a pre-tax rate that refl ects current market assessments of the time value of money and the Transactions risks specifi c to the liability, being risk-free rates on government Transactions in foreign currencies are translated at the foreign bonds most closely matching the expected future payments, exchange rate ruling at the date of the transaction. Monetary except where noted below. The unwinding of the discount is assets and liabilities denominated in foreign currencies at the treated as part of the expense related to the particular provision. balance sheet date are translated to Australian dollars at the foreign exchange rate ruling at that date. Foreign exchange Dividends differences arising on translation are recognised in the Income A provision for dividends payable is recognised in the reporting Statement. Non-monetary assets and liabilities that are measured period in which the dividends are declared, for the entire in terms of historical cost in a foreign currency are translated using undistributed amount, regardless of the extent to which they the exchange rate at the date of the transaction. Non-monetary will be paid in cash. assets and liabilities denominated in foreign currencies that are Restructuring stated at fair value are translated to Australian dollars at foreign Provisions for restructuring or termination benefi ts are only exchange rates ruling at the dates the fair value was determined. recognised when a detailed plan has been approved and the Translation of controlled foreign operations restructuring or termination benefi t has either commenced or been The assets and liabilities of foreign operations, including goodwill publicly announced, or fi rm contracts related to the restructuring and fair value adjustments arising on consolidation, generally or termination benefi ts have been entered into. Costs related to are translated to Australian dollars at foreign exchange rates ongoing activities are not provided for. ruling at the balance sheet date. The revenues and expenses Surplus lease space of foreign operations are translated to Australian dollars at rates Provision is made for non-cancellable operating lease rentals approximating the foreign exchange rates ruling at the dates of the payable on surplus leased premises when it is determined that no transactions. Foreign exchange differences arising on retranslation substantive future benefi t will be obtained from its occupancy and are recognised directly in a separate component of equity. sub-lease rentals are less. Net investment in foreign operations The estimate is calculated based on discounted net future cash Exchange differences arising from the translation of the net fl o ws, using the interest rate implicit in the lease or an estimate investment in foreign operations, and of related hedges, are taken thereof. to the foreign currency translation reserve. They are released into the Income Statement upon disposal. In respect of all foreign operations, any differences are presented as a separate component of equity.

68 Pacifi c Brands Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 1 Signifi cant accounting policies (continued)

(v) Derivative fi n ancial instruments that were recognised directly in equity are reclassifi ed into the Current period policy Income Statement in the same period or periods during which the The consolidated entity uses derivative fi nancial instruments to asset acquired or liability assumed affects the Income Statement hedge its exposure to foreign exchange and interest rate risks arising (i.e. when interest income or expense is recognised). from operating, investing and fi nancing activities. In accordance For cash fl ow hedges, other than those covered by the preceding with its treasury policy, the consolidated entity does not hold or two policy statements, the associated cumulative gain or loss is issue derivative fi nancial instruments for trading purposes. However, removed from equity and recognised in the Income Statement derivatives that do not qualify for hedge accounting are accounted for in the same period or periods during which the hedged forecast as trading instruments. transaction affects the Income Statement. The ineffective part Derivative fi nancial instruments are recognised initially at fair value. of any gain or loss is recognised immediately in the Income Subsequent to initial recognition, derivative fi nancial instruments Statement. are stated at fair value. The gain or loss on remeasurement to When a hedging instrument expires or is sold, terminated fair value is recognised immediately in the Income Statement. or exercised, or the entity revokes designation of the hedge However, where derivatives qualify for hedge accounting, relationship but the hedged forecast transaction still is expected recognition of any resultant gain or loss depends on the nature to occur, the cumulative gain or loss at that point remains in equity of the item being hedged. and is recognised in accordance with the above policy when the The fair value of interest rate swaps is the estimated amount that transaction occurs. If the hedged transaction is no longer expected the consolidated entity would receive or pay to terminate the swap to take place, then the cumulative unrealised gain or loss at the balance sheet date, taking into account current interest recognised in equity is recognised immediately in the rates and the current creditworthiness of the swap counterparties. Income Statement. The fair value of forward exchange contracts is their quoted market Hedge of monetary assets and liabilities price at the balance sheet date, being the present value of the When a derivative fi nancial instrument is used to hedge quoted forward price. economically the foreign exchange exposure of a recognised Hedging monetary asset or liability, hedge accounting is not applied and On entering into a hedging relationship, the consolidated entity any gain or loss on the hedging instrument is recognised in the formally designates and documents the hedge relationship and Income Statement. the risk management objective and strategy for undertaking the Hedge of net investment in foreign operation hedge. The documentation includes identifi cation of the hedging The portion of the gain or loss on an instrument used to hedge instrument, the hedged item or transaction, the nature of the a net investment in a foreign operation that is determined to be risk being hedged and how the entity will assess the hedging an effective hedge is recognised directly in equity. The ineffective instrument’s effectiveness in offsetting the exposure to changes portion is recognised immediately in the Income Statement. in the hedged item’s fair value or cash fl ows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash fl ows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the fi nancial reporting periods for which they are designated. Cash fl ow hedges Where a derivative fi nancial instrument is designated as a hedge of the variability in cash fl ows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the derivative fi nancial instrument is recognised directly in equity. When the forecast transaction subsequently results in the recognition of a non-fi nancial asset or non-fi nancial liability, or the forecast transaction for a non-fi nancial asset or non-fi nancial liability, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non-fi nancial asset or liability. If a hedge of a forecast transaction subsequently results in the recognition of a fi nancial asset or a fi nancial liability, then the associated gains and losses

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Financial Report to Shareholders

Notes to the Financial Statements 1 Signifi cant accounting policies (continued)

(v) Derivative fi nancial instruments (continued) Comparative period policy are only deferred where the original anticipated transaction is still The consolidated entity is exposed to changes in interest rates and expected to occur as designated. When the original anticipated foreign exchange rates from its activities. The consolidated entity transaction is no longer expected to occur as designated, any uses the following derivative fi nancial instruments to hedge these gains or losses relating to the hedge instrument are included in risks: interest rate swaps, forward foreign exchange contracts and the Income Statement for the period. foreign currency options. Derivative fi nancial instruments are not Gains or losses that arise prior to and upon the maturity of held for speculative purposes. transactions entered into under hedge rollover strategies are Cash fl ow hedges deferred and included in the measurement of the hedged anticipated Transactions are designated as a hedge of the anticipated specifi c transaction if the transaction is still expected to occur as designated. purchase or sale of goods or services or purchase of qualifying If the anticipated transaction is no longer expected to occur as assets, only when they are expected to reduce exposure to the designated, the gains or losses are recognised immediately in the risks being hedged, and are designated prospectively so that it Income Statement. is clear when an anticipated transaction has or has not occurred Net investment in foreign operation and it is probable the anticipated transaction will occur as Foreign exchange differences relating to foreign currency designated. Gains or losses on the hedge arising up to the date transactions hedging a net investment in a self-sustaining foreign of the anticipated transaction, together with any costs or gains operation, together with any related income tax expense/benefi t, arising at the time of entering into the hedge, are deferred and are transferred to the foreign currency translation reserve on included in the measurement of the anticipated transaction when consolidation. the transaction has occurred as designated. Any gains or losses Other hedges on the hedge transaction after that date are included in the Income All other hedge transactions are initially recorded at the relevant Statement. rate at the date of the transaction. Hedges outstanding at reporting The net amounts payable or receivable under forward foreign date are valued at the rates ruling on that date and any gains or exchange contracts and the associated deferred gains or losses losses are brought to account in the Income Statement. are recorded on the Balance Sheet from the date of inception Costs or gains arising at the time of entering into the hedge are of the hedge transaction. When recognised, the net payable or deferred and amortised over the life of the hedge. receivable is revalued using the foreign currency rates current at reporting date. The net amounts payable or receivable under interest rate and foreign currency options and the associated deferred gains or losses are not recorded on the Balance Sheet until the hedge transaction occurs. When recognised, the net payable or receivable is revalued using the interest or foreign currency rates current at reporting date. Option premiums are recorded in other assets when paid and included in the measurement of the transaction when it occurs. When the anticipated transaction is no longer expected to occur as designated, the deferred gains or losses relating to the hedged transaction are recognised immediately in the Income Statement. Where a hedge transaction is terminated early and the anticipated transaction is still expected to occur as designated, the deferred gains or losses that arose on the hedge prior to its termination continue to be deferred and are included in the measurement of the purchase or sale or interest transaction when it occurs. Where a hedge transaction is terminated early because the anticipated transaction is no longer expected to occur as designated, deferred gains or losses that arose on the hedge prior to its termination are included in the Income Statement for the period. Where a hedge is redesignated as a hedge of another transaction, gains or losses arising on the hedge prior to its redesignation

70 Pacifi c Brands Annual Report 2006

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Notes to the Financial Statements 1 Signifi cant accounting policies (continued)

(w) Accounting estimates and judgements The preparation of the fi nancial report requires the making of estimations and assumptions that affect the recognised amounts of assets, liabilities, revenues and expenses and the disclosure of contingent liabilities. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The estimates and judgements that have a signifi cant risk of causing an adjustment to the carrying amounts of assets and liabilities within the next fi nancial year are discussed below.

Defi ned benefi t superannuation plan assumptions The consolidated entity has decided on a rate of return on assets of 6.5% (the discount rate) because this is the average premium achieved over the last three years. If this were to reduce, then the consolidated entity’s unrecognised actuarial gains would increase with the risk that they would fall outside the corridor and would be recognised in the Income Statement and Balance Sheet in 2007.

Impairment of goodwill and intangible assets with indefi nite useful lives The consolidated entity assesses whether goodwill and intangible assets with indefi nite useful lives are impaired at least annually (refer Note 13). These calculations involve an estimation of the recoverable amount of the cash generating units to which the goodwill and intangible assets with indefi nite useful lives are allocated.

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Financial Report to Shareholders

Notes to the Financial Statements 2 Revenue and other income Consolidated The Company 2006 2005 2006 2005 $’000 $’000 $’000 $’000 Sales revenue 1,624,878 1,521,724 – –

Other income Royalties – other parties 805 643 – – Dividends – controlled entities – – 77,500 62,417 Net foreign exchange gain – 193 – – Net gain on disposal of non-current assets 1,561 161 – – Sundry income 14,823 16,102 – 5 Total other income 17,189 17,099 77,500 62,422 Total revenue and other income 1,642,067 1,538,823 77,500 62,422

3 Other expenses

Depreciation of: Buildings 2,499 1,446 – – Plant and equipment 12,742 10,311 – – 15,241 11,757 – – Amortisation of: Software 2,832 2,847 – – Leased plant and equipment 1,230 551 – – 4,062 3,398 – – Total depreciation and amortisation 19,303 15,155 – – Net fi nancing costs: Financial income (2,174) (1,839) (100) (287) Interest on bank loans and overdraft 36,644 33,404 – – Amortisation of debt establishment costs – 902 – – Finance charges on capitalised leases 1,073 165 – – 35,543 32,632 (100) (287) Impairment loss on trade debtors 1,417 546 – – Amounts set aside to allow for: Doubtful debts 1,040 434 – – Rebates, trade allowances, claims and settlement discounts 101,837 79,310 – –

Personnel expenses: Wages and salaries 284,373 260,688 – – Contributions to defi ned contributions superannuation plans 21,018 18,944 – – Defi ned benefi t superannuation expense 1,430 2,141 – – Leave entitlements 28,552 29,020 – – Other employee costs 16,281 16,677 – – Share based payments 1,565 1,510 1,565 1,510 353,219 328,980 1,565 1,510

Net foreign exchange loss 1,009 – – –

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Financial Report to Shareholders

Notes to the Financial Statements 4 Auditors’ remuneration Consolidated The Company 2006 2005 2006 2005 $ $ $ $ Audit services Auditors of the Company KPMG Australia Audit and review of fi nancial reports 1,065,000 1,040,000 55,000 50,000 Overseas KPMG fi rms Audit of fi nancial reports 230,000 195,000 – – 1,295,000 1,235,000 55,000 50,000

Other services Auditors of the Company KPMG Australia Taxation services 210,070 131,765 – – Other assurance services 12,695 65,148 – – Overseas KPMG fi rms Taxation services 20,043 24,987 – – Other assurance services 7,036 36,510 – – 249,844 258,410 – –

It is the Company’s policy to employ KPMG on assignments additional to its statutory audit duties where KPMG’s expertise with the Company is important. Approval for these assignments is required from the Audit, Business Risk and Compliance Committee; the assignments are principally related to tax advice and assurance services relating to debt covenants and regulatory requirements.

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Financial Report to Shareholders

Notes to the Financial Statements 5 Income tax expense/(benefi t) Consolidated The Company Note 2006 2005 2006 2005 $’000 $’000 $’000 $’000 Current income tax expense/(benefi t) Current year 35,193 32,814 (3,564) (3,616) Adjustments for prior year (2,483) (1,964) – – Deferred income tax expense/(benefi t) Origination and reversal of temporary differences 3,396 10,187 3,105 2,866 Total income tax expense/(benefi t) in the Income Statements 36,106 41,037 (459) (750)

Numerical reconciliation between income tax expense/(benefi t) and profi t before income tax Profi t before income tax 137,472 142,052 74,374 58,408 Income tax using the domestic corporation tax rate of 30% 41,241 42,615 22,312 17,522 Increase in income tax expense due to: Share based payments 469 453 469 453 Decrease in income tax expense due to: Non-assessable dividend income – – (23,250) (18,725) Sundry items (3,121) (67) 10 – Under/(over) provided in prior year (2,483) (1,964) – – Income tax expense/(benefi t) on profi t before income tax 36,106 41,037 (459) (750)

Deferred tax recognised directly in equity Relating to derivative fi nancial instruments 1(v) 1,336 – – –

Current income tax liability The current tax liability for the consolidated entity of $3.9 million (2005: $10.2 million) and for the Company of $8.6 million (2005: $11.2 million) represent the amount of income taxes payable in respect of current and prior fi nancial periods. In accordance with the tax consolidation legislation, the Company as the head entity of the Australian tax consolidated group has assumed the current tax liability initially recognised by the members in the tax consolidated group.

74 Pacifi c Brands Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 6 Earnings per share Consolidated 2006 2005 $’000 $’000 Earnings reconciliation Profi t for the year 101,366 101,015 Less minority interest (155) (113) Basic earnings 101,211 100,902

Consolidated 2006 2005 Number Number Weighted average number of shares used as the denominator Number for basic earnings per share Ordinary shares 503,000,003 503,000,003

There are no dilutive potential ordinary shares; therefore, basic and diluted earnings per share are the same.

7 Segment reporting

Segment information is presented in respect of the consolidated entity’s business and geographical segments. The primary format, business segments, is based on the consolidated entity’s management and internal reporting structure. Intersegment pricing is determined on an arm’s length basis. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Segment capital expenditure is the total cost incurred during the year to acquire segment assets that are expected to be used for more than one year. Primary reporting: business segments The consolidated entity comprises the following main business segments, based on the consolidated entity’s management reporting system:

Underwear & Hosiery Marketer, distributor, importer and manufacturer of underwear, intimate apparel, socks and hosiery. Outerwear & Sport Marketer, distributor, importer and manufacturer of casual outerwear, workwear, sports clothing, sports footwear and sporting equipment. Home Comfort Marketer, distributor, manufacturer and importer of mattresses, pillows, bed linen, bedding accessory products and foam. Footwear Marketer, distributor, importer and manufacturer of women’s, men’s and children’s footwear. Other Retail clearance outlets and administration functions.

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Notes to the Financial Statements 7 Segment reporting (continued) Underwear Outerwear Home & Hosiery & Sport Comfort Footwear Other Eliminations1 Consolidated $’000 $’000 $’000 $’000 $’000 $’000 $’000 2006 Revenue External segment revenue 617,876 249,533 448,889 282,161 43,608 – 1,642,067 Intersegment revenue 7 98 – 449 765 (1,319) – Total segment revenue 617,883 249,631 448,889 282,610 44,373 (1,319) 1,642,067 Result Segment result 87,644 22,271 36,529 35,693 (9,122) – 173,015 Net fi nancing costs (35,543) Income tax expense (36,106) Net profi t 101,366 Depreciation and amortisation 6,662 1,671 6,056 1,371 3,543 – 19,303 Segment assets 335,273 106,723 259,603 104,720 1,453,219 (151,752) 2,107,786 Segment liabilities 67,065 67,593 176,863 29,889 619,522 (151,752) 809,180 Acquisition of non-current assets 7,403 3,056 92,124 2,172 4,543 – 109,298

2005 Revenue External segment revenue 652,862 254,166 309,377 276,741 45,677 – 1,538,823 Intersegment revenue – 108 – 1,815 – (1,923) – Total segment revenue 652,862 254,274 309,377 278,556 45,677 (1,923) 1,538,823 Result Segment result 99,638 20,574 33,312 31,487 (10,327) – 174,684 Net fi nancing costs (32,632) Income tax expense (41,037) Net profi t 101,015 Depreciation and amortisation 5,882 1,090 3,973 1,063 3,147 – 15,155 Segment assets 314,114 101,549 130,838 89,044 1,399,565 (63,180) 1,971,930 Segment liabilities 68,533 70,616 69,556 32,847 515,643 (63,180) 694,015 Acquisition of non-current assets 15,462 1,672 6,035 1,298 1,061 – 25,528

1 Segment revenue, results, assets and liabilities are determined before the effects of consolidation eliminations, except where transactions are between entities in a single segment.

76 Pacifi c Brands Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 7 Segment reporting (continued)

Secondary reporting: geographical segments In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of the assets: Australia Manufacturing facilities, distribution facilities and sales offi ces New Zealand Manufacturing facilities, distribution facilities and sales offi ces Rest of world Manufacturing facilities, distribution facilities and sales offi ces

Australia New Zealand Rest of world Consolidated $’000 $’000 $’000 $’000 2006 External segment revenue by location of customers 1 , 410,438 136,714 94,915 1,642,067 Segment assets by location of assets 1 , 843,994 178,410 85,382 2,107,786 Acquisition of non-current assets 90,644 11,556 7,098 109,298

2005 External segment revenue by location of customers 1 , 312,516 141,038 85,269 1,538,823 Segment assets by location of assets 1 , 727,938 178,666 65,326 1,971,930 Acquisition of non-current assets 23,269 1,643 616 25,528

8 Cash and cash equivalents Consolidated The Company Note 2006 2005 2006 2005 $’000 $’000 $’000 $’000 Cash on hand 465 162 – – Cash at bank 91,132 37,014 487 2,365 Bank short term deposits 2,428 63,930 – – 27(a) 94,025 101,106 487 2,365

The bank short term deposit matures within 45 days and interest is paid at a weighted average interest rate of 4.7% per annum (2005: 5.4% per annum).

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Financial Report to Shareholders

Notes to the Financial Statements 9 Trade and other receivables Consolidated The Company Note 2006 2005 2006 2005 $’000 $’000 $’000 $’000 Current Trade debtors 212,554 195,903 – – Less allowance for doubtful trade debtors (1,999) (2,310) – – Less allowance for rebates, trade allowances, claims and settlement discounts (22,638) (18,866) – – 187,917 174,727 – – Amounts owing by controlled entities – – 26,068 23,103 Other debtors 23,485 16,708 8 3 211,402 191,435 26,076 23,106

Non-current Amounts owing by controlled entities 30 – – 1,203,714 1,203,714 Other debtors 214 – – – 214 – 1,203,714 1,203,714

Other debtor amounts generally arise from transactions outside the usual operating activities of the consolidated entity.

10 Inventories

Raw materials and stores 41,247 42,012 – – Work in progress 15,190 14,867 – – Finished goods 240,064 198,517 – – 296,501 255,396 – –

11 Other assets

Current Prepayments 7,064 7,339 – 2

Non-current Other investments 1,979 1,926 – – Deferred debt establishment costs – 4,635 – – Accumulated amortisation – (1,120) – – 1,979 5,441 – –

The consolidated entity has elected to apply the requirements of AASB 132 Financial Instruments: Presentation and AASB 139 Financial Instruments: Recognition and Measurement from 1 July 2005. As a result, deferred establishment costs have been recalculated on the effective interest rate method and recognised as part of the interest bearing liability (refer Notes 16 and 33).

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Financial Report to Shareholders

Notes to the Financial Statements 12 Property, plant and equipment Consolidated The Company 2006 2005 2006 2005 $’000 $’000 $’000 $’000 Freehold land At cost 31,413 29,916 – – Freehold buildings At cost 30,528 30,423 – – Accumulated depreciation (1,644) (931) – – 28,884 29,492 – – Leasehold improvements At cost 14,497 7,899 – – Accumulated amortisation (3,319) (853) – – 11,178 7,046 – – Plant and equipment At cost 106,721 87,842 – – Accumulated depreciation (23,380) (12,299) – – 83,341 75,543 – – Leased plant and equipment At capitalised cost 5,610 2,669 – – Accumulated amortisation (1,586) (601) – – 4,024 2,068 – – Capital works in progress 8,246 8,232 – – Total property, plant and equipment at net book value 167,086 152,297 – –

Reconciliation A reconciliation of the carrying amounts for each class of property, plant and equipment is set out below: Leased Capital Freehold Freehold Leasehold Plant and plant and works in land buildings improvements equipment equipment progress Total $000 $000 $000 $000 $000 $000 $000 Consolidated 2006 Carrying amount at the beginning of the year 29,916 29,492 7,046 75,543 2,068 8,232 152,297 Acquisitions through business combinations – – 2,857 4,151 – 2,516 9,524 Additions 3,004 – 40 1,709 3,775 17,330 25,858 Transfer from/(to) capital works in progress 190 379 3,020 16,484 (309) (19,764) – Disposals (1,540) – (10) (1,393) (288) – (3,231) Depreciation and amortisation – (739) (1,760) (12,742) (1,230) – (16,471) Effects of movements in foreign exchange (157) (248) (15) (411) 8 (68) (891) Carrying amount at the end of the year 31,413 28,884 11,178 83,341 4,024 8,246 167,086

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Financial Report to Shareholders

Notes to the Financial Statements 12 Property, plant and equipment (continued) Leased Capital Freehold Freehold Leasehold Plant and plant and works in land buildings improvements equipment equipment progress Total $000 $000 $000 $000 $000 $000 $000 Consolidated 2005 Carrying amount at the beginning of the year 30,008 30,250 6,818 74,689 1,958 3,578 147,301 Acquisitions through business combinations – – – – – – – Additions – – – 615 961 18,288 19,864 Transfer from/(to) capital works in progress – 122 1,263 12,362 (113) (13,634) – Disposals – – – (1,578) (181) – (1,759) Depreciation and amortisation – (756) (690) (10,311) (551) – (12,308) Effects of movements in foreign exchange (92) (124) (345) (234) (6) – (801) Carrying amount at the end of the year 29,916 29,492 7,046 75,543 2,068 8,232 152,297

13 Intangible assets Consolidated Brand Goodwill Names Software Total $’000 $’000 $’000 $’000 Balance at 1 July 2004 824,783 375,000 24,549 1,224,332 Acquisitions through business combinations 5,664 – – 5,664 Amortisation for the year – – (2,847) (2,847) Effect of movements in foreign exchange (80) – – (80) Balance at 30 June 2005 830,367 375,000 21,702 1,227,069 Acquisitions through business combinations 43,355 30,561 – 73,916 Amortisation for the year – – (2,832) (2,832) Effect of movements in foreign exchange 173 (996) – (823) Balance at 30 June 2006 873,895 404,565 18,870 1,297,330

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Financial Report to Shareholders

Notes to the Financial Statements 13 Intangible assets (continued)

Impairment tests for cash generating units containing goodwill The following units have signifi cant carrying amounts of indefi nite life intangible assets. Consolidated Goodwill Brandnames 2006 2005 2006 2005 $’000 $’000 $’000 $’000 Pacifi c Brands Group 832,169 830,367 381,565 375,000 Sheridan 41,726 – 23,000 – 873,895 830,367 404,565 375,000

The recoverable amount of the Pacifi c Brands Group cash generating unit is based on value in use calculations. Those calculations use cash fl ow projections based on actual operating results and cash fl ows for a further 5 year period which are extrapolated using a growth rate appropriate for markets and industries in which Pacifi c Brands Group operates. A pre-tax discount rate of 11.3% has been used in discounting the projected cash fl ows. The recoverable amount of the Sheridan cash generating unit is based on value in use calculations. Those calculations use cash fl ow projections based on actual operating results and cash fl ows for a further 5 year period which are extrapolated using a growth rate appropriate for markets in which Sheridan operates. A pre-tax discount rate of 11.3% has been used in discounting the projected cash fl ows.

14 Recognised deferred tax assets and liabilities

Deferred tax assets and liabilities are attributable to the following: Assets Liabilities Net 2006 2005 2006 2005 2006 2005 $’000 $’000 $’000 $’000 $’000 $’000 Consolidated Receivables 1,177 560 – – 1,177 560 Inventories 4,035 3,452 – 4,035 3,452 Property, plant and equipment – – (813) (2,212) (813) (2,212) Provisions for employee benefi ts 15,063 15,999 – – 15,063 15,999 Other provisions 5,180 2,585 – – 5,180 2,585 Transaction costs 5,964 8,946 – – 5,964 8,946 Other items1 1,579 2,517 – – 1,579 2,517 Tax assets/(liabilities) 32,998 34,059 (813) (2,212) 32,185 31,847 Set off of tax (813) (2,212) 813 2,212 – – Net tax assets/(liabilities) 32,185 31,847 – – 32,185 31,847

The Company Provisions for employee benefi ts – 115 – – – 115 Transaction costs 5,964 8,946 – – 5,964 8,946 Tax assets/(liabilities) 5,964 9,061 – – 5,964 9,061 Set off of tax – – – – – – Net tax assets/(liabilities) 5,964 9,061 – – 5,964 9,061

1 Includes a deferred tax asset of $0.1 million (2005: $nil) relating to derivative fi nancial instruments recognised directly in equity.

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Financial Report to Shareholders

Notes to the Financial Statements 15 Payables Consolidated The Company 2006 2005 2006 2005 $’000 $’000 $’000 $’000 Current Trade creditors 107,334 102,358 140 22 Other creditors and accruals 19,448 13,128 – – 126,782 115,486 140 22

Non-current Other creditors 9,983 11,106 – –

16 Interest-bearing loans and borrowings

Current Lease liabilities 1,642 638 – –

Non-current Bank loans – secured1 599,287 490,396 – – Lease liabilities 2,356 1,530 – – 601,643 491,926 – –

1 Includes deferred borrowing costs in accordance with the requirements of AASB 139 Financial Instruments: Recognition and Measurement (refer Note 33). Bank overdrafts The bank overdraft facility of a controlled entity, overdraft limit $40 million, is secured by a guarantee from the Company. This facility is undrawn at year end. Interest on bank overdrafts is charged at prevailing market rates. The weighted average interest rate for all overdrafts as at 30 June 2006 is 6.6% per annum (2005: 6.6% per annum). The total bank overdraft is also secured by a fl oating charge over the assets of the Australian and New Zealand controlled entities with a carrying amount of $2,022 million (2005: $1,864 million). The bank overdrafts are payable on demand and are subject to annual review. Finance lease liability The consolidated entity’s lease liabilities are secured by the leased assets of $4 million as in the event of default, the assets revert to the lessor. Finance lease liabilities of the consolidated entity are payable as follows: Minimum Minimum lease lease payments Interest Principal payments Interest Principal 2006 2006 2006 2005 2005 2005 Within one year 2,155 513 1,642 725 87 638 One year or later and no later than fi ve years 2,493 137 2,356 1,715 185 1,530 4,648 650 3,998 2,440 272 2,168

The consolidated entity leases motor vehicles under fi nance leases expiring in one to fi ve years. At the end of the lease term, the consolidated entity has the option to purchase the motor vehicles at the agreed residual value.

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Financial Report to Shareholders

Notes to the Financial Statements 16 Interest-bearing loans and borrowings (continued)

Bank loans All bank loans are denominated in Australian dollars. The bank loans are secured by a fl oating charge over the assets of the Australian and New Zealand controlled entities with a carrying amount of $2,022 million (2005: $1,864 million). The consolidated entity is also required to comply with various fi nancial covenants which it has met. In addition, the consolidated entity entered into a debtor securitisation arrangement by which it transfers to a third party its gross trade debtors in exchange for an immediate discounted cash payment while retaining an exposure to credit losses and a continuing obligation to service its accounts with these customers. The maximum amount allowed to be drawn on this facility is $250 million. At 30 June 2006, this arrangement was drawn to $160 million (2005: $150 million). The gross trade debtors which have been securitised have been presented as trade debtors (refer Note 9) with the secured borrowing included as a component of bank loans – secured.

17 Provisions Consolidated The Company Note 2006 2005 2006 2005 $’000 $’000 $’000 $’000 Current Employee benefi ts 28 51,532 50,660 – 384 Leased premises 3,173 2,988 – – 54,705 53,648 – 384 Non-current Employee benefi ts 28 7,354 7,281 – – Leased premises 3,168 3,741 – – 10,522 11,022 – – Reconciliation A reconciliation of the carrying amounts of each class of provision, except for employee benefi ts (refer Note 28), is set out below: Leased premises 2006 2005 Consolidated $’000 $’000 Carrying amount at the beginning of the year 6,729 7,892 Recognised in the Income Statement (307) (44) Increase through business combinations 585 – Payments (666) (1,119) Carrying amount at the end of the year 6,341 6,729

18 Contributed equity Consolidated The Company 2006 2005 2006 2005 $’000 $’000 $’000 $’000 Share capital 503,000,003 ordinary shares, fully paid 1,220,446 1,220,446 1,220,446 1,220,446

There have been no movements in contributed equity during the year. Terms and conditions Holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders’ meetings. In the event of the winding up of the Company, ordinary shareholders rank after all other shareholders and creditors and are fully entitled to any proceeds of liquidation.

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Financial Report to Shareholders

Notes to the Financial Statements 19 Nature of reserves

The nature and purpose of reserves included in the Statement of Change in Equity for the Company and consolidated entity are: Foreign currency translation reserve The foreign currency translation reserve records the foreign currency differences arising from the translation of foreign operations, the translation of transactions that hedge the Company’s net investment in a foreign operation or the translation of foreign currency monetary items forming part of the net investment in a foreign operation (refer Note 1(u)). Equity compensation reserve The equity compensation reserve arises on the grant of performance rights to executives under the performance rights plan. Amounts are transferred out of the reserve and into issued capital when the options are exercised. Further information about equity compensation payments to employees is given in Note 28. Hedging reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash fl ow hedging instruments related to hedged transactions that have not yet occurred.

20 Retained earnings Consolidated The Company 2006 2005 2006 2005 $’000 $’000 $’000 $’000 Balance at the beginning of the year 54,484 8,926 4,655 841 Net profi t attributable to members of the parent 101,211 100,902 74,833 59,158 Dividends recognised during the year (75,493) (55,344) (75,493) (55,344) Balance at the end of the year 80,202 54,484 3,995 4,655

21 Dividends

Dividends recognised in the current year by the Company are: Cents per Total Franked/ Date of share amount unfranked payments Paid out of $’000 2006 Interim 2006 ordinary 7.5 37,751 franked 3 April 2006 AIFRS profi ts Final 2005 ordinary 7.5 37,742 franked 3 October 2005 AIFRS profi ts 75,493

2005 Interim 2005 ordinary 7.5 37,733 franked 1 April 2005 AIFRS profi ts Final 2004 ordinary 3.5 17,611 franked 30 September 2004 AGAAP profi ts 55,344

Franked dividends declared or paid during the year were franked at the tax rate of 30% Subsequent events Since the end of the fi nancial year, the directors declared the following dividends: Final 2006 ordinary 7.5 37,725 franked 2 October 2006

84 Pacifi c Brands Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 21 Dividends (continued)

The fi nancial effect of these dividends have not been brought to account in the fi nancial statements for the year ended 30 June 2006 and will be recognised in subsequent fi nancial reports. The Company 2006 2005 $’000 $’000 Dividend franking account 30% franking credits available to shareholders of the Company for subsequent fi nancial years 12,456 15,503

The above available amounts are based on the balance of the dividend franking account at the end of the year adjusted for: • franking credits that will arise from the payment of the current tax liabilities; • franking debits that will arise from the payment of dividends recognised as a liability at the end of the year; • franking credits that will arise from the receipt of dividends recognised as receivables by the tax consolidated group at the end of the year; and • franking credits that the entity may be prevented from distributing in subsequent years. The ability to utilise the franking credits is dependent upon there being suffi cient available profi ts to declare dividends. The impact on the dividend franking account of dividends proposed after the balance sheet date but not recognised as a liability is to reduce it to $nil (2005: $4.2 million).

22 Minority interest

The minority interest relates to the 50% interest in Restonic (M) Sdn Bhd which is not held by the Company nor by one of its controlled entities. Consolidated 2006 2005 $’000 $’000 Minority interest in controlled entities comprise: Interest in accumulated losses at the beginning of the year (26) (139) Net profi t attributable to minority interest 155 113 Interest in retained profi ts/(accumulated losses) at the end of the year 129 (26) Interest in share capital 4,293 4,293 Interest in reserves 342 63 Total minority interest 4,764 4,330

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Financial Report to Shareholders

Notes to the Financial Statements 23 Additional fi nancial instruments disclosure

(a) Interest rate risk The consolidated entity enters into interest rate swaps to manage cash fl ow risks associated with the interest rates on borrowings that are fl oating. Interest rate swaps Interest rate swaps allow the consolidated entity to swap fl oating rate borrowings into fi xed rates. Maturities of swap contracts are principally between two and fi ve years. Each contract involves quarterly payment or receipt of the net amount of interest. Interest rate risk exposures The consolidated entity’s exposure to interest rate risk and the effective weighted average interest rate for classes of fi nancial assets and fi n ancial liabilities are set out below: Weighted Floating Fixed interest maturing in: Non- average interest 1 year 1 to 5 interest interest rate or less year(s) bearing Total rate pa $’000 $’000 $’000 $’000 $’000 2006 Financial assets Cash and cash equivalents 4.7% 94,025 – – – 94,025 Trade and other receivables – – – – 211,402 211,402 Foreign exchange options – – – – 347 347 Other fi nancial assets – – – – 1,979 1,979 94,025 – – 213,728 307,753 Financial liabilities Trade and other payables – – – – 136,765 136,765 Bank loans 6.6%1 599,287 – – – 599,287 Lease liabilities 6.6% – 1,642 2,356 – 3,998 599,287 1,642 2,356 136,765 740,050 Interest rate swaps2 (340,036) – 340,036 – –

2005 Financial assets Cash and cash equivalents 5.4% 101,106 – – – 101,106 Trade and other receivables – – – 191,435 191,435 Other fi nancial assets – – – 1,926 1,926 101,106 – – 193,361 294,467 Financial liabilities Trade and other payables – – – 126,592 126,592 Bank loans 6.6%1 490,396 – – – 490,396 Lease liabilities 6.6% – 638 1,530 – 2,168 490,396 638 1,530 126,592 619,156 Interest rate swaps2 (470,036) – 470,036 – –

1 After incorporating the effect of interest rate swaps, forward agreements and options. 2 Notional principal amounts.

86 Pacifi c Brands Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 23 Additional fi nancial instruments disclosure (continued)

(b) Foreign exchange risk From time to time in the ordinary course of business, the consolidated entity enters into forward exchange contracts to hedge a proportion of anticipated purchase and sale commitments denominated in foreign currencies (principally US dollars). The amount of anticipated future purchases and sales is forecast in light of current market conditions and commitments from customers. Hedge contracts are used to cover the next available trading exposure until all contacts are fully utilised. Hedge cover generally does not exceed 12 months. The following table sets out the weighted average contracted exchange rates, the gross value to be received under foreign currency contracts and the settlement periods of outstanding contracts for the consolidated entity: Consolidated 2006 2005 Weighted Australian Weighted Australian average dollar average dollar exchange equivalent exchange equivalent rate $’000 rate $’000 Not later than one year Buy US dollars 0.74 216,852 0.77 154,574 Buy Hong Kong dollars 5.97 41,575 5.97 32,359 Buy sterling pounds 0.40 2,421 0.46 290 Buy euros 0.59 473 0.61 1,169 Buy Japanese yen 84.62 2,227 80.33 2,822 Buy New Zealand dollars 1.22 833 – –

The net deferred costs and exchange gains and losses on hedges of anticipated foreign currency purchases and sales recognised in other debtors at Note 9 and the timing of their anticipated recognition as part of purchases and sales are: Consolidated Net (losses)/gains 2006 2005 $’000 $’000 Within six months (429) 487

(c) Credit risk exposures Credit risk represents the loss that would be recognised if counterparties failed to perform as contracted. Recognised fi nancial instruments The credit risk on fi nancial assets, excluding investments, of the consolidated entity, which have been recognised in the Balance Sheet, is the carrying amount, net of any allowance for doubtful debts. Unrecognised fi n ancial instruments In accordance with AASB 139: Financial Instruments: Recognition and Measurement, the net fair value of fi nancial instruments were recognised in the Balance Sheet at 1 July 2005 (refer to Note 33). Unrecognised fi nancial instruments at reporting date in the prior year were: Consolidated 2005 $’000 Interest rate swaps (5,354)

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Financial Report to Shareholders

Notes to the Financial Statements 23 Additional fi nancial instruments disclosure (continued)

(d) Net fair values of fi nancial assets and liabilities Valuation approach Net fair values of fi nancial assets and liabilities are determined by the consolidated entity on the following bases. Monetary fi nancial assets and fi nancial liabilities not readily traded in an organised fi nancial market are determined by valuing them at the present value of contractual future cash fl ows on amounts due from customers (reduced for expected credit losses) or due to suppliers. Cash fl ows are discounted using standard valuation techniques at the applicable on-market yield having regard to the timing of the cash fl ows. The carrying amounts of cash and cash equivalents, trade and other receivables, trade and other payables, bank loans, lease liabilities and provision for employee benefi ts approximate net fair value due to their short term nature. Net fair values Recognised fi nancial instruments The carrying amounts and net fair values of fi nancial assets and liabilities as at the reporting date are as follows: Consolidated 2006 2005 Carrying Net Fair Carrying Net Fair Amount Value Amount Value $’000 $’000 $’000 $’000 Financial assets Cash and cash equivalents 94,025 94,025 101,106 101,106 Trade and other receivables 211,402 211,402 191,435 191,435 Interest rate swaps 908 908 – – Foreign exchange contract receivable 2,682 2,682 – – Other fi nancial assets 1,979 1,979 1,926 1,926 Financial liabilities Trade and other payables 137,244 137,244 126,592 126,592 Bank loans 599,287 599,287 490,396 490,396 Foreign exchange contract payable 3,111 3,111 – – Lease liabilities 3,998 3,998 2,168 2,168

Cash assets are readily traded on organised markets in a standardised form. All other fi nancial assets and liabilities are not readily traded on organised markets in a standardised form.

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Financial Report to Shareholders

Notes to the Financial Statements 23 Additional fi n ancial instruments disclosure (continued) (e) Financing facilities Consolidated The Company 2006 2005 2006 2005 $’000 $’000 $’000 $’000 Secured bank overdraft facility, reviewed annually and payable at call: Amount used – – – – Amount unused 40,000 40,000 – 40,000 40,000 – – Secured bank loan facilities with various maturity dates through to 2011 which may be extended by mutual agreements: Amount used 602,200 490,396 – – Amount unused 197,800 309,604 – – 800,000 800,000 – –

24 Commitments Consolidated 2006 2005 $’000 $’000 Non-cancellable operating lease expense commitments Future operating lease commitments not provided for in the fi n ancial statements and payable: Within one year 29,403 25,402 One year or later and no later than fi ve years 78,009 53,576 Later than fi ve years 12,349 9,704 119,761 88,682

The consolidated entity leases property under non-cancellable operating leases expiring in one to fi ve year(s). Leases generally provide the consolidated entity with a right of renewal at which time all terms are renegotiated. Lease payments comprise a base amount plus an incremental contingent rental. Contingent rentals are based on either movements in the Consumer Price Index or operating criteria. Where the incremental rentals are fi xed, they are incurred evenly over the term of the lease. The consolidated entity has provided for these fi xed increments (refer Note 17).

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Financial Report to Shareholders

Notes to the Financial Statements 25 Controlled entities

The following table outlines the particulars in relation to controlled entities: Ordinary share Ordinary share Place of consolidated entity consolidated entity Name incorporation interest 2006 interest 2005 % % Parent entity Pacifi c Brands Limited Controlled entities Pacifi c Brands (Australia) Pty Ltd Australia 100% 100% Pacifi c Brands Holdings Pty Ltd Australia 100% 100% Pacifi c Brands Footwear Pty Ltd Australia 100% 100% Sachi Australia Pty Ltd Australia 100% 100% Pacifi c Brands Sport & Leisure Pty Ltd Australia 100% 100% Pacifi c Brands Clothing Pty Ltd Australia 100% 100% Pacifi c Brands Household Products Pty Ltd Australia 100% 100% Bonds Industries Pty Ltd Australia 100% 100% Sheridan Australia Pty Ltd Australia1 100% – Pacifi c Brands Services Group Pty Ltd Australia 100% 100% PT Berlei Indonesia Indonesia 100% 100% Restonic (M) Sdn Bhd Malaysia 50% 50% Dream Crafts Sdn Bhd Malaysia 50% 50% Dream Products Sdn Bhd Malaysia 50% 50% Dreamland Corporation (M) Sdn Bhd Malaysia 50% 50% Dreamland (Singapore) Pte Ltd Singapore 50% 50% Dreamland Spring Manufacturing Sdn Bhd Malaysia 50% 50% Eurocoir Products Sdn Bhd Malaysia 50% 50% Sleepmaker Sdn Bhd Malaysia 50% 50% Pacifi c Brands Holdings (NZ) Ltd New Zealand 100% 100% Sheridan NZ Limited New Zealand1 100% – Pacifi c Brands Holdings (Hong Kong) Ltd Hong Kong2 100% 100% Grosby (China) Ltd Hong Kong 100% 100% Pacifi c Brands (Asia) Ltd Hong Kong 100% 100% Pacifi c Brands (UK) Ltd UK 100% 100% Sheridan UK Limited UK1 100% – PacBrands USA Inc USA 100% 100% Pacifi c Brands (Fiji) Limited Fiji 100% 100%

1 Acquired on 26 September 2005; refer Note 26. 2 Pacifi c Brands Holdings (Hong Kong) Ltd has a 36% interest in Dunlop Slazenger Philippines Inc and a 50% interest in Pacifi c Brands Marketing (Hong Kong) Ltd but does not have control of these entities.

90 Pacifi c Brands Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 26 Acquisitions

On 26 September 2005, the consolidated entity acquired 100% of the equity of Sheridan Australia Pty Ltd, Sheridan NZ Limited and Sheridan UK Limited for $64.7 million in cash (net of cash acquired) and assumed interest bearing debt of $28.7 million. These companies design, source and distribute high quality bed linen and towels primarily to the consumer market in Australia, New Zealand and the United Kingdom. On 30 November 2005, the consolidated entity acquired from Arthur Ellis Limited its Bedwares and the Everwarm/Survival businesses for $11.5 million in cash. The Bedwares business manufactures, supplies and distributes pillows, quilts and mattress protectors to major retailers in New Zealand whilst the Everwarm/Survival business supply and distribute thermalwear products. During June 2006, the consolidated entity acquired the Peri bed linen business and Foam Products Australia’s foam manufacturing business for $0.7 million and $3.0 million in cash respectively. Since acquisition the acquired businesses have contributed net profi t of $0.5 million to the consolidated profi t for the year. If these acquisitions had all occurred on 1 July 2005, the consolidated entity’s sales revenue would have been $1,679.2 million and profi t for the year would have been $101.0 million. Effect of current year acquisitions These acquisitions had the following effect on the consolidated entity’s assets and liabilities: Adjustment for Provisional accounting fair value Provisional Book value policies adjustments fair value $’000 $’000 $’000 $’000 Inventories 48,854 (845) (14,018) 33,991 Trade and other receivables 13,155 (705) (2,434) 10,016 Property, plant and equipment 11,768 – (2,244) 9,524 Brandnames 30,561 – – 30,561 Other assets 1,781 (253) (196) 1,332 Deferred tax assets 1,906 771 2,335 5,012 Trade and other payables (12,452) – (2,036) (14,488) Interest bearing liabilities (1) – – (1) Current provisions (6,019) (1,356) (3,134) (10,509) Non-current provisions (200) – – (200) Net assets acquired 89,353 (2,388) (21,727) 65,238 Goodwill 43,355 Total cost of acquisitions (net of cash acquired and including incidental costs of $2.5 million) 108,593 Less: Interest bearing debt assumed (28,675) Total cash payments for acquisitions 79,918 Effect of prior year acquisitions During the year ended 30 June 2005, the consolidated entity paid $5.6 million of stamp duty in relation to the acquisition of Pacifi c Brands Holdings Pty Ltd and also acquired the businesses of TMI Australia and Merrell (Australian licence) for a combined total of $6.5 million. The effect of these items are as follows: 2005 $’000 Fair value of net assets acquired: Inventories 1,026 Other assets 375 Deferred tax assets 224 Trade and other payables 5,561 Provisions (747) Net assets acquired 6,439 Goodwill 5,664 Consideration (cash) 12,103

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Financial Report to Shareholders

Notes to the Financial Statements 27 Notes to the statements of cash fl ows

(a) Reconciliation of cash For the purposes of the statements of cash fl ows, cash includes cash on hand and at bank and short term deposits at call. Cash as at the end of the year as shown in the Cash Flow Statements is reconciled to the related items in the Balance Sheets as follows: Consolidated The Company Note 2006 2005 2006 2005 $’000 $’000 $’000 $’000 Cash and cash equivalents 8 94,025 101,106 487 2,365

(b) Reconciliation of profi t for the year to net cash from operating activities Profi t for the year 101,366 101,015 74,833 59,158 Add/(less) non-cash items: Share based payments 1,565 1,510 1,565 1,510 Net gain on disposal of non-current assets (1,561) (161) – – Amortisation of debt establishment costs 3 – 902 – – Amounts set aside to allow for doubtful debts, rebates, claims and settlement discounts 3 102,877 79,744 – – Amounts set aside to allow for employee benefi ts 25,309 26,924 (384) 384 Depreciation and amortisation of property, plant and equipment 3 19,303 15,155 – – Unrealised foreign exchange loss – 980 – – (Decrease)/increase in income taxes payable (6,286) (4,111) (2,646) 11,231 Decrease/(increase) in current and deferred tax assets 4,530 13,870 3,097 (16,226) Net cash provided by operating activities before change in assets and liabilities 247,103 235,828 76,465 56,057 Change in assets and liabilities: Increase in trade and other receivables (105,505) (98,452) (2,970) (277) Increase in inventories (12,931) (2,601) – Decrease/(increase) in prepayments 1,607 (162) 2 (2) Increase in debt establishment costs – (935) – – (Decrease)/increase in trade and other payables (11,627) (6,524) 118 (11,655) Decrease in provisions (30,228) (37,383) – – Net cash from operating activities 88,419 89,771 73,615 44,123

28 Employee benefi ts Consolidated The Company Note 2006 2005 2006 2005 $’000 $’000 $’000 $’000 Aggregate liability for employee benefi ts, including on-costs: Current 17 51,532 50,660 – 384 Non-current 17 7,354 7,281 – – 58,886 57,941 – 384

92 Pacifi c Brands Annual Report 2006

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Notes to the Financial Statements 28 Employee benefi ts (continued)

The present values of employee benefi ts not expected to be settled within 12 months of reporting date have been calculated using the following weighted averages: Consolidated 2006 2005 Assumed rate of increase in wage and salary rates (per annum) 4.0% 4.0% Discount rate (per annum) 5.5% 5.5% Settlement term (period) 10 years 10 years Number of employees Number of employees at the end of the year 8,126 7,334

(a) Superannuation plans The consolidated entity contributes to the Pacifi c Brands Superannuation Plan (‘Plan’), which is a plan in the Mercer Super Trust, at rates advised from time to time by the Plan’s actuary. The consolidated entity has been contributing at the rates set out in the previous actuarial review, as at 1 July 2004. The actuarial assessments of the Plan as at both 1 July 2005 and 1 July 2004 were carried out by Mr D.A. Scott, Fellow of the Institute of Actuaries of Australia on behalf of Mercer Human Resource Consulting Pty Ltd. The results of the valuations were provided in reports dated August 2004 and August 2005. The actuary concluded that the assets of the Plan were suffi cient to meet all benefi ts payable in the event of the Plan’s termination, or the voluntary or compulsory termination of employment of each employee of the Company. The Plan provides both defi ned benefi ts, based on years of service and fi nal average salary, and accumulation benefi ts. In accordance with AAS 25 Financial Reporting by Superannuation Plans the surplus of the Plan at the last actuarial review date of 1 July 2004, on a funding basis, was $1.0 million (fund assets of $112.9 million and accrued benefi ts $111.9 million). With respect to the defi ned benefi ts component of the Plan, the defi ned benefi t obligations and Plan assets at fair value are: Movements in the recognised net defi ned benefi t obligations (included in non-current employee benefi ts) Consolidated The Company 2006 2005 2006 2005 $’000 $’000 $’000 $’000 Present value of funded defi ned benefi t obligation 47,363 46,384 – – Fair value of plan assets (54,617) (48,118) – – Surplus (7,254) (1,734) – – Unrecognised actuarial gains 6,349 1,734 – – Net (asset)/liability for defi ned benefi t obligations at 30 June (905) – – –

Amounts for the current and previous periods are as follows: Defi ned benefi t obligation 47,363 46,384 – – Fund assets (54,617) (48,118) – – Surplus (7,254) (1,734) – – Experience adjustments (gains)/losses – plan assets (4,323) (3,674) – – Experience adjustments (gains)/losses – plan liabilities 1,657 (348) – –

The consolidated entity and the Company have used the AASB 1.20A exemption and disclosed amounts under AASB 1.20A(p) above for each annual reporting period prospectively from the transition date. Changes in the present value of the defi ned benefi t obligation are as follows: Opening defi ned benefi t obligation 46,384 44,790 – – Service cost 2,588 2,797 – – Interest cost 1,890 2,098 – – Contributions by plan participants 1,305 1,204 – – Actuarial gains and losses 260 1,388 – – Benefi ts paid (4,193) (5,047) – – Taxes and premium paid (871) (846) – – Closing defi ned benefi t obligation 47,363 46,384 – –

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Financial Report to Shareholders

Notes to the Financial Statements 28 Employee benefi ts (continued)

(a) Superannuation plans (continued) Changes in the fair value of fund assets are as follows: Consolidated The Company 2006 2005 2006 2005 $’000 $’000 $’000 $’000 Opening fair value of fund assets 48,118 43,410 – – Expected return 3,048 2,754 – – Actuarial gains and (losses) 4,323 3,674 – – Contributions by employer 2,887 2,969 – – Contributions by plan participants 1,305 1,204 – – Benefi ts paid (4,193) (5,047) – – Taxes and premiums paid (871) (846) – – 54,617 48,118 – – The major categories of fund assets as a percentage of total fund assets are as follows: Australian Equities 34% 38% – – International Equities 29% 25% – – Fixed Income 14% 24% – – Property 8% 8% – – Cash 15% 5% – –

The consolidated entity’s investment policies and strategies for the defi ned benefi t superannuation funds and post retirement benefi ts funds do not use target allocations for the individual asset categories. The consolidated entity’s investment goals are to maximise returns subject to specifi c risk management policies. Its risk management policies permit investments in mutual funds, and prohibit direct investments in debt and equity securities and derivative fi nancial instruments. The consolidated entity addresses diversifi cation by the use of mutual fund investments whose underlying investments are in domestic and international fi xed income securities and domestic and international equity securities. These mutual funds are readily marketable and can be sold to fund benefi t payment obligations as they become payable. Expense recognised in the income statement Consolidated The Company 2006 2005 2006 2005 $’000 $’000 $’000 $’000 Current service costs 2,588 2,797 – – Interest on obligation 1,890 2,098 – – Expected return on fund assets (3,048) (2,754) – – 1,430 2,141 – – The expense is recognised in the following line items in the income statement: Administrative expenses 1,430 2,141 – – Actual return on fund assets 7,371 6,428 – –

The contribution rate is between 9% and 24%. The consolidated entity expects to contribute $2.7 million to its defi ned benefi t superannuation funds in the 2007 fi nancial year. Consolidated The Company 2006 2005 2006 2005 Principal actuarial assumptions at the balance sheet date (expressed as weighted averages): Discount rate at 30 June 4.9% 4.3% – – Expected return on fund assets at 30 June 6.5% 6.5% – – Future salary increases 4.0% 4.0% – –

The expected return on assets assumption is determined by weighting the expected long-term return for each asset class by the target allocation of assets classes. The returns used for each class are net of investment tax and investment fees. An allowance for administration expenses has been deducted from the expected return.

94 Pacifi c Brands Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 28 Employee benefi ts (continued)

(b) Share based payments The Company has introduced a number of share plans pursuant to which senior executives and directors may acquire shares. These are: • the Performance Rights Plan (which is open to executive directors and selected senior executives); and • the Non-Executive Director Share Plan (which applies to all non-executive directors). (i) Performance Rights Plan (‘PRP’) General The PRP is the Company’s long term incentive scheme for selected key senior executives. Under the PRP, eligible executives will be granted performance rights (each being an entitlement to a share, subject to the satisfaction of vesting conditions, principally related to fi nancial performance) on terms and conditions determined by the Board of Directors. If the vesting conditions are satisfi ed, the performance rights vest and shares will be delivered to the executive. Grant of performance rights The Board of Directors has approved the following grants of performance rights to employees, under the PRP:

Contractual life of performance Valuation at Grant date Grant date Grant date/employee entitled rights grant date 1 July 2005 1 July 2004 (Years) $ (Number) (Number) Opening balance 2,500,000 – Performance rights grant 1 July 2004 4 1.60 Key management personnel – 2,100,000 Senior employees – 400,000 Performance rights grant 1 July 2005 4 1.35 Key management personnel 475,000 – Senior employees 50,000 – Total performance rights 3,025,000 2,500,000 Valuation The fair value of the performance rights was calculated at the date of grant using a Monte-Carlo simulation model and allocated to each reporting period evenly over the period from grant date to vesting date. The value disclosed in Note 3 is the portion of the fair value of the performance rights allocated to this year. In valuing the performance rights, market conditions have been taken into account.

1 July 2005 1 July 2004 Fair value of performance rights and assumptions Fair value at measurement date $1.35 $1.60 Share price $2.30 $2.70 Expected volatility 25% 25% Option life (period) 4 years 4 years Dividend Yield (per annum) 5.5% 3.0% Risk-free interest rate (per annum) 5.1% 5.4%

The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the performance rights), adjusted for any expected changes to future volatility due to publicly available information. Performance rights are granted under a service condition and, for grants to key management personnel, market and non-market performance conditions. Non-market performance conditions are not taken into account in the grant date fair value measurement of the services received.

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Financial Report to Shareholders

Notes to the Financial Statements 28 Employee benefi ts (continued)

(b) Share based payments (continued) (i) Performance Rights Plan (‘PRP’) (continued) Vesting conditions In respect of the above grants the performance conditions are based on the relative total shareholder return (‘TSR’) of the Company, measured against a comparator group of companies. Details of the comparator group of companies are contained on page 49 of this Annual Report. TSR is, broadly, a measure of the return to shareholders provided by share price appreciation, plus reinvested dividends, expressed as a percentage of investment. In addition, the price of the Company’s shares must, as at the relevant date, exceed the price at which the shares listed on the Australian Stock Exchange on 6 April 2004 ($2.50) prior to any performance rights vesting, subject to the operation of the PRP rules. The TSR performance conditions in relation to these grants are:

Percentage of shares available Target in given year that vests The Company’s annual TSR is less than the median TSR of the comparator companies 0% The Company’s annual TSR equals or exceeds performance of the median TSR of the comparator companies 50% The Company’s annual TSR ranks in third quartile of the comparator companies Pro rata between 50% and 100% (2% increase for each higher ranking) The Company’s annual TSR ranks in fourth quartile of the comparator companies 100%

In relation to the grants to date, performance conditions were tested at the end of the year ended 30 June 2006 and will be tested annually until the fi nal vesting date. At 30 June 2006, the performance rights were not exercised as the annual performance conditions were not met. The percentage of the maximum performance rights granted to date vest in favour of the executives as follows:

% vesting % vesting grant date grant date 1 July 2005 1 July 2004 1 July 2007 35%1 60%2 1 July 2008 25% 40% 1 July 2009 40% – Maximum 100% 100%

1 Includes 15% which were due to vest at 1 July 2006 as performance conditions were not met. 2 Includes 15% which were due to vest at 1 July 2005 and 25% which were due to vest at 1 July 2006 as performance conditions were not met. Any performance rights which do not vest in a fi nancial year will be added to the performance rights otherwise available in the next vesting year and tested against the performance condition applicable to that subsequent year. In general, the executives are not entitled to trade in shares allocated on vesting of the performance rights until the earlier to occur of: • three years after the date of grant of the shares allocated on vesting; or • 12 months following the date of cessation of employment with the consolidated entity. (ii) Non-Executive Director Share Plan Under the Non-Executive Director Share Plan, non-executive directors are required to sacrifi ce at least 25% (or such other minimum percentage determined by the Board of Directors from time to time) of their annual directors’ fees. Non-executive directors are not able to sell or otherwise dispose of the shares until the earliest of 10 years after acquisition, the non-executive director ceasing to be a director of the Company, or the non-executive director applying to the Board of Directors and the Board of Directors determining (in exceptional circumstances) that any or all restrictions applying to the shares cease. Shares will usually be purchased on-market at the prevailing market price of shares by applying an amount equal to the amount of fees a non-executive director has elected to sacrifi ce to acquire shares. Shares are acquired monthly at the end of each calendar month.

96 Pacifi c Brands Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 29 Key management personnel disclosures

The following were key management personnel of the consolidated entity at any time during the year and unless otherwise indicated were key management personnel for the entire year: Non-executive directors R.P. Handley H.A. Lynch A.D. Cummins M.G. Ould M.A. Plavsic Executive directors P. R . Moore, Chief Executive Offi cer S.J. Tierney, Group General Manager, Operations Executives S.W. Audsley, Chief Financial Offi cer I.C. Barton, Group General Manager, Home Comfort M.J. Ford, Group General Manager, Footwear S.M. Morphet, Group General Manager, Underwear & Hosiery M.E. Keely, Group Manager, People and Performance M.S. Daniel, General Manager, Supply Chain Key management personnel compensation The key management personnel compensation included in personnel expenses (refer Note 3) are as follows: Consolidated The Company 2006 2005 2006 2005 $ $ $ $ Short-term employee benefi ts 3,825,058 3,193,658 440,500 430,500 Non-monetary benefi ts 582,085 516,129 220,050 230,050 Post-employment benefi ts 709,510 621,564 59,450 59,450 Share based payments 1,332,131 1,268,623 1,332,131 1,268,623 6,448,784 5,599,974 2,052,131 1,988,623

Individual directors and executives compensation disclosures Information regarding individual directors and executives compensation and some equity instruments disclosure as permitted by Corporations Regulations 2M.3.03 and 2M.6.04 is provided in the Remuneration Report section of the Directors’ Report on pages 43 to 55. Apart from the details disclosed in this Note, no director has entered into a material contract with the Company or the consolidated entity since the end of the previous year and there were no material contracts involving directors’ interests existing at year end.

Report+Accounts 2006 97 Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 29 Key management personnel disclosures (continued)

Performance rights over equity instruments The movement during the reporting period in the number of performance rights over ordinary shares in Pacifi c Brands Limited held, directly, indirectly or benefi cially, by each key management person, including their related parties, is as follows: Held at Held at Held at 30 June Granted as 30 June Granted as 30 June 2004 compensation 2005 compensation 2006 Directors P. R . Moore – 500,000 500,000 125,000 625,000 S.J. Tierney – 300,000 300,000 75,000 375,000 Executives S.W. Audsley – 250,000 250,000 62,500 312,500 I.C. Barton – 200,000 200,000 50,000 250,000 M.J. Ford – 200,000 200,000 50,000 250,000 S.M. Morphet – 250,000 250,000 62,500 312,500 M.E. Keely – 200,000 200,000 50,000 250,000 M.S. Daniel – 200,000 200,000 – 200,000

No performance rights were exercised or vested during the years ended 30 June 2005 and 30 June 2006. Movements in shares The movement during the year in the number of ordinary shares in Pacifi c Brands Limited held, directly, indirectly or benefi cially, by each key management person, including their related parties, is as follows: Held at Held at Held at 30 June 30 June 30 June 2004 Purchases 2005 Purchases Sales 2006 Directors R.P. Handley 1,211,178 124,842 1,336,020 28,285 – 1,364,305 H.A. Lynch 46,189 19,313 65,502 17,242 – 82,744 P. R . Moore 1,220,001 100,000 1,320,001 – – 1,320,001 S.J. Tierney 400,001 – 400,001 – – 400,001 A.D. Cummins 192,689 81,072 273,761 23,739 – 297,500 M.G. Ould 44,588 13,353 57,941 14,874 – 72,815 M.A. Plavsic 1,690 29,849 31,539 11,663 – 43,202 Executives S.W. Audsley 201,800 – 201,800 – – 201,800 I.C. Barton 120,400 – 120,400 – – 120,400 M.J. Ford 200,400 9,461 209,861 – – 209,861 S.M. Morphet 200,400 – 200,400 – – 200,400 M.E. Keely 200,400 8,199 208,599 5,665 (13,835) 200,429 M.S. Daniel 120,400 17 120,417 26 – 120,443

No shares were granted to key management personnel during the year as compensation.

98 Pacifi c Brands Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 30 Non-key management personnel disclosures

All transactions with non-key management personnel are on normal terms and conditions, except for the interest free loan of $1,204 million shown below. This loan was made from Pacifi c Brands Limited to Pacifi c Brands (Australia) Pty Ltd on 6 April 2004 to enable it to acquire Pacifi c Brands Holdings Pty Ltd and its associated international operations. Directors of related parties (not being directors of the entity or their director related entities) From time to time, directors of related parties or their director related entities may purchase goods from the consolidated entity. These purchases are on the same terms and conditions as those entered into by consolidated entity employees or customers and are immaterial or domestic in nature. The Company 2006 2005 $’000 $’000 The aggregate amounts included in the profi t from ordinary activities before income tax expense/(benefi t) that resulted from transactions with controlled entities are: Dividend revenue Wholly-owned controlled entities 77,500 62,417 Aggregate amounts receivable from controlled entities: Amounts receivable other than trade receivables Current Wholly-owned controlled entity 26,068 23,106 Non-current Wholly-owned controlled entity (interest free) 1,203,714 1,203,714

31 Events subsequent to reporting date

Capital Management On 23 August 2006, the directors approved a capital management initiative, whereby the Company may purchase up to $75.0 million of its own shares, on market, over the ensuing 12 month period. The fi nancial impact of this announcement has not been refl ected in this Financial Report. Dividends For dividends declared after 30 June 2006, refer Note 21.

32 Explanation of transition to AIFRSs

As stated in Note 1(a), these are the Company’s and the consolidated entity’s fi rst AIFRS annual Financial Report prepared in accordance with AIFRSs. The accounting policies in Note 1 have been applied in preparing the Company and consolidated fi nancial statements for the year ended 30 June 2006 and the comparative information for the year ended 30 June 2005, and in preparing an opening AIFRS Balance Sheet at 1 July 2004 (the consolidated entity’s date of transition). In preparing its opening AIFRS Balance Sheet, comparative information for the fi nancial statements for the year ended 30 June 2005, the Company and consolidated entity have adjusted amounts reported previously in fi nancial statements prepared in accordance with their old basis of accounting (previous Australian GAAP). An explanation of how the transition from previous Australian GAAP to AIFRSs has affected the consolidated entity’s fi nancial position and performance is set out in the following tables and the notes that accompany the tables.

Report+Accounts 2006 99 Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 32 Explanation of transition to AIFRSs (continued)

Reconciliation of equity Consolidated 1 July 2004 30 June 2005 Previous Effect of Previous Effect of Australian transition to Australian transition to Note GAAP AIFRSs AIFRSs GAAP AIFRSs AIFRSs $’000 $’000 $’000 $’000 $’000 $’000 Assets Cash and cash equivalents 99,273 – 99,273 101,106 – 101,106 Trade and other receivables 174,350 – 174,350 191,435 – 191,435 Inventories 253,632 – 253,632 255,396 – 255,396 Other current assets 8,158 – 8,158 7,339 – 7,339 Total current assets 535,413 – 535,413 555,276 – 555,276 Trade and other receivables 41 – 41 – – – Property, plant and equipment (a) 171,850 (24,549) 147,301 173,999 (21,702) 152,297 Intangible assets (a),(b) 1,199,783 24,549 1,224,332 1,163,991 63,078 1,227,069 Deferred tax assets (c) 44,279 1,228 45,507 30,633 1,214 31,847 Other non-current assets 5,616 – 5,616 5,441 – 5,441 Total non-current assets 1,421,569 1,228 1,422,797 1,374,064 42,590 1,416,654 Total assets 1,956,982 1,228 1,958,210 1,929,340 42,590 1,971,930

Liabilities Trade and other payables 127,795 – 127,795 115,486 – 115,486 Interest-bearing loans and borrowings 2,014 – 2,014 638 – 638 Income tax payable (c) 14,314 – 14,314 10,203 (14) 10,189 Provisions (c) 61,960 44 62,004 53,341 307 53,648 Total current liabilities 206,083 44 206,127 179,668 293 179,961 Trade and other payables 12,451 – 12,451 11,106 – 11,106 Interest-bearing loans and borrowings 491,514 – 491,514 491,926 – 491,926 Provisions (c) 8,326 4,050 12,376 7,281 3,741 11,022 Total non-current liabilities 512,291 4,050 516,341 510,313 3,741 514,054 Total liabilities 718,374 4,094 722,468 689,981 4,034 694,015 Net assets 1,238,608 (2,866) 1,235,742 1,239,359 38,556 1,277,915

Equity Issued capital 1,220,446 – 1,220,446 1,220,446 – 1,220,446 Reserves (d) 1,693 – 1,693 (2,855) 1,510 (1,345) Retained earnings (b),(c),(d) 11,792 (2,866) 8,926 17,438 37,046 54,484 Total equity attributable to equity holders of the parent 1,233,931 (2,866) 1,231,065 1,235,029 38,556 1,273,585 Minority interest 4,677 – 4,677 4,330 – 4,330 Total equity 1,238,608 (2,866) 1,235,742 1,239,359 38,556 1,277,915

100 Pacifi c Brands Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 32 Explanation of transition to AIFRSs (continued) Reconciliation of equity (continued) Company 1 July 2004 30 June 2005 Previous Effect of Previous Effect of Australian transition to Australian transition to Note GAAP AIFRSs AIFRSs GAAP AIFRSs AIFRSs $’000 $’000 $’000 $’000 $’000 $’000 Assets Cash and cash equivalents 13,586 – 13,586 2,365 – 2,365 Trade and other receivables (e) 769 – 769 1,046 22,060 23,106 Tax assets 2,967 – 2,967 – – – Other current assets – – – 2 – 2 Total current assets 17,322 – 17,322 3,413 22,060 25,473 Trade and other receivables 1,203,714 – 1,203,714 1,203,714 – 1,203,714 Deferred tax assets (e) 11,928 – 11,928 31,121 (22,060) 9,061 Total non-current assets 1,215,642 – 1,215,642 1,234,835 (22,060) 1,212,775 Total assets 1,232,964 – 1,232,964 1,238,248 – 1,238,248

Liabilities Trade and other payables 11,677 – 11,677 22 – 22 Income tax payable – – – 11,231 – 11,231 Provisions – – – 384 – 384 Total current liabilities 11,677 – 11,677 11,637 – 11,637 Total liabilities 11,677 – 11,677 11,637 – 11,637 Net assets 1,221,287 – 1,221,287 1,226,611 – 1,226,611

Equity Issued capital 1,220,446 – 1,220,446 1,220,446 – 1,220,446 Reserves (d) – – – – 1,510 1,510 Retained earnings (d) 841 – 841 6,165 (1,510) 4,655 Total equity attributable to equity holders of the parent 1,221,287 – 1,221,287 1,226,611 – 1,226,611 Minority interest – – – – – – Total equity 1,221,287 – 1,221,287 1,226,611 – 1,226,611

Report+Accounts 2006 101 Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 32 Explanation of transition to AIFRSs (continued) Reconciliation of profi t Consolidated Company Year ended 30 June 2005 Year ended 30 June 2005 Previous Effect of Previous Effect of Australian transition to Australian transition to Note GAAP AIFRSs AIFRSs GAAP AIFRSs AIFRSs $’000 $’000 $’000 $’000 $’000 $’000 Revenue 1,521,724 – 1,521,724 – – – Cost of sales (f) (910,400) 1,920 (908,480) – – – Gross profi t 611,324 1,920 613,244 – – – Other income (f),(g) 20,858 (3,759) 17,099 62,709 (287) 62,422 Freight and distribution expenses (97,146) – (97,146) – – – Sales, marketing and advertising expenses (257,954) – (257,954) – – – Information technology expenses (19,537) – (19,537) – – – Administrative expenses (c),(d) (79,558) (1,464) (81,022) (2,791) (1,510) (4,301) Goodwill amortisation (b) (41,376) 41,376 – – – – Results from operating activities 136,611 38,073 174,684 59,918 (1,797) 58,121 Financial income (g) – 1,839 1,839 – 287 287 Financial expenses (34,471) – (34,471) – – – Net fi nancing costs (34,471) 1,839 (32,632) – 287 287 Profi t before income tax 102,140 39,912 142,052 59,918 (1,510) 58,408 Income tax (expense)/benefi t (41,037) – (41,037) 750 – 750 Profi t for the year 61,103 39,912 101,015 60,668 (1,510) 59,158 Profi t attributable to minority interest (113) – (113) – – – Profi t attributable to members of the parent 60,990 39,912 100,902 60,668 (1,510) 59,158

102 Pacifi c Brands Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 32 Explanation of transition to AIFRSs (continued)

Notes to the reconciliation of equity and profi t (a) Consistent with AIFRS, on transition software developed for internal use is capable of recognition under AASB 138 Intangible Assets as intangible assets. Previously these assets were recognised as plant and equipment. The effect of this reclassifi cation on the consolidated entity was to: 1 July 2004 30 June 2005 Decrease property, plant and equipment $24,549,112 $21,702,003 Increase intangible assets $24,549,112 $21,702,003

(b) Under AIFRS goodwill is no longer amortised, but is tested annually for impairment. As a result, the effect on the consolidated entity is a: 1 July 2004 30 June 2005 Increase in carrying value of goodwill $0 $41,375,705 Decrease in amortisation charge $0 $41,375,705

(c) Under AIFRS, AASB 117 Leases requires the payment of leases that have fi xed rental increase to be expensed on a straightline basis over the term of the lease. Under previous Australian GAAP, lease payments on operating leases were expensed as they were incurred. The consolidated entity has recognised a: 1 July 2004 30 June 2005 Decrease in retained earnings $2,865,160 $2,865,160 Increase in deferred tax assets $1,227,925 $1,214,617 Decrease in current income tax payable $0 $13,308 Increase in current provisions $44,361 $307,713 Increase in non-current provisions $4,048,724 $3,741,012 Decrease in administrative expenses $0 $44,360

(d) Under previous Australian GAAP, no expense was recognised for the performance rights issued to employees. Under AIFRS, the fair value of the performance rights granted must be recognised as share based payments with a corresponding increase in equity. The effect on the consolidated entity and the Company is to: 1 July 2004 30 June 2005 Increase equity compensation reserve $0 $1,510,267 Increase administrative expenses $0 $1,510,267

(e) As set out in Note 1(g), the Company is the head entity in a tax consolidated group. Under previous Australian GAAP, the head entity recognised all of the current and deferred tax assets and liabilities of the tax consolidated group (after elimination of intragroup transactions). Assets and liabilities arising under tax funding arrangements are recognised as intercompany assets and liabilities with a consequential adjustment to income tax expense/benefi t. Under AIFRS, accounting for the impact of the tax consolidated system in the separate fi nancial statements of the members of a tax consolidated group is addressed by UIG 1052 Tax Consolidation Accounting. Wholly-owned controlled entities in a tax consolidated group must recognise their own tax amounts directly, and the current tax liability (asset) and any deferred tax asset relating to tax losses are assumed by the head entity. The effect is to: 1 July 2004 30 June 2005 Increase in intercompany receivables $0 $22,060,000 Decrease in deferred tax assets $0 $22,060,000

(f) Under previous Australian GAAP, revenue from the disposal of assets was required to be disclosed gross. Under AIFRS, AASB 118 Revenue requires that profi ts and losses on the disposal of asset be shown on a net basis. The effect on the consolidated entity is to: 1 July 2004 30 June 2005 Reduce other income $0 $1,920,000 Reduce cost of sales $0 $1,920,000

Report+Accounts 2006 103 Annual Report 2006

Financial Report to Shareholders

Notes to the Financial Statements 32 Explanation of transition to AIFRSs (continued)

Notes to the reconciliation of equity and profi t (continued)

(g) Under previous Australian GAAP, Interest revenue was disclosed as other income. Under AIFRS, AASB 101 Presentation of Financial Statements requires net fi nancing costs be shown on the face of the Income Statements. The effect of this is to: Consolidated Company 1 July 2004 30 June 2005 1 July 2004 30 June 2005 Reduce other income $0 $1,839,000 $0 $287,000 Reduce cost of sales $0 $1,839,000 $0 $287,000

33 Changes in accounting policy

Reconciliation of fi nancial instruments as if AASB 139: Financial Instruments: Recognition and Measurement was applied at 1 July 2005 In the current fi nancial year the consolidated entity adopted AASB 132 Financial Instruments: Presentation and AASB 139 Financial Instruments: Recognition and Measurement. This change in accounting policy has been adopted in accordance with the transition rules contained in AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards, which does not require the restatement of comparative information for fi nancial instruments within the scope of AASB 132 Financial Instruments: Presentation and AASB 139 Financial Instruments: Recognition and Measurement. The adoption of AASB 139 Financial Instruments: Recognition and Measurement has resulted in the consolidated entity recognising all derivative fi n ancial instruments as assets or liabilities at fair value. This change has been accounted for by adjusting the opening balance of equity (retained earnings and hedging reserve at 1 July 2005). The impact on the Balance Sheet in the comparative year is set out below as an adjustment to the opening Balance Sheet at 1 July 2005. Application of AASB 132: Financial Instruments: Presentation and AASB 139: Financial Instruments: Recognition and Measurement prospectively from 1 July 2005 Note Previous Impact of change Australian in accounting GAAP policy AIFRSs $’000 $’000 $’000 Other current assets (a) 7,339 893 8,232 Deferred tax assets (a) 30,633 1,192 31,825 Other creditors and accruals (a) 13,128 4,867 17,995 Hedging reserve (a) 0 (2,781) (2,781) Bank loans (b) 491,926 (3,515) 488,411 Non-current other assets (b) 3,515 (3,515) 0

Notes to the reconciliation of fi nancial instruments as if AASB 139: Financial Instruments: Recognition and Measurement was applied at 1 July 2005 (a) Under previous Australian GAAP, the consolidated entity did not recognise all derivatives on the Balance Sheet. On adoption of AASB 139 Financial Instruments: Recognition and Measurement, all derivatives are recognised at fair value in the Balance Sheet. The effect on the consolidated entity is an increase in other current assets of $893,145, an increase in other creditors and accruals of $4,866,709, an increase in the deferred tax assets of $1,192,069 and a decrease in the hedging reserve of $2,781,495. (b) Debt establishment costs capitalised and amortised over the term of the borrowings under previous Australian GAAP have been recalculated based on the effective interest rate method and recognised as part of the liability rather than as a separate asset. This has resulted in a decrease in non-current other assets of $3,515,242 and a decrease in non-current interest bearing liabilities of $3,515,242.

104 Pacifi c Brands Annual Report 2006

Directors’ Declaration

1. In the opinion of the directors of Pacifi c Brands Limited (the ‘Company’): (a) the fi n ancial statements and notes and the remuneration disclosures contained in the Remuneration Report in the Directors’ Report, set out on pages 43 to 104, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the fi nancial position of the Company and the consolidated entity as at 30 June 2006 and of their performance, as represented by the results of their operations and their cash fl ows, for the fi nancial year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; (b) the remuneration disclosures that are contained in the Remuneration Report in the Directors’ Report comply with Australian Accounting Standard AASB 124 Related Party Disclosures; and (c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Chief Executive Offi cer and Chief Financial Offi cer for the fi nancial year ended 30 June 2006.

Dated at Melbourne this 23rd day of August 2006

Signed in accordance with a resolution of the directors:

Pat Handley Paul Moore Chairman Director

Report+Accounts 2006 105 Annual Report 2006

Independent Audit Report to the Members of Pacifi c Brands Limited

Scope The fi nancial report, remuneration disclosures and directors’ responsibility The fi nancial report comprises the income statements, statements of changes in equity, balance sheets, statements of cash fl ows, accompanying notes (1 to 33) to the fi nancial statements, and the directors’ declaration (set out on pages 56 to 105) for both Pacifi c Brands Limited (the ‘Company’) and Pacifi c Brands Limited and it’s controlled entities (the ‘consolidated entity’), for the fi nancial year ended 30 June 2006. The consolidated entity comprises both the Company and the entities it controlled during that fi nancial year. As permitted by the Corporations Regulation 2001, the Company has disclosed information about the remuneration of directors and executives (‘remuneration disclosures’), required by Australian Accounting Standard AASB 124 Related Party Disclosures, under the heading ‘Remuneration report’ in the directors’ report and not in the fi nancial report. The Remuneration report also contains information not required by Australian Accounting Standard AASB 124 which is not subject to our audit. The directors of the Company are responsible for the preparation and true and fair presentation of the fi nancial report in accordance with the Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the fi nancial report. The directors are responsible for preparing the relevant reconciling information regarding the adjustments required under the Australian Accounting Standard AASB 1 First-time Adoption of Australian equivalents to International Financial Reporting Standards. The directors are also responsible for the remuneration disclosures contained in the directors’ report.

Audit Approach We conducted an independent audit in order to express an opinion to the members of the Company. Our audit was conducted in accordance with Australian Auditing Standards in order to provide reasonable assurance as to whether the fi nancial report is free of material misstatement and that the remuneration disclosures comply with AASB 124. The nature of the audit is infl uenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected. We performed procedures to assess whether in all material respects the fi nancial report presents fairly, in accordance with the Corporations Act 2001, Australian Accounting Standards and other mandatory fi nancial reporting requirements in Australia, a view which is consistent with our understanding of the Company’s and the consolidated entity’s fi nancial position, of their performance as represented by the results of their operations and cash fl ows and whether the remuneration disclosures comply with Australian Accounting Standard AASB 124. We formed our audit opinion on the basis of these procedures, which included: • examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the fi nancial report, and • assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of signifi cant accounting estimates made by the directors. While we considered the effectiveness of management’s internal controls over fi nancial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls.

Audit opinion 1. In our opinion, the fi nancial report of Pacifi c Brands Limited is in accordance with: a) the Corporation Act 2001 including: i). giving a true and fair view of the Company’s and consolidated entity’s fi nancial position as at 30 June 2006 and of their performance for the fi nancial year ended on that date; and ii). complying with Australian Accounting Standards and the Corporations Regulations 2001; and b) other mandatory fi nancial reporting requirements in Australia. 2. The remuneration disclosures that are contained in the Remuneration report in the Directors’ report comply with Australian Accounting Standard AASB 124 Related Party Disclosures.

KPMG Don Pasquariello Partner Melbourne, 23 August 2006

106 Pacifi c Brands Annual Report 2006

Financial Report to Shareholders

Shareholders’ Statistics

as at 23 August 2006

Distribution of ordinary shareholders and shareholdings Size of holding Number of holders Number of shares 1 to 1,000 9,590 28.4% 5,715,208 1.1% 1,001 to 5,000 18,770 55.7% 43,681,728 8.7% 5,001 to 10,000 3,499 10.4% 26,812,094 5.3% 10,001 to 100,000 1,757 5.2% 37,083,486 7.4% 100,001 and over 100 0.3% 389,707,487 77.5% Total 33,716 100.0% 503,000,003 100.0%

Included in the above total are 1,239 shareholders holding less than a marketable parcel of 209 shares.

Twenty largest ordinary fully paid shareholders Shares % of total Westpac Custodian Nominees Limited 79,961,326 15.90% National Nominees Limited 57,416,993 11.41% J P Morgan Nominees Australia Limited 56,520,430 11.24% RBC Dexia Investor Services Australia Nominees Pty Limited 32,443,334 6.45% Citicorp Nominees Pty Limited 30,722,456 6.11% ANZ Nominees Limited 22,211,898 4.42% J P Morgan Nominees Australia 16,080,223 3.20% Suncorp Custodian Services Pty Limited 12,693,700 2.52% Cogent Nominees Pty Limited 12,316,748 2.45% Westpac Financial Services Limited 8,449,984 1.68% RBC Dexia Investor Services Australia Nominees Pty Limited 5,614,714 1.12% Queensland Investment Corporation 4,171,447 0.83% AMP Life Limited 3,541,430 0.70% Citicorp Nominees Pty Limited 3,407,628 0.68% Citicorp Nominees Pty Limited 3,383,194 0.67% Citicorp Nominees Pty Limited 2,872,755 0.57% UBS Nominees Pty Ltd 2,693,802 0.54% UBS Wealth Management Australia Nominees Pty Ltd 1,813,754 0.36% Suncorp General Insurance Limited 1,663,100 0.33% HSBC Custody Nominees (Australia) Limited 1,595,953 0.32% 359,574,869 71.49%

Substantial shareholders

The names of substantial shareholders in the Company, and the number of fully paid ordinary shares in which each has an interest, as disclosed in substantial shareholder notices to the Company on the respective dates, are as follows: 21 July 2006 Perpetual Trustees Australia Limited 54,745,612 10.88% 6 April 2006 Perennial Value Management Limited 54,281,514 10.79% 12 May 2005 Westpac Banking Corporation 32,337,054 6.43% 11 August 2006 Morgan Stanley Investment Management Limited 29,697,738 5.90%

Report+Accounts 2006 107 Annual Report 2006

CashShareholder Flow Statement Information

Annual General Meeting Dividend Reinvestment Plan 10.00am Tuesday 24 October 2006. The Dividend Reinvestment Plan enables Pacifi c Brands fully paid Palladium C, Crown Towers, 8 Whiteman Street, ordinary shareholders having a registered address or being resident Southbank, Melbourne Australia. in Australia or New Zealand to reinvest all or part of their dividends in additional Pacifi c Brands fully paid ordinary shares. Applications Stock exchange listing are available from the Share Registrar. Pacifi c Brands shares are listed on the Australian Stock Exchange (‘ASX’) and New Zealand Stock Market and are traded under the Consolidation of multiple holdings code ‘PBG’. If you have multiple issuer-sponsored holdings that you wish to consolidate into a single account, please notify the Share Registrar Pacifi c Brands Share Registry in writing, quoting your fully registered names and SRNs for these Australia accounts and nominating the account to which the holdings are to Computershare Investor Services Pty Limited be consolidated. Yarra Falls, 452 Johnston Street Abbotsford Victoria 3067 Australia Change of name and/or address GPO Box 2975 For issuer-sponsored holdings, please notify the Share Registry in Melbourne Victoria 3001 writing if you change your name and/or address. When advising the Australia Share Registry of a change of name, please supply details of your new/previous name, your new/previous address, your SRN and New Zealand supporting documentation evidencing your change of name. You Computershare Investor Services Limited can also change your address details online at the Share Registry’s Level 2, 159 Hurstmere Road website at www.computershare.com.au. Changes of address Takapuna, Auckland relating to shareholdings in a single name can be made over the New Zealand phone by calling 1300 132 632 (Australia only). Please note that this Telephone: does not apply to shareholdings held jointly or in a company name. Australia: 1300 132 632 For CHESS/broker-sponsored holdings, please notify your broker New Zealand: (64 9) 488 8777 in writing if you change your name and/or address. International: (61 3) 9415 4184 Share enquiries Facsimile: (61 3) 9473 2500 Shareholders seeking information about their shareholding or dividends Email: [email protected] should contact the Share Registrar. Contact details are above. Tax and dividend payments Pacifi c Brands’ communications For Australian registered shareholders who have not quoted their Pacifi c Brands internet site, www.pacifi cbrands.com.au offers Tax File Number (‘TFN’), exemption or Australian Business Number information about the Company, news releases, announcements (‘ABN’), the Company is obliged to deduct tax at the top marginal to ASX and NZX and addresses by the Chairman and CEO. tax rate plus Medicare levy from unfranked and/or partially franked The website provides essential information about the Company dividends. If you have not already provided your TFN/ABN, you and an insight into Pacifi c Brands’ businesses. may do so by contacting the Share Registry or by registering your TFN/ABN at the Share Registry’s website at Registered offi ce www.computershare.com.au ABN 64 106 773 059 Pacifi c Brands Limited Dividend payments Level 3, 290 Burwood Road Your dividends will be paid in Australian currency credited directly Hawthorn Victoria 3122 into your nominated bank account. If you have not nominated a Telephone: (61 3) 9947 4900 bank account, a dividend cheque will be mailed to the address Fascimile: (61 3) 9947 4951 recorded on the share register less an administration fee of $1.00. Email: [email protected] If you wish to elect to receive your dividends by way of direct credit Website: www.pacifi cbrands.com.au but have not done so, you should complete an application form available by contacting the Share Registrar or enter the details at Investor relations the Share Registrar’s website at www.computershare.com.au. Telephone: (61 3) 9947 4900 Email: [email protected]

Auditors KPMG

108 Pacifi c Brands Company Directory

Chairman Pacific Brands Limited Registered Office Pat Handley Level 3, 290 Burwood Road Hawthorn, Victoria 3122 Chief Executive Officer Telephone: (61 3) 9947 4900 Paul Moore Facsimile: (61 3) 9947 4951 Group General Manager, Operations Email: [email protected] Stephen Tierney Underwear & Hosiery Non-Executive Directors Level 3, 290 Burwood Road Andrew Cummins Hawthorn, Victoria 3122 Helen Lynch AM Telephone: (61 3) 9947 4900 Max Ould Facsimile (61 3) 9947 4951 Maureen Plavsic Outerwear & Sport Chief Financial Officer 1096 Toorak Road Stephen Audsley Hartwell, Victoria 3124 Telephone: (61 3) 9835 5200 Company Secretary Facsimile (61 3) 9835 5220 John Grover Home Comfort Access your Annual Report on the web 1 Dunlopillo Drive Pacific Brands offers the option for shareholders to be Dandenong, Victoria 3175 advised of the availability of the Annual Report through Telephone: (61 3) 9794 1500 the Company’s website via an email notification (refer Facsimile: (61 3) 9794 1511 instructions below).

By providing us with your email address through our Footwear website, shareholders will be notified by email when the 1096 Toorak Road Annual Report is available together with a direct link to the Hartwell, Victoria 3124 Annual Report. You will also be notified by email of other Telephone: (61 3) 9835 5200 major Pacific Brands announcements. Facsimile: (61 3) 9835 5220

Email notification Pacific Brands New Zealand Enter Pacific Brands website www.pacificbrands.com.au Greenlane and click onto ‘Investor Relations’ then select ‘Shareholder Level 1, 308 Great South Road Services’. Under the heading Share Registry, click on the link Greenlane, Auckland 1005 to Computershare. You will be requested to enter your SRN or Holder Identification Number (HIN) and postcode. This New Zealand process is a security validation prior to entering your email Telephone: (64 9) 523 7800 address under ‘Electronic Shareholder Communication’. Facsimile: (64 9) 523 7801

After confirmation of your email address you will receive Pacific Brands (Asia) Limited notification of the availability of future Annual Reports and Harbour City other Pacific Brands announcements by email. Suites 1608-1611, Level 16, Tower 2 25-27 Canton Road The Gateway, Harbour City, Kowloon Hong Kong Telephone: (852) 2956 6688 Facsimile: (852) 2956 1778

Pacific Brands UK Unit 1, Stretton Green Distribution Park Langford Way, Appleton Warrington, Cheshire, WA4 4TQ England Telephone: (44) 19 2521 2212 Facsimile: (44) 19 2521 2222

Designed and produced by The Ball Group Melbourne and Sydney PACB0006 9/06 PACIFIC BRANDS LIMITED AND ITS CONTROLLED ENTITIES ABN 64 106 773 059 www. pacifi cbrands.com.au