Pac Brands by Susan Werkner

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CONTENTs 01 WE ARE BRANDS 02 Full Year Results 04 chairman’s letter 08 CEO’S REPORT 10 Bonds 14 Innovation & Research 16 Points of Presence 17 Dunlop Volley 20 Everlast 21 Hard Yakka 24 Leading Processes 26 Talent & Culture 27 BusinessES behaving well 30 Operational Highlights 34 BOARD OF DIRECTORS 38 Senior Management Team 40 Sheridan 44 FINANCIALS 45

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Pacific Brands 2008 Full Year Results Resilient and innovative business delivered results in line with guidance despite challenging conditions. The year in review

• Full year sales and profit growth delivered – Total revenue up 16.3% to $2,116.6m – EBITA increased 18.1% to $229.1m • Margins improved – EBITA margin of 10.8% for the year – 11.3% in the second-half • Net Profit After Tax up 11.1% to $119.3m (pre-amortisation) • Earnings per share increase of 11.1% to 23.7 cents per share (pre-amortisation) • Strong cashflow after capital expenditure – up 39.2% to $157.2m • Net debt reduced by $59.5m to $742.7m • Improved return on capital – Increased return on average capital employed – up 0.6% points • Increased dividends – Final dividend of 8.5 cents per share, resulting in a 17.0 cents per share full year dividend – Fully franked to 30% for Australian shareholders Drivers of performance

• Category leadership position maintained and strengthened • Growth of share of market • Return on investment in icon brands • Acquisitions integrated seamlessly and performing to plan • Business to Business (contracted uniform supply) providing growth and increased diversity of revenue sources • Disposals completed successfully – World Brands JV and the NZ Foams, Flooring and Bedding businesses – which contributed $48.4m in revenue during FY08

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Pacific Brands Full Year Results Year ended 30 June 2008

Full Year (A$ million)

FY07

FY08

% Chg

Total net sales

1,820.7

2,116.6

16.3

EBITDA

216.4

253.0

16.9

EBITA

194.0

229.1

18.1

EBIT

192.3

226.1

17.6

EBITA margin %

10.6

10.8

NPAT (pre-amortisation)

107.3

119.3

11.2

Reported NPAT (post minority interests)

106.0

116.6

10.0

EPS (pre-amortisation) cents

21.3

23.7

EPS (reported) cents

21.1

23.2

DPS (cents)

16.5

17.0

PORTFOLIO SNAPSHOT SALES BY OPERATING GROUP

SALES BY CUSTOMER CHANNEL

Underwear/Hosiery

Department stores

Outerwear/Sport

Discount department stores

Home Comfort

Specialty/Independents/Other

Footwear

Supermarkets

Other

Sales outside Australia/NZ

30.1%

31.0%

24.8% 12.8% 1.3%

14.0%

24.7% 51.7% 5.0% 4.6%

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“ Can’t get on the plane without it.” Mikaela, 29, international woman of mystery, loves her Tontine pillow

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Pat Handley

chairman’s letter “We have demonstrated that when we deliver products to the marketplace which are differentiated, the outcomes are quite rewarding.”

Dear Shareholders, The 2008 Financial Year showed Pacific Brands to be a resilient business, delivering results that demonstrated good market and financial management in a period of deteriorating market conditions. We have achieved this outcome by placing more emphasis on our core brands. In addition, across the company we became more effective at managing our inventory levels and working capital. As most of our earnings are cash earnings, we have been able to keep our dividend payout ratio at the higher end of our range of expectations. Combined with better management of our working capital, our cash generation exceeded our earnings, giving us the ability to reduce our debt levels and pay a healthy dividend. As a result, we believe we enter 2009 more focused on the aspects of our business that can make a difference in this market environment. We have demonstrated that when we deliver products to the marketplace which are differentiated, the outcomes are quite rewarding. While our sales, profit and cash position have never been higher, we were not completely immune to the downturn in the retail environment. Our principal strategy is to continue to invest in our market-leading brands as well as our people. If we do this well, we believe we will be well positioned to capitalise on these efforts over the entire cycle, especially when retail conditions improve. As you no doubt know, we have appointed Ms Sue Morphet as Chief Executive Officer to replace Paul Moore, who retired at the end of 2007 after 30-years of a distinguished career at Pacific Brands. Prior to assuming this new role, Sue ran our most successful division. Under her guidance, we are formulating the next stages of Pacific Brands’ evolution. As our business has broadened and increased, we elected to broaden our expertise on the board with the appointment of James MacKenzie in May 2008. James brings extensive experience to Pacific Brands, having held board positions with a diverse set of listed companies in Australia and internationally.

In addition to our responsibility to you, our shareholders, our success depends upon having a balanced view of our responsibilities to the community and its needs. We have strengthened those relationships with our community partners, not only through direct support but by supporting our people as they connect with local community groups, schools and charities. Pacific Brands is also serious about investing in sustainable options for the future. In the past year we implemented a variety of initiatives to help reduce our impact on the environment and we have bolstered our already strong commitment to ethical trading with membership of the Ethical Trading Initiative. Our entire team continues to work to identify the areas where we can best use our position and resources to make a difference to all our stakeholders. Thank you for your continued support during the year. We are optimistic about the future. I trust you will find this Annual Report informative and useful.

Pat Handley Chairman Pacific Brands Limited

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Sue Morphet ceo’s report

“The essential ingredients of our company remain the same: our great brands, products, service and our great people.” Pacific Brands is an excellent company. Its strength is a testament to the effort and vision of our previous Chief Executive Officer Paul Moore. As the new Chief Executive Officer, I am honoured to have the opportunity to lead the next phase of our development. As you know, Pacific Brands has always been built on four pillars – people, products, service and brands. In previous annual reports we have talked about our talented people, our products and our services. In this report we give special focus to our power brands and how they help drive the performance of our business in all market conditions. Pacific Brands has concluded another strong year. Despite a changing market, we delivered results in line with our commitment to our shareholders – 15–20% sales growth and more than 10% profit growth. The measures of our performance – sales, earnings before interest, tax and amortisation (EBITA), net profit after tax (NPAT), earnings per share and dividends – continue to improve. Like the rest of the retail sector, we were not immune to the current downturn in consumer sentiment. However, our results show that our business model is resilient. We are well prepared and well equipped to manage through these challenging times. I am pleased to report that our two acquisitions from the prior year, Yakka Group and Brand Collective, are being successfully integrated into our business and both contributed positively to our result. As planned, the Yakka Group has added another dimension to Pacific Brands with a strong workwear and corporate apparel business, enabling us to leverage our product and sourcing capabilities into a predominantly new channel. Our revenue increased by 16.3% to $2,116.6 million, our debt was reduced by 7.4% to $743 million and we’ve maintained our strong cash flow after capital expenditure with a net result of $157 million – up 39% on last year. Our organic growth has also continued through recent difficult conditions. Australian core business grew 2.5% for the year. Pacific Brands today is a vastly different company to the one that listed in 2004. However, the essential ingredients of our company remain the same: our great brands, products, service and our great people. We will continue to evolve, develop and improve with a dedicated leadership

team committed to delivering performance and increased shareholder value. We recently completed a full review of the company, which confirmed the effectiveness of our business strategy. Whilst exposing areas where we can improve and build on our strengths, we identified a number of growth opportunities worthy of prudent pursuit. This review has enabled the executive team to crystalise their focus on the business with a clear vision for the future, specifically targeted on growth, whilst continuing to improve those areas of the business not performing as well as we would like or expect. This will be achieved by giving even greater focus to our strongest brands and continuing investment in our core strength of product innovation. We are also working to ensure that the retail presentation and penetration of our products improves our consumers’ shopping experience. Every indication suggests that the next year will continue to be challenging – but we are ready for it. Our great design teams will keep leading the way and developing the best products; our businesses will provide their customers the best service; and we will continue to have the brands our customers and consumers want and need. We will continue to grow organically to deliver higher revenue. We will generate strong cash flow. In the 2009 financial year we expect to lift our like-for-like sales by 2–3%, EBITA and NPAT by 3–5%. On a personal note, I would like to thank Paul Moore, the Pacific Brands Board, the Senior Leadership Team and all Pacific Brands’ employees for supporting me during my transition into the Chief Executive position. I feel we are well positioned to direct the company into its next phase and I look forward to working closely with the team during the coming year.

Sue Morphet CEO Pacific Brands Limited

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â&#x20AC;&#x153; All the right moves.â&#x20AC;? Sam and Vanessa, 16, teach themselves the latest Bonds Mash TV moves

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“ It’s all about the look.” Cody, 13, accomplished busker and Chesty wearer

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Bonds If undies are just undies, how come Bonds is better? Twenty years ago the concept of a range of clothing basics as a ‘Superbrand’ would have seemed absurd. Few ever see your underwear; a sweatshirt is a sweatshirt; baby clothes are wash ’n wear. How could a Bonds tag hope to make our brand of basics more highly valued and desired than those of our competitors? To make the task harder still, most successful brands have a tightly defined market. Ours is ‘everyone’: all ages, all demographics… everyone. A challenge indeed. But become a ‘Superbrand’ is exactly what Bonds has done: • Bonds was recently ranked in the top 10 most valuable brands in Australia (out of 1456). (Source: 2006 Brand Asset Valuator, GP Y&R) • Almost four out of five Australian teens think Bonds is the number one clothing brand that reflects their values. (Source: Dolly Youth Monitor, ’07/’08) • In 2008, Bonds was ranked the fifth most authentic brand in Australia (out of 104 leading Australian brands). (Source: Principals Synovate, ’08) The secret has been managing the Bonds brand with passion, vision and realising its potential by spotting trends others don’t and taking them to market with perfectly executed campaigns. Our history (including Chesty Bond who turned 70 in 2008) is rich and to be leveraged. But there’s a thin line between ‘old favourite’ and ‘old fashioned’ and the key to Bonds’ success is to be contemporary and forever surprising our consumers by being one step ahead. Bonds ambassadors, particularly Sarah Murdoch and Pat Rafter, have played a key role in our success. This year, cricketer Michael Clarke joined our team to help us continue to keep Bonds’ public face fresh. Along the way Bonds has invented many new words that are now part of the Australian vernacular: Hipsters, Hoodies, Hi-Tops and others such as Chesty, Cottontails and Easysuit. And we’re not about to rest on our laurels. Pacific Brands is as committed as ever to maintaining Bonds’ momentum and giving all Australians the confidence to look good and feel good every day.

The key to Bonds’ success is to be contemporary and forever surprising our consumers by being one step ahead.

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Innovation with Insight Innovation & Research At Pacific Brands we love classics and have more than our fair share of them – Chesty Bond singlets and Dunlop Volley shoes to name but two. But staying relevant as times change is essential for all brands and knowing when and how to innovate is something Pacific Brands has become a master of over many years. Nobody does it better. Our product development teams are the industry’s best at identifying emerging trends and developing products to create demand and lead the market. We innovate in style, function and quality – sometimes all three at once. At the heart of it is our commitment to research. Not just consumer research, so we know what new products or improvements people want, but product research, so we can create new products no one’s ever dreamt of and drive demand through our marketing campaigns. At the same time we keep a watchful eye on emerging trends both here and overseas so we’re ahead of the curve and not playing catch-up. We spot trends and develop products from scratch through our own R&D. Sometimes we spot niche solutions and turn them into mass-market opportunities. Above all else, it is Pacific Brands’ skilful management of innovation and research that keeps our classics at the top of their game and creates the new classics of tomorrow. Hoodies and Easysuits are two recent examples from Bonds. Slazenger BioSlyx and Voodoo Ladder Control Pantyhose are two from other brands in the Pacific Brands’ portfolio. We work hard to make the ordinary extraordinary. We want our consumers to not only look good but feel great. So we need to know how comfortable they are in their socks and underwear, how fast kids feet grow and whether our pillows are giving the neck support for a good nights’ sleep. It’s what keeps us in front. Our retail partners are great supporters of our innovation and ability to grow and drive categories through design, development and advertising and marketing activities. With the right product, at the right price, on the right shelf, in the right place, at the right time, our classics will stay classic and new classics will emerge.

Throughout 2007/2008 these are just some of the new products and innovations we introduced to the market: • Dunlop Volley SS Skate series • Voodoo Ladder Control Pantyhose • Slazenger BioSlyx compression training products • Mooks loves Volley collaboration • Dunlop Double-Laminated Carpet Cushion • Merrell lightweight Barado shoes • SHE by Sheridan bed linen range • Bonds Hi-Tops • Bonds Easysuit • Yakka Xtreme range of workwear Bonds Hi-Tops

The Bonds team saw the emerging trend of high-waisted jeans and belted skirts in the US and realised that when it reached Australia, as it was sure to, there was no underwear specifically designed for high waistlines. The Bonds Hi-Top was born. Launched with the unforgettable ‘Mash’ dance campaign, it became an instant success. Bonds Easysuit

Existing coveralls have a series of studs, ties or buttons that, even for the most experienced of parents, can be well… tricky. The Bonds team saw this as an opportunity and after Intensive research, gave birth to an innovation in babywear, the ‘Bonds Easysuit’ – the first ever all-in-one babysuit without buttons, studs or fasteners of any kind. Since its launch in December 2007, sales have surpassed all expectations. Voodoo Ladder Control Pantyhose

It’s the oldest challenge in pantyhose: the sheer finish women want with the durability they need. Voodoo overcame it by developing Ladder Control Pantyhose with elastomeric yarn bonded with a special heat treatment. Even if a hole does occur, the bonded fabric stops it laddering. Independent tests by RMIT University agree. Slazenger BioSlyx

The Slazenger team saw the growth and benefits of ‘compression’ garments but could also see that their high price was keeping them out of reach of many ‘everyday’ athletes. They took up the challenge and the result was BioSlyx, which delivered the performance needed at a fraction of the price. Not surprisingly, they’ve been a runaway success.

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Closing the Sale Points of Presence Points of presence equates to how our product looks at point of purchase – and it’s more important everyday. We have thousands of points of presence when you consider our full range of brands. The critical thing for us is that every point of presence meets our standards – and is consistent with the brands’ values and proposition. We have some way to go before we achieve the standards we aspire to across the board – but it is something we are working on and we believe that there will be sales upside to be gained. This discipline of optimum presentation meets consumers’ expectations and helps drive the category for retailers. The more we have focused on improving our sophistication in this area, the more we see opportunities emerge. Partly as a consequence of our acquisitions of Sheridan and Brand Collective, and the work we have done with our hero Brands, we now have direct influence over presentation through concessions, concept stores and branded relationships with licensed third party retail operators. Our presence today includes: • 60 concessions in Department Stores • 70 Clearance Stores/Direct Sheridan Outlets • 50 Concept/Boutique/Workwear Stores • 65 Totally Workwear and Bike-Hub stores licensed to third party operators • Stores in UK and retail partnerships We are also diversifying our thinking and attitudes to ensure we capitalise on changes in buying behaviour – such as the internet.

Having our products in the right place, at the right time, presented in the right way is one of our greatest opportunities for competitive advantage.

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â&#x20AC;&#x153; In total? 23 pairs and counting.â&#x20AC;? Ian, 55, founder of the Volley Fanclub

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Dunlop Volley Making understated our best feature Dunlop Volleys, born 1939. The shoe of choice for nine out of ten Wimbledon players for forty years – Evonne Goolagong, Ken Rosewall, Margaret Court among them. Very little has changed in Volleys in more than 75 years, right down to still having the same pattern on the sole. When Dunlop joined Pacific Brands, Volleys presented a fascinating challenge. Clearly the sports shoe landscape had changed beyond recognition – now dominated by some of the biggest, most aggressively marketed brands in the world. Yet there was something about Volleys – their very basic-ness – that our team felt could provide a welcome antidote to the relentless wave of slick sports shoe marketing. Could we really turn understated into brilliant? The 1.8 million pairs of Volleys sold in the 12 months to June 2008 proves our team was right… we could and we did. It took skill, careful planning and a degree of ‘un-marketing’. In December 2007, we launched the ‘Exceptionally Average’ campaign featuring US ‘Hand Musician’ Gerry Phillips, wearing Volley Internationals while playing classic tunes with nothing but his hands. The captivating quirkiness of the campaign matched the Volley brand proposition perfectly and struck a chord with consumers. Sales rose 42% on the previous year, with the campaign itself developing a huge following on internet video site Youtube. How do you innovate a classic? Very carefully indeed. When your brand is grounded by being understated, bells and whistles will not be well received. But innovate our team has – both skilfully and successfully.

Steel Capped Volleys

Volleys have long been worn in the trade sector – particularly by roofers and painters due to the high grip of the sole. So we released Steel Capped Volleys meeting the safety requirements of the modern worksite and still letting young guys wear the shoes they want. Mooks Loves Volleys

In October 2007, Dunlop and Australian streetwear label, Mooks, collaborated on the Mooks loves Volleys range – a limited edition range of Volley Internationals customised with Mooks designs. Sales were great and consumer feedback was positive, so watch out for more collaborations in the future. As we head towards 2009, Dunlop Volleys are in a league of their own with a huge and loyal fan base. Just flicking through the pictures and stories of their beloved shoes that Volley fans upload on our website is evidence enough of this remarkable brand’s cult status and enduring potential.

Volley SS

Hearing that the classic Volley was no longer measuring up against the more advanced tricks of today’s skate scene, Dunlop teamed up with Australian skater Trevor Ward to create a more hard-wearing, double-layered canvas, padded shoe perfect for the job.

How do you innovate a classic? Very carefully indeed.

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Everlast Everlast punches well above its weight Everlast grew up on the streets of The Bronx and became the original boxing brand, with the tough reputation you’d expect from that start in life. Almost a century later, Everlast is now known in more than 100 countries and became a part of Pacific Brands in 1995. Since then, the brand’s rich heritage has been carefully managed to leverage its strengths while building a powerful brand, relevant to the ultra-competitive sports apparel market in Australia today. No small task when Everlast is outspent many times over by some of the world’s most heavily marketed sports brands. But Everlast always punches above its weight. In the last five years sales have soared 34% and we’re now fighting at the elite level – up with the top three sports apparel brands in the country Everlast is widely celebrated as an authentic sports fashion brand, with a broad appeal to both sexes right across the country. And while we’ve managed Everlast for the Australian sports market, we’ve never lost touch with the brand’s gritty heritage. Everlast is a brand with the strength and credibility to become an even tougher competitor in the sports apparel arena. After all, nothing soft comes out of The Bronx.

And while we’ve managed Everlast for the Australian sports market, we’ve never lost touch with the brand’s gritty heritage.

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“ Whoever said ‘no pain no gain’ was right.” Thomas, 30, wears Everlast but sometimes doesn’t feel everlasting

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Hard Yakka Growing an iconic brand is hard yakka Where can you take a brand that’s over 70 years old and already synonymous with workwear Australia wide? Onward and upward – just so long as you continually reinforce your core strengths and use innovation smartly to enhance (and never diminish) your iconic status. In 2007/2008, Pacific Brands’ expertise in managing brands has served Hard Yakka well. The brand remains top of mind and relevant on today’s work sites and to the new generation of tradies that inhabit them. And all without ever compromising Hard Yakka’s hard-earned heritage of rugged toughness, durability and strength. In April 2008 we released Hard Yakka Xtreme Workwear, utilising new technology and fabrics to provide even tougher clothing for those doing the hardest yakka. We’ve also improved our existing lines with more durable fabrics, UPF 50+ sun protection, double-stitched seams and extra pockets, including one for every tradie’s most important tool – the mobile phone. And we’ve kept a cautious eye on the role of fashion, ensuring the Hard Yakka range is as relevant today as it was in the beginning. In May 2008, Hard Yakka had its biggest sales month ever. You could say all our hard yakka is paying off. Hard Yakka Hard Facts

• ‘Yakka’ is an indigenous Australian word meaning ‘work’ • The ‘Hard Yakka’ chant has remained largely unchanged since it was first introduced in advertising almost 40 years ago • Hard Yakka’s support of the Collingwood Australian Rules Football Club is more than 30 years old, making it one of the longest partnerships in Australian sport.

In May 2008, Hard Yakka had its biggest sales month ever. You could say all our hard yakka is paying off.

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â&#x20AC;&#x153; We breed them tough out hereâ&#x20AC;? Ken, 62, wears Hard Yakka and his favourite Chesty. He loves his dog.

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Leading Processes 300 million units. 23,000 customers. 14,000 shipping containers. 9,000 employees in 8 countries. More than $2 billion in net sales. World Class Supply Chain

Sourcing

Pacific Brands is one of the largest importers of shipping containers in Australia. In the 2008 Financial Year, we shipped 14,000 containers i, delivered to more than 23,000 customer addresses and supplied in excess of 300 million units internationally. The scale of our business has demanded we operate a world-class supply chain, spanning the Asia Pacific region and delivering to customers throughout the world. In fact, Logistics Magazine – the official publication of the Supply Chain Logistics Association of Australia – ranked Pacific Brands as Australia’s Top Apparel Supply Chain. The sophistication of our supply operations allows us to offer flexibility to our customers and increase speed to market for the benefit of our consumers. We are committed to maintaining world-best practice with our supply chain and we are continually looking for ways to optimise its speed and efficiency. One recent improvement in our continuing evolution has been the consolidation of four of our businesses into one distribution centre at the new $1 billion TradeCoast Industrial Park at Eagle Farm north-east of Brisbane. Pacific Brands was the foundation tenant of the site, acquiring a 24,000m2 warehouse, 2,000m2 office and showrooms. The new location is a significant improvement, delivering better safety outcomes, modern handling equipment and more advanced technology. We have also implemented a strategic procurement plan that has led to us developing a number of key partnerships with suppliers of indirect goods and services such as travel, communications, logistics and insurance. By sharing this supplier base across the business, productivity is increased and costs are minimised.

The majority of our products are sourced from China. Our relationships with our suppliers in China are long-standing, built on our 50-year history in the region and based on shared values of flexibility, quality, speed and ethical responsibility. As costs in China increase, we will continue to work closely with our key suppliers and strategic partners to maintain the quality of our products while at the same time, achieving the lowest costs and reduced lead times. While the majority of our products are sourced from China, we also source from other emerging producer nations. We will continue to source products from other countries such as Vietnam, Indonesia and Bangladesh. We are also investigating emerging producer regions in China. Pacific Brands Asia (PBA), our permanent presence in Asia, is based in Hong Kong. Its objective is to ensure that we build or maintain meaningful and trusted relationships with leading suppliers, ensuring that our standards of quality and social compliance are upheld. We drive our sourcing scale through PBA where it is appropriate to do so.

(Endnotes) i Twenty Foot Equivalent Units (TEUs)

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Talent and Culture Our stable of iconic Australian brands is successful because of the passion and commitment of our employees. From manufacturing and warehousing, to product development, sales and marketing, everyone helps make the crucial connection between our brands and the consumers who love to buy them. We have five core values, which we encourage all our employees to live by. They urge us to work smarter and more collaboratively – and to ensure the most ethical and commercial outcomes for our customers, shareholders and partners. Our values are: • Unity – one team, one company; • Innovation – dare to try; • Speed – better, smarter, faster; • Accountability – take responsibility; and • Commitment – to brands, employees, retailers, consumers, and community. We’re enthusiastic about developing our people – helping them to enhance their skills and capability for larger more complex roles, and providing the right level of challenge for those seeking to build careers at Pacific Brands. We measure our internal promotions and turnover rates to ensure we are doing all we can to retain our key talent to grow our brands. We’ve also taken some innovative steps towards winning the battle to attract and retain the very best employees in a highly competitive global market. We attract the best available talent to our business through our internal recruitment team and careers micro-site at www.pacificbrands.com.au/careers We have joined up with the Melbourne Business School (MBS) and the RMIT School of Fashion and Textiles to offer internships and employment opportunities to the best available mature hires (MBS) and graduates (RMIT) to continually build our talent pool.

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“ Can you wear the same pair of jeans too much?” Karen, 22, admits to a Lee addiction

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Businesses Behaving Well When we set an example through our ethical, responsible and sustainable conduct as a business, our consumers make a stronger connection with our brands. We’re committed to ethical, responsible and sustainable conduct across the entire business and have realised that with the launch of PlanetBrands, our business strategy for sustainable growth. PlanetBrands is a five-year plan which touches every part of our business and encourages our stakeholders to contribute to our vision of a more sustainable future. By 2013, we want to have made a significant contribution to reducing greenhouse gas emissions, zero trade waste to landfill and to have significantly reduced our energy and water consumption. PlanetBrands touches four areas where we want to make a difference: our people, our marketplace, our community and our environment.

Our People Corporate responsibility in the workplace begins by providing safe, equitable and supportive working conditions. Creating a responsible working environment, where people are valued and respected, leads to improved productivity, profitability, reputation and ultimately greater value to our customers, consumers and shareholders. We’ve instituted a number of health and wellbeing programs to ensure that our people remain safe and healthy, including: • Brandssafe – our workplace Integrated Management System encompassing safety (AS/NZS:4801), quality (ISO:9001) and environment (ISO:14001). Brandssafe covers areas such as leadership, process approach and continual improvement. Pacific Brands is externally accredited to all three systems; • Online services delivering health assessments, lifestyle plans, healthy recipes and a library of health and fitness information; • Annual influenza vaccination program; and • Discounted private hospital, health and wellbeing insurance and gym memberships. Our behaviour can set an example for our suppliers and their employees. Our supplier evaluation processes require our suppliers to show they have formal management systems in place to identify and manage safety, health, environment and quality (SHEQ) aspects, a history of SHEQ compliance and evidence of how they manage the SHEQ performance of their subcontractors.

Case Study Pacific Brands joins Ethical Trading Initiative (ETI)

The Ethical Trading Initiative is an alliance of companies, trade union organisations and non-government organisations committed to working together to identify and promote good practice in implementing labour practice codes. Pacific Brands is the first Australian company to join the ETI to promote and enhance our social compliance program. It gives us the opportunity to make sure we’re a world’s bestpractice company when it comes to looking after our employees and partners. ETI members believe that this collaborative approach provides the opportunity for making significant progress in promoting the observance of internationally recognised labour standards throughout global supply chains. While we have a strong commitment to social compliance, we recognise the difficulties in dealing with a large and complex supply chain. However, a targeted focus on continual improvement in this area will result in lifting the standards of our suppliers.

Our Marketplace Many consumers now look beyond the actual product they’re buying to ask serious questions about how that product was made. Our consumers want to make sure the product was produced using ethical manufacturing, with minimal environmental impact. And if they can’t be sure, that will influence their buying decision. We aim to foster partnerships that are mutually beneficial by being innovative, transparent and fair in all our dealings with our suppliers, retail partners and consumers. Suppliers can also have a significant social and environmental impact on a company’s performance and reputation. We want to work with our consumers and our supply chain, to deliver the best products to meet our customers’ needs while providing good social and environmental outcomes for all our stakeholders.

Our Community Looking after the community our employees and consumers live in helps us build deeper connections with them. To enhance the economic and social wellbeing of our communities, we develop innovative programs and partnerships. Our community investment strategy aims to enhance the social and economic wellbeing of the communities where we live and work. The heart of our approach involves developing innovative programs and partnerships with clear aims and meaningful outcomes. Our community investment program, Brands for Good, continues to support our six national, not-for-profit community partners in the areas of cancer awareness and children, youth and families at risk: • Breast Cancer Network of Australia (BCNA) • Prostate Cancer Foundation of Australia (PCFA) • Camp Quality • Lifeline Australia • The Brotherhood of St Laurence • Reconciliation Australia

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We have increased our support of BCNA by forming a three-year partnership that will assist in funding key activities and a number of strategies in support of women diagnosed with breast cancer. Our relationship with BCNA began in 2005, via the My Care Kit which sees women newly diagnosed with breast cancer given kits containing a Berlei soft-cup bra, breast forms and a carry bag to help them through the months after surgery. The My Care Kit program now provides more than 130 kits to women each week. Our sponsorship of PCFA has also grown. We’re a Platinum sponsor of the organisation and will continue to support the 2008 National Men’s Health Promotion Forums which assist in raising awareness and early detection of prostate cancer. As the company which sells more men’s underwear in Australia than any other, we know the importance of helping men understand and combat prostate cancer. Pacific Brands also donates stock from our businesses to help our charity partners – last year we donated $500,000 worth of in-kind stock to Lifeline and Brotherhood of St Laurence stores to help those less fortunate. Many of our businesses support a wide range of local community groups, schools, charities and voluntary organisations by providing financial support and in-kind donations. We encourage every one of our employees to be active in fundraising and volunteering initiatives in the community. Our Brands for Good programme continues to use the London Benchmarking Model, an internationally recognised framework for measuring and reporting corporate community contributions.

Our Environment Any business makes an impact on the environment, but we believe that minimising our environmental footprint delivers benefits not only to our company and our employees, but to our customers and the broader community as well. We’re continually improving our environmental impact, with an environmental management system to measure how we affect the community through: • Paper and packaging; • Greenhouse emissions; • Waste production and recycling; • Energy use; • Water use; and • Transport. We try to reduce our environmental impact by: • Supporting the National Packaging Covenant (NPC) and its commitment to managing the environmental impact of consumer packaging in Australia. Our packaging materials are either reused or recycled and new opportunities are being explored across Pacific Brands on an ongoing basis;

• Subscribing to Greenfleet and supporting its tree-planting programme to neutralise greenhouse emissions from all our corporate vehicles. We have 1,000 cars registered with the programme; • Recycling as much as possible through our partners SITA Environmental Services and Visy Recycling to achieve our target of zero percent waste to landfill; • Auditing of the energy and lighting we use in all our operations to identify where we can do better; • Setting printers to double-sided printing, which has reduced the amount of paper we use for printing; • Using water-saving programmes at our manufacturing sites; and • Insisting on all employees using a Toyota Prius hybrid car when they require a hire car. Case Study water

Many of our businesses use a significant amount of water in their manufacturing operations. Three of these sites now have water-saving initiatives in place that reuse water previously discarded as part of the process. In May 2008, Pacific Brands Hosiery Group in Coolaroo, Victoria installed a water-recycling plant that reuses the water used in the hosiery dyeing process. Using reverse-osmosis technology – a fine filtering technique – water from the rinse cycles is directed through a series of filters where it is purified and reused in the next batch to be dyed. The plant now saves almost 125,000 litres of water per day, halving its water use. This is the first time reverse-osmosis technology has been used in an Australian textile industry dyehouse on this scale. Holeproof in Nunawading, Victoria and Bonds in Wentworthville, New South Wales also have water reuse programs, where water used to wash pre-dyed yarn is reused in the dyeing process. These programmes have seen the sites save 27,500 litres and 120,000 litres of water a day respectively. More conversions of dyeing machines to use water saving techniques are planned in the coming months. We’ll continue to look for new ways we can decrease our water use without compromising the quality of our products.

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â&#x20AC;&#x153; This is the one I wear for special occasions.â&#x20AC;? Jason, 42, has a Chesty in every colour. Except pink.

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Operational Highlights Review of Operations

Pacific Brands is a resilient business and performed well in 2008 delivering 16.3% sales increase and 18.1% increase in earnings before interest, tax and amortisation. Our results were in line with the growth guidance we provided at the start of the year. We were particularly pleased to have increased our second-half profit despite declining retail conditions. Australian like-for-like growth, excluding Clearance Stores was 2.5%, affected by weaker second-half retail market conditions. Conditions in New Zealand were difficult. Our newly integrated businesses, the Yakka Group and Brand Collective have both performed well and to expectation. Tax

The effective tax rate on earnings for the year was 27.2%, which was marginally above the rate of 27.1% for the prior corresponding period. Interest

Net interest expense increased as a result of acquisitions but the company maintained a strong interest cover (EBITDA/Interest) of 3.5 times down from 4.1 in the prior corresponding period. Dividends

The full year dividend of 17.0 cents per share has been declared and represents a payout of 73% of reported NPAT. Dividends will be fully franked for Australian shareholders at a 30% tax rate. Review of Financial Position

Net debt was reduced by $59.5m during the year to $742.7m. Gearing (Net Debt/EBITDA) has been reduced to pre-Yakka Group acquisition levels. Total Capital Employed reduced by 2.3% during the year to $2,069.1m. Review of Cash Flows

Working Capital reduced 10.1% against the prior corresponding period to $452.8m. Inventory was well controlled with inventory turn improving to 3.4 times. Net operating cash flow up 39.2% to $157.2m, assisted by the timing of collection of debtors.

Underwear & Hosiery Our Underwear and Hosiery brands are the clear market leaders in Australia – a market in which we grew 3.3% during the year. Bonds and Rio are Australia’s number 1 and 2 women’s underwear brands. Berlei, Bonds and Hestia are the number 1, 2 and 3 women’s intimates brands, while Bonds, Holeproof and Rio are the country’s number 1, 2, and 3 sock brands i. Brand and product strength enabled Underwear and Hosiery to successfully focus on profitable growth – total sales grew 1.2% over the prior corresponding period, but profit grew 8.2%. Bonds was a key category driver and had another record sales year. Five major campaigns were successfully conducted through the year – each supporting new exciting ranges and innovations – the ‘Kaleidoscope’ women’s youth range, Baby EasySuit, the Mash range of mix and match tops/bottoms, the now ubiquitous Hoodies and the Patty Cake Hi & Lo range. The Berlei brand in Australia also improved its position with its highly successful ‘Great Shape Bus’ campaign. The brand now has the highest affinity level among consumers for women’s bras as well as the highest advocacy and biggest core loyalty group i.

Berlei’s reputation as a leader in bra design and innovation was further cemented by an endorsement from the Australian Institute of Sport who revealed that the Berlei High Performance Sports Bra is the bra of choice by female athletes at the Institute. Radio and television personality Fifi Box was appointed brand ambassador for Rio men’s and women’s underwear. Television ads featuring Fifi coincided with her role on Dancing With the Stars and were well received. Playtex have also recently appointed Kate Cebrano as their brand ambassador and in the coming year will use Kate’s image to strengthen the brand. Our hosiery brands have also performed well, leveraging from the continuing popularity of the ‘leg wear’ trend. Voodoo and Razzamatazz were among the key brands that released new styles and colours throughout the year to capitalise on the trend. We believe that the ‘leg wear’ trend will continue in the next period and we will continue to support our hosiery brands to ensure they are the fastest to market with new and improved ranges. (A$ million) FY07 Underwear & Hosiery Total net sales 630.0 EBITA 93.7 EBITA margin % 14.9%

FY08

% Chg

637.3 101.4 15.9%

1.2% 8.2% +1.0%

Outerwear & Sport Outerwear and Sport sales and profit increased sharply during the year. As predicted, growth in the division was strong, significantly heightened by the first full year of our acquisitions of Brand Collective and Yakka Group, both of which have been completed and integrated seamlessly into the business. In line with last years’ results, Brand Collective is continuing to perform to plan, increasing its number of flagship retail stores throughout Australia and overseas. Yakka Group has exceeded expectations, having achieved its best sales month ever in May 2008. The acquisition of Yakka Group has also significantly boosted the Workwear division of Outerwear and Sport and we now own the number one and number two industrial workwear brands in Australia: Hard Yakka and King Gee. Our Business to Business (B2B) division of the Workwear Group continued to perform strongly supported by the following businesses: Yakka, CTE, NNT and Dowd. Our holistic approach to Total Apparel Management has enabled success in winning new contracts whilst simultaneously retaining existing accounts. A number of our key contracts have been retained, including Bendigo Bank and NSW Fire Brigade and we have also secured numerous contracts for new clients including Westfield Australia, New Zealand and UK, Singapore Airlines and NSW Police. We will continue to identify opportunities to expand our business in the B2B sector over the next financial year. While the acquisitions were integrated seamlessly and contributed strongly, the underlying Outerwear and Sport businesses delivered on their promise to return to profit following the completion of a restructure.

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Slazenger Sportswear delivered pleasing results, particularly in the discount department store channel. The Slazenger BioSlyx performance apparel range launched in September 2007 was exceptionally well received by the market given its high quality at a very competitive price. Bikes have also shown strong growth throughout the year, capped off with the relaunch of Malvern Star towards the year end, with a repositioning of the brand to rebuild equity in the market. The release of the new Malvern Star Legend series, including the top of the range Oppy Le Mauco bike will drive solid growth in the category in the coming year. (A$ million) Outerwear & Sport Total net sales EBITA EBITA margin %

FY07

363.2 27.0 7.4%

FY08

% Chg

656.3 58.2 8.9%

80.7% 115.6% +1.5%

Home Comfort Home Comfort delivered a strong profit uplift of 9.2% over the prior corresponding period. Sheridan remains the favourite manchester brand in Australia ii. Brand strength and the launch of strong ranges through the year drove the business to solid growth in the first half of the year, however, manchester was more susceptible to the reduction in discretionary spending especially evident in the second half. Sheridan released two major campaigns during the year – the black and white ‘Feel’ campaign and the new ‘SHE by Sheridan’ premium range. Both campaigns were well received in the market. The strength of the Sheridan brand and its product ranges makes it well placed to capitalise when market conditions become more favourable. In the coming period, the focus for Sheridan will be to increase market share profitably. Pillows and quilts continued to sell well and delivered strong growth during the year. Tontine is Australia’s number one brand for pillows iii and has delivered solid growth throughout the year. The brand continues to connect well with consumers by releasing products that tap into needs that are important such as the BreathEASY range of bedding accessories supported by the National Asthma Council of Australia. Our Foams and Flooring businesses remained steady throughout the year in a challenging market. In November 2007, Dunlop Foams sponsored the first annual Young Designer Furniture Award 07, a unique design competition to encourage new ideas in the design and production of foambased furniture for the Australian youth market. The winning piece from the competition – the multi-purpose Zeus – inspired the threepiece Dusko Collection from Smith, a range of versatile micro-suede covered pieces filled with Australian-made Dunlop foam.

As previously announced to the market, Pacific Brands sold the New Zealand Foams, Flooring and Bedding businesses. (A$ million) Home Comfort Total net sales EBITA EBITA margin %

FY07

517.1 45.5 8.8%

FY08

% Chg

524.9 49.7 9.5%

1.5% 9.2% +0.7%

Footwear Footwear held its market share in the sporting, comfort and casual categories, but continued the declining trend from the previous year in the women’s fashion category. Dunlop Footwear, in particular, performed strongly overall with their marketing investment winning three awards at the Melbourne Advertising and Design Club (MADC) Awards – Best Art Direction for the Dunlop Industrial Campaign, Best Outdoor for the Dunlop Industrial Campaign and Best Website for Dunlop Volleys. More importantly, the successful marketing campaign drove sales of Volleys to increase rapidly, with the brand showing strong connections to consumers of all ages. An astonishing 1.8 million pairs were sold in the 2008 financial year – up 42% from 1.27 million last year. Rising sales of the shoes can largely be attributed to Volleys’ ‘Exceptionally Average’ campaign that ran over Summer 2007/2008. The campaign had an extremely positive response in the market and developed a strong following on internet video site Youtube. Merrell also grew their share in the market, expanding their range in the women’s outdoor market with the Barado – a lightweight shoe using 4-way stretch fabric that led the lifestyle category. Clarks Children’s footwear also showed strong growth throughout the year, with the Perfect Fit campaign re-establishing the brand in the fashion category. Clarks continues to follow an ‘ongoing fitting’ story, being the only children’s brand that comes in five different widths. Pacific Brands is highly regarded by retailers for possessing the ability to replenish footwear quickly and efficiently. During the 2008 financial year, 7 million pairs of shoes were delivered through our effective ‘pick and pack’ service. (A$ million) Footwear Total net sales EBITA EBITA margin %

(Endnotes) i Source – AMR Interactive Awareness Study May/June 2008 (Consumer awareness Men/Women) ii Source – Roy Morgan Research March 2008 iii Source – Newspoll

FY07

280.1 37.3 13.3%

FY08

% Chg

270.8 36.4 13.4%

(3.3%) (2.4%) +0.1%

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â&#x20AC;&#x153; They understand the difference between going out and working out.â&#x20AC;? Madeleine, 28, on why she loves her Berlei bras

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Left to right [standing]: Dominique Fisher, Andrew Cummins, John Grover (Company Secretary), Max Ould, James MacKenzie Left to right [seated]: Sue Morphet, Stephen Tierney, Pat Handley, Maureen Plavsic

Board of Directors

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Pat Handley Chairman, Independent Non-Executive

Andrew Cummins Director, Independent Non-Executive

Maureen Plavsic Director, Independent Non-Executive

BA (Econ), MBA (Finance) Age 63 Pat has been Chairman of Pacific Brands Limited since incorporation in December 2003. Pat brings with him over 30-years of international financial services experience. Pat was appointed a director of Vantage Private Equity Growth Limited in 2005. He has previously been an Executive Director and Chief Financial Officer of Westpac Banking Corporation, Chairman and CEO of Country Savings Bank (USA), Chief Financial Officer of BancOne Corporation (USA), Chairman of Calliva Group Holdings Pty Ltd and a director of Suncorp-Metway Limited, AMP Limited (2003 to 2004) and HHG plc. In addition, Pat is currently a strategic adviser to PricewaterhouseCoopers and Chairman of the Advisory Board of Nomura Securities.

BEng (Hons), MBA (Stanford), PostGradDip (Bus Studies), MIEAust, Age 59 Andrew joined the Board of Pacific Brands Holdings Pty Ltd in November 2001, bringing with him many years of experience in private equity and as an executive in prominent Australian and international public companies. Andrew was appointed to the Board of Pacific Brands Limited in February 2004. Currently, Andrew is Chairman of the Advisory Board of CVC Asia Pacific Limited and a director of Samsonite Inc., Global Voyager Holdings Pty Ltd, I-Med Group, Asia Bottles Limited and RCTI Inc. Previously, Andrew has been Chairman of Amatek Holdings Limited, a director of Affinity Health Limited (2003 to 2005), Tech Pacific Holdings, Li & Fung (Distribution) Limited, Inchcape plc, Strategy Director of Foster’s Brewing Group Limited and Chief Executive of Elders Investments Limited. Andrew also spent nine years with McKinsey & Company.

Age 52 Maureen joined the Board of Pacific Brands Limited in May 2004, bringing over 25 years of experience in media, advertising and brand marketing roles. Maureen is currently Chair of the Nomination and Remuneration Committee. Maureen is a trustee of National Gallery of Victoria (appointed 2003) a non-executive director of Macquarie Radio Network Limited (appointed 2005). Maureen has previously been a director of Seven Network Limited (1998 to 2003) and Opera Australia (1998 to 2003). Maureen previously spent 14 years in various executive roles at the Seven Network, including Chief Executive of Broadcast Television and prior to that Director of Sales and Corporate Marketing. Maureen also held various roles in the advertising industry and a senior regional media role at Unilever.

Dominique Fisher Director, Independent Non-Executive

BBus, FCA, FAICD, Age 55 James joined the Board of Pacific Brands Limited in May 2008 bringing with him extensive board experience gained in the financial sector. A Chartered Accountant by profession, James was a partner in both the Melbourne and Hong Kong ofﬁces of an international accounting ﬁrm, now part of Deloitte Touche Tohmatsu. He has also previously held the positions of Managing Director, Funds Management and Insurance at Australia and New Zealand Banking Group Limited, CEO of Norwich Union Australia, and a Director of funds management companies Paladin Australia, Portfolio Partners and Victorian Funds Management Corporation. James was formerly Chairman of the Victorian Transport Accident Commission and the Victorian WorkCover Authority and continues on both Boards of Management as a Director. James is Chairman of Mirvac Group (since 2005) and a director of Bravura Solutions Limited (since 2006) and Melco Crown Entertainment Limited (appointed April 2008). James has previously been a director of Circadian Technologies Limited (2002 to 2008), James Fielding Holdings Limited (2001 to 2005), Medaire Inc. (2004 to 2005), Strategic Pooled Development Limited (2005 to 2007) and Zenyth Therapeutics Limited (2005 to 2006).

Sue Morphet Chief Executive Officer, Executive Director

BSc (Ed) Age: 53 Sue was appointed CEO in January 2008 and prior to this was Group General Manager of Underwear & Hosiery at Pacific Brands, the largest operating group within the business. Sue joined Pacific Brands in 1996 as General Manager of Tontine, following which she became the General Manager of Bonds in 1999. Under her leadership, the Bonds team relaunched the iconic brand, more than doubling sales and taking the brand to women for the first time. Prior to joining Pacific Brands, Sue held senior marketing roles with Sheridan and Herbert Adams. Sue is a director of the L’Oréal Melbourne Fashion Festival and is a member of Chief Executive Women together with various other philanthropic interests. Stephen Tierney Chief Financial Officer, Executive Director

BComm, CA, Age 50 Stephen joined Pacific Brands in 1990 as Group Accountant after an 11 year career with Touche Ross & Co (now KPMG) specialising in finance, taxation and accounting. Stephen was appointed to the role of Chief Financial Officer in December 1998 which he held until December 2005. In December 2005, he was appointed to the role of Group General Manager, Operations where he was responsible for the day to day operations for all Operating Groups. In March 2008 Stephen was re-appointed to the role of Chief Financial Officer. Stephen was appointed to the Board of Pacific Brands Limited in December 2003.

BA (Hons), Age 51 Dominique joined the Board of Pacific Brands Limited in March 2007, bringing with her significant experience gained in information technology and telecommunications, electronic commerce, commercialisation of new technologies and the development and implementation of business strategy across a range of industries including roles as CEO. Dominique is currently the Chairman of Circadian Technologies Ltd, Managing Director of WebAlive Pty Ltd, and Chairman of Sky Technologies Pty Ltd and the Australian Council of the Arts Dance Board. She is also a board member of the Australian Council of Arts and the Prostate Cancer Foundation of Victoria. Dominique has previously been a director of Insurance Australian Group Ltd and its predecessor companies for eight years. She is a past member of the advisory board to the Minister for Information Technology and Communications and a director of the Malthouse Theatre, Sydney Opera House Trust and a wide range of other community organisations. Max Ould Director, Independent Non-Executive

BEcon, Age 61 Max was appointed to the Board of Pacific Brands Limited in February 2004, bringing leadership expertise in the consumer goods industry. Max is a director of Foster’s Group Limited (since 2004), AGL Energy Limited (previously The Australian Gas Light Company) (since 2004) and Chairman of Goodman Fielder Limited (since 2006). Max has considerable experience in the Australian food industry, including previous roles as Managing Director of the East Asiatic Company, CEO of Peters Foods and Managing Director of National Foods Limited from 1996 to 2003. Max is currently Chair of the Audit, Business Risk and Compliance Committee.

James MacKenzie Director, Independent Non-Executive

John Grover Company Secretary

LLB, BComm, FCIS, Age 46 John was appointed to the position of General Counsel & Company Secretary in December 2003 having held the same role with the Company’s predecessor, Pacific Brands Holdings Pty Ltd, since December 2001. Prior to joining Pacific Brands, he held senior corporate legal roles with Ansell Limited (formerly Pacific Dunlop Limited) and RTZ Limited (formerly CRA Limited). Prior to this John had an eight year career with major Australian law firm, Freehills, which included two roles based in South East Asia.

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Left to right: Ross Taylor, Mary Keely, Michael Sonand, Kit Cheong

Senior Management Team Ross Taylor Group General Manager, Home Comfort

Mary Keely Group General Manager, People & Performance

Ross joined Pacific Brands in 1991 after a career in sales and marketing with a number of major food and consumer goods companies. In his time with Pacific Brands, Ross has worked across all sectors of the business, with senior roles in sporting footwear, bikes, sporting equipment, workwear, outerwear, underwear and now home comfort. Ross brings extensive sales and marketing experience to this role and a real depth of understanding of the operational capacity of Pacific Brands. Ross is currently focused on driving marketing and operational excellence programmes in the Home Comfort Group.

Mary joined Pacific Brands in 1999, after a career at both Coca-Cola Amatil and Westpac. Mary is responsible for performance management, recruitment, safety, health and environment, corporate social responsibility, community investment, employee relations, learning and development, remuneration and benefits, and organisational development. Michael Sonand Group General Manager, Outerwear & Sport

Mike joined Pacific Brands in January 2007 as part of the acquisition of Brand Collective, the streetwear division of Globe, where he was President Australasia and Chief Operating Officer of Globe

International Limited. He brings extensive wholesale and retail experience to the role having held positions at Globe International Limited, Just Group, Myer and previously at KPMG. Kit Cheong Group General Manager, Supply & Operations

Kit joined Pacific Brands in March 2008 after spending a total of 18 years at the former Coles Myer in numerous General Manager positions including roles within the Target, Myer, Coles Supermarkets and Food, Liquor and Fuel divisions. Kit is responsible for all supply and operations activities across the business, including sourcing, supply chain, freight, quality and infrastructure.

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Left to right: Malcolm Ford, Mark Clark, Bernadette Hannagan

Malcolm Ford Group General Manager, Footwear

Mark Clark Group General Manager, Workwear

Bernadette Hannagan Group General Manager, Underwear & Hosiery

Malcolm joined Pacific Brands in 1991 after 20 years in product development, sales, marketing and general management within the footwear industry. Malcolm has been instrumental in developing a successful, strongly branded and category-focused footwear business, with the acquisition of brands and licences including Clarks, Hush Puppies, Sachi and Merrell.

Mark joined Pacific Brands in May 2008 from Coca-Cola Amatil, where he held positions including President of Coca-Cola Bottlers Korea for four years and Managing Director for Coca-Cola Amatil Australasia for eight years. Mark is the Group General Manager of Pacific Brands’ newest division – Workwear. Mark’s responsible for growing the combined businesses of Yakka, King Gee, NNT, Dowd, and CTE across our major B2B customers as well as various retail channels.

Bernadette joined Pacific Brands in October 2001 as General Manager, Tontine, having gained experience in the textile industry, including a seven year period at Sheridan. In 2004, she was appointed to the role of General Manager, The Berlei Group. Following this, Bernadette was General Manager, Asia based in Hong Kong where she was responsible for Asian sourcing and supplier relationship management working across all key categories of the company. Bernadette was appointed to her current role in December 2007.

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“ I love my sheets nearly as much as my snooze button.” Melissa, 27, blames her Sheridans every time she’s late for work

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Sheridan And so to bed When you consider we spend a third of our lives in our beds, it’s no surprise we place a high priority on the look and feel of the products we choose to sleep in. Sheridan’s rich history of innovation and design includes the introduction of the first printed and fitted sheets to Australia, bringing a new world of colour to our bedrooms. Hugely successful ranges designed by Ken Done and Jenny Kee followed in the 1980s successfully broadening the brands appeal and cemented our credentials as the fashion leader in our category. Our innovative approach to style and luxury come together today with powerful emotional dimensions in our Sheridan ‘Feel’ campaign. A unique marketing programme that introduced consumers to the concept of choices in textual sensations to feel against your skin. The luxurious SHE collection launched in 2007 is the ultimate in beautiful design and quality. Haute Couture for the bedroom – inspired by the classic glamour of the 1940s and ’50s – it features decadent extras such as pearl button closures and hand-sewn beads. The SHE collection also strengthens Sheridan’s reputation for innovation by fusing wearable fashion and home design by including pieces for outside the bedroom – cushions featuring highlight elegant glass brooches and a charmeuse throw, designed in a size suitable to wear as a wrap over an evening gown. Sheridan’s quality rating among consumers is five times higher than any other manchester brand and today it is truly ‘a fashion brand for the home’. Sheridan became a part of Pacific Brands in 2005 and our brand expertise has cemented Sheridan’s position as Australia’s best known, most trusted and preferred manchester brand. Many Australians view the bedroom as one of their favourite rooms in their homes. If Sheridan has its way, it’ll soon be their most favourite.

Sheridan has a rich history of quality and innovation, including the introduction of the printed sheet in the 1960s, which forever changed the way we sleep.

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FINANCIAL CONTENTS CORPORATE GOVERNANCE STATEMENT DIRECTORS’ REPORT REMUNERATION REPORT LEAD AUDITOR’S INDEPENDENCE DECLARATION FINANCIAL REPORT TO SHAREHOLDERS NOTE TO THE FINANCIAL STATEMENTS DIRECTORS’ DECLARATION INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PACIFIC BRANDS LIMITED SHAREHOLDERS’ STATISTICS SHAREHOLDERS’ INFORMATION COMPANY DIRECTORY

45 46 54 57 70 71 76 111 112 113 114 115

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CORPORATE GOVERNANCE STATEMENT Pacific Brands’ directors and management are committed to conducting the Company’s business ethically and in accordance with high standards of corporate governance. Good corporate governance structures encourage companies to create value for shareholders through sensible risk taking, but provide accountability and control systems commensurate with the risks involved. This statement describes Pacific Brands’ approach to corporate governance. The Board believes that the Company’s policies and practices comply in all substantial respects with the Australian Stock Exchange (ASX) Corporate Governance Council’s Corporate Governance Principles and Recommendations. A checklist summarising this is found in section 11 of this Statement. Copies of the main policies of corporate governance adopted by the Company can be found on the Company’s website at www.pacificbrands.com.au.

ROLE AND RESPONSIBILITIES OF THE BOARD

The Board is committed to maximising performance, generating appropriate levels of shareholder value and financial return, and sustaining on a long term basis a stable of recognisable and successful brands. In conducting business in line with these objectives, the Board is concerned to ensure that the Company is properly managed to protect and enhance shareholder interests, and that the Company, its directors, officers and employees operate in an appropriate environment of corporate governance. The Board’s charter can be found on the Company’s website at www.pacificbrands.com.au. The Board has ultimate responsibility for establishing policies regarding the business and affairs of the Company for the benefit of its shareholders and other stakeholders. The Board’s key responsibilities include: •

appointing, and reviewing the performance of, the Chief Executive Officer;

•

ensuring executive and Board succession planning;

•

approving budgets and strategic plans;

•

evaluating the performance of the Company against strategies and business plans;

•

approving the Company’s risk management strategy and monitoring its effectiveness;

•

approving significant acquisitions or divestments;

•

overseeing relations with shareholders; and

•

approving accounting policies and annual accounts.

The Board delegates management of the Company’s resources to senior management, under the leadership of the Chief Executive Officer, to deliver the strategic direction and goals agreed between senior management and the Board. A key function of the Board is to monitor the performance of senior management in this function. The evaluation of senior management’s performance is addressed as part of the processes described in the Remuneration Report.

BOARD APPOINTMENT AND COMPOSITION

It is the Board’s policy that there should be a majority of independent, non-executive directors. That is, the majority of directors should be free from any business or other relationship that could materially compromise their independent judgement. As an additional safeguard in preserving independence, the policy requires that the office of Chairman be held by an independent, non-executive director. Specifically, the Board considers a director to be independent where he or she is not, and was not within the last three years, a member of management and is free of any business or other relationship that could materially interfere with, or could reasonably be perceived to materially interfere with, the director’s ability to act in the best interests of the Company. The Board will consider the materiality of any given relationship on a case by case basis and has adopted materiality guidelines to assist it in this regard. Under the Board’s materiality guidelines, the following interests are regarded as, prima facie, material: •

a holding of 5% or more of the Company’s shares; or

•

an affiliation with a business which accounts for 5% or more of the revenue or expenses of the Company.

However, ultimately the Board will make a qualitative assessment of any factors or considerations which may, or might reasonably be perceived to, materially interfere with the director’s ability to act in the best interests of the Company. The Board reviews the independence of each director in light of interests disclosed to the Board from time to time and at least once a year. The Board has determined that each of the six non-executive directors satisfy the Board’s criteria for independence. Directors are required to promptly disclose to the Board interests in contracts, other directorships or offices held, possible related party transactions and sales or purchases of the Company’s shares. The Board is currently made up of eight directors, the Company’s two executive directors and six independent non-executive directors. Details of the directors as at the date of this Annual Report, including their qualifications and experience, are set out on page 39 of the Annual Report. In making recommendations to the Board regarding the appointment of directors, the Nomination and Remuneration Committee periodically assesses the appropriate mix of skills, experience and expertise required by the Board and assesses the extent to which the required skills and experience are represented on the Board. Nominations for appointment are then approved by the Board as a whole. New directors are provided with a letter of appointment, setting out the terms of their appointment, including their powers, rights and obligations. An induction program is provided for new members of the Board. Under the Company’s Constitution and the ASX Listing Rules, all directors other than the Chief Executive Officer are subject to shareholder reelection every three years. It is the Board’s current policy that, in general, directors do not hold office beyond a maximum term of nine years. The Company’s Constitution requires directors to hold a minimum 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 54 of the Annual Report.

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BOARD PROCESSES

The Board currently schedules nine meetings per year. In addition, the Board meets whenever necessary to deal with specific matters requiring attention between the scheduled meetings. During the 2008 financial year, the Board met nine times. Extraordinary meetings take place at such other times as may be necessary to address any specific significant matters that may arise. The table on page 54 of the Annual Report shows the number of Board meetings held in the 2008 financial year and the attendance of each director. The agenda for meetings is prepared by the Company Secretary, in conjunction with the Chairman and Chief Executive Officer, with periodic input from the Board. Comprehensive Board papers are distributed to directors in advance of scheduled meetings. Board meetings take place both at the Company’s head office and at key operating sites, on a rotational basis, to assist the Board in its understanding of operational issues.

BOARD COMMITTEES

To assist the Board in the execution of its responsibilities, the Board has established two standing committees, being: •

the Audit, Business Risk and Compliance Committee; and

•

the Nomination and Remuneration Committee.

Any issues of corporate governance which are not dealt with specifically by either committee are the responsibility of the full Board. Each committee operates under a specific charter, both of which can be found on the Company’s website at www.pacificbrands.com.au. The charter of each committee requires all independent directors to be members of the committee and for the committee to be comprised of a minimum of three independent directors. The purpose of having all independent directors as members of each committee is to allow the Board to delve more deeply into issues, without formal Board meetings being burdened with discussions of technical compliance and other issues.

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CORPORATE GOVERNANCE STATEMENT (CONTINUED) 4

BOARD COMMITTEES (CONTINUED)

Details of the committee members’ qualifications are set out on page 39 of the Annual Report. Further details regarding the two committees are set out in the table below: AUDIT, BUSINESS RISK AND COMPLIANCE COMMITTEE

NOMINATION AND REMUNERATION COMMITTEE

Role and responsibilities

The committee’s role is to monitor and review the effectiveness of the Company’s controls in the areas of operational and balance sheet risk, legal and regulatory compliance and financial reporting.

The committee is responsible for matters relating to succession planning, recruitment and the appointment and remuneration of directors and the Chief Executive Officer, as well as for other senior executives.

Functions

• overseeing the adequacy of processes and controls established by senior management to identify and manage areas of potential risk and to safeguard the assets of the Company;

• assessing Board composition, strategic function and size (taking into consideration the skills and experience required and the extent to which they are represented on the Board);

• overseeing the relationship with the external auditor, auditor independence and the external audit function;

• establishing processes for reviewing the performance of individual non-executive directors, the Board as a whole and the operation of Board committees;

• evaluating the processes in place to ensure that accounting records are properly maintained in accordance with statutory requirements; and • ensuring that financial information provided to shareholders and the Board is accurate and reliable.

• overseeing the selection and appointment practices for non-executive directors and senior management of the Company; • developing succession plans for the Board and overseeing the development of succession planning in relation to the Chief Executive Officer and senior management; • making recommendations to the Board on the Chief Executive Officer’s remuneration (including short and long term incentive plans); and • reviewing and approving recommendations from the Chief Executive Officer on total levels of remuneration, and performance targets, for senior executives reporting to the Chief Executive Officer.

Members

• Max Ould (Chair)

• Maureen Plavsic (Chair)

• Andrew Cummins

• Dominique Fisher

• Pat Handley

• James MacKenzie

• Maureen Plavsic

• Max Ould

Composition

The committee must comprise of at least three independent directors. The Chairman of the Board is not permitted to chair the committee.

The committee must comprise of at least three independent directors.

Consultation

The Chief Financial Officer and external auditor have standing invitations to attend committee meetings. Other members of management may also attend by invitation. The committee has access to financial and legal advisers, in accordance with the Board’s general policy. The chairman of the committee also meets privately with the auditor to ensure the committee can be satisfied that the auditor has had the full co-operation of management in conducting the audit, and to give the auditor the opportunity to raise any matters of concern.

The Chief Executive Officer and the Group General Manager, People and Performance have standing invitations to attend committee meetings. The committee may obtain information from, and consult with, management and external advisers, as it considers appropriate.

Meetings and attendance

The committee is scheduled to meet three times in the 2009 financial year. The table on page 54 of this statement shows the number of meetings held in the 2008 financial year and the attendance of each member.

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REVIEW OF BOARD PERFORMANCE

The performance of the Board is reviewed bi-annually by the Board with the assistance of the Nomination and Remuneration Committee and an external adviser. The most recent process of formally reviewing the performance of the Board (including the Board committees) was undertaken in late 2007. The evaluation process includes a review of: •

the Board’s membership;

•

Board processes and its committees’ effectiveness in supporting the Board; and

•

the performance of the Board and its committees.

As part of the 2007 review process, all directors completed a questionnaire and were able to make other comments or raise any issue that they had relating to the Board’s or a committee’s operation. The results of the questionnaire were compiled by the external adviser and a written report provided to the Board which included both a quantitative and qualitative analysis. In addition, a review of each director’s performance is also undertaken prior to a director standing for re-election. In the case of directors, other than the Chairman, the review is undertaken by the Chairman after consultation with the other directors. This occurred during 2008 in respect of the proposed re-election of Mr A.D. Cummins, Ms M.A. Plavsic and Mr S.J. Tierney. In the case of the Chairman, a director chosen by the Board for this purpose would review the Chairman’s performance. Details about the senior executive performance review process are contained in the Remuneration Report on page 57.

ACCESS TO INFORMATION AND INDEPENDENT ADVICE

Each director has the right of access to all relevant Company information and to the Company’s senior management, external advisers and auditors. Directors may also seek independent professional advice at the Company’s expense. Any director seeking such advice is required to make a formal request to the Chairman. Where the Chairman wishes to seek independent advice, he must make a formal request to the Chair of the Audit, Business Risk and Compliance Committee. Any advice so received must be made available to all other directors. Pursuant to a deed executed by the Company and each director, a director also has the right to have access to all documents which have been presented to meetings of the Board or to any committee of the Board or otherwise made available to the director whilst in office. This right continues for a term of seven years after ceasing to be a director or such longer period as is necessary to determine relevant legal proceedings that commenced during that term.

DISCUSSION OF GOVERNANCE POLICIES

The Board has adopted corporate governance policies and practices designed to promote responsible management and conduct of the Company. The Board (together with management) regularly review these policies and practices to ensure the Company maintains or improves its corporate governance standards in a changing environment. A discussion of the Company’s key governance policies is set out below.

7.1 Risk management The Company is committed to the proper identification and management of risk. The Company has in place processes to identify and measure business risk, including the regular review of results from its risk identification procedures. The Audit, Business Risk and Compliance Committee is charged with oversight of these processes. The Committee has adopted a written policy in relation to the Company’s risk oversight and management practices and a copy of this policy is available through the Company’s website at www.pacificbrands.com.au. The Board receives regular reports about the financial condition and operational results of the Company. The Board has also received written assurances from the Chief Executive Officer and Chief Financial Officer that to the best of their knowledge and belief: •

the Company’s financial statements present a true and fair view of the Company’s financial condition and operational results and comply with relevant accounting standards; and

•

the risk management and internal compliance and control systems are sound, appropriate and operating effectively and implement the policies adopted by the Board.

The Company regularly undertakes reviews of its risk management procedures which include implementation of a system of internal sign-offs to ensure not only that the Company complies with its legal obligations but that the Board, and ultimately shareholders, can take comfort that an appropriate system of checks and balances is in place regarding those areas of the business which present financial or operating risks. Periodically the Audit, Business Risk and Compliance Committee initiate an external review of the Company’s risk management practices which to date have not revealed any material issues of concern in relation to the Company’s risk management practices. The committee reviews the appropriateness of the framework adopted by the Company for managing operational risk issues and the Company’s action plans designed to strengthen and improve risk control practices. In this regard, on a rotational basis, senior management updates the committee or the full Board on the Company’s risk profile and compliance and control systems. Management has also reported to the committee on the effectiveness of the Company’s compliance and control systems in the management of material risks. The Committee also monitors and reviews activities in the Company’s material risk areas of taxation, treasury operations, insurance and environment, quality and occupational health and safety. As part of the Company’s risk management framework, comprehensive practices have been established to ensure: •

capital expenditure and leasing commitments above a certain size obtain prior Board approval;

•

financial exposures are controlled, including the use of hedging arrangements;

•

occupational health and safety standards and management systems (‘Brandsafe’) are monitored and reviewed to achieve high standards of performance and compliance with regulations;

•

business transactions are properly authorised and executed;

•

the quality and integrity of personnel;

•

the ethical practices of its suppliers (see section 8 of this statement);

•

financial reporting accuracy and compliance with the financial reporting regulatory framework (see above); and

•

environmental regulation compliance (see section 9 of this statement).

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CORPORATE GOVERNANCE STATEMENT (CONTINUED) 7

DISCUSSION OF GOVERNANCE POLICIES (CONTINUED)

7.1 Risk management (continued) The Company has also adopted a code of conduct which sets out the Company’s commitment to maintaining the highest level of integrity and ethical standards in all business practices. The code of conduct sets out for all directors, management and employees, the standards of behaviour expected of them, and the steps that should be taken in the event of uncertainty or a suspected breach by a colleague. The code of conduct is discussed in more detail in section 7.4 of this statement.

7.2 Continuous disclosure and keeping shareholders informed The Company aims to ensure that shareholders are well informed of all major developments affecting the state of affairs of the Company. To achieve this, the Company has implemented the following procedures: •

shareholders can gain access to information about the Company, including media releases, key policies, annual reports and financial accounts, and the terms of reference of the Company’s committees through the Company’s website at www.pacificbrands.com.au or by writing to the Company Secretary at the Company’s registered office address;

•

all relevant announcements made to the market and any related information are posted on the Company’s website as soon as they have been released to the ASX and New Zealand Stock Exchange (‘NZX’); and

•

the Company encourages full participation of shareholders at its Annual General Meeting to ensure a high level of accountability and discussion of the Company’s strategy and goals; and

•

the Company also invites the external auditor to attend its Annual General Meeting and be available to answer shareholder questions about the conduct of the audit, and the preparation and content of the auditor’s report.

The Company’s commitment to keeping shareholders fully informed is embodied in the Company’s Shareholder Communications Policy, a copy of which can be found on the Company’s website at www.pacificbrands.com.au. The Company is fully aware of the obligations under the Corporations Act 2001, and the ASX and NZX listing rules, to keep the market fully informed of information which is not generally available and which may have a material effect on the price or value of the Company’s securities. The Company has adopted a policy which establishes procedures to ensure that directors and management are aware of, and fulfil their obligations, in relation to the timely disclosure of material price-sensitive information. Information must not be selectively disclosed prior to being announced to the ASX and NZX. Directors and senior management must notify the Company Secretary as soon as they become aware of information that should be considered for release to the market. The Company Secretary is the person responsible for communication with the ASX and NZX. A copy of the Company’s Continuous Disclosure Policy may be found on the Company’s website at www.pacificbrands.com.au.

7.3 Trading in shares by directors and employees The Company has adopted guidelines for dealing in securities which provide a summary of prohibited conduct in relation to dealings in securities under the Corporations Act 2001 and the Securities Markets Act 1988 (NZ). The guidelines also establish a best practice procedure in relation to directors’, management’s and employees’ dealings in the Company’s shares. Subject to the overriding restriction that persons may not deal in shares while they are in possession of material price-sensitive information, directors, management and employees will only be permitted to deal in shares during certain ‘window periods’, being within 31 days following release of the Company’s full and half year financial results and the holding of the Company’s Annual General Meeting. Outside of these periods, directors, management and employees must receive clearance from the person stated in the guidelines for any proposed dealing in shares, with such clearance only to be granted in exceptional circumstances. For New Zealand, any dealing in the Company’s shares must receive clearance from the Company Secretary. Except in circumstances of special hardship, with the Chairman’s approval, employees may not buy and sell the Company’s shares within a three month period. A copy of the Company’s Guidelines for Dealing in Securities is available on the Company’s website at www.pacificbrands.com.au.

7.4 Ethical standards and code of conduct The Board believes it is important to provide employees with a clear set of values that emphasise a culture encompassing strong corporate governance, sound business practices and good ethical conduct. Accordingly, the Company adopted a code of conduct which outlines how the Company expects directors and employees to behave and conduct business in a range of circumstances. In particular, the code requires: •

awareness of, and compliance with, laws and regulations relevant to the Company’s operations including environmental laws and the Trade Practices Act 1974 and equivalent overseas legislation;

•

all business transactions to be conducted solely in the best interests of the Company and for directors and employees to avoid situations where their personal interest could conflict with interests of the Company or create the appearance of a conflict of interest;

•

employees and directors to protect any Company assets under their control and not to use Company assets for personal purposes, without prior Company approval;

•

employees and directors to respect the privacy of others and comply with the Company’s privacy policy; and

•

employees and directors not to disclose or use in any improper manner confidential information about the Company, its customers or affairs.

A copy of the code of conduct is available on the Company’s website at www.pacificbrands.com.au. The Company has extensive dealings with companies based in countries where gift giving has important cultural significance and plays an important role in business relationships. As a consequence, the Company has a policy on the giving and receipt of gifts, a copy of which can be found on the Company’s website at www.pacificbrands.com.au. The policy prohibits the giving and acceptance of gifts of a material nature and, in particular, the giving and acceptance of gifts where they are given or offered with the intention to influence business dealings.

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DISCUSSION OF GOVERNANCE POLICIES (CONTINUED)

7.4 Ethical standards and code of conduct (continued) Employees are encouraged to bring to the attention of their manager, their People and Performance Manager or members of senior management any behaviour or activity occurring in the business which they believe to be inappropriate or inconsistent with 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 employees to report matters of concern on a confidential basis. The service, known as ‘Faircall’, is operated by an independent third party to ensure that calls can be made in total confidence. Callers may also elect to remain anonymous. The third party reports on each call to the Group General Manager, People and Performance. A summary of all calls and the subsequent actions undertaken are periodically reported to the Nomination and Remuneration Committee. Under the provisions of the Company’s whistleblower protection policy, any reported improper conduct will be investigated while protecting the confidentiality of the identity of the whistleblower. The Company also has in place an Occupational Health and Safety Policy which outlines the methods and practices that the Company requires to be observed to provide a working environment which is free, as far as practicable, from risk of injury or disease for the Company’s employees, visitors and contractors. Occupational health and safety key performance indicators are reported to the Board on a regular basis, to assist the Board in monitoring compliance with the Company’s Occupational Health and Safety Policy.

7.5 Remuneration Full details of the remuneration paid to non-executive and executive directors and the Company’s senior executives in relation to the 2008 financial year, as well as the Board policy for determining the nature and amount of remuneration and the relationship between such policy and performance, is discussed in detail in sections 3 and 4 of the Remuneration Report.

7.6 External audit The Audit, Business Risk and Compliance Committee has also adopted a policy on the provision of non-audit services and the rotation of external audit personnel. Subject to some limited exceptions, unless the committee determines otherwise, the auditor is prohibited from providing valuation and fairness opinions, internal audit services, advice on deal structuring, tax planning advice, IT systems services, executive recruitment services, material human resources functions or legal services or from acting as a broker, promoter or underwriter. The policy also requires the partner managing the Company’s audit to be rotated within five years from the date of appointment. A copy of this policy is also available on the Company’s website at www.pacificbrands.com.au.

CODE OF CONDUCT FOR SUPPLIERS

The Company is committed to ethical and responsible conduct in all of its operations, and respect for the rights of all individuals and the environment. The Company expects these same commitments to be shared by all suppliers of its products and seeks to enforce this policy through a formal code of conduct, which includes: •

not using child labour;

•

not using any forced or involuntary labour; and

•

providing employees with a safe and healthy workplace in compliance with all applicable laws and regulations.

The Company, through external auditors, periodically conducts audits of its non-Australasian suppliers and in the event that a supplier is found to be unable or unwilling to achieve compliance, the Company reserves the right to terminate or suspend the relevant supply contract.

ENVIRONMENT

The Company’s operations are subject to environmental laws and regulations, the details of which vary depending upon the jurisdiction in which the operation is located. These environmental laws and regulations control the use of land, the erection of buildings and structures on land, the emission of substances to water, land and atmosphere, the emission of noise and odours, the treatment and disposal of waste, and the investigation and remediation of soil and groundwater contamination. The Company has procedures in place designed to ensure compliance with all environmental regulatory requirements. In particular, the Company has developed a system, known as the ‘Brandsafe Environmental Management System’, for identifying and assessing the environmental hazards which arise from its activities and effectively managing those risks by applying sound practices for the prevention of pollution and disposal and minimisation of waste. Brandsafe is based on international standards AS/NZS ISO 9001 which covers areas such as leadership, process approach and continual improvement. The Company’s major environmental impacts and the key programs in place to help reduce the Company’s environmental impact are discussed on page 31 of the Annual Report.

NZX CORPORATE GOVERNANCE RULES

The following statement is included in compliance with NZX Listing Rule 5.1.6(d). The Company notes that the ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations (‘ASX Corporate Governance Rules’) may materially differ from NZX’s corporate governance rules and principles in the NZX Corporate Governance Best Practice Code. Details of the ASX corporate governance rules are available on the ASX website at www.asx.com.au.

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CORPORATE GOVERNANCE STATEMENT (CONTINUED) 11

ASX CORPORATE GOVERNANCE COUNCIL’S PRINCIPLES OF GOOD CORPORATE GOVERNANCE AND BEST PRACTICE RECOMMENDATIONS ASX PRINCIPLE

REFERENCE 1

COMPLIANCE

Principle 1:

Lay solid foundations for management and oversight

1.1

Companies should establish the functions reserved to the board and those delegated to senior executives and disclose those functions.

1, Remuneration Report

Comply

1.2

Companies should disclose the process for evaluating the performances of senior executives.

1, Remuneration Report

Comply

1.3

Companies should provide the information indicated in the Guide to reporting on Principle 1.

1, Remuneration Report

Comply

Principle 2:

Structure the board to add value

2.1

A majority of the board should be independent directors.

2.2

The chair should be an independent director.

Comply

2.3

The roles of chair and chief executive officer should not be exercised by the same individual.

Comply

2.4

The board should establish a nomination committee.

Comply

2.5

Companies should disclose the process for evaluating the performance of the board, its committees and individual directors.

Comply

2.6

Companies should provide the information indicated in Guide to reporting on Principle 2.

1, 2, 4, 6, Board members (page 39), Directors’ Report (page 54)

Comply

7.4

Comply

Principle 3:

Promote ethical and responsible decision making

3.1

Companies should establish a code of conduct and disclose the code or a summary of the code as to:

3.1.1 the practices necessary to maintain confidence in the company’s integrity; 3.1.2 the practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders; and 3.1.3 the responsibility and accountability of individuals for reporting and investigating reports of unethical practices. 3.2

Companies should establish a policy concerning trading in company securities by directors, senior executives and employees and disclose the policy or a summary of that policy.

7.3

Comply

3.3

Companies shall provide the information indicated in Guide to reporting on Principle 3.

7.3, 7.4

Comply

Principle 4:

Safeguard integrity in financial reporting

4.1

The board should establish an audit committee.

Comply

4.2

The audit committee should be structured so that it:

Comply

• consists only of non-executive directors; • consists of a majority of independent directors; • is chaired by an independent chair, who is not chair of the board; and • has at least three members 4.4

The audit committee should have a formal charter.

Comply

4.5

Companies should provide the information indicated in Guide to reporting on Principle 4.

Comply

Principle 5:

Make timely and balanced disclosure

5.1

Companies should establish written policies and procedures designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies.

7.2

Comply

5.2

Companies should provide the information indicated in Guide to reporting on Principle 5.

7.2

Comply

Principle 6:

Respect the rights of shareholders

6.1

Companies should design and disclose a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy.

7.2

Comply

6.2

Companies should provide the information indicated in the Guide to reporting on Principle 6.

7.2

Comply

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ASX CORPORATE GOVERNANCE COUNCIL’S PRINCIPLES OF GOOD CORPORATE GOVERNANCE AND BEST PRACTICE RECOMMENDATIONS (CONTINUED) ASX PRINCIPLE

REFERENCE 1

COMPLIANCE

Principle 7:

Recognise and manage risk

7.1

Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies.

7.1

Comply

7.2

The board should require management to design and implement the risk management and internal control system to manage the company’s material business risks and report to it on whether those risks are being managed effectively. The board should disclose that management has reported to it as to the effectiveness of the company’s management of its material business risks.

7.1

Comply

7.3

The board should disclose whether it has received assurance from the chief executive officer (or equivalent) and the chief financial officer (or equivalent) that, the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks.

7.1

Comply

7.4

Companies should provide the information indicated in Guide to reporting on Principle 7.

4, 7.1, 7.6

Comply

Principle 8:

Remunerate fairly and responsibly

8.1

The board should establish a remuneration committee.

Comply

8.2

Companies should clearly distinguish the structure of non-executive directors’ remuneration from that of executive directors and senior executives.

Remuneration Report

Comply

8.3

Companies should provide the information indicated in Guide to reporting on Principle 8.

4, 7.5, Directors’ Report (page 54) and Remuneration Report

Comply

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

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DIRECTORS’ REPORT The directors of Pacific Brands Limited (‘Company’) present their report together with the financial report of the Company and its controlled entities (collectively the ‘consolidated entity’) for the year ended 30 June 2008 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 57 to 70 which forms part of this Directors’ Report.

DIRECTORS The directors of the Company during the financial year and up to the date of this report are: R.P. Handley, Chairman A.D. Cummins D.G. Fisher J.A.C. MacKenzie (appointed 27 May 2008) P.R. Moore (retired 1 January 2008) S.M. Morphet, Chief Executive Officer (appointed 1 January 2008) M.G. Ould M.A. Plavsic S.J. Tierney, Chief Financial Officer Particulars of directors’ age, qualifications and other listed company directorships, experience and special responsibilities are detailed on page 39 of the Annual Report.

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 ORDINARY SHARES

A.D. Cummins

316,293

D.G. Fisher

15,321

R.P. Handley

928,544

J.A.C. MacKenzie

3,911

S.M. Morphet

361,337

M.G. Ould

104,827

M.A. Plavsic

70,000

S.J. Tierney

393,126

PERFORMANCE 1 RIGHTS

342,261

165,712

Details of the terms and conditions of issue of the performance rights granted to Mrs Morphet and Mr Tierney are set out on pages 61 to 66 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 2008 financial year are: BOARD DIRECTOR

HELD

AUDIT, BUSINESS RISK AND COMPLIANCE COMMITTEE

ATTENDED

HELD

ATTENDED

NOMINATION AND REMUNERATION COMMITTEE 1

HELD

ATTENDED

A.D. Cummins

D.G. Fisher

R.P. Handley

J.A.C. MacKenzie

N/A

P.R. Moore

N/A

S.M. Morphet

N/A

M.G. Ould

M.A. Plavsic

S.J. Tierney

N/A

1 2 3

This column shows the number of meetings held during the period the director was a member of the Board or committee. This column shows the number of meetings attended. Mr Tierney also attended all meetings of the Audit, Business Risk and Compliance Committee by invitation. Mr Moore and Mrs Morphet each attended the two meetings of the Audit, Business Risk and Compliance Committee held during the relevant period each was a director of the Company. Mrs Morphet also attended all meetings of the Nomination and Remuneration Committee by invitation. Mr Moore attended the one meeting of the Nomination and Remuneration Committee held while he was a director.

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STATE OF AFFAIRS In the opinion of the directors, there were no significant changes in the state of affairs of the consolidated entity that occurred during the financial year under review.

PRINCIPAL ACTIVITIES The principal activities of the consolidated entity during the course of the 2008 financial year were the manufacturing, sourcing, marketing and distribution of consumer lifestyle brands across the underwear, socks, hosiery, intimate apparel, footwear, bed linen, bedding accessories, bedding, foams, corporate uniforms, workwear, streetwear, lifestyle apparel and sporting goods markets. All products are sold predominantly throughout the Asia-Pacific region. The consolidated entity also markets and distributes underwear, intimates, footwear and bed linen in the United Kingdom and Europe. There has been no significant change in the nature of principal activities during the year. The Company’s key strategies established to drive future shareholder value include: •

building brand leadership and consumer connections through targeted marketing, innovation and strong product development;

•

operational excellence by leveraging scale across sourcing, logistics and technology;

•

growth through strategic acquisitions to build strong category positions; and

•

increased investment in attracting and retaining a creative, talented and motivated workforce.

These strategies have been applied to drive branded sales growth and demonstrate the power of our branded portfolio. Outside of its people, the Company’s brands are its number one asset. The Company is focused on branded sales, margin growth, earnings growth and cash generation. In the 2009 financial year, the Company will continue to focus on earnings growth, profit improvement and cash generation via: •

raising the performance bar – brand processes and people;

•

profitable, branded sales growth;

•

brand investment through relevant advertising and targeted marketing;

•

innovative product development based on consumer insight and research – driving consumer needs and wants;

•

increasing our points of presence through retail presentation and new geographies;

•

continued emphasis on gross profit improvement;

•

building “Business to Business” (corporate uniform) channels;

•

leveraging of scale across the total business;

•

maintaining flexibility and speed in the supply chain to meet the changing needs of the marketplace;

•

creation of local manufacturing excellence;

•

management of working capital and cash flow; and

•

execution of strategically sound, value enhancing acquisitions.

Disclosure of information relating to developments in the business strategies and prospects for the consolidated entity for future financial years which would not, in the opinion of the directors, be unreasonably prejudicial to the consolidated entity is contained in the Chairman’s Letter and the Chief Executive Officer’s Report and the Review of Operations.

REVIEW AND RESULTS OF OPERATIONS A review of the operations of the consolidated entity during the 2008 financial year and of the results of those operations is contained on pages 34 and 35 of the Annual Report.

DIVIDENDS An interim dividend of 8.5 cents per share, amounting to $42.7 million was paid on 1 April 2008. The directors have declared a final dividend of $42.7 million to be paid at the rate of 8.5 cents per share on 502,277,852 ordinary shares. The dividend is expected to be paid on 1 October 2008 to shareholders on the register at the record date of 29 August 2008. This dividend will be fully franked at the 30% corporate tax rate in Australia.

EVENTS SUBSEQUENT TO REPORTING DATE There has not arisen in the interval between the end of the financial year and the date of this report, any item, transaction or event that has significantly affected, or may significantly affect, the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity, in future financial periods.

LIKELY DEVELOPMENTS Likely developments in the operations of the consolidated entity and the expected results of those operations are covered generally in the Review of Operations on pages 34 and 35 of the Annual Report. Further information as to likely developments in the operations of the consolidated entity and the expected results of those operations in subsequent financial periods has not been included in this report because disclosure would be likely to result in unreasonable prejudice to the consolidated entity.

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DIRECTORS’ REPORT (CONTINUED) NON-AUDIT SERVICES During the 2008 financial year, KPMG, the Company’s auditor, performed certain other services in addition to its statutory duties. The Board has considered the non-audit services provided during the financial year by the auditor and in accordance with written advice provided by resolution of the Audit, Business Risk and Compliance Committee, is satisfied that the provision of those non-audit services during the financial year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: •

all non-audit services were subject to the corporate governance procedures adopted by the Company and have been reviewed by the Audit, Business Risk and Compliance Committee to ensure they did not impact the integrity and objectivity of the auditor; and

•

the non-audit services provided do not undermine the general principles relating to auditor independence as set out in Professional Statement F1 Professional Independence, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards.

A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is included on page 70 in this report. 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 financial year are set out below: CONSOLIDATED 2008

2007

1,259,600

1,128,000

Statutory audit: Auditors of the Company – audit and review of financial reports (KPMG Australia) – audit and review of financial reports (overseas KPMG firms)

377,400

291,000

1,637,000

1,419,000

Services other than statutory audit: Other assurance services – other assurance services (KPMG Australia)

85,641

13,240

– other assurance services (overseas KPMG firms)

26,873

38,167

171,294

209,800

14,461

9,357

298,269

270,564

Other services – taxation compliance services (KPMG Australia) – taxation compliance services (overseas KPMG firms)

INDEMNIFICATION AND INSURANCE OF OFFICERS In accordance with the Company’s Constitution, the Company has agreed to indemnify every person who is, or has been, an officer of the Company or its controlled entities against any liability (including reasonable legal costs) incurred by the person as such an officer of the Company or its controlled entities, to the extent permitted by law and subject to the restrictions in section 199A of the Corporations Act 2001. Indemnified officers are the directors and secretaries of the Company or its controlled entities. During the financial year, there were no claims made against any officer of the Company that would invoke the above indemnity. In addition, the Company has entered into standard form deeds of indemnity with all of its current directors against all liabilities which they may incur in the performance of their duties as directors of the Company, except liability to the Company or a related body corporate, liability for a pecuniary penalty or compensation under the Corporations Act 2001, and liability arising from conduct involving a lack of good faith. The Company holds a directors’ and officers’ liability insurance policy on behalf of current and former directors and officers of the Company and its controlled entities. The period of the policy extends from 1 December 2007 to 30 November 2008 and the premium was paid on 7 February 2008. Due to confidentiality obligations and undertakings of the policy, no further details in respect of the premium or policy can be disclosed.

ENVIRONMENTAL REGULATION The consolidated entity’s operations are subject to environmental laws and regulations, the details of which vary depending upon the jurisdiction in which the operation is located. These environmental laws and regulations control the use of land, the erection of buildings and structures on land, the emission of substances to water, land and atmosphere, the emission of noise and odours, the treatment and disposal of waste, and the investigation and remediation of soil and groundwater contamination. The consolidated entity has procedures in place designed to ensure compliance with all environmental regulatory requirements. The directors are not aware of any material breaches of environmental regulations during the financial year.

ROUNDING OFF The Company is of a kind referred to in Australian Securities and Investments Commission Class Order 98/100 dated 10 July 1998 (as in force on 30 June 2008) and in accordance with that Class Order, amounts in the financial report and this Directors’ Report have been rounded off to the nearest thousand dollars, unless otherwise stated.

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DIRECTORS’ REPORT/REMUNERATION REPORT 1

REMUNERATION STRATEGY

The Board believes that a transparent and appropriately structured remuneration strategy can underpin a strong performance based culture and assist in driving above average returns. The Company’s remuneration strategy has been constructed based on this belief and is designed to attract, retain and motivate appropriately qualified and experienced directors and senior executives. This Remuneration Report discloses the remuneration of, and provides an explanation of the remuneration strategies for key management personnel of the consolidated entity, including the directors and the five most highly remunerated executives of the Company and the consolidated entity. A substantial proportion of the remuneration of executives is at risk and is based on the achievement of both internal (short term) performance hurdles set at the beginning of the financial year and the achievement of market based (long term) performance hurdles. The fees paid to non-executive directors are set at levels which reflect both the responsibilities of, and the time commitments required from, each non-executive director to discharge their duties. Fee levels are set having regard to independent advice and the fees paid by comparable companies. An overview of the elements of remuneration are set out in the following table. The more detailed discussion of each element is contained in this Remuneration Report. Overview of elements of remuneration DIRECTORS ELEMENTS OF REMUNERATION

Fixed remuneration

NON-EXECUTIVE

EXECUTIVE

SENIOR EXECUTIVES

✔

Page 60

✔

Fees 1

Page 58

Salary

✔

Page 60

Other benefits

✔

Page 60

Short term incentive

✔

Page 60

Long term incentive

✔

Page 61

Notice periods and termination payments

✔

Superannuation

At risk remuneration

Post employment

DISCUSSION IN REMUNERATION REPORT

✔

Page 68

Non-executive directors are required to apply a minimum of 25% of their fee in acquiring shares in the Company under the terms of the Pacific Brands Non-Executive Director Share Plan. Non-executive directors fees are set inclusive of 9% statutory superannuation contributions.

COMPANY PERFORMANCE

As reported on page 5, the consolidated entity generated a record $229.1 million in EBITA (earnings before interest, tax and amortisation) for the year ended 30 June 2008 (which was 18.1% higher than the prior year’s result of $194.0 million) and a reported net operating profit after tax pre amortisation of $118.7 million (which was 10.7% higher than the prior year’s amount of $107.2 million). The strategic direction of the Company has remained constant and continues to deliver solid results. Investment in brands, people and product innovation, a continuing drive for operational excellence and well targeted acquisitions all contributed to this strong performance. A fully franked final dividend of 8.5 cents per share has been declared. This results in a fully franked 17.0 cent per share full year dividend which represents a 73% payout ratio to shareholders. The following table sets out various measures of the consequences of Company’s performance on shareholder wealth:

Net sales revenue ($m)

2008

2007

2006

2005

2004

2,116.6

1,820.7

1,624.9

1,521.7

EBITA ($m)

229.1

194.0

173.0

174.6

29.5

NPAT 3

117.1

106.0

101.2

100.9

11.8

23.2

21.1

20.1

2.3

EPS (cents) 4

363.4

Dividends per share (cents)

17.0

16.0

15.0

3.5

Year end share price ($)

1.78

3.49

2.15

2.27

2.67

1.87

(44.9)

66.4

(1.1)

(12.4)

6.8

Return of capital ($m) TSR (%) 1 2

3 4 5

The measures of financial performance for the 2005 financial year were restated in accordance with AIFRS. The measures of financial 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 2004, and were restated in accordance with AIFRS. Net operating profit after tax. Earnings per share have been calculated based on the weighted average number of shares outstanding for the relevant period, currently being 502,277,852. 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 financial period and reinvested in Company shares, expressed as a percentage of investment.

As part of the Board’s commitment to maximising the performance of the Company and shareholder wealth, employee performance is measured annually against agreed performance objectives which will have been set prior to the commencement of the relevant financial year. So far as practical, objectives should be Specific, Measureable, Achievable, Relevant and Time bound (‘SMART’). The performance of the Chief Executive Officer is reviewed by the Chairman on behalf of the Board. The performance of the Chief Financial Officer and all other senior executive is reviewed by the Chief Executive Officer. All performance reviews take place annually, shortly after the end of the financial year and, in respect of the 2008 financial year, occurred in July and August 2008. The Company’s performance review system involves employees completing a self assessment template as well as their manager completing an assessment document. These written assessments form the basis of a performance review discussion between the employee and their manager. Details about the Board and Non-executive Director performance review process are contained in Section 5 of the Corporate Governance Statement.

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DIRECTORS’ REPORT/REMUNERATION REPORT (CONTINUED) 3

NON-EXECUTIVE DIRECTORS’ REMUNERATION

Board policy on remuneration

The disclosures in this section relate to the remuneration for the Company’s non-executive directors who are regarded as ‘key management personnel’ for the purpose of Australian Accounting Standard AASB 124. The focus of the Board is on long term strategic direction and the overall performance of the Company and accordingly non-executive director remuneration is not linked to Company performance and short term results. In order to better align the interests of non-executive directors and shareholders in relation to the long term performance of the Company, a minimum of 25% of each non-executive director’s annual fee must be taken in the form of shares in the Company pursuant to the terms of the Non-Executive Director Share Plan. The plan enables non-executive directors to elect to apply up to 100% of their fees in acquiring shares in the Company. The Non-Executive Director Share Plan is not a performance based share plan, nor is it intended as an incentive component of non-executive director remuneration, so as to maintain the independence and impartiality of the non-executive directors. Shares acquired under the Non-Executive Director Share Plan must, in general, be held for the period the director holds office as a director and are purchased monthly, on-market, at the prevailing market price at the end of each calendar month. Non-executive directors are provided with formal letters of appointment prior to commencing their directorship. Their tenure with the Company is also governed by the Company’s Constitution and the Australian Securities Exchange (‘ASX’) Listing Rules, which provide that all non-executive directors are subject to shareholder re-election every three years. Non-executive directors’ fees, including any committee fees, are set by the Board within the maximum aggregate amount approved by shareholders. Currently this amount is $1,000,000 per annum which has not varied since the time of the Company’s initial public offering in April 2004. The Company intends to seek shareholder approval at its Annual General Meeting on 21 October 2008 to increase the maximum aggregate amount of non executive director remuneration by $500,000 to $1,500,000 per annum. This increase is being sought to ensure that directors’ fees can be set out at a level which enables the Company to appoint and retain the best and most appropriate non-executive directors and to accommodate any increase in the number of non executive directors. The fees paid to non-executive directors are set at levels which reflect both the responsibilities of, and the time commitments required from, each director to discharge their duties. In that regard, it should be noted that all non-executive directors are required to be members of the two Board committees in order to be informed on all issues which are considered by the committees and which may subsequently come before the full Board and to facilitate in depth discussion on such issues. The Nomination and Remuneration Committee makes recommendations to the Board on the total level of remuneration of the Chairman and other non-executive directors, including any additional fees payable to directors for membership of Board committees. The Chairman is not present at discussions relating to his own fees. The Board, through the auspices of the Nomination and Remuneration Committee, reviews periodically its approach to non-executive director remuneration to ensure it remains in line with general industry practice and reflects proper compensation for duties undertaken. In setting fee levels, the Nomination and Remuneration Committee takes into account: •

the Company’s existing remuneration policies;

•

independent remuneration consultants’ advice;

•

fees paid by comparable companies; and

•

the level of remuneration necessary to attract and retain directors of appropriate experience, qualifications and time commitment.

Details of the membership of the Nomination and Remuneration Committee and its responsibilities are set out in section 4 of the Corporate Governance Statement. The Nomination and Remuneration Committee Charter is available on the Company’s website at www.pacificbrands.com.au. The aggregate fees paid to the non-executive directors, including the Chairman, during the 2008 financial year were $791,846 approximately 22% above the aggregate fee amount for the 2007 financial year. The Company does not currently pay additional fees for membership of the Board’s committees. Superannuation contributions are made on behalf of the non-executive directors in accordance with the Company’s statutory superannuation obligations and any election of a director to sacrifice part of his/her fee in favour of increased superannuation contributions. The sum of $791,846 paid as directors’ fees during the 2008 financial year is inclusive of such superannuation contributions. Directors are also entitled to be reimbursed for all business related expenses, including travel on Company business, as may be incurred in the discharge of their duties in accordance with rule 8.3(e) of the Company’s Constitution. The Board has determined that retirement benefits are not payable to non-executive directors upon their retirement.

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Remuneration

Details of non-executive directors’ remuneration for the 2008 financial year are set out in the following table: POST EMPLOYMENT

SHORT TERM PAYMENTS CASH

R.P. Handley (Chairman)

2008 2007

200,229 166,858

75,000 62,500

24,771 20,642

300,000 250,000

A.D. Cummins

2008 2007

28,092 43,830

60,000 52,500

31,908 8,670

120,000 105,000

D.G. Fisher3

2008 2007

80,092 18,328

30,000 6,865

9,908 2,267

120,000 27,460

J.A.C. MacKenzie4

2008 2007

7,906 –

2,962 –

978 –

11,846 –

M.G. Ould

2008 2007

62,092 0

48,000 30,000

9,908 80,000

120,000 110,000

M.A. Plavsic

2008 2007

11,250 17,520

30,000 26,250

78,750 61,230

120,000 105,000

Total

2008 2007

389,661 279,908

245,962 190,615

156,223 176,937

791,846 647,460

1 2

3 4

TOTAL

SUPERANNUATION CONTRIBUTIONS

Relates solely to the purchase of shares under the Non-Executive Director Share Plan. Amounts disclosed for remuneration of directors exclude insurance premiums paid by the consolidated entity in respect of directors’ and officers’ liability insurance contracts which covers, among others, current and former directors of the Company. Due to confidentiality 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. Ms D.G. Fisher was appointed as a director of the Company on 28 March 2007. Mr J.A.C. MacKenzie was appointed as a director of the Company on 27 May 2008.

EXECUTIVE DIRECTOR AND SENIOR EXECUTIVE REMUNERATION

The disclosures in this section relate to the remuneration for key management personnel of both the Company and the consolidated entity (being those persons with authority and responsibility for planning, directing and controlling the activities of the Company during the financial year) other than the non-executive directors. This group of executives (referred to throughout this Remuneration Report as “senior executives”) includes the five most highly remunerated executives of the Company and the consolidated entity during the financial year. The names and positions of the senior executives of the Company and the consolidated entity, as at the date of this report, are listed in, among other places, the table on page 69 of this report. The Board and the Nomination and Remuneration Committee believe that the performance of the Company depends on the quality of its people. The Board has adopted a remuneration policy which assists the Company to achieve its business strategy and goals and has the following objectives: •

ensuring alignment of executive remuneration with the short and long term objectives as set out in the Company’s strategic business plans endorsed by the Board;

•

providing a common interest between employees and shareholders by linking the rewards that accrue to management to the creation of value for shareholders;

•

being competitive in the markets in which the Company operates in order to attract, motivate and retain high calibre employees; and

•

being fully costed on a ‘cost to company’ basis including all applicable fringe benefits and other taxes.

The Nomination and Remuneration Committee obtains independent advice from external specialists on the level and mix of remuneration for comparable roles in comparable companies. Alignment of executive remuneration with the Company’s business strategy is achieved through both short and long term incentives. Key financial and strategic value drivers are identified, targets set, and rewards provided on their achievement. Value drivers include, in the case of short term incentives, net profit after tax (‘NPAT’) growth and the achievement of specified strategic objectives and, in the case of long term incentives, relative total shareholder return (‘TSR’) and earnings per share (‘EPS’) growth. The mix of short and long term incentives varies with each executive’s business focus. As much of the Company’s business is subject to short retail cycles, it follows that many executives will have a balance between short term and long term incentives. The Board believes that a company’s remuneration policy needs to be contemporary and as such must be capable of adjustment over time to reflect changes in market conditions. For this reason, the Board has initiated a review of the fixed and performance related components of remuneration, ( which are summarised below in respect of the 2008 financial year) to ensure that the current weighting between fixed and performance related components reflects market conditions. The review will also consider whether or not the current performance hurdles are sufficiently aligned with the ability of the relevant executives to drive the performance of the Company. The outcome of the review referred to above may result in changes to the weighting of executive directors and senior managements remuneration between fixed and performance related components and changes in the hurdles applicable to the performance based elements of such employees remuneration.

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DIRECTORS’ REPORT/REMUNERATION REPORT (CONTINUED) 4

EXECUTIVE DIRECTOR AND SENIOR EXECUTIVE REMUNERATION (CONTINUED)

The relative proportion of executive directors’ and senior management’s total remuneration packages for the 2008 financial year that is performance based is set out in the table below: % OF TOTAL TARGET REMUNERATION (ANNUALISED) FIXED REMUNERATION

PERFORMANCE BASED REMUNERATION SHORT TERM INCENTIVES

LONG TERM INCENTIVES

TOTAL PERFORMANCE 2 BASED REMUNERATION

Chief Executive Officer

34%

27%

39%

66%

Chief Financial Officer

38%

29%

33%

62%

Other senior executives1

59%

23%

18%

41%

1 2

Percentages based on average remuneration for the relevant executives assuming incentives fully vest. The remuneration of those employees who ceased or commenced to be employed by the company part way through the financial year have not been taken into account as the inclusion of the remuneration of these employees would distort the relative proportions of fixed and performance based remuneration and give a misleading representation of the Company’s remuneration policy.

Financial results are verified by reference to the Company’s audited accounts. Relative TSR performance is verified by external advisers. The achievement of performance objectives is assessed by the Chief Executive Officer for direct reports and verified by the Board, while the Board assesses whether or not the Chief Executive Officer has met her performance objectives.

Fixed remuneration

The terms of employment for all executive management contain a fixed remuneration component comprising base salary, superannuation and motor vehicle (or motor vehicle allowance). The Company utilises the Hay points rating system to value individual roles. Longer serving employees receive defined benefit superannuation as a legacy from the previous ownership of Pacific Brands. The cost of providing their superannuation benefit varies with each individual’s salary level and years of membership of the plan. Longer serving employees will attract greater superannuation costs than more recent employees. This plan has been closed to new members for several years. Newer employees receive a superannuation benefit that allows them to control and vary their contribution levels above the mandated statutory minimum on a salary sacrifice basis. The executive directors and a majority of the executives for whom remuneration is disclosed are members of the defined benefit plan. Hence, the expense associated with their superannuation benefit reflects most individuals’ relatively long periods of service. Executive fixed remuneration is reviewed annually, with effect from 1 July each year.

Short term incentives (‘STI’)

Both executive directors and all other members of the senior executive team participate in a STI program which involves linking specific targets (both financial and qualitative) with the opportunity to earn cash based on a percentage of the executive’s base salary. In respect of the 2008 financial year, the Chief Executive Officer and the Chief Financial Officer both had the opportunity to earn a bonus equivalent to 100% of their respective base salary. In relation to other Australian members of the senior executive team, the opportunity generally comprised an amount of up to 50% of their base salary for target performance. Payment of executive STI was conditional on the consolidated entity’s earnings before interest and tax (‘EBIT’) being in excess of the budgeted EBITA growth of 17.6% (after fully providing for all STI payments) over the prior year. This is a threshold criterion which must be satisfied before the payment of any STI can be contemplated. Additional performance requirements need to be met for a senior executive to be entitled to the maximum STI incentive. Individual performance requirements relate to individual financial and non-financial objectives. The specified objectives must represent outcomes that can extend the Company’s sustainable profit growth over time. These may vary with the individual executive and his/her responsibilities and can include financial, operational, acquisition, divestment, investment, workforce capability and succession planning goals. Targets for each objective are determined by the Chief Executive Officer (and, in the case of the Chief Executive Officer by the Board) according to the roles and responsibilities of the relevant executive. The actual amount of any STI award is determined based on achievement of annual performance conditions. Performance is tested at the end of each financial year. The payment of a STI to the Chief Executive Officer is subject to the discretion of the Board notwithstanding achievement of the performance hurdles. Similarly, in the case of all other senior executives the payment of any STI is subject to the discretion of the Chief Executive Officer, in consultation with the Board, to take account of the overall level of performance of the senior executive. In the 2008 financial year, the threshold criterion of budgeted EBITA growth of 17.6% and all other individual specified performance conditions were met, and accordingly cash bonuses were paid to all senior executives employed by the Company as at the end of the 2008 financial year, other than those senior executives who had not been employed with the Company for the entirety of the 2008 financial year. The service agreements for the Chief Executive Officer and the Chief Financial Officer provide that a percentage (determined at the discretion of the Board) of any STI to which they may become entitled is to be applied to acquiring shares (‘Deferred Shares’). Specifically, the Chief Executive Officer is required to apply forty percent of any annual incentive to acquiring Deferred Shares, while the Chief Financial Officer is required to apply one third of any incentive towards the acquisition of Deferred Shares. The executives may elect to apply a greater percentage of any incentive to acquiring shares which are subject to the ‘restriction’ condition described below. Other senior executives receive their STI in the form of a cash payment. In the case of the Chief Executive Officer and the Chief Financial Officer, the Deferred Shares are subject to a vesting period of two years, based on service, from the date of allocation. Once acquired, the Deferred Shares are held on trust, subject to a further restriction on dealing for a period of three years after the date of allocation of the Deferred Shares. If the executive is terminated for cause prior to the end of the two year vesting period, any entitlement to the Deferred Shares ceases. If the employment of the executive ceases in other circumstances, the executive will, in general, be entitled to receive their Deferred Shares. Deferred Shares allocated under this arrangement will generally be acquired on-market. The balance of any annual incentive award will be paid to the executive in cash.

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EXECUTIVE DIRECTOR AND SENIOR EXECUTIVE REMUNERATION (CONTINUED)

Current STI programs relevant to executive directors and senior executives

DATE OF GRANT

PERCENTAGE OF STI PAYABLE (%)

PERCENTAGE OF STI NOT AWARDED (%)

MINIMUM TOTAL VALUE OF STI ($)

MAXIMUM TOTAL VALUE OF STI ($)

S.M. Morphet Chief Executive Officer 1

30/11/2007

100

$700,000

P.R. Moore former Chief Executive Officer1

01/07/2007

100

$525,000

S.J. Tierney Chief Financial Officer 2

24/02/2007

100

$436,800

N/A

I.C. Barton Group General Manager, Home Comfort 4

30/11/2007

83%

17%

157,500

Y.K. Cheong Group General Manager, Supply & Operations 5

N/A

M.M. Clark Group General Manager, Workwear 6

N/A

M.S. Daniel Group General Manager, Workwear 7

16/10/2007

N/A

M.J. Ford Group General Manager, Footwear

16/10/2007

100

$180,000

B.A. Hannagan Group General Manager, Underwear & Hosiery 8

16/10/2007

100

$175,000

M.E. Keely Group General Manager, People & Performance

16/10/2007

100

$175,000

M. Sonand Group General Manager, Outerwear & Sport

16/10/2007

100

$150,000

R.A.Taylor Group General Manager, Home Comfort 9

16/10/2007

100

$165,000

Executive directors

Senior executives S.W. Audsley Chief Financial Officer 3

1 2

3 4 5 6 7 8 9

P.R. Moore retired from the Company effective 1 January 2008 and S.M. Morphet was appointed to the role of Chief Executive Officer effective 1 January 2008. S.J. Tierney was appointed to the role of Chief Financial Officer effective 17 March 2008. Prior to this Mr Tierney held the role of Group General Manager, Operations. S.W. Audsley resigned from the Company effective 5 October 2007. I.C. Barton ceased in the role of Group General Manager, Home Comfort effective 30 November 2007 and resigned from the Company effective 30 April 2008. Y.K. Cheong was appointed to the role of Group General Manager, Supply & Operations effective 10 March 2008. M.M. Clark was appointed to the role of Group General Manager, Workwear effective 26 May 2008. M.S. Daniel resigned from the Company effective 2 May 2008. B.A. Hannagan was appointed to the role of Group General Manager, Underwear & Hosiery effective 29 January 2008. R.A. Taylor was appointed to the role of Group General Manager, Home Comfort effective 1 December 2007.

Long term incentives (‘LTI’)

The Company’s LTI arrangements are designed to link executive reward with the key performance drivers which underpin sustainable growth in shareholder value. Participation in the LTI arrangements is only offered to executives who are able to influence the generation of shareholder wealth and thus have a direct impact on the Company’s performance against the relevant performance hurdles. In addition, the Board believes that the appropriateness of LTI arrangements cannot be viewed in isolation, but must be considered in the context of the total array of possible remuneration elements which may be provided to senior executives, taking account of the remuneration practices of competitor companies. The Company’s senior executive LTI plans are currently comprised of a performance rights plan (‘PRP’) introduced in 2004 as part of the Company’s initial public offering, giving an entitlement to shares on satisfaction of the performance requirements. Grants are generally made annually to ensure there is a balance between the achievement of short term objectives and longer term goals. There have been grants of performance rights to senior executives pursuant to the terms of the PRP in 2004, 2005, 2006 and 2007. As noted above, the Board has initiated a review of the fixed and performance related components of remuneration so as to ensure alignment of the performance related components of remuneration and the ability of, and the incentives for, the relevant executives to drive the performance of the Company.

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DIRECTORS’ REPORT/REMUNERATION REPORT (CONTINUED) 4

EXECUTIVE DIRECTOR AND SENIOR EXECUTIVE REMUNERATION (CONTINUED)

The rules of the PRP provide that the Board may, at the time of making a grant of performance rights, determine an amount that is payable by the relevant senior executive upon allocation of a share following vesting of a performance right, or that no amount is payable upon allocation of a share once a performance right vests. In respect of the performance rights granted to date, the Board has on each occasion determined that no amount is payable by the relevant executive on vesting of their grant of rights. Performance hurdle selection Eligible executives (including the executive directors) were first granted performance rights in 2004. Under the 2004 grant, vesting was based on relative TSR performance against the individual TSRs of the companies comprising the ASX 100 index at that time. The use of a TSR based hurdle was regarded by the Company as appropriate as it: •

ensures an alignment between comparative shareholder return and reward for the executive;

•

provides an external market performance measure in respect of share price growth and dividends; and

•

measures and rewards the extent to which shareholder returns are generated relative to the performance of those companies with which the Company competes for capital, customers and talent.

At the 2005, 2006 and 2007 Annual General Meetings of the Company, shareholders approved further grants of performance rights to the executive directors. Similar grant of performance rights were also made to other eligible senior executives at these times. Half of these grants of performance rights are subject to an EPS growth hurdle. The other half of each grant is subject to a relative TSR hurdle. In moving from a purely TSR based measure (which formed the basis of the 2004 grant of performance rights), to a combination of TSR and EPS based performance measures (adopted in respect of each subsequent grant of performance rights), the Board determined that TSR alone did not always reflect the long term value created by senior executives in the measurement period. At the time of issue, the Board believed that, collectively, TSR and EPS performance was better correlated with executive performance over time. Frequency of testing against performance hurdles The 2004 and 2005 grants were divided into tranches corresponding to performance measurement periods of one year, two years, three years and four years. Any unvested tranche in any period is held over and subject to retesting against the performance criteria in following periods. The 2006 and 2007 grant of performance rights have the performance requirements tested only once, at the end of the 2009 and 2010 financial years, respectively. Based on the financial performance of the Company in the 2008 financial year no performance rights vested in the executive directors and senior executives effective 1 July 2008. The maximum percentage of remaining performance rights that may vest, subject to performance, in any one year are set out in the table below: MAXIMUM % OF 2005 GRANT1

MAXIMUM % OF 2006 GRANT1

1 July 2009

82.5%

100%

1 July 2010

100%

82.5%

100%

VESTING DATE

Maximum 1

MAXIMUM % OF 2007 GRANT1

No shares vested under any of the LTI grants in respect of the Company’s performance in the 2005, 2006 or 2008 financial years. 17.5% of the 2005 grant of performance rights vested effective 1 July 2007. The percentage of performance rights which may vest on 1 July 2009 under the 2005 grant includes a certain percentage of the performance rights granted which did not vest on 1 July 2008 and which therefore carried forward to the next possible vesting date.

TSR performance conditions Each year, the Board reviews and if necessary refines the peer group for TSR performance comparison. The 2004 grant used a comparison group of the ASX’s 100 largest companies by market capitalisation and the 2005 comparison group was composed of a basket of 72 companies selected from the ASX 200 as comparable yield stocks. The comparison group for the 2006 and 2007 grants was comprised of companies which were: •

ASX listed;

•

in the consumer staples and discretionary sectors; and

•

either side of the Company in the market capitalisation, such that the Company’s market capitalisation at the start of the performance period approximates the median of the comparison group. The companies that met these criteria compete with the Company for customers’ spending, while representing alternatives to current and potential investors in the competition for capital in this sector.

The 2007 comparator group is identical to the comparator group which applied to the 2006 grant of performance rights, but excluding Burns Philp & Company Limited and UNiTAB Limited which were removed from the comparator group for the 2007 grant of performance rights, as those companies had been delisted.

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EXECUTIVE DIRECTOR AND SENIOR EXECUTIVE REMUNERATION (CONTINUED)

A summary table of comparator companies for unvested performance rights is provided in the table below: 2004: ASX 100

2005: HIGHEST YIELD COMPANIES IN ASX 200

All companies comprising the ASX 100 at the start of the performance period.

ABC Learning Centres Limited, Adelaide Brighton Limited, Adsteam Marine Limited, Alesco Corporation Limited, Amcor Limited, Ansell Limited, Aristocrat Leisure Limited, Austereo Group Limited, Australian Gas Light Company (The), Australian Pharmaceutical Industries Limited, AWB Limited, Baycorp Advantage Limited, Billabong International Limited, BlueScope Steel Limited, Boral Limited, Bradken Limited, Brambles Industries Limited, Burns Philp & Company Limited, Coates Hire Limited, Cochlear Limited, Coles Myer Limited, Colorado Group Limited, Corporate Express Australia Limited, Crane Group Limited, CSL Limited, CSR Limited, David Jones Limited, DCA Group Limited, Downer EDI Limited, Flight Centre Limited, Foodland Associated Limited, Foster’s Group Limited, GRD Limited, GUD Holdings Limited, Gunns Limited, GWA International Limited, Harvey Norman Holdings Limited, Hills Industries Limited, Housewares International Limited, Invocare 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, Pacific Brands Limited, Pacifica 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.

2006: CONSUMER STAPLES AND DISCRETIONARY COMPANIES

2007: CONSUMER STAPLES AND DISCRETIONARY COMPANIES

ABC Learning Centres Limited, Austereo Group Limited, Amalgamated Holdings Limited, APN News & Media Limited, AWB Limited, Billabong International Limited, Burns Philp & Company Limited, David Jones Limited, Futuris Corporation Limited, Flight Centre Limited, GUD Holdings Limited, Harvey Norman Holdings Limited, JB Hi-Fi Limited, Just Group Limited, Metcash Limited, Southern Cross Broadcasting (Australia) Limited, Seek Limited, Seven Network Limited, STW Communications Group Limited, Ten Network Holdings Limited, Tattersall’s Limited, UNiTAB Limited and West Australia Newspapers Holdings Limited.

ABC Learning Centres Limited, Austereo Group Limited, Amalgamated Holdings Limited, APN News & Media Limited, AWB Limited, Billabong International Limited, David Jones Limited, Futuris Corporation Limited, Flight Centre Limited, GUD Holdings Limited, Harvey Norman Holdings Limited, JB Hi-Fi Limited, Just Group Limited, Metcash Limited, Southern Cross Broadcasting (Australia) Limited, Seek Limited, Seven Network Limited, STW Communications Group Limited, Ten Network Holdings Limited, Tattersall’s Limited and West Australia Newspapers Holdings 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, 2006 and 2007 grants of performance rights are: TARGET

PERCENTAGE OF SHARES AVAILABLE IN GIVEN YEAR THAT VESTS

The Company’s annual TSR is less than the median TSR of the comparator companies

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%

EPS performance conditions As noted above, the EPS growth requirement was introduced in 2005 for half of the performance rights and is also a requirement in relation to the 2006 and 2007 grant of performance rights. The Board introduced 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.

EPS performance requirements are reviewed prior to each year’s allocation of performance rights. The range of EPS growth reflects the Company’s view of what is a reasonable target value, taking account of likely business cycle conditions as well as the upside potential the Company has for further earnings growth.

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DIRECTORS’ REPORT/REMUNERATION REPORT (CONTINUED) 4

EXECUTIVE DIRECTOR AND SENIOR EXECUTIVE REMUNERATION (CONTINUED)

EPS performance requirements for each grant are shown in the table below: PERCENTAGE OF SHARES IN TRANCHE AVAILABLE IN GIVEN YEAR THAT VESTS

2005 PERFORMANCE RIGHTS EPS TARGET

2006 AND 2007 PERFORMANCE RIGHTS EPS TARGET

The Company’s compound EPS growth (tested over 1, 2, 3 and 4 years) is less than 8.5%

The Company’s 3 year compound EPS growth is less than 8.0%

25%

The Company’s compound EPS growth (tested over 1, 2, 3 and 4 years) equals 8.5%

The Company’s 3 year compound EPS growth equals 8.0%

Pro rata between 25% and 100%

The Company’s compound EPS growth (tested over 1, 2, 3 and 4 years) is between 8.5% and 10.5%

The Company’s 3 year compound EPS growth is between 8.0% and 12.0%

100%

The Company’s compound EPS growth (tested over 1, 2, 3 and 4 years) equal to or exceeding10.5%

The Company’s 3 year compound EPS growth equal to or exceeding 12.0%

Testing In relation to the 2004 and 2005 grants of performance rights, performance conditions were again tested at the end of the 2008 financial year. Based on the EPS growth and the relative TSR of the Company for the 2008 financial year, no performance rights vested on 1 July under either the 2004, or 2005 performance rights grants. The final testing of the performance hurdles in respect of the 2005 grant will occur on 30 June 2009. Restrictions on performance rights which vest In the case of the 2004 and 2005 grants of performance rights, 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.

In the case of the 2006 and 2007 grants executives are not entitled to trade in shares allocated on vesting of the performance rights until the earliest to occur of: •

a request from the relevant executive to the Board to release the holding lock; or

•

10 years after the date of grant of the shares allocated on vesting; or

•

six months following the date of cessation of employment with the consolidated entity.

Performance rights will lapse in accordance with the terms of the grant if performance hurdles are not achieved or if participants resign prior to the completion of required vesting periods. Where a participant leaves the Company as a result of death, disability, retrenchment, or other reason with the approval of the Board, subject to performance hurdles being met, the Board may determine the extent to which performance rights granted to the participant vest. In the event of a takeover for the Company, performance rights may, at the discretion of the Board, vest on a pro rata basis in accordance with an assessment of performance on the same performance criteria, but with the performance period pro rated to the date of the takeover offer. A discussion of the Company’s performance, specifically against the Company’s earnings and the consequences of the Company’s performance on shareholder wealth in the period from 2 April 2004 to 30 June 2008 is set out in section 1 of this report. Vesting of rights Details of the number of performance rights which have been granted and the extent (if any) to which they have vested are set out in the table following. The Company values and discloses all performance rights granted under the PRP in accordance with relevant Australian Accounting Standards. The Company’s guidelines for dealing in securities also prohibit any employee who has been granted performance rights or deferred shares in the Company pursuant to the terms of any of the Company’s employee share plans from entering into a transaction to limit the economic risk of such performance rights or deferred shares, whether through a derivative, hedge or other similar arrangement, without the prior written approval of the Chief Executive Officer or the Board.

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EXECUTIVE DIRECTOR AND SENIOR EXECUTIVE REMUNERATION (CONTINUED)

Equity grants made to executive directors and senior executives 1 PERCENTAGE OF GRANT PAID/VESTED (%)

PERCENTAGE OF GRANT FORFEITED (%)

FUTURE FINANCIAL YEARS THAT GRANT WILL BE PAYABLE

MINIMUM TOTAL VALUE OF GRANT 1 ($)

MAXIMUM TOTAL VALUE OF GRANT 2 ($)

NATURE OF COMPENSATION/ INSTRUMENT GRANTED

EFFECTIVE DATE OF GRANT

S.M. Morphet Chief Executive Officer

250,000 performance rights 62,500 performance rights 40,698 performance rights 250,000 performance rights

01/07/2004 01/07/2005 01/07/2006 01/07/2007

60 17.5 Nil Nil

40 Nil Nil Nil

N/A 2009 2009 2010

Nil Nil Nil Nil

Nil 69,609 57,792 570,000

P.R. Moore,3 former Chief Executive Officer

500,000 performance rights 125,000 performance rights 122,093 performance rights

01/07/2004 01/07/2005 01/07/2006

100 100 Nil

Nil Nil 100

N/A N/A N/A

Nil Nil Nil

S.J. Tierney, Chief Financial Officer

300,000 performance rights 75,000 performance rights 48,837 performance rights 55,000 performance rights

01/07/2004 01/07/2005 01/07/2006 01/07/2007

60 17.5 Nil Nil

40 Nil Nil Nil

N/A 2009 2009 2010

Nil Nil Nil Nil

Nil 83,531 69,349 125,400

S.W. Audsley4

250,000 performance rights 62,500 performance rights 40,698 performance rights

01/07/2004 01/07/2005 01/07/2006

60 17.5 Nil

40 82.5 100

N/A N/A N/A

Nil Nil Nil

I.C. Barton5

200,000 performance rights 50,000 performance rights 36,628 performance rights

01/07/2004 01/07/2005 01/07/2006

60 17.5 Nil

40 82.5 100

N/A N/A N/A

Nil Nil Nil

M.S. Daniel6,7

200,000 performance rights 42,442 performance rights 50,000 reward rights 48,000 performance rights

01/07/2004 01/07/2006 01/07/2006 01/07/2007

60 Nil Nil Nil

40 100 100 100

N/A N/A N/A N/A

Nil Nil Nil Nil

M.J. Ford

200,000 performance rights 50,000 performance rights 40,116 performance rights 45,000 performance rights

01/07/2004 01/07/2005 01/07/2006 01/07/2007

60 17.5 Nil Nil

40 Nil Nil Nil

2008 2009 2009 2010

Nil Nil Nil Nil

Nil 55,688 56,965 102,600

B.A. Hannagan8

44,000 performance rights 50,000 reward rights

01/07/2007 01/07/2006

Nil Nil

2010 2009

Nil Nil

100,320 90,000

M.E. Keely

200,000 performance rights 50,000 performance rights 31,977 performance rights 44,000 performance rights

01/07/2004 01/07/2005 01/07/2006 01/07/2007

60 17.5 Nil Nil

40 Nil Nil Nil

2008 2009 2009 2010

Nil Nil Nil Nil

128,000 55,688 45,407 100.320

M. Sonand

35,000 performance rights

01/07/2007

Nil

2010

Nil

79,800

R. Taylor

41,000 performance rights

01/07/2007

Nil

2010

Nil

93,480

Executive directors

Senior executives

3 4 5 6

A total of 2,500,000 performance rights were granted under the 2004 issue of performance rights and 1,500,000 of these performance rights vested with effect from 1 July 2007 based on the financial performance of the Company in the 2007 financial year. The balance of this grant of performance rights lapsed on 30 June 2008. A total of 530,000 performance rights were granted under the 2005 issue of performance rights and 91,874 of these performance rights vested with effect from 1 July 2007 based on the financial performance of the Company in the 2007 financial year. A total of 433,722 performance rights were granted under the 2006 issue of performance rights and 562,000 performance rights were granted under the 2007 issue of performance rights and to date none of these performance rights have vested. The terms and conditions attached to the 2004, 2005, 2006 and 2007 performance rights grants are set out on pages 62 to 64 in this Annual Report. The fair 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 financial statements). The fair value in respect of the grant having an effective date of 1 July 2004 was $1.60 per share. The fair value in respect of the grant having an effective date of 1 July 2005 is $1.35 per share. The fair value in respect of the grant having an effective date of 1 July 2006 is $1.42 per share. The fair value in respect of the grant having an effective date of 1 July 2007 is $2.28 per share. Mr P.R. Moore retired from the Company effective 1 January, 2008. Mr S.W. Audsley resigned from the Company effective 5 October, 2007. Mr I.C. Barton, resigned from the Company effective 30 April 2008. Mr M.S. Daniel resigned from the Company effective 2 May 2008.

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DIRECTORS’ REPORT/REMUNERATION REPORT (CONTINUED) 4 7

EXECUTIVE DIRECTOR AND SENIOR EXECUTIVE REMUNERATION (CONTINUED)

Mr M.S. Daniel was the recipient of 50,000 Reward Rights granted with effect from 1 July 2006, as part of his remuneration when in the role of General Manager, Supply Chain. The terms of the Reward Rights, which lapsed upon Mr Daniel’s resignation from the Company on 2 May 2008, were identical to the terms of the Reward Rights granted to Ms B.A. Hannagan and discussed in note 8, below. 8 Ms B.A. Hannagan was the recipient of 50,000 ‘Reward Rights’ granted with effect from 1 July 2006, as part of her remuneration when in the role of General Manager, The Berlei Group. The Reward Rights were issued pursuant to the Company’s Deferred Employee Share Plan (DESP), established with the approval of the Board in June 2006 to provide long-term equity incentives to certain senior management, not being senior executives, approved by the Chief Executive Officer. Subject to the satisfaction of performance and service conditions described below, the Reward Rights will vest and Ms Hannagan will be allocated 50,000 Reward Shares in the Company. The Performance Conditions applicable to the Reward Rights are measured over a period of 3 years from the effective date of grant of Reward Rights, as follows: (a) 60% of the Reward Rights will be available to vest in accordance with the following schedule: Actual EPS (compound % of available Reward Growth per annum) Rights to vest 8.5% 25% +0.1% +3.75% 10.5% 100% (b) 40% of the Reward Rights will be available to vest if Ms Hannagan discharges her obligations to the Company in accordance with annual key performance measures agreed with her manager, subject to the overriding discretion of the Chief Executive Officer. If the target EPS does not reach 10.5% at the end of 3 years and some Reward Rights remain unvested, those unvested Reward Rights remain available for a further 2 years, and will be re-tested at that time. Therefore, unvested Reward Rights will be tested over a 5 year period from the grant date, so that if the threshold EPS of 8.5% per annum compound is achieved over the 5 year period, 25% of those previously unvested Reward Rights will vest. Vesting will again be scaled on a straight line basis to 100%, at the target EPS of 10.5% per annum on a compound basis. During the financial year, the Company has not granted any options or rights in addition to the performance rights granted on 1 July 2007 (and summarised in the previous table).

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EXECUTIVE DIRECTOR AND SENIOR EXECUTIVE REMUNERATION (CONTINUED)

The following table set out details of any movement in performance rights and other equity grants currently on issue to the Chief Executive Officer, Chief Financial Officer and senior executives and the number of rights held by such persons during the reporting period. Number and value of performance rights held by executive directors and senior executives BALANCE AT 01/07/2007

GRANTED

EXERCISED 1

LAPSED/ FORFEITED

BALANCE AT 30/06/2008

747,093 $1,142,122

Nil

625,000 $968,750

122,093 $173,372

Nil

S.M. Morphet Number Value

353,198 $542,167

250,000 $570,000

160,937 $254,765

100,000 $160,000

342,261

S.J. Tierney Number Value

423,837 $650,598

55,000 $125,400

193,125 $305,719

120,000 $192,000

165,712

353,198 $542,167

Nil

160,937 $254,765

192,261 $287,402

Nil

Nil Nil

44,000 $100,320

Nil

44,000

286,628 $439,512

Nil

128,750 $203,813

157,878 $235,699

Nil

Nil Nil

41,000 $93,480

Nil

41,000

242,442 $380,268

48,000 $109,440

120,000 $192,000

170,442 $297,708

Nil

Nil Nil

Nil

N/A

Nil

M.J. Ford Number Value

290,116 $444,465

45,000 $102,600

128,750 $203,813

80,000 $128,000

126,366

M.E. Keely Number Value

281,977 $432,907

44,000 $100,320

128,750 $203,813

80,000 $128,000

117,227

Y.K. Cheong Number Value

Nil Nil

Nil

N/A

Nil

M. Sonand Number Value

Nil Nil

35,000 $79,800

Nil

Total – Executive directors and senior executives Number 2,978,489 Value $4,574,206

562,000 $1,281,360

1,646,249 $2,587,438

AGGREGATE VALUE TOTAL AT 30/06/2008

Executive Directors P.R. Moore 2 Number Value

Nil

$697,402

$278,279

Senior Executives S.W. Audsley 3 Number Value B.A. Hannagan Number Value I.C. Barton Number Value

M.S. Daniel Number Value

3 4

5 6

Nil

$93,480

M.M. Clark Number Value

$100,320

R.A. Taylor Number Value

Nil

$215,252

$201,414

Nil Nil

35,000 $79,800

1,022,674 $1,602,181

871,566 $1,665,947

Based on the financial performance of the Company in the 2007 financial year 1,343,124 performance rights vested with effect from 1 July 2007. The same number of shares in the Company were acquired on-market and issued to the relevant executive directors and senior executives. Mr P.R. Moore retired from the Company effective 1 January 2008. Mr S.W. Audsley resigned from the Company effective 5 October 2007. Ms Hannagan was also granted 50,000 Reward Rights, effective 1 July 2006, at the time she held the role of General Manager, The Berlei Group. The notional value of these Reward Rights is $90,000. No further Reward Rights have been granted to Ms Hannagan and no Reward Rights have been exercised or have lapsed or been forfeited. Accordingly the number and value of Reward Rights was unchanged at 30 June 2008. Mr I.C. Barton resigned from the Company effective 30 April 2008. Mr Daniel was also granted 50,000 Reward Rights, effective 1 July 2006, at the time he held the role of General Manager, Supply Chain. These Reward Rights were forfeited upon Mr Daniel’s resignation from the Company effective 2 May 2008.

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DIRECTORS’ REPORT/REMUNERATION REPORT (CONTINUED) 4

EXECUTIVE DIRECTOR AND SENIOR EXECUTIVE REMUNERATION (CONTINUED)

Hedging and Margin Lending Arrangements Any shares which issue upon the vesting of performance rights are restricted from trading, the Company’s Guidelines for Dealing in Securities also 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 Officer or the Board. To date, no such approval has been sought or given. In addition, directors are required to inform the Board annually of the existence of any lending arrangements in respect of shares in the Company which a director has a relevant interest in, where those shares are offered as security for the lending arrangement. The Company treats compliance with these policies as a serious issue and takes appropriate measures to ensure the policy is adhered to, requiring directors and senior executives to confirm in writing their compliance with these policies on an annual basis. Any employee found to have breached these policies will be subject to appropriate sanctions, which could include termination of employment.

Service agreements

The remuneration and other terms of employment for the Chief Executive Officer, Chief Financial Officer and the senior executives are formalised in service agreements. Each of these agreements provides for the payment of a fixed annual remuneration component comprising of a base salary, car allowance and superannuation contributions, the provision of performance related cash bonuses (as disclosed on page 61 in this report), and participation in the Company’s employee long term incentive scheme (as disclosed on page 65 in this report). Each year, the Board agrees criteria for the evaluation of the Chief Executive Officer and reviews performance against those criteria at the end of the financial year. The Board similarly reviews the objectives of the other senior executives. Performance against those criteria is reviewed by the relevant senior executive’s manager. General information regarding the duration of each agreement, the periods of notice required to terminate the agreement and the termination payments provided for under the service agreements are summarised in the discussion below. Duration of service agreements The Chief Executive Officer is employed under a fixed term service agreement of three years which expires on 31 December 2010. Under the terms of the service agreement, the Chief Executive Officer’s employment will terminate on the expiry date of the agreement unless terminated earlier or renewed. The Chief Financial Officer is also employed under a fixed term service agreement which expires on 31 December 2010. All other senior executives are employed under agreements that are ongoing unless terminated by either party. Notice periods and payments on termination The service agreements provide for termination payments to be made in certain circumstances. In particular, the Company may terminate the employment of the Chief Executive Officer, Chief Financial Officer or any of the other senior executives on giving three months notice. The Company may make a payment in lieu of notice not to exceed one year’s fixed annual remuneration plus a pro rata part of the current STI (cash bonus), based on the performance of the relevant executive against the annual target applicable at that time. In general, the Chief Executive Officer, Chief Financial Officer and other senior executives must give the Company at least three months notice of resignation. In the event that the Chief Executive Officer ceases to be the most senior executive in the consolidated entity or the Company ceases to be listed on the ASX, the Company will be deemed to have terminated the employment of the Chief Executive Officer and will be liable to make compensation payments. Upon termination of employment for any reason, the Chief Executive Officer and the Chief Financial Officer are both prohibited from engaging in any activity that would compete with the Company for a period of one year, in order to protect the Company’s business interests. Sign-on payments No payment was made to the Chief Executive Officer, the Chief Financial Officer or any of the other senior executives of the Company and the consolidated entity before they took office as part consideration for them agreeing to hold office.

Remuneration paid and other specific disclosures

Details of the remuneration paid to the Chief Executive Officer, the Chief Financial Officer, each of the five named executives of the Company and the consolidated entity with the highest remuneration during the 2008 financial year and the key management personnel (excluding the non-executive directors) are set out in the following table. All values are in Australian dollars unless otherwise stated.

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EXECUTIVE DIRECTOR AND SENIOR EXECUTIVE REMUNERATION (CONTINUED)

Remuneration for 2008 financial year Chief Executive Officer, Chief Financial Officer and other senior executives of the Company and the consolidated entity SHORT TERM EMPLOYEE BENEFITS

S.M. Morphet, 2008 Chief Executive Officer 4,6 2007

SHARE BASED PAYMENTS

POST EMPLOYMENT BENEFITS SUPERANNUATION BENEFITS

RETIREMENT PAYMENTS

OTHER

TERMINATION BENEFITS

TOTAL

FIXED SALARY 1

FEES

INCENTIVE PAYMENTS

NONMONETARY BENEFITS 2

PERFORMANCE RIGHTS 3

742,444 356,202

700,000 100,000

37,408 54,874

115,570 68,071

265,227 106,628

1,860,649 685,775

P.R. Moore, former Chief Executive Officer 4

2008 2007

1,560,130 1,192,603

525,000 250,000

28,885 53,134

126,000 3,448,357 252,000

169,525 213,255

5,857,897 1,960,992

S.J. Tierney, Chief Financial Officer 5

2008 2007

452,415 441,955

436,800 50,000

34,534 32,265

104,832 100,800

132,072 127,953

1,160,653 752,973

S.W. Audsley, Chief Financial Officer 6

2008 2007

363,280 365,468

0 100,000

29,511 20,493

19,844 67,364

I.C. Barton, 2008 Group General Manager, 2007 Home Comfort 7

593,600 320,024

131,250 25,000

26,474 31,136

63,000 75,600

Y.K. Cheong, 2008 Group General Manager, 2007 Supply & Operations

148,743

11,173

12,066

171,982

M.M. Clark, 2008 Group General Manager, 2007 Workwear 8

39,589

2,822

3,946

46,357

M.S. Daniel, 2008 Group General Manager, 2007 Yakka 9

347,525 364,014

0 50,000

19,940 14,950

44,574 31,047

101,293 63,303

513,332 523,313

M.J. Ford, 2008 Group General Manager, 2007 Footwear

321,917 342,028

180,000 50,000

38,169 37,410

136,400 82,800

97,923 85,302

774,409 597,540

B.A. Hannagan, 2008 Group General Manager, 2007 Underwear and Hosiery 10

301,531 249,450

175,000 0

90,814 47,965

30,488 23,278

63,107 29,667

660,940 350,360

M.E. Keely, 2008 Group General Manager, 2007 People & Performance 11

333,221 229,453

635,880 100,000

26,880 26,096

84,000 57,841

93,349 85,302

1,173,330 498,692

M. Sonand, 2008 Group General Manager, 2007 Outerwear & Sport 12

227,516 102,045

150,000 25,000

37,522 13,761

86,979 8,688

26,600 0

528,617 149,494

R.A. Taylor, 2008 Group General Manager, 2007 Home Comfort 13

295,152 265,000

165,000 25,000

36,391 26,196

113,367 51,675

31,160

641,070 367,871

5,727,063 4,228,242

3,098,930 775,000

420,523 350,280

75,227 205,160 106,628

693,022 659,953

62,089 501,120 1,377,533 85,302 537,062

Total remuneration – senior executives 2008 2007 1 2

4 5 6 7 8 9 10 11 12 13

941,066 3,448,357 819,163 0

1,117,572 706,280 15,459,791 903,340 0 7,084,025

Includes movements in annual leave and long service leave provisions. Amounts disclosed for remuneration of senior executives exclude insurance premiums paid by the consolidated entity in respect of directors’ and officers’ liability insurance contracts which cover current and former directors and officers, including, among others, the named senior executives. Due to confidentiality 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. To the extent required by the Australian Accounting Standards, remuneration includes a proportion of the fair value of equity compensation granted or outstanding during the financial year. The fair 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 benefit (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 fair value in respect of the grant having an effective date of 1 July 2004 is $1.60 per share. The fair value in respect of the grant having an effective date of 1 July 2005 is $1.35 per share. The value in respect of the grant having an effective date of 1 July 2006 is $1.42 per share. The value in respect of the grant having an effective date of 1 July 2007 is $2.28. Part of the Chief Executive Officer’s, Chief Financial Officer’s and other senior executives’ remuneration for the financial year ended 30 June 2008 consisted of performance rights which vested in the relevant executive in respect of the financial performance of the Company in the 2007 financial year. S.M. Morphet replaced P.R. Moore as Chief Executive Officer effective 1 January 2008. S.J. Tierney was appointed as Chief Financial Officer effective 17 March 2008. S.W. Audsley resigned from the Company effective 5 October 2007. I.C. Barton resigned from the Company effective 30 April 2008. M.M. Clark was appointed as Group General Manager, Workwear effective 26 May 2008. M.S. Daniel resigned from the Company effective 2 May 2008. B.A. Hannagan replaced S.M. Morphet as Group General Manager, Underwear & Hosiery effective 29 January 2008. M.E. Keely was paid a retention bonus of $460,880 pursuant to the terms of an agreement dated 7 August 2006. M. Sonand commenced employment with the Company on 2 January 2007. R.A. Taylor replaced I.C. Barton as Group General Manager, Home Comfort effective 1 December 2007.

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DIRECTORS’ REPORT/REMUNERATION REPORT (CONTINUED) F.

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 20th day of August 2008.

Signed in accordance with a resolution of the directors:

Pat Handley Chairman

Sue Morphet Chief Executive Officer

LEAD AUDITOR’S INDEPENDENCE DECLARATION under Section 307C of the Corporations Act 2001

To: the Directors of Pacific Brands Limited

I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 30 June 2008 there have been: (i)

no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and

(ii)

no contraventions of any applicable code of professional conduct in relations to the audit.

KPMG Melbourne 20 August 2008

Don Pasquariello Partner

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Financial Report to Shareholders

Income Statements for the year ended 30 June 2008 CONSOLIDATED

THE COMPANY

2008

2007

2008

2007

NOTE

$’000

2,116,640

1,820,737

–

Cost of sales

(1,176,214)

(1,062,103)

–

Gross profit

940,426

758,634

–

Sales revenue

Other income

13,193

13,425

70,000

100,000

Freight and distribution expenses

(143,763)

(118,543)

–

Sales, marketing and advertising expenses

(406,601)

(332,762)

–

(30,786)

(24,954)

–

(146,393)

(103,544)

(2,503)

(4,791)

226,076

192,256

67,497

95,209

3,459

3,378

(68,608)

(50,016)

–

(65,149)

(46,638)

160,927

145,618

67,539

95,253

(43,801)

(39,482)

579

2,553

117,126

106,136

68,118

97,806

Information technology expenses Administrative expenses Results from operating activities Financial income Financial expenses Net financing costs

Profit before income tax (expense)/benefit Income tax (expense)/benefit

Profit for the year Attributable to: Equity holders of the parent

116,558

105,959

68,118

97,806

Minority interest

568

177

–

117,126

106,136

68,118

97,806

23.2 cents

21.1 cents

Profit for the year

Basic and diluted earnings per share Ordinary shares

The Income Statements are to be read in conjunction with the Notes to the Financial Statements set out on pages 76 to 110.

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PACIFIC BRANDS AR08

Financial Report to Shareholders

Balance Sheets as at 30 June 2008 CONSOLIDATED NOTE

THE COMPANY

2008

2007

2008

2007

$’000

Current assets Cash and cash equivalents

104,822

138,640

538

568

Trade and other receivables

272,306

302,966

37,160

48,624

Inventories

356,970

361,524

–

Other current assets

14,266

9,636

–

748,364

812,766

37,698

49,192

Total current assets

Non-current assets Trade and other receivables Property, plant and equipment

1,203,714

204,899

206,849

–

Intangible assets

1,507,516

1,503,765

–

Deferred tax assets

24,053

30,357

1,625

3,321

Other non-current assets

1,530

1,731

–

Total non-current assets

1,738,028

1,742,752

1,205,339

1,207,035

Total assets

2,486,392

2,555,518

1,243,037

1,256,227

199,732

191,702

394

1,133

Current liabilities Trade and other payables

Interest-bearing loans and borrowings

1,340

2,689

–

12,917

7,924

16,135

7,725

76,660

70,681

–

290,649

272,996

16,529

8,858

9,306

14,599

–

Interest-bearing loans and borrowings

846,194

938,171

–

Provisions

10,155

10,378

–

Income tax payable Provisions

Total current liabilities

Non-current liabilities Trade and other payables

Total non-current liabilities

865,655

963,148

–

Total liabilities

1,156,304

1,236,144

16,529

8,858

Net assets

1,330,088

1,319,374

1,226,508

1,247,369

Equity Contributed equity

1,218,577

Reserves

(28,330)

(12,109)

4,591

4,911

Retained earnings

Total equity attributable to equity holders of the parent Minority interest Total equity

136,140

108,241

3,340

23,881

1,326,387

1,314,709

1,226,508

1,247,369

3,701

4,665

–

1,330,088

1,319,374

1,226,508

1,247,369

The Balance Sheets are to be read in conjunction with the Notes to the Financial Statements set out on pages 76 to 110.

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PACIFIC BRANDS AR08

Cash Flow Statements for the year ended 30 June 2008 CONSOLIDATED NOTE

THE COMPANY

2008

2007

2008

2007

$’000

Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees

2,208,032

1,851,155

–

(1,928,395)

(1,641,491)

(3,240)

(2,002)

Dividends received

–

70,000

100,000

Income taxes paid

(34,645)

(30,830)

(25,350)

(22,610) 26,946

Reimbursements received from tax consolidated entities Interest paid Interest received Net cash from operating activities

27(b)

–

36,035

(65,941)

(43,713)

–

3,459

3,174

182,510

138,295

77,487

102,418

838

1,432

–

Cash flows from investing activities Proceeds from sale of property, plant and equipment Acquisition of controlled entities (net of cash acquired)

–

(266,348)

–

Acquisition of businesses (net of cash acquired)

(6,516)

(42,304)

–

Disposal of businesses (net of cash disposed)

6,116

–

Acquisition of property, plant and equipment

(25,276)

(23,921)

–

Net cash used in investing activities

(24,838)

(331,141)

–

(1,913)

(4,059)

–

(95,765)

(10,846)

–

Cash flows from financing activities Lease payments Repayment of borrowings Loans to controlled entities Dividends paid Dividend paid to minority interest Proceeds from borrowings Share buy back

–

7,907

(22,548)

(85,424)

(77,920)

(85,424)

(77,920)

(533)

(358)

–

334,300

–

(1,869)

–

(1,869)

(183,635)

239,248

(77,517)

(102,337)

Net (decrease)/increase in cash and cash equivalents

(25,963)

46,402

(30)

Cash and cash equivalents at the beginning of the year

138,640

94,025

568

487

Net cash (used in)/from financing activities

Effect of exchange rate fluctuations on cash held Cash and cash equivalents at the end of the year

27(a)

(7,855)

(1,787)

–

104,822

138,640

538

568

The Cash Flow Statements are to be read in conjunction with the Notes to the Financial Statements set out on pages 76 to 110.

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PACIFIC BRANDS AR08

Financial Report to Shareholders

Consolidated Statement of Changes in Equity for the year ended 30 June 2008

ISSUED CAPITAL

RETAINED EARNINGS

EQUITY COMPENSATION RESERVE

FOREIGN CURRENCY TRANSLATION RESERVE

HEDGE RESERVE

TOTAL EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT

MINORITY INTEREST

TOTAL EQUITY

$’000

1,220,446

80,202

3,075

(10,217)

336

1,293,842

Effective portion of changes in fair value of cash flow hedges1

–

(7,341)

(325)

(7,666)

Foreign exchange translation differences

–

202

–

202

–

202

Total income/(expense) for the period recognised directly in equity

–

202

(7,341)

(7,139)

(325)

(7,464)

Balance at 1 July 2006

4,764 1,298,606

Profit for the year

–

105,959

–

105,959

177

106,136

Total recognised income/(expense)

–

105,959

–

202

(7,341)

98,820

(148)

98,672

Minority interest acquired

–

407

Share buy back Dividends recognised Cost of share based payments

(1,869)

–

(1,869)

–

(1,869)

–

(77,920)

–

(77,920)

(358)

(78,278)

–

1,836

–

1,836

–

1,836

Balance at 30 June 2007

1,218,577

108,241

4,911

(10,015)

(7,005)

1,314,709

4,665 1,319,374

Balance at 1 July 2007

1,218,577

108,241

4,911

(10,015)

(7,005)

1,314,709

4,665 1,319,374

Effective portion of changes in fair value of cash flow hedges1

–

5,918

–

5,918

Foreign exchange translation differences

–

(21,819)

–

(21,819)

(266)

(22,085)

Total (expense)/income recognised directly in equity

–

(21,819)

5,918

(15,901)

(266)

(16,167)

Profit for the year

–

116,558

–

116,558

568

117,126

Total recognised income/(expense)

–

116,558

–

(21,819)

5,918

100,657

302

100,959

On-market purchase of performance rights

–

(3,235)

(2,750)

–

(5,985)

–

(5,985)

Minority interest disposed

–

(733)

Dividends recognised

–

(85,424)

–

(85,424)

(533)

(85,957)

Cost of share based payments

–

2,430

–

2,430

–

2,430

1,218,577

136,140

4,591

(31,834)

(1,087)

1,326,387

Balance at 30 June 2008

3,701 1,330,088

The Consolidated Statement of Changes in Equity is to be read in conjunction with the Notes to the Financial Statements set out on pages 76 to 110. 1

Net of any related income tax.

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PACIFIC BRANDS AR08

Company Statement of Changes in Equity for the year ended 30 June 2008 ISSUED CAPITAL

Balance at 1 July 2006

RETAINED EARNINGS

EQUITY COMPENSATION RESERVE

TOTAL EQUITY

$’000

1,220,446

3,995

3,075

1,227,516

Profit for the year

–

97,806

–

97,806

Total recognised income

–

97,806

–

97,806

Share buy back

(1,869)

–

(1,869)

Dividends recognised

–

(77,920)

–

(77,920)

Cost of share based payments

–

1,836

Balance at 30 June 2007

1,218,577

23,881

4,911

1,247,369

Balance at 1 July 2007

1,218,577

23,881

4,911

1,247,369

Profit for the year

–

68,118

–

68,118

Total recognised income

–

68,118

–

68,118

Dividends recognised

–

(85,424)

–

(85,424)

Cost of share based payments

–

2,430

On-market purchase of performance rights

–

(3,235)

(2,750)

(5,985)

1,218,577

3,340

4,591

1,226,508

Balance at 30 June 2008

The Company Statement of Changes in Equity is to be read in conjunction with the Notes to the Financial Statements set out on pages 76 to 110.

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PACIFIC BRANDS AR08

Financial Report to Shareholders

Notes to the Financial Statements for the year ended 30 June 2008 Note 1

Significant accounting policies ................................................................................................................................................................ 77

Revenue and other income ...................................................................................................................................................................... 84

Other expenses ...................................................................................................................................................................................... 84

Auditorsâ&#x20AC;&#x2122; remuneration ............................................................................................................................................................................ 85

Income tax expense/(benefit) .................................................................................................................................................................. 85

Earnings per share .................................................................................................................................................................................. 86

Segment reporting.................................................................................................................................................................................... 86

Cash and cash equivalents ...................................................................................................................................................................... 88

Trade and other receivables .................................................................................................................................................................... 89

Inventories .............................................................................................................................................................................................. 89

Other assets ............................................................................................................................................................................................ 89

Property, plant and equipment ................................................................................................................................................................ 89

Intangible assets ...................................................................................................................................................................................... 90

Recognised deferred tax assets and liabilities .......................................................................................................................................... 91

Trade and other payables ........................................................................................................................................................................ 91

Interest-bearing loans and borrowings .................................................................................................................................................... 92

Provisions ................................................................................................................................................................................................ 92

Contributed equity .................................................................................................................................................................................. 93

Nature of reserves .................................................................................................................................................................................... 93

Retained earnings .................................................................................................................................................................................... 93

Dividends ................................................................................................................................................................................................ 93

Minority interest ........................................................................................................................................................................................ 94

Additional financial instruments disclosure .............................................................................................................................................. 94

Commitments .......................................................................................................................................................................................... 99

Controlled entities .................................................................................................................................................................................. 100

Acquisitions and disposals...................................................................................................................................................................... 101

Notes to the Cash Flow Statements ...................................................................................................................................................... 102

Employee benefits .................................................................................................................................................................................. 102

Key management personnel disclosures ................................................................................................................................................ 108

Non-key management personnel disclosures ........................................................................................................................................ 109

Events subsequent to reporting date .................................................................................................................................................... 110

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PACIFIC BRANDS AR08

Notes to the Financial Statements 1

SIGNIFICANT ACCOUNTING POLICIES September 2007) introduces as a financial statement the “Statement of Comprehensive Income”. The revised standard does not change the recognition, measurement or disclosure of transactions or events that are required by other AASBs. The revised standard will become mandatory for the Consolidated Entity’s 30 June 2010 financial statements. The Consolidated Entity has not determined the potential effect of the revised standard on the Consolidated Entity’s disclosures;

Pacific Brands Limited (‘Company’) is a company domiciled in Australia. The consolidated Financial Report of the Company as at and for the year ended 30 June 2008 comprises the Company and its controlled entities (together referred to as the ‘Consolidated Entity’). This Financial Report was authorised for issue by the directors on 20 August 2008.

(a)

Statement of compliance

The Financial Report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards (‘AASBs’) (including Australian Accounting Interpretations) adopted by the Australian Accounting Standards Board (‘AASB’) and the Corporations Act 2001. The consolidated Financial Report of the Consolidated Entity and the Financial Report of the Company comply with International Financial Reporting Standards and interpretations adopted by the International Accounting Standards Board.

(b)

•

AASB 8 Operating Segments replaces the presentation requirements of segment reporting in AASB 114 Segment Reporting. AASB 8 is applicable for annual reporting periods beginning on or after 1 January 2009 and is not expected to have an impact on the financial results of the Company and the Consolidated Entity as the standard is only concerned with disclosures;

•

revised AASB 123 Borrowing Costs removes the option of expensing borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset. The revised AASB 123 will become mandatory for the Consolidated Entity’s 30 June 2010 financial statements. The Consolidated Entity has not yet determined the potential effect of the revised standard on the Financial Report;

•

revised AASB 3 Business Combinations changes the application of acquisition accounting for business combinations and the accounting for non-controlling (minority interests) interests and is applicable for annual reporting periods beginning on or after 1 July 2009. The Consolidated Entity has not yet determined the potential effect of this revised standard on the Financial Report;

•

revised AASB 127 Consolidated and Separate Financial Statements changes the accounting for investments in subsidiaries and is applicable for annual reporting periods beginning on or after 1 July 2009. The potential impact on initial adoption of this revised standard has not been determined; and

•

AASB 2008-1 Amendments to Australian Accounting Standard – Share-based Payment: Vesting Conditions and Cancellations will become mandatory for the Consolidated Entity’s 30 June 2010 financial report. The Consolidated Entity has not yet determined the potential impact of amending the standard on the Consolidated Entity’s Financial Report.

Basis of preparation

This Financial Report is presented in Australian dollars. This Financial Report is prepared on the historical cost basis except for derivative financial instruments that are stated at their fair value. The Company is of a kind referred to in Australian Securities and Investments Commission Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, amounts in this Financial Report and the Directors’ Report have been rounded off to the nearest thousand dollars, unless otherwise stated. The preparation of a financial report in conformity with AASBs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. 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. These accounting policies have been consistently applied by each entity in the Consolidated Entity. In the current year, the Consolidated Entity adopted all of the new and revised AASBs issued by the AASB that are relevant to its operations and effective for the current annual reporting period. Details of the impact of the adoption of the new AASBs are set out in the individual accounting policy notes below. The Consolidated Entity has also adopted the following AASBs as listed below that only impacted on the Consolidated Entity’s financial statements with respect to disclosures:

(c)

Principles of consolidation

Controlled entities Controlled entities are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of controlled entities are included in this Financial Report from the date that control commences until the date that control ceases.

•

AASB 101 Presentation of Financial Statements (revised October 2006);

•

AASB 2007-4 Amendments to Australian Accounting Standards arising from ED151 and Other Amendments;

•

AASB 2007-7 Amendments to Australian Accounting Standards;

Transactions eliminated on consolidation

•

AASB 7 Financial Instruments: Disclosures; and

•

AASB 2005-10 Amendments to Australian Accounting Standards.

Intragroup balances, and any unrealised gains and losses or revenues and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements.

The following AASBs, amendments and interpretations have been identified as those which may impact the entity in the period of initial application. They are available for early adoption but have not been applied by the Company and Consolidated Entity in these financial statements: •

AASB 101 Presentation of Financial Statements (revised

Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

(d)

Revenue recognition

Revenues are recognised at fair value of the consideration received, net of the amount of goods and services tax (‘GST’) payable to the relevant taxation authority.

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Financial Report to Shareholders

Notes to the Financial Statements 1

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Sale of goods

(g)

Revenue from the sale of goods (net of returns, discounts and allowances) is recognised in the Income Statement when the significant risks and rewards of ownership have been transferred to the buyer. Transfers of risks and rewards vary depending on the individual terms of the contract of sale. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, the costs incurred or to be incurred cannot be measured reliably, there is a risk of return of goods or there is continuing management involvement with the goods.

Income tax on the profit or loss for the years presented comprises current and deferred tax. Income tax is recognised in the Income Statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Dividends Dividend revenue is recognised net of any franking credits. Revenue from distributions from controlled entities is recognised by the Company when they are declared by the controlled entities. Dividends received out of pre-acquisition reserves are eliminated 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 profit 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.

(e)

Net financing costs

Net financing costs comprise interest payable on borrowings calculated using the effective interest rate method, interest receivable on funds invested and gains and losses on hedging instruments that are recognised in the Income Statement (refer Note 1(v)). Borrowing costs are expensed as incurred and included in net financing costs. Interest income is recognised in the Income Statement as it accrues, using the effective interest rate method.

(f)

Goods and services tax

Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the relevant taxation authorities. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the relevant taxation authority is included as a current asset or liability in the Balance Sheet. Cash flows are included in the Cash Flow Statements on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the relevant tax authority are classified as operating cash flows.

Income tax

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the tax balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill, the initial recognition of assets or liabilities from a transaction that is not a business combination that affect neither accounting nor taxable profit, and differences relating to investments in controlled entities to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Tax consolidation The Company and its wholly-owned Australian resident entities have formed a tax consolidated group with effect from April 2004 and are therefore taxed as a single entity from that date. The head entity within the tax consolidated group is Pacific Brands Limited. Current tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax consolidated group are recognised in the separate financial statements of the members of the tax consolidated group using the â&#x20AC;&#x2DC;stand-alone tax payerâ&#x20AC;&#x2122; method consistent with UIG 1052 Tax Consolidation Accounting. Accounting. Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of subsidiaries are assumed by the head entity in the tax consolidated group and are recognised as amounts payable to/(receivable from) other entities in the tax consolidated group in conjunction with any tax funding arrangement amount (refer below). Nature of tax funding arrangements and tax sharing agreements The members of the tax consolidated group have entered into a tax funding arrangement which sets out the funding obligations of members of the tax consolidated group in respect of tax amounts. The tax funding arrangement requires payments to/from the head entity equal to the current tax liability/(asset) assumed by the head entity and any tax-loss deferred tax asset assumed by the head entity. The members of the tax consolidated group have also entered into a tax sharing agreement. The tax sharing agreement provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement as payment of any amounts under the tax sharing agreement is considered remote.

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PACIFIC BRANDS AR08

Notes to the Financial Statements 1

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(h)

Earnings per share

Basic and diluted earnings per share is calculated by dividing the profit attributable to equity holders of the parent for the reporting period, after excluding any costs of servicing, by the weighted average number of ordinary shares of the Company, adjusted for any bonus issue.

Operating leases Payments made under operating leases are expensed on a straight line basis over the term of the lease, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased property. Depreciation and amortisation

(i)

Receivables

Trade and other receivables are stated at their amortised cost less impairment losses (refer Note 1(n)).

(j)

Inventories

Inventories are carried at the lower of cost and net realisable value. Cost includes direct materials, direct labour, other direct variable costs and allocated production overheads necessary to bring inventories to their present location and condition, based on normal operating capacity of the production facilities.

Items of property, plant and equipment are depreciated over their estimated useful lives as set out below. Depreciation and amortisation are calculated on a straight line basis so as to write off the cost of each item of property, plant and equipment, excluding land, over its estimated useful life. The expected useful lives, in the current and comparative periods, are as follows: •

freehold buildings: 40 years;

•

leasehold improvements: life of lease; and

The cost of inventory may also include transfers from equity of any gain or loss on qualifying cash flow hedges of foreign currency purchases of inventory.

•

owned and leased plant and equipment: 3 to 10 years.

Manufacturing activities

(m) Intangible assets

The costs of manufacturing inventories and work in progress are assigned on a first-in, first-out basis. Costs arising from exceptional wastage are expensed as incurred.

Brandnames

Net realisable value Net realisable value is determined on the basis of each inventory line’s normal selling pattern. Expenses of marketing, selling and distribution to customers are estimated and are deducted to establish net realisable value. Obsolete and slow moving stocks are allowed for, to ensure the inventories are recorded at net realisable value where such value is below cost.

(k)

Investments

Controlled entities Investments in controlled entities are carried in the Company’s financial statements at cost less any impairment losses (refer Note 1(n)).

(l)

Property, plant and equipment

Owned assets Items of property, plant and equipment are stated at cost less accumulated depreciation and impairment (refer Note 1(n)). The cost of self-constructed assets includes the cost of materials, direct labour, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and an appropriate proportion of production overheads. Leased assets Leases under which the Consolidated Entity assumes substantially all the risks and benefits of ownership are classified as finance leases. Other leases are classified as operating leases. Finance leases A lease asset and a lease liability are recognised equal to the 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.

The residual value of, the useful life of and the depreciation method applied to an asset are reassessed at least annually.

The carrying value of brandnames is reviewed at least at each reporting date to determine whether they are in excess of their recoverable amount. If the carrying amount exceeds the recoverable amount, the asset is written down to the lower amount, through a charge to the Income Statement. No amortisation is allowed for, against the carrying value of these brandnames on the basis that the lives of these assets are considered indefinite at this point in time, as they are not currently associated with products that are likely to become commercially or technically obsolete. Software Software that is acquired by the Consolidated Entity is stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the Income Statement on a straight line basis over the estimated useful life. Other intangible assets Other intangibles assets that are acquired by the Consolidated Entity are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the Income Statement on a straight line basis over the estimated useful life of the asset.

(n)

Impairment

The carrying amounts of the Consolidated Entity’s assets, other than deferred tax assets (refer Note 1(g)) and inventories (refer Note 1(j)), are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. For goodwill and intangible assets that have an indefinite useful life, the recoverable amount is estimated annually. An impairment loss is recognised whenever the carrying amount of an asset or cash generating unit exceeds its recoverable amount. Impairment losses are recognised in the Income Statement unless the asset has previously been revalued, in which case the impairment loss is recognised as a reversal to the extent of that previous revaluation with any excess recognised through the Income Statement.

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PACIFIC BRANDS AR08

Financial Report to Shareholders

Notes to the Financial Statements 1

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Impairment losses recognised in respect of a cash generating unit are allocated first to reduce the carrying amount of any goodwill allocated to the cash generating unit (group of units) and then, to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. When a decline in the fair value of an available-for-sale financial asset has been recognised directly in equity and there is objective evidence that the asset is impaired, the cumulative loss that had been recognised directly in equity is recognised in the Income Statement even though the financial asset has not been derecognised. The amount of the cumulative loss that is recognised in the Income Statement is the difference between the acquisition cost and current fair value, less any impairment loss on that financial asset previously recognised in the Income Statement.

An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Derecognition of financial assets and liabilities A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when: •

the rights to receive cash flows from the asset have expired;

•

the Company and Consolidated Entity retain the right to receive cash flows from the asset, but have assumed an obligation to pay them in full without material delay to a third party; or

•

the Company and Consolidated Entity have transferred their rights to receive cash flows from the asset and either (a) have transferred substantially all the risks and rewards of the asset, or (b) have neither transferred nor retained substantially all the risks and rewards of the asset, but have transferred control of the asset.

Calculation of recoverable amount The recoverable amount of the Consolidated Entity’s receivables carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e. the effective interest rate computed at initial recognition of these financial assets). Receivables with a short duration are not discounted. Impairment of receivables is not recognised until objective evidence is available that a loss event has occurred. Significant receivables are individually assessed for impairment. Impairment testing of significant receivables that are not assessed as impaired individually is performed by placing them into portfolios of significant receivables with similar risk profiles and undertaking a collective assessment of impairment. Non-significant receivables are not individually assessed. Instead, impairment testing is performed by placing non-significant receivables in portfolios of similar risk profiles, based on objective evidence from historical experience adjusted for any effects of conditions existing at each balance date. The recoverable amount of other assets is the greater of their fair value less costs to sell, and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit to which the asset belongs. Reversals of impairment Impairment losses, other than in respect of goodwill, are reversed when there is an indication that the impairment loss may no longer exist and there has been a change in the estimate used to determine the recoverable amount. An impairment loss in respect of a held-to-maturity security or receivable carried at amortised cost is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. An impairment loss in respect of an investment in an equity instrument classified as available-for-sale is not reversed through the Income Statement. If the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the Income Statement, the impairment loss shall be reversed, with the amount of the reversal recognised in the Income Statement. An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.

A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the Income Statement.

(o)

Payables

Trade and other payables are stated at their amortised cost.

(p)

Interest-bearing loans and borrowings

Interest-bearing loans and borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing loans and borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the Income Statement over the period of the loans or borrowings on an effective interest rate basis.

(q)

Employee benefits

Wages, salaries and annual leave Liabilities for employee benefits for wages, salaries and annual leave represent the present obligations resulting from employees’ services provided up to the reporting date. The provisions have been calculated at undiscounted amounts based on expected wage and salary rates that the Consolidated Entity expects to pay as at reporting date and include related on-costs, such as workers’ compensation insurance and payroll tax. Long service leave The provision for employee benefits to long service leave represents the present value of the estimated future cash outflows to be made by the Consolidated Entity resulting from employees’ services provided up to the reporting date. The provision is calculated using expected future increases in wage and salary rates including related on-costs and expected settlement dates based on turnover history and is discounted using the rates attaching to national government bonds at reporting date which most closely match the terms of maturity of the related liabilities. The unwinding of the discount is treated as long service leave expense.

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Notes to the Financial Statements 1

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Superannuation plans The Consolidated Entity contributes to various defined benefit and defined contribution superannuation plans. Employer contributions to these plans are recognised as an expense as they are made.

specific to the liability, being risk-free rates on government bonds most closely matching the expected future payments, except where noted below. The unwinding of the discount is treated as part of the expense related to the particular provision.

Defined benefit plans

Dividends

The Consolidated Entity’s net obligation in respect of defined benefit superannuation plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior years; that benefit is discounted to determine its present value, and the fair value of any plan assets deducted.

A provision for dividends payable is recognised in the reporting period in which the dividends are declared, for the entire undistributed amount, regardless of the extent to which they will be paid in cash.

The discount rate is the yield at the balance sheet date on national government bonds that have maturity dates approximating to the terms of the Consolidated Entity’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method.

Provisions for restructuring or termination benefits are only recognised when a detailed plan has been approved and the Consolidated Entity has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement the plan or announcing its main features to those affected by it. Costs related to ongoing activities are not provided for.

When employee benefits under the plan are improved, the proportion of the increased benefit relating to past service by employees is recognised as an expense in the Income Statement on a straight line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in the Income Statement. Where the calculation results in a net benefit to the Consolidated Entity, the recognised asset is limited to the net total of any unrecognised past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan. For actuarial gains and losses that arise in calculating the Consolidated Entity’s obligation in respect of a plan, to the extent that any cumulative unrecognised actuarial gain or loss exceeds 10% of the greater of the present value of the defined benefit obligation and the fair value of plan 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.

(r)

Surplus lease space Provision is made for non-cancellable operating lease rentals payable on surplus leased premises when it is determined that no substantive future benefit will be obtained from its occupancy and sub-lease rentals are less. The estimate is calculated based on discounted net future cash flows, using the interest rate implicit in the lease or an estimate thereof.

(t)

Accounting for acquisitions

Business combinations All business combinations are accounted for by applying the purchase method. Goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. Goodwill is allocated to cash generating units and is tested annually for impairment (refer Note 1(n)). Negative goodwill arising on an acquisition is recognised directly in the Income Statement.

Share based payments

The Company has introduced a number of share plans pursuant to which senior executives and directors may acquire shares. The fair value of performance rights granted is recognised as a personnel expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the performance rights. The fair value of the performance rights granted is measured using a Monte-Carlo simulation model, taking into account the terms and conditions upon which the performance rights were granted. The amount recognised as an expense is adjusted to reflect the actual number of performance rights that vest except where forfeiture is only due to share prices not achieving the threshold for vesting. The expense related to share based payments is accounted for in the entity which employs the relevant individual.

(s)

Restructuring

Provisions

A provision is recognised when there is a legal, equitable or constructive obligation as a result of a past event and it is probable that a future sacrifice of economic benefits will be required to settle the obligation, the timing or amount of which is uncertain. If the effect is material, a provision is determined by discounting the expected future cash flows (adjusted for expected future risks) required to settle the obligation at a pre-tax rate that reflects current market assessments of the time value of money and the risks

Property, plant and equipment The fair value of property, plant and equipment recognised as a result of a business combination is based on market values. The market value of property is the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The market value of items of plant, equipment, fixtures and fittings is based on the quoted market prices for similar items. Intangible assets The fair value of patents and trademarks acquired in a business combination is based on the discounted estimated royalty payments that have been avoided as a result of the patent or trademark being owned. The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets.

(u)

Foreign currency

Transactions Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet

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Financial Report to Shareholders

Notes to the Financial Statements 1

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

date are translated to Australian dollars at the foreign exchange rate ruling at that date. Foreign exchange gains and losses arising on translation are recognised in the Income Statement on a net basis. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Australian dollars at foreign exchange rates ruling at the dates the fair value was determined. Translation of controlled foreign operations The assets and liabilities of controlled foreign operations, including goodwill and fair value adjustments arising on consolidation, generally are translated to Australian dollars at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated to Australian dollars at rates approximating the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on retranslation are recognised directly in a separate component of equity. Net investment in foreign operations Exchange differences arising from the translation of the net investment in foreign operations, and of related hedges, are taken 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.

(v)

Derivative financial instruments

The Consolidated Entity uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operating, investing and financing activities. In accordance with its treasury policy, the Consolidated Entity does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised immediately in the Income Statement. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged. The fair value of interest rate swaps is the estimated amount that the Consolidated Entity would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. Hedging On entering into a hedging relationship, the Consolidated Entity formally designates and documents the hedge relationship and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrumentâ&#x20AC;&#x2122;s effectiveness in offsetting the exposure to changes in the hedged itemâ&#x20AC;&#x2122;s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they are designated.

Cash flow hedges Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. When the forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, or the forecast transaction for a non-financial asset or non-financial liability, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the nonfinancial asset or liability. If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, then the associated gains and losses that were recognised directly in equity are reclassified into the Income Statement in the same period or periods during which the asset acquired or liability assumed affects the Income Statement (i.e. when interest income or expense is recognised). For cash flow hedges, other than those covered by the preceding two policy statements, the associated cumulative gain or loss is removed from equity and recognised in the Income Statement in the same period or periods during which the hedged forecast transaction affects the Income Statement. The ineffective part of any gain or loss is recognised immediately in the Income Statement. When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship but the hedged forecast transaction still is expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, then the cumulative unrealised gain or loss recognised in equity is recognised immediately in the Income Statement. Hedges of monetary assets and liabilities When derivative financial instruments are used to hedge economically the foreign exchange exposure of recognised monetary assets or liabilities, hedge accounting is not applied and any gains or losses on the hedging instruments are recognised in the Income Statement. Hedges of net investment in foreign operation The portions of the gains or losses on instruments used to hedge net investments in foreign operations that are determined to be effective hedges are recognised directly in equity. The ineffective portions are recognised immediately in the Income Statement.

(w) Accounting estimates and judgements The preparation of the Financial 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 significant risk of causing an adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

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Notes to the Financial Statements 1

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Defined benefit superannuation plan assumptions The Consolidated Entity has decided on a rate of return on assets of 6.9% per annum because this is the average return achieved over the last three years. If this were to reduce, then the Consolidated Entityâ&#x20AC;&#x2122;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 future years. Impairment of goodwill and intangible assets with indefinite useful lives The Consolidated Entity assesses, at least annually, whether goodwill and intangible assets with indefinite useful lives are impaired (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 indefinite useful lives are allocated.

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Financial Report to Shareholders

Notes to the Financial Statements 2

REVENUE AND OTHER INCOME CONSOLIDATED

Sales revenue

THE COMPANY

2008

2007

2008

2007

$’000

2,116,640

1,820,737

–

2,619

919

–

70,000

100,000

564

–

Other income Royalties – other parties Dividends – controlled entities Net gain on disposal of businesses Sundry income

10,010

12,506

–

Total other income

13,193

13,425

70,000

100,000

2,129,833

1,834,162

70,000

100,000

Total revenue and other income

OTHER EXPENSES

Depreciation of: Freehold buildings and leasehold improvements

4,788

3,962

–

15,712

14,232

–

20,500

18,194

–

Software

2,379

2,692

–

Other intangible assets

3,052

1,781

–

Leased plant and equipment

1,029

1,440

–

6,460

5,913

–

26,960

24,107

–

Plant and equipment Amortisation of:

Total depreciation and amortisation Net financing costs: Financial income

(3,459)

(3,378)

(42)

(44)

Interest on bank loans and overdraft

68,328

49,688

–

Finance charges on capitalised leases

280

328

–

65,149

46,638

(42)

(44)

709

1,255

–

Amounts set aside to allow for: Doubtful debts Rebates, trade allowances, claims and settlement discounts

147,943

125,759

148,652

127,014

371,804

322,146

–

25,538

21,606

–

Personnel expenses: Wages and salaries Contributions to defined contribution superannuation plans Defined benefit superannuation expense

(474)

1,050

–

Leave entitlements

53,664

33,405

–

Other employee costs

27,749

17,136

–

Share based payments

2,430

1,836

–

1,836

480,711

397,179

–

1,836

516

1,327

–

Net foreign exchange loss

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Notes to the Financial Statements 4

AUDITORS’ REMUNERATION CONSOLIDATED

THE COMPANY

2008

2007

2008

2007

$’000

1,259,600

1,128,000

62,000

60,000

Audit services Auditors of the Company KPMG Australia: Audit and review of financial reports Overseas KPMG firms: Audit of financial reports

377,400

291,000

–

1,637,000

1,419,000

62,000

60,000

171,294

209,800

–

85,641

13,240

–

14,461

9,357

–

26,873

38,167

–

298,269

270,564

–

Other services Auditors of the Company KPMG Australia: Taxation services Other assurance services Overseas KPMG firms: Taxation services Other assurance services

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.

INCOME TAX EXPENSE/(BENEFIT) CONSOLIDATED

THE COMPANY

2008

2007

2008

2007

$’000

Current year

44,435

42,103

(3,615)

(5,193)

(Over)/under provided in prior year

(2,134)

(4,713)

159

–

NOTE

Current income tax expense/(benefit)

Deferred income tax expense Origination and reversal of temporary differences Total income tax expense/(benefit) in the Income Statements

1,500

2,092

2,877

2,640

43,801

39,482

(579)

(2,553)

160,927

145,618

67,539

95,253

48,278

43,685

20,262

28,575

729

550

–

550

–

(21,000)

(30,000)

Numerical reconciliation between income tax expense/(benefit) and profit before income tax Profit before income tax expense/(benefit) Income tax using the domestic corporation tax rate of 30% Increase in income tax expense due to: Share based payments Decrease in income tax expense due to: Non-assessable dividend income

(3,072)

(40)

–

(1,678)

(Over)/under provided in prior year

Sundry items

(2,134)

(4,713)

159

–

Total income tax expense/(benefit) on profit before income tax

43,801

39,482

(579)

(2,553)

2,535

(3,146)

–

Deferred tax recognised directly in equity Relating to derivative financial instruments

1(v)

Current income tax liability The current tax liability for the Consolidated Entity of $12.9 million (2007: $7.9 million) and for the Company of $16.1 million (2007: $7.7 million) represents the amount of income taxes payable in respect of current and prior financial 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.

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Financial Report to Shareholders

Notes to the Financial Statements 6

EARNINGS PER SHARE CONSOLIDATED 2008

2007

$’000

117,126

106,136

Earnings reconciliation Profit for the year Less minority interest Basic and diluted earnings

(568)

(177)

116,558

105,959

CONSOLIDATED 2008 NUMBER

2007 NUMBER

502,277,852

503,000,003

Weighted average number of shares used as the denominator Number for basic and diluted earnings per share Ordinary shares at 1 July Effect of shares bought back Ordinary shares at 30 June

–

(514,859)

502,277,852

502,485,144

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. It is the Consolidated Entity’s policy that 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, importer and manufacturer of mattresses, pillows, bed linen, bedding accessory products and foam;

Footwear

Marketer, distributor and importer of women’s, men’s and children’s footwear; and

Other

Retail clearance outlets, administration functions and amortisation of other intangible assets.

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Notes to the Financial Statements 7

SEGMENT REPORTING (CONTINUED)

Primary reporting: business segments (continued) UNDERWEAR & HOSIERY

OUTERWEAR & SPORT

HOME COMFORT

FOOTWEAR

OTHER

CONSOLIDATED

$’000

638,231

661,230

525,877

274,582

29,913

–

2,129,833

ELIMINATIONS

2008 Revenue External segment revenue Intersegment revenue Total segment revenue

–

250

117

(404)

–

638,231

661,480

525,884

274,612

30,030

(404)

2,129,833

101,414

58,191

49,685

36,422

(19,636)

–

226,076

Result Segment result Net financing costs

(65,149)

Income tax expense

(43,801)

Profit for the year

117,126

Depreciation and amortisation Segment assets Segment liabilities Acquisition of non-current assets

6,444

4,754

7,654

1,635

6,473

–

26,960

398,907

448,839

260,285

148,060

1,405,537

(175,236)

2,486,392

80,227

156,715

149,965

34,421

910,212

(175,236)

1,156,304

3,555

11,124

11,703

3,262

930

–

30,574

633,580

362,706

518,530

284,435

34,911

–

1,834,162

2007 Revenue External segment revenue Intersegment revenue Total segment revenue

122

–

468

(669)

–

633,702

362,785

518,530

284,435

35,379

(669)

1,834,162

93,701

26,959

45,544

37,251

(11,199)

–

192,256

Result Segment result Net financing costs

(46,638)

Income tax expense

(39,482)

Profit for the year

106,136

Depreciation and amortisation Segment assets Segment liabilities Acquisition of non-current assets 1

6,633

3,479

7,042

1,493

5,460

–

24,107

366,121

480,134

290,292

129,875

1,499,162

(210,066)

2,555,518

67,595

173,990

191,657

35,029

977,939

(210,066)

1,236,144

5,252

245,770

15,993

1,404

2,636

–

271,055

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

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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 offices;

New Zealand

Manufacturing facilities, distribution facilities and sales offices; and

Rest of world

Manufacturing facilities, distribution facilities and sales offices. AUSTRALIA

NEW ZEALAND

REST OF WORLD

CONSOLIDATED

$’000

External segment revenue by location of customers

1,819,295

213,170

97,368

2,129,833

Segment assets by location of assets

2,300,300

111,074

75,018

2,486,392

26,646

1,002

2,926

30,574

External segment revenue by location of customers

1,561,625

167,196

105,341

1,834,162

Segment assets by location of assets

2,357,101

117,215

81,202

2,555,518

260,083

8,413

2,559

271,055

2008

Acquisition of non-current assets

2007

Acquisition of non-current assets

CASH AND CASH EQUIVALENTS CONSOLIDATED

THE COMPANY

2008

2007

2008

2007

$’000

196

326

–

Cash at bank

92,144

128,631

538

568

Bank short term deposits

12,482

9,683

–

104,822

138,640

538

568

NOTE

Cash on hand

27(a)

The bank short term deposits mature within 19 days (2007: 45 days) and interest is received at a weighted average interest rate of 6.8% per annum (2007: 6.3% per annum).

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Notes to the Financial Statements 9

TRADE AND OTHER RECEIVABLES CONSOLIDATED NOTE

THE COMPANY

2008

2007

2008

2007

$’000

285,021

315,686

–

(3,128)

(4,467)

–

(35,471)

(30,552)

–

246,422

280,667

–

Current Trade debtors Less allowance for doubtful trade debtors Less allowance for rebates, trade allowances, claims and settlement discounts

Amounts owing by controlled entity

Other debtors

–

37,156

48,618

25,884

22,299

272,306

302,966

37,160

48,624

Non-current Amounts owing by controlled entity

–

1,203,714

–

1,203,714

2008

2007

2008

2007

$’000

Raw materials and stores

50,835

56,642

–

Work in progress

17,898

22,670

–

288,237

282,212

–

356,970

361,524

–

14,266

9,636

–

1,530

1,731

–

41,620

34,134

–

36,544

52,009

–

Other debtors

Other debtor amounts generally arise from transactions outside the usual operating activities of the Consolidated Entity.

INVENTORIES CONSOLIDATED

Finished goods

OTHER ASSETS

Current Prepayments Non-current Other investments

THE COMPANY

PROPERTY, PLANT AND EQUIPMENT

Freehold land At cost Freehold buildings At cost Accumulated depreciation

(4,151)

(8,859)

–

32,393

43,150

–

At cost

27,738

23,749

–

Accumulated amortisation

(9,526)

(6,483)

–

18,212

17,266

–

At cost

145,150

155,655

–

Accumulated depreciation

(49,781)

(61,286)

–

95,369

94,369

–

Leasehold improvements

Plant and equipment

Leased plant and equipment At capitalised cost Accumulated amortisation

Capital works in progress Total property, plant and equipment at net book value

5,784

7,409

–

(1,920)

(2,063)

–

3,864

5,346

–

13,441

12,584

–

204,899

206,849

–

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Financial Report to Shareholders

Notes to the Financial Statements 12

PROPERTY, PLANT AND EQUIPMENT (CONTINUED)

Reconciliation A reconciliation of the carrying amounts for each class of property, plant and equipment is set out below: FREEHOLD LAND

FREEHOLD BUILDINGS

LEASEHOLD IMPROVEMENTS

PLANT AND EQUIPMENT

LEASED PLANT AND EQUIPMENT

CAPITAL WORKS IN PROGRESS

TOTAL

$’000

Carrying amount at the beginning of the year

34,134

43,150

17,266

94,369

5,346

12,584

206,849

Acquisitions through business combinations

3,196

–

3,196

CONSOLIDATED

2008

Disposed businesses

–

(70)

(2,945)

–

(25)

(3,040)

4,660

(9,613)

(310)

1,813

(62)

–

(3,512)

Additions

–

2,952

2,651

866

19,774

26,259

Transfer from/(to) capital works in progress

–

3,076

16,935

(1,197)

(18,814)

–

Disposals

–

(53)

(203)

(1,132)

–

(1,388)

Depreciation and amortisation

–

(837)

(3,951)

(15,712)

(1,029)

–

(21,529)

Fair value adjustments

Effects of movements in foreign exchange

(370)

(270)

(548)

(610)

(60)

(78)

(1,936)

41,620

32,393

18,212

95,369

3,864

13,441

204,899

Carrying amount at the beginning of the year

31,413

28,884

11,178

83,341

4,024

8,246

167,086

Acquisitions through business combinations

2,400

15,074

4,189

10,860

367

32,978

Carrying amount at the end of the year 2007

Additions Transfer from/(to) capital works in progress Disposals Depreciation and amortisation Effects of movements in foreign exchange Carrying amount at the end of the year

–

235

1,380

3,606

22,919

28,140

384

4,871

14,515

(1,079)

(18,741)

–

(197)

–

(1,791)

(29)

–

(2,017)

–

(1,084)

(2,878)

(14,232)

(1,440)

–

(19,634)

134

226

(329)

296

(103)

296

34,134

43,150

17,266

94,369

5,346

12,584

206,849

INTANGIBLE ASSETS CONSOLIDATED

GOODWILL

BRANDNAMES

SOFTWARE

OTHER INTANGIBLE 1 ASSETS

TOTAL

$’000

Balance at 1 July 2006

873,895

404,565

18,870

–

1,297,330

Acquisitions through business combinations

109,265

80,000

–

20,672

209,937

Amortisation Effects of movements in foreign exchange Balance at 30 June 2007

–

(2,692)

(1,781)

(4,473)

299

672

–

971

983,459

485,237

16,178

18,891

1,503,765

Additions

–

1,119

Disposals

–

(41)

–

(41)

Amortisation

–

(2,379)

(3,052)

(5,431)

Fair value adjustments

9,988

–

9,988

Effects of movements in foreign exchange

(999)

(885)

–

(1,884)

992,448

484,352

13,758

16,958

1,507,516

Balance at 30 June 2008 1

Other intangible assets include licences, customer contracts and other customer related intangible assets.

Impairment tests for cash generating units containing goodwill The following cash generating units have significant carrying amounts of indefinite life intangible assets: CONSOLIDATED GOODWILL

Pacific Brands Group

BRANDNAMES

2008

2007

2008

2007

$’000

832,088

832,468

381,352

382,237

Sheridan

41,107

41,726

23,000

Brand Collective

19,645

18,728

–

Yakka Group

99,608

90,537

80,000

992,448

983,459

484,352

485,237

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Notes to the Financial Statements 13

INTANGIBLE ASSETS (CONTINUED)

The recoverable amount of the Pacific Brands Group excluding the cash generating units below is based on value in use calculations. Separate value in use calculations are prepared for each of the business segments that make-up the Pacific Brands Group (refer Note 7 for a listing of business segments). Those calculations use cash flow projections based on actual operating results and cash flows for a further five year period which are extrapolated using a growth rate appropriate for markets and industries in which the Pacific Brands Group operates. A pre-tax discount rate of 11.6% per annum has been used in discounting the projected cash flows. The recoverable amount of the Sheridan cash generating unit is based on value in use calculations. Those calculations use cash flow projections based on actual operating results and cash flows for a further five year period which are extrapolated using a growth rate appropriate for markets in which Sheridan operates. A pre-tax discount rate of 11.6% per annum has been used in discounting the projected cash flows. The recoverable amount of the Brand Collective cash generating unit is based on value in use calculations. Those calculations use cash flow projections based on actual operating results and cash flows for a further five year period which are extrapolated using a growth rate appropriate for markets in which Brand Collective operates. A pre-tax discount rate of 11.6% per annum has been used in discounting the projected cash flows. The recoverable amount of the Yakka Group cash generating unit is based on value in use calculations. Those calculations use cash flow projections based on actual operating results and cash flows for a further five year period which are extrapolated using a growth rate appropriate for markets and industries in which Yakka Group operates. A pre-tax discount rate of 11.6% per annum has been used in discounting the projected cash flows.

RECOGNISED DEFERRED TAX ASSETS AND LIABILITIES

Deferred tax assets and liabilities are attributable to the following: ASSETS

LIABILITIES

NET

2008

2007

2008

2007

2008

2007

$’000

Trade and other receivables

2,092

2,695

–

2,092

2,695

Inventories

1,232

3,751

–

1,232

3,751

–

(3,129)

(3,705)

(3,129)

(3,705)

22,976

19,062

–

22,976

19,062

1,870

3,466

–

1,870

3,466

Consolidated

Property, plant and equipment Provisions for employee benefits Other provisions Transaction costs

–

2,981

–

2,981

Other items1

–

2,107

(988)

–

(988)

2,107

Tax assets/(liabilities)

28,170

34,062

(4,117)

(3,705)

24,053

30,357

Set off of tax

(4,117)

(3,705)

4,117

3,705

–

Net tax assets

24,053

30,357

–

24,053

30,357

340

The Company Provisions for employee benefits Other items Transaction costs Tax assets Set off of tax Net tax assets 1

105

340

–

105

1,520

–

1,520

–

2,981

–

2,981

1,625

3,321

–

1,625

3,321

–

1,625

3,321

–

1,625

3,321

Includes a deferred tax asset of $0.5 million (2007: $3.0 million) relating to derivative financial instruments recognised directly in equity.

TRADE AND OTHER PAYABLES CONSOLIDATED

THE COMPANY

2008

2007

2008

2007

$’000

150,581

138,753

394

1,133

49,151

52,949

–

199,732

191,702

394

1,133

9,306

14,599

–

Current Trade creditors Other creditors and accruals

Non-current Other creditors

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Financial Report to Shareholders

Notes to the Financial Statements 16

INTEREST-BEARING LOANS AND BORROWINGS CONSOLIDATED

Current Lease liabilities

THE COMPANY

2008

2007

2008

2007

$’000

1,340

2,689

–

844,427

936,708

–

1,767

1,463

–

846,194

938,171

–

Non-current Bank loans Lease liabilities

Bank overdrafts Interest on bank overdrafts is charged at prevailing market rates. Finance lease liability The Consolidated Entity’s lease liabilities are secured by the leased assets of $3.9 million (2007: $5.3 million) as in the event of default, the assets revert to the lessor. Finance lease liabilities of the Consolidated Entity are payable as follows:

Within one year One year or later and no later than five years

MINIMUM LEASE PAYMENTS

INTEREST

PRINCIPAL

MINIMUM LEASE PAYMENTS

INTEREST

2008

2007

$’000

1,545

205

1,340

2,907

218

2,689

PRINCIPAL

1,885

118

1,767

1,562

1,463

3,430

323

3,107

4,469

317

4,152

The Consolidated Entity leases motor vehicles under finance leases expiring in one to five years. At the end of the lease term, the Consolidated Entity has the option to purchase the motor vehicles at the agreed residual value. Bank loans All bank loans are denominated in Australian dollars. The Consolidated Entity is required to comply with various financial covenants which it has met. Additionally, 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 2008, this arrangement was drawn to $171 million (2007: $172 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.

PROVISIONS CONSOLIDATED

THE COMPANY

2008

2007

2008

2007

NOTE

$’000

72,711

65,666

–

3,949

5,015

–

76,660

70,681

–

Current Employee benefits Leased premises

Non-current Employee benefits Leased premises

4,330

6,343

–

5,825

4,035

–

10,155

10,378

–

Reconciliation A reconciliation of the carrying amounts of each class of provision, except for employee benefits (refer Note 28), is set out below: LEASED PREMISES CONSOLIDATED

Carrying amount at the beginning of the year Recognised in the Income Statement Increase through business combinations Fair value adjustments Payments Carrying amount at the end of the year

2008

2007

$’000

9,050

6,341

949

1,709

–

1,686

3,456

–

(3,681)

(686)

9,774

9,050

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PACIFIC BRANDS AR08

Notes to the Financial Statements 18

CONTRIBUTED EQUITY CONSOLIDATED

THE COMPANY

2008

2007

2008

2007

$’000

1,218,577

1,220,446

1,218,577

1,220,446

Share capital 502,277,852 (2007: 503,000,003) fully paid ordinary shares at the beginning of the year No shares were bought back during the financial year (2007: 722,151) 502,277,852 fully paid ordinary shares at the end of the year

–

(1,869)

–

(1,869)

1,218,577

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.

NATURE OF RESERVES

The nature and purpose of reserves included in the Statements of Changes in Equity for the Company and Consolidated Entity are: 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 rights are exercised. Further information about equity compensation payments to employees is given in Note 28. 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 foreign operations or the translation of foreign currency monetary items forming part of the net investment in foreign operations (refer Note 1(u)). Hedge reserve The hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred.

RETAINED EARNINGS CONSOLIDATED

THE COMPANY

2008

2007

2008

2007

$’000

Balance at the beginning of the year

108,241

80,202

23,881

3,995

Net profit attributable to equity holders of the parent

116,558

105,959

68,118

97,806

(3,235)

–

(3,235)

–

On-market purchase of performance rights Dividends recognised

(85,424)

(77,920)

(85,424)

(77,920)

Balance at the end of the year

136,140

108,241

3,340

23,881

DIVIDENDS

Dividends recognised in the current year by the Company are: CENTS PER SHARE

TOTAL AMOUNT

FRANKED/ UNFRANKED

DATE OF PAYMENT

$’000

2008 Interim 2008 ordinary

8.5

42,709

franked

1 April 2008

Final 2007 ordinary

8.5

42,715

franked

1 October 2007

85,424 2007 Interim 2007 ordinary

8.0

40,182

franked

2 April 2007

Final 2006 ordinary

7.5

37,738

franked

2 October 2006

franked

1 October 2008

77,920 Franked dividends declared or paid were franked at the tax rate of 30%. Subsequent events Since the end of the financial year, the directors declared the following dividends: Final 2008 ordinary

8.5

42,694

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Financial Report to Shareholders

Notes to the Financial Statements 21

DIVIDENDS (CONTINUED)

The financial effect of these dividends have not been brought to account in the financial statements for the year ended 30 June 2008 and will be recognised in subsequent financial reports. THE COMPANY 2008

2007

$’000

46,073

40,156

Dividend franking account 30% franking credits available to shareholders of the Company for subsequent financial years

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 sufficient available profits 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 $27.8 million (2007: $22.9 million).

MINORITY INTEREST

The minority interest at 30 June 2008 relates to a 50% interest in Restonic (M) Sdn Bhd which is not held by the Company nor by one of its controlled entities. The minority interest at 30 June 2007 also included a 50.1% interest in World Brands Pty Ltd that was disposed of during the year. CONSOLIDATED 2008

2007

$’000

Interest in retained earnings at the beginning of the year

355

129

Net profit attributable to minority interest

Minority interest in controlled entities comprise:

568

177

Minority interest acquired

–

407

Minority interest disposed

(733)

–

Dividend paid to minority interest

(533)

(358)

Interest in (accumulated losses)/retained earnings at the end of the year

(343)

355

Interest in share capital

4,293

Interest in reserves

(249)

Total minority interest

3,701

4,665

ADDITIONAL FINANCIAL INSTRUMENTS DISCLOSURE

Overview The Company and Consolidated Entity have exposure to the following risks from their use of financial instruments: •

market risk;

•

credit risk; and

•

liquidity risk.

This Note presents information about the Company’s and Consolidated Entity’s exposure to each of the above risks, their objectives, policies and processes for measuring and managing risk, and the management of capital. Further quantitative disclosures are included throughout this Financial Report. The Board has overall responsibility for the establishment and oversight of the risk management framework. Risk management policies are established to identify and analyse the risks faced by the Company and Consolidated Entity, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s and Consolidated Entity’s activities. The Company and Consolidated Entity, through their training and management standards and procedures, aim to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Audit, Business Risk and Compliance Committee oversees how management monitors compliance with the Company’s and Consolidated Entity’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Company and Consolidated Entity.

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Notes to the Financial Statements 23

ADDITIONAL FINANCIAL INSTRUMENTS DISCLOSURE (CONTINUED)

Capital management The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Consolidated Entity defines capital as total shareholders’ equity in the Balance Sheet plus net debt. Net debt is calculated as total interest-bearing loans and borrowings less cash and cash equivalents. Total capital amounted to $2,072,800,000 (2007:$2,121,594,000). In order to adjust the capital structure, the Consolidated Entity may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or reduce debt. The Board monitors the level of dividends to ordinary shareholders. The Company aims to return approximately 70% of net profit after tax to shareholders in the form of dividends. From time to time, the Consolidated Entity purchases its own shares on market; the timing of these purchases depends on-market prices. Primarily, the shares are intended to be used for issuing shares under the Consolidated Entity’s Performance Rights Plan or Dividend Reinvestment Plan. Buy and sell decisions are made on a specific transaction basis by the management. There were no changes in the Consolidated Entity’s approach to capital management during the year. (a) Fair values of financial assets and liabilities A number of the Consolidated Entity’s accounting policies and disclosures require the determination of fair value, for both financial and nonfinancial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. Where applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. Trade and other receivables The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. Derivatives The fair value of forward exchange contracts is based on their listed market price, if available. If a listed market price is not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate (based on government bonds). The fair value of interest rate swaps is based on broker quotes. Those quotes are tested for reasonableness by discounting estimated future cash flows based on the terms and maturity of each contract and using market interest rates for a similar instrument at the measurement date. Non-derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. Fair values versus carrying amounts The fair values of financial assets and liabilities, together with the carrying amounts shown in the Balance Sheets, are as follows: CONSOLIDATED

30 JUNE 2008 CARRYING AMOUNT $’000

Cash and cash equivalents Trade and other receivables

30 JUNE 2007

FAIR VALUE

CARRYING AMOUNT

FAIR VALUE

$’000

104,822

138,640

267,307

297,048

4,438

5,153

591

–

776

Financial assets

Derivative instruments designated in hedge relationship: Interest rate swaps Forward exchange contracts receivable Foreign exchange options Financial liabilities Measured at amortised cost: Trade and other payables

202,455

191,102

Bank loans

844,427

936,708

3,107

4,152

6,583

15,199

Finance lease liabilities Derivative instruments designated in hedge relationship: Forward exchange contracts payable

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Financial Report to Shareholders

Notes to the Financial Statements 23

ADDITIONAL FINANCIAL INSTRUMENTS DISCLOSURE (CONTINUED)

THE COMPANY

30 JUNE 2008 CARRYING AMOUNT $’000

Cash and cash equivalents Trade and other receivables

30 JUNE 2007

FAIR VALUE

CARRYING AMOUNT

FAIR VALUE

$’000

538

568

1,240,874

1,252,338

394

1,133

Financial assets

Financial liabilities Measured at amortised cost: Trade and other payables

(b) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Consolidated Entity’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters. The Consolidated Entity enters into derivatives, and also incurs financial liabilities, in order to manage market risk. All such transactions are carried out within the guidelines set by the Board. The Consolidated Entity applies hedge accounting in order to manage volatility in profit or loss. The market risk associated with the Consolidated Entity’s and Company’s financial instruments is detailed below. (i) Interest rate risk The Consolidated Entity adopts a policy of ensuring that between 40% and 60% of its exposure to changes in interest rates on borrowings is on a fixed rate basis. This is achieved by entering into interest rate swaps. At the reporting date the interest rate profile of the Company’s and the Consolidated Entity’s interest-bearing financial instruments was: CONSOLIDATED

THE COMPANY

2008

2007

2008

2007

WEIGHTED AVERAGE INTEREST RATE P.A.

Cash and cash equivalents

6.8%

6.3%

6.8%

6.3%

Finance lease liabilities

9.2%

6.6%

–

Bank loans1

7.9%

7.1%

–

Instruments with interest rate risk exposure:

After incorporating the effect of interest rate swaps, forward agreements and options.

Refer ‘(d) Liquidity risk’ for maturity profile of the above financial liabilities. Sensitivity analysis The sensitivity analysis below has been determined based on the exposure of interest-bearing loans and borrowings, interest rate swaps and cash and cash equivalents to interest rates at the reporting date. The increase/decrease of 100 basis points is assumed to have taken place at the beginning of the financial year and held constant throughout the entire reporting period, and is applied against the net balance of interestbearing loans and borrowings (excluding the portion fixed through interest rate swaps) and cash and cash equivalents held at reporting date. The analysis assumes the net balance at reporting date was held constantly throughout the financial year. A change of 100 basis points in interest rates at the reporting date would increase/(decrease) profit before tax and increase/(decrease) equity by the amounts shown below for the Consolidated Entity. The analysis also assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis as at 30 June 2007. The impact to profit before tax reflects the additional interest that would have been expensed had the change in basis points occurred at the beginning of the financial year. The impact to equity reflects the change in basis points on the valuation of interest swaps at the reporting date on the portion of debt fixed through effective cash flow hedges. PROFIT BEFORE TAX

EQUITY

100BP

INCREASE

DECREASE

INCREASE

DECREASE

$000

30 June 2008

(4,428)

4,428

3,817

(3,817)

30 June 2007

(4,539)

4,539

6,344

(6,344)

(ii) Currency risk The Consolidated Entity is exposed to currency risk on purchases that are denominated in a currency other than the respective functional currencies of entities within the Consolidated Entity, primarily the Australian dollar (‘AUD’), but also the US dollar (‘USD’), the New Zealand dollar (‘NZD’) and UK pound (‘GBP’). The currencies in which these transactions primarily are denominated are AUD, USD, GBP and Hong Kong dollar. As a result of the large purchases of inventories denominated in USD, the Balance Sheet of the Consolidated Entity can be significantly impacted by movements in the USD.

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Notes to the Financial Statements 23

ADDITIONAL FINANCIAL INSTRUMENTS DISCLOSURE (CONTINUED)

(b) Market risk (continued) (ii) Currency risk (continued) However, at any point in time the Consolidated Entity hedges 75% to 85% of its estimated foreign currency exposure in respect of forecast purchases over the following six months. The Consolidated Entity uses forward exchange contracts to hedge its currency risk, most with a maturity of less than one year from the reporting date. The following table sets out the weighted average contracted exchange rates, the gross value to be received under foreign currency contracts, the fair value of the foreign currency contracts and the settlement periods of outstanding contracts for the Consolidated Entity: CONSOLIDATED 2008 WEIGHTED AVERAGE EXCHANGE RATE

2007

AUSTRALIAN DOLLAR EQUIVALENT

FAIR VALUE

$’000

0.92

202,454

(5,716)

7.26

25,026

0.4888

1,203

WEIGHTED AVERAGE EXCHANGE RATE

AUSTRALIAN DOLLAR EQUIVALENT

FAIR VALUE

$’000

0.80

252,372

(12,560)

(556)

6.25

39,429

(2,140)

0.4164

1,854

(32)

Maturing within one year Buy US dollars Buy Hong Kong dollars Buy UK pounds Buy euros

0.6130

388

0.6198

1,805

(28)

Buy Japanese yen

100.83

2,086

(1)

96.08

2,157

(151)

Buy New Zealand dollars

1.2132

6,766

259

1.1138

701

(249)

The net deferred costs and exchange gains and losses on hedges of anticipated foreign currency purchases and sales recognised in other creditors in Note 15 and the timing of their anticipated recognition as part of purchases and sales are: CONSOLIDATED NET GAINS/(LOSSES)

Within six months

2008

2007

$’000

(5,992)

(15,160)

In respect of other monetary assets and liabilities denominated in foreign currencies, the Consolidated Entity ensures that its net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary to address short term imbalances. The Consolidated Entity’s exposure to the USD at balance date was as follows, based on notional amounts: 30 JUNE 2008

30 JUNE 2007

$’000

Cash and cash equivalents

14,946

15,743

Trade debtors

11,282

7,790

Trade creditors

(37,911)

(30,368)

(5,716)

(12,560)

(17,399)

(19,395)

Forward exchange contracts Net Exposure Sensitivity analysis

A 10% strengthening of the AUD against the USD at 30 June 2008 would have increased/(decreased) profit before income tax and (decreased)/increased equity by the amounts shown below for the Consolidated Entity. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis as at 30 June 2007. CONSOLIDATED EQUITY

NET PROFIT

$’000

30 June 2008

(18,512)

30 June 2007

(20,998)

155

A 10% weakening of the AUD against the USD at 30 June 2008 would effectively have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant and any foreign exchange exposures deemed to be translation risk exposures have been excluded from the analysis. (c) Credit risk Credit risk is the risk of financial loss to the Consolidated Entity if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Consolidated Entity’s receivables from customers. For the Company it arises from receivables due from subsidiaries. Exposure to credit risk The carrying amount of the Consolidated Entity’s and Company’s financial assets represents the maximum credit exposure.

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Financial Report to Shareholders

Notes to the Financial Statements 23

ADDITIONAL FINANCIAL INSTRUMENTS DISCLOSURE (CONTINUED)

(c) Credit risk (continued) Trade and other receivables The Company’s and Consolidated Entity’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the Consolidated Entity’s customer base, including the default risk of the industry and country in which customers operate, have less of an influence on credit risk. The Company has established a credit policy under which each new customer is analysed individually for creditworthiness before the Consolidated Entity’s standard payment and delivery terms and conditions are offered. The Consolidated Entity’s review includes external ratings, when available, and in some cases bank references. Purchase limits are established for each customer, which represent the maximum open amount without requiring approval from senior management. The Consolidated Entity’s trade and other receivables relate primarily to the Consolidated Entity’s wholesale customers. Customers that are graded as “high risk” are placed on a restricted customer list, and future sales are made on a prepayment basis. Goods are sold subject to retention of title clauses, so that in the event of non-payment the Consolidated Entity may have a secured claim. The Consolidated Entity does not require collateral in respect of trade and other receivables. The Company and Consolidated Entity have established an allowance for impairment that represents their estimate of incurred losses in respect of trade and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. Impairment losses The ageing of the Consolidated Entity’s trade debtors past due at the reporting date was: GROSS

IMPAIRMENT

GROSS

2008

2007

IMPAIRMENT 2007

$’000

Past due 0-30 days

16,792

–

18,707

–

Past due 30 days

15,009

3,128

11,133

4,467

The movement in the allowance for doubtful debts in respect of the Consolidated Entity’s trade debtors during the year was as follows: CARRYING AMOUNT

Balance at 1 July Impairment loss recognised Increase in allowance recognised in profit or loss Increase due to business combinations

2008

2007

$’000

4,467

1,999

(1,912)

(628)

709

1,255

–

1,875

Effects of movements in foreign exchange

(136)

(34)

Balance at 30 June

3,128

4,467

Based on historic default rates, the Consolidated Entity believes that no impairment allowance is necessary in respect of trade debtors not past due or past due by up to 30 days. The allowance accounts in respect of trade debtors are used to record impairment losses unless the Consolidated Entity is satisfied that no recovery of the amount owing is possible; at that point, the amount is considered irrecoverable and is written off against the financial asset directly. Other receivables includes the carrying value of derivative assets representing the Consolidated Entity’s interest rate swaps. The counterparties to these interest rate swaps are ‘AA’ rated Australian financial institutions. The Consolidated Entity believes no impairment is necessary in respect of these receivables. (d) Liquidity risk Liquidity risk is the risk that the Consolidated Entity will not be able to meet its financial obligations as they fall due. The Consolidated Entity’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Consolidated Entity’s reputation. The Consolidated Entity uses various methodologies, which assist it in monitoring cash flow requirements and optimising its cash return on investments. Typically, the Consolidated Entity ensures that it has sufficient cash on demand to meet expected operational expenses for a period of 60 days, including the servicing of financial obligations; this excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters. In addition, the Consolidated Entity maintains the following lines of credit: •

AUD40 million overdraft facility that is unsecured. Interest would be payable at the annual rate of BBSY plus 275 basis points; and

•

NZD5 million overdraft facility that is unsecured. Interest would be payable at the annual rate of BBSY plus 275 basis points.

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Notes to the Financial Statements 23

ADDITIONAL FINANCIAL INSTRUMENTS DISCLOSURE (CONTINUED)

(d) Liquidity Risk (continued) Financing facilities CONSOLIDATED

THE COMPANY

2008

2007

2008

2007

$’000

Unsecured bank overdraft facility, reviewed annually and payable at call: Amount used

–

43,965

44,531

–

43,965

44,531

–

845,700

936,500

–

204,300

113,500

–

1,050,000

–

CARRYING AMOUNT

LESS THAN 1 YEAR

1-5 YEAR(S)

$’000

Trade and other payables

202,455

–

Bank loans

844,427

–

844,427

3,107

1,340

1,767

6,583

–

Trade and other payables

191,102

–

Bank loans

936,708

–

936,708

4,152

2,689

1,463

15,199

–

Amount unused

Bank loan facilities with various maturity dates through to 2013 which may be extended by mutual agreements: Amount used Amount unused

The following are the contractual maturities of financial liabilities: CONSOLIDATED

2008 Non-derivative financial liabilities

Finance lease liabilities Derivative financial liabilities Forward exchange contracts 2007 Non-derivative financial liabilities

Finance lease liabilities Derivative financial liabilities Forward exchange contracts

COMMITMENTS CONSOLIDATED 2008

2007

$’000

49,030

51,324

134,549

135,105

35,316

34,378

218,895

220,807

Non-cancellable operating lease expense commitments Future operating lease commitments not provided for in the financial statements and payable: Within one year One year or later and no later than five years Later than five years

The Consolidated Entity leases property under non-cancellable operating leases expiring in one to five 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 fixed, they are incurred evenly over the term of the lease. The Consolidated Entity has provided for these fixed increments (refer Note 17).

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Financial Report to Shareholders

Notes to the Financial Statements 25

CONTROLLED ENTITIES

The Consolidated Entity has a 100% ownership interest in the following entities in the current and prior years except where noted: CONTROLLED ENTITY

PLACE OF INCORPORATION/ FORMATION

CONTROLLED ENTITY

PLACE OF INCORPORATION/ FORMATION

Pacific Brands (Australia) Pty Ltd

Australia

Yakka Pty Ltd

Australia

Pacific Brands Holdings Pty Ltd

Australia

CTE Pty Ltd

Australia

Pacific Brands Footwear Pty Ltd

Australia

Shared Apparel Services Pty Ltd

Australia

Sachi Australia Pty Ltd

Australia

Wrights Workwear Pty Ltd

Australia

Pacific Brands Sport & Leisure Pty Ltd

Australia

Neat n Trim Uniforms Pty Ltd

Australia

Pacific Brands Clothing Pty Ltd

Australia

Dowd Corporation Pty Ltd

Australia

Pacific Brands Household Products Pty Ltd

Australia

Icon Clothing Pty Ltd

Australia

Bonds Industries Pty Ltd

Australia

Icon Clothing (NZ) Pty Ltd

Australia

Sheridan Australia Pty Ltd

Australia

Yakka (Kingsgrove) Pty Ltd

Australia

Pacific Brands Services Group Pty Ltd

Australia

Yakka (QLD) Pty Ltd

Australia

PT Berlei Indonesia

Indonesia

Yakka (Wodonga) Pty Ltd

Australia

Pacific Brands Holdings (NZ) Ltd

New Zealand

Cushen Clothing Company Pty Ltd

Australia 2,3

Sheridan NZ Limited

New Zealand

Cushen Clothing (Distributors) Pty Ltd

Australia 2,3

Pacific Brands Holdings (Hong Kong) Ltd

Hong Kong 1

Cushen Unit Trust

Australia 2,3

Grosby (China) Ltd

Hong Kong

FW Fleming Pty Ltd

Australia 2

Pacific Brands (Asia) Ltd

Hong Kong

Industrial Workwear Centre Pty Ltd

Australia 2

Pacific Brands (UK) Ltd

Yakka (WA) Pty Ltd

Australia 2

Sheridan UK Limited

Yakka (SA) Pty Ltd

Australia 2

PacBrands USA Inc

USA

Yalee Pty Ltd

Australia 2

Pacific Brands (Fiji) Limited

Fiji 2

West End Clothing Pty Ltd

Australia 2

Yakka (Aust) Pty Ltd

Australia

Pacific Brands Holdings (Hong Kong) Ltd has a 36% interest in Dunlop Slazenger Philippines Inc and a 50% interest in Pacific Brands Marketing (Hong Kong) Ltd but does not have control of these entities.

These entities were placed into voluntary liquidation during the year and will be liquidated following year end.

Cushen Clothing (Distributors) Pty Ltd is the trustee for Cushen Unit Trust.

The Consolidated Entity had a 100% ownership interest in the following entities at 30 June 2007 but not at 30 June 2008: CONTROLLED ENTITY

PLACE OF INCORPORATION/ FORMATION

CONTROLLED ENTITY

PLACE OF INCORPORATION/ FORMATION

Yakka Apparel Solutions Limited

New Zealand 4

Neat n Trim Uniforms Ltd

New Zealand 4

Yakka New Zealand Limited

New Zealand

Yakobi Pty Ltd

Australia 5

Dowd Corporation (NZ) Limited

New Zealand 4

These entities were amalgamated into Pacific Brands Holdings (NZ) Ltd during the year.

This entity was de-registered on 26 November 2007.

The Consolidated Entity has a controlling interest in the ordinary shares of the following entities that are not 100% owned: CONSOLIDATED ENTITY INTEREST

CONSOLIDATED ENTITY INTEREST

CONTROLLED ENTITY

PLACE OF INCORPORATION

2008

2007

Restonic (M) Sdn Bhd

Malaysia

50%

Dream Crafts Sdn Bhd

Malaysia

50%

Dream Products Sdn Bhd

Malaysia

50%

Dreamland Corporation (M) Sdn Bhd

Malaysia

50%

Dreamland (Singapore) Pte Ltd

Singapore

50%

Dreamland Spring Manufacturing Sdn Bhd

Malaysia

50%

Eurocoir Products Sdn Bhd

Malaysia

50%

Sleepmaker Sdn Bhd

Malaysia

50%

World Brands Pty Ltd

Australia

â&#x20AC;&#x201C;

50.1%

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Notes to the Financial Statements 26

ACQUISITIONS AND DISPOSALS

Effect of prior year acquisitions On 2 April 2007, the Consolidated Entity acquired all of the equity of Yakka (Aust) Pty Ltd for $270.0 million in cash (net of cash acquired). The company manufactures, imports, distributes and retails industrial, corporate and casual wear in Australia and New Zealand. On 2 January 2007, the Consolidated Entity acquired the Australasian streetwear business and a 50.1% controlling interest in World Brands Pty Ltd from Globe International Limited for $42.3 million cash. The streetwear and World Brands businesses design, develop and distribute youth apparel under both proprietary brands and other licensed and distributed brands. During the year the Consolidated Entity finalised the fair values assigned to the net assets acquired and the consideration paid. These acquisitions had the following effect on the Consolidated Entity’s assets and liabilities on acquisition date: BOOK VALUE

ADJUSTED FOR ACCOUNTING POLICIES

FAIR VALUE ADJUSTMENTS

FAIR VALUE

$’000

16,650

Cash and cash equivalents

16,650

–

Trade and other receivables

63,335

–

(612)

62,723

Inventories

88,139

(810)

(13,663)

73,666

Property, plant and equipment

36,834

–

(4,172)

32,662

–

80,000

Brandnames Other intangible assets Other assets Deferred tax assets

–

20,672

2,710

–

2,710

3,702

1,088

(2,412)

2,378

Trade and other payables

(13,662)

–

(215)

(13,877)

Other liabilities

(30,437)

–

(2,017)

(32,454)

(930)

958

Income tax payable Current provisions

(9,340)

(313)

(559)

(10,212)

Non-current provisions

(578)

(84)

(8,703)

(9,365)

Lease liabilities

(668)

–

(668)

(14,810)

–

(14,810)

(382)

–

(26)

(408)

140,563

(56)

69,251

External debt Minority interest Net assets acquired

209,758

Goodwill

119,252

Consideration

329,010

Less: cash and cash equivalents acquired

(16,650)

Consideration (net of cash acquired)

312,360

Disposals On 27 June 2008 the Consolidated Entity disposed of its New Zealand Flooring, Foam and Bedding businesses for $7.2 million in cash. The Consolidated Entity recorded a profit on disposal of $0.1 million. On 30 June 2008 the Consolidated Entity disposed of its 50.1% interest in World Brands Pty Ltd for $1.3 million. The Consolidated Entity recorded a profit on disposal of $0.5 million.

101

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Financial Report to Shareholders

Notes to the Financial Statements 27

NOTES TO THE CASH FLOW STATEMENTS

(a) Reconciliation of cash For the purposes of the Cash Flow Statements, 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

2008

2007

2008

2007

NOTE

$’000

104,822

138,640

538

568

117,126

106,136

68,118

97,806

Share based payments

2,430

1,836

–

1,836

Net gain on disposal of businesses

(564)

–

553

–

148,652

127,014

–

45,269

29,297

–

Cash and cash equivalents (b) Reconciliation of profit for the year to net cash from operating activities Profit for the year Add/(less) non-cash items:

Loss on disposal of non-current assets Amounts set aside to allow for doubtful debts, rebates, claims and settlement discounts

Amounts set aside to allow for employee benefits Depreciation and amortisation

26,960

24,107

–

Increase/(decrease) in income tax payable

5,950

3,191

8,410

(861)

Decrease in current and deferred tax assets

3,252

5,559

1,696

2,643

349,628

297,140

78,224

101,424

(122,531)

(151,633)

–

(12,791)

10,733

–

(4,477)

(2,572)

Net cash provided by operating activities before change in assets and liabilities Change in assets and liabilities: Increase in trade and other receivables (Increase)/decrease in inventories Increase in prepayments Increase/(decrease) in trade and other payables

20,843

11,364

(739)

992

Decrease in provisions

(48,162)

(26,737)

–

Net cash from operating activities

182,510

138,295

77,487

102,418

EMPLOYEE BENEFITS CONSOLIDATED

THE COMPANY

2008

2007

2008

2007

NOTE

$’000

Current

72,711

65,666

–

Non-current

4,330

6,343

–

77,041

72,009

–

Aggregate liability for employee benefits, including on-costs:

The present values of employee benefits not expected to be settled within 12 months of reporting date have been calculated using the following weighted averages: CONSOLIDATED 2008

2007

Assumed rate of increase in wage and salary rates (per annum)

4.0%

Discount rate (per annum)

5.9%

5.4%

6 years

9,022

8,878

Settlement term (period) Number of employees Number of employees at the end of the year (a) Superannuation plans

The Consolidated Entity contributes to the Pacific 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. Defined benefit members receive lump sum benefits on retirement, death, disablement and withdrawal. The defined benefit section of the plan is closed to new members. The Consolidated Entity has been contributing at the rates set out in the previous actuarial review, as at 1 July 2007.

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Notes to the Financial Statements 28

EMPLOYEE BENEFITS (CONTINUED)

(a) Superannuation plans (continued) With respect to the defined benefits component of the Plan, the defined benefit obligations and Plan assets at fair value are: Movements in the recognised net defined benefit obligations (included in non-current employee benefits) CONSOLIDATED

Present value of funded defined benefit obligation Fair value of (plan) assets Surplus Unrecognised actuarial gains

THE COMPANY

2008

2007

2008

2007

$’000

41,173

50,287

–

(44,114)

(60,183)

–

(2,941)

(9,896)

–

1,135

8,564

–

(1,806)

(1,332)

–

50,287

47,363

–

Service cost

1,842

2,416

–

Interest cost

2,407

2,229

–

Net (asset)/liability for defined benefit obligations at 30 June Changes in the present value of the defined benefit obligation are as follows: Opening defined benefit obligation

Contributions by plan participants Actuarial (gains)/losses Benefits paid

459

510

–

(1,433)

1,650

–

(3,335)

–

(101)

(460)

–

Contributions to accumulation section

(91)

(86)

–

Curtailments

228

–

Settlements

(12,425)

–

41,173

50,287

–

Taxes and premium paid

Closing defined benefit obligation Changes in the fair value of plan assets are as follows:

CONSOLIDATED

Opening fair value of plan assets Expected return Actuarial gains/(losses) Contributions by employer Contributions by plan participants Benefits paid Taxes and premiums paid Contributions to accumulation section Settlements Closing fair value of plan assets

THE COMPANY

2008

2007

2008

2007

60,183

54,617

–

3,628

3,450

–

(7,539)

4,010

–

1,477

–

459

510

–

(3,335)

–

(101)

(460)

–

(91)

(86)

–

(12,425)

–

44,114

60,183

–

103

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Notes to the Financial Statements 28

EMPLOYEE BENEFITS (CONTINUED)

(a) Superannuation plans (continued) The major categories of fund assets as a percentage of total plan assets are as follows: CONSOLIDATED

Australian equities

THE COMPANY

2008

2007

2008

2007

31%

34%

–

International equities

25%

28%

–

Fixed income

10%

14%

–

Property

12%

–

Cash

22%

15%

–

The Consolidated Entity’s investment policies and strategies for the defined benefit superannuation plans and post-retirement benefits funds do not use target allocations for the individual asset categories. The Consolidated Entity’s investment goals are to maximise returns subject to specific risk management policies. Its risk management policies permit investments in mutual funds and prohibit direct investments in debt and equity securities and derivative financial instruments. The Consolidated Entity addresses diversification by the use of mutual fund investments whose underlying investments are in domestic and international fixed income securities and domestic and international equity securities. These mutual fund investments are readily marketable and can be sold to fund benefit payment obligations as they become payable. Historical Information: Amounts for the current and previous periods are as follows: CONSOLIDATED

Defined benefit obligation Plan assets Surplus

2008

2007

2006

2005

$’000

41,173

50,287

47,363

46,384

(44,114)

(60,183)

(54,617)

(48,118)

(2,941)

(9,896)

(7,254)

(1,734)

Experience adjustments (gains)/losses – plan assets

7,539

(4,010)

(4,323)

(3,674)

Experience adjustments (gains)/losses – plan liabilities

(615)

2,579

1,657

(348)

(Income)/Expenses recognised in the Income Statements CONSOLIDATED

Current service costs Interest cost on obligation

THE COMPANY

2008

2007

2008

2007

$’000

1,842

2,416

–

2,407

2,229

–

(3,628)

(3,450)

–

Actuarial gain

(347)

(145)

–

Effects of curtailments and settlements

(748)

–

(474)

1,050

–

(474)

1,050

–

Expected return on plan assets

The (income)/expenses are recognised in the following line items in the Income Statements: Administrative expenses

CONSOLIDATED

THE COMPANY

2008

2007

2008

2007

$’000

5.9%

5.4%

–

Principal actuarial assumptions at the balance sheet date (expressed as weighted average annual rates): Discount rate at 30 June Expected return on plan assets at 30 June

6.9%

–

Future salary increases

4.0%

–

The expected return on plan assets assumption is determined by weighting the expected long term return for each asset class by the target allocation of asset 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.

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Notes to the Financial Statements 28

EMPLOYEE BENEFITS (CONTINUED)

(b) Share based payments The Company has a number of share plans pursuant to which directors and senior executives may acquire shares. These are: •

the Performance Rights Plan (which is open to executive directors and selected senior executives);

•

Deferred Shares (which is open to 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 financial performance) on terms and conditions determined by the Board. If the vesting conditions are satisfied, the performance rights vest and shares will be delivered to the executive. Grant of performance rights The Board has approved the following grants of performance rights to employees, under the PRP: GRANT DATE 1 JULY 2007 (NUMBER) GRANT 4 1

GRANT DATE 1 JULY 2006 (NUMBER) GRANT 3 1

GRANT DATE 1 JULY 2005 (NUMBER) GRANT 2 1

GRANT DATE 1 JULY 2004 (NUMBER) GRANT 1

–

525,000

2,500,000

Granted

–

433,721

–

30 June 2007

–

433,721

525,000

2,500,000

659,000

–

NUMBER OF PERFORMANCE RIGHTS

1 July 2006

Granted Exercised

–

(195,000)

(1,700,000)

Forfeited

(48,000)

(241,861)

(98,213)

(800,000)

30 June 2008

611,000

191,860

231,787

–

These grants consisted of two equal tranches with different vesting conditions, 1) total shareholder return; and 2) earnings per share.

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 of share based payments disclosed in Note 3 includes a 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 2007 GRANT 4

1 JULY 2006 GRANT 3

1 JULY 2005 GRANT 2

1 JULY 2004 GRANT 1

Fair value at measurement date

$2.28

$1.42

$1.35

$1.60

Share price

$3.45

$2.15

$2.30

$2.70

Fair value of performance rights and assumptions

Expected volatility

27%

25%

3 years

4 years

Dividend yield (per annum)

6.4%

6.0%

5.5%

3.0%

Risk-free interest rate (per annum)

6.4%

5.8%

5.1%

5.4%

Performance right life (period)

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. Vesting conditions Total shareholder return conditions The performance conditions are based on the relative total shareholder return (‘TSR’) of the Company, measured against a comparator group of companies. The comparator group of companies differs for each grant, details of the comparator groups of companies are contained on page 63 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 respect of those performance rights with TSR conditions in Grants 1 and 2, the price of the Company’s shares must also, 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.

105

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Notes to the Financial Statements 28

EMPLOYEE BENEFITS (CONTINUED)

(b) Share based payments (continued) (i) Performance Rights Plan (‘PRP’) (continued) The TSR performance conditions in relation to Grants 1 and 2 are: PERCENTAGE OF SHARES AVAILABLE IN GIVEN YEAR THAT VESTS

TARGET

The Company’s annual TSR is less than the median TSR of the comparator companies

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%

The TSR performance conditions in relation to Grants 3 and 4 are: PERCENTAGE OF SHARES AVAILABLE IN GIVEN YEAR THAT VESTS

TARGET

The Company’s 3 year TSR does not exceed the median performance of the comparator companies

The Company’s 3 year TSR exceeds the median performance of the comparator companies

50%

The Company’s 3 year TSR is ranked in the third quartile of the comparator companies

Pro rata between 50% and 100% (2% increase for each higher ranking)

The Company’s 3 year TSR is ranked in the fourth quartile of the comparator companies

100%

EPS performance conditions Earnings per share (‘EPS’) growth requirements were introduced in Grant 2 for half of the performance rights and are requirements in relation to Grants 3 and 4. The Board introduced this performance requirement because: •

as an absolute measure, it provides management with a performance goal over which it can directly exert some control;

•

it provides a very good ‘line of sight’ between the actions of senior executives and the Company’s result; and

•

it is directly correlated with shareholder returns, so it complements the relative TSR performance requirement.

EPS performance requirements are reviewed prior to each year’s allocation of performance rights. The range of EPS growth reflects the Company’s view of what is reasonable target value, taking account of likely business cycle conditions as well as the upside potential the Company has for further earnings growth. EPS performance requirements for each grant are shown in the table below: PERCENTAGE OF SHARES IN TRANCHE AVAILABLE IN GIVEN YEAR THAT VESTS

GRANT 2 PERFORMANCE RIGHTS EPS TARGET

GRANTS 3 AND 4 PERFORMANCE RIGHTS EPS TARGET

The Company’s compound EPS growth (tested over 1, 2, 3 and 4 years) is less than 8.5%

The Company’s 3 year compound EPS growth is less than 8.0%

25%

The Company’s compound EPS growth (tested over 1, 2, 3 and 4 years) equals 8.5%

The Company’s 3 year compound EPS growth equals 8.0%

Pro rata between 25% and 100%

The Company’s compound EPS growth (tested over 1, 2, 3 and 4 years) is between 8.5% and 10.5%

The Company’s 3 year compound EPS growth is between 8.0% and 12.0%

100%

The Company’s compound EPS growth (tested over 1, 2, 3 and 4 years) is equal to or exceeding 10.5%

The Company’s 3 year compound EPS growth is equal to or exceeding 12.0%

Any performance rights in Grants 1 and 2 which do not vest in a financial 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 relation to Grants 1 and 2, performance conditions were again tested at the end of the year ended 30 June 2008. Based on the financial performance of the Company in the 2008 financial year, no shares (2007: 1,591,874 shares) in the capital of the Company vested in the executive directors and senior executives effective 1 July 2008. The maximum percentage of the performance rights granted to date which may vest in favour of the executives is as follows: % VESTING GRANT DATE

% VESTING GRANT DATE

1 JULY 2007

1 JULY 2006

1 JULY 2005

1 JULY 2004

1 July 2007 (vested)

–

17.5%

60%

1 July 2008

–

42.5%1

40%

1 July 2009

–

100%

40%

–

1 July 2010

100%

–

Maximum

100%

Includes 17.5% which were due to vest at 1 July 2007 as performance conditions were not met.

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PACIFIC BRANDS AR08

Notes to the Financial Statements 28

EMPLOYEE BENEFITS (CONTINUED)

(b) Share based payments (continued) (i) Performance Rights Plan (‘PRP’) (continued) Restrictions on shares With respect to Grants 1 and 2, 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.

In the case of Grants 3 and 4, executives are not entitled to trade in shares allocated on vesting of the performance rights until the earliest to occur of: •

a request from the relevant executive to the Board to release the holding lock;

•

10 years after the date of grant of the shares allocated on vesting; or

•

six months following the date of cessation of employment with the Consolidated Entity.

(ii) Deferred Shares Grant of deferred shares The Board has approved the following grants of deferred shares: NUMBER OF PERFORMANCE RIGHTS

GRANT DATE 1 JULY 2007 (NUMBER) GRANT 2

1 July 2006 Granted Lapsed/forfeited

GRANT DATE 1 JULY 2006 (NUMBER) GRANT 1

– 990,000 (130,000)

30 June 2007

860,000

Granted Exercised Forfeited

1,150,000 – –

– – (50,000)

30 June 2008

1,150,000

810,000

Valuation The fair value of the deferred shares was calculated at the date of grant based on the market value of shares on that date. Expected dividends are not considered in the determination of the fair value of deferred shares. The fair value of deferred shares is allocated to each reporting period evenly over the period from grant date to vesting date. The value of share based payments disclosed in Note 3 includes a portion of the fair value of the deferred shares allocated to this year. In valuing the deferred shares, the following assumptions have been taken into account.

Fair value of deferred shares and assumptions Fair value at measurement date Share price Performance right life (period) Dividend yield (per annum)

1 JULY 2007 GRANT 2

1 JULY 2006 GRANT 1

$2.85 $3.45 3 years 6.4%

$1.80 $2.15 3 years 6.0%

Performance conditions for vesting The conditions with respect to deferred shares issued in Grants 1 and 2 are based on the following: 60% of the deferred shares will be available to vest in accordance with the following scheduled measured at the end of the 3 year performance period. TARGET

The Company’s compound EPS is less than 8.5% per annum The Company’s compound EPS is 8.5% per annum For each 0.1% per annum increase in The Company’s compound EPS growth rate above 8.5%

The Company’s 3 compound EPS growth rate is above 10.5%

PERCENTAGE OF SHARES AVAILABLE IN GIVEN YEAR THAT VESTS

0% 25% Pro rata between 25% and 100% (3.75% increase for each 0.1% additional EPS growth) 100%

40% of the deferred shares will be available to vest if eligible executives discharge their obligations to the Company in accordance with annual KPIs agreed with their managers. This performance condition will be determined at the end of the 3 year performance period (ie after 30 June 2009 for Grant 1 and after 30 June 2010 for Grant 2) by the Chief Executive Officer. If the target EPS does not reach 10.5% at the end of the initial 3 year period, and some of the deferred shares remain unvested, those unvested deferred shares remain available for a further 2 years, and will be re-tested at the end of that time (ie. 30 June 2011 for Grant 1 and 30 June 2012 for Grant 2). The unvested deferred shares will then be tested over a 5 year period in accordance with the vesting schedule above, so that if the threshold EPS of 8.5% per annum compound is achieved over the 5 year period, 25% of those previously unvested deferred shares will vest. Vesting will again be scaled on a straight line basis to 100%, at the target EPS of 10.5% per annum on a compound basis.

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Financial Report to Shareholders

Notes to the Financial Statements 28

EMPLOYEE BENEFITS (CONTINUED)

(b) Share based payments (continued) (iii) Non-Executive Director Share Plan Under the Non-Executive Director Share Plan, non-executive directors are required to sacrifice at least 25% (or such other minimum percentage determined by the Board from time to time) of their annual directors’ fees towards the acquisition of shares in the Company. Nonexecutive 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 and the Board 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 sacrifice to acquire shares. Shares are acquired monthly at the end of each calendar month.

KEY MANAGEMENT PERSONNEL DISCLOSURES

Key management personnel compensation The key management personnel compensation included in the Consolidated Entity’s personnel expenses (refer Note 3) is as follows: CONSOLIDATED

Short term employee benefits Non-monetary benefits Post-employment benefits

THE COMPANY

2008

2007

2008

2007

9,215,654

4,743,700

389,661

279,608

666,484

474,734

245,961

190,615

1,097,290

921,148

156,224

176,937

Termination benefits

706,280

–

Retirement benefits

3,448,357

–

Share based payments

1,117,572

873,673

–

873,673

16,251,637

7,013,255

791,846

1,520,833

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 is provided in the Remuneration Report section of the Annual Report on pages 57 to 70. 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. Performance rights over equity instruments The movement during the reporting period in the number of performance rights over ordinary shares in Pacific Brands Limited held, directly, indirectly or beneficially, by each key management personnel, including their related parties, is as follows: HELD AT 30 JUNE 2006

GRANTED AS COMPENSATION

HELD AT 30 JUNE 2007

GRANTED AS COMPENSATION

EXERCISED

FORFEITED

HELD AT 30 JUNE 2008

P.R. Moore 1

625,000

122,093

747,093

–

(625,000)

(122,093)

–

S.M. Morphet

312,500

40,698

353,198

250,000

(160,937)

(100,000)

342,261

S.J. Tierney

375,000

48,837

423,837

55,000

(193,125)

(120,000)

165,712

S.W. Audsley 2

312,500

40,698

353,198

–

(160,937)

(192,261)

–

I.C. Barton 3

250,000

36,628

286,628

–

(128,750)

(157,878)

–

Directors

Executives

M.S. Daniel

200,000

42,442

242,442

48,000

(120,000)

(170,442)

–

250,000

40,116

290,116

45,000

(128,750)

(80,000)

126,366

–

44,000

–

44,000

M.E. Keely

250,000

31,977

281,977

44,000

(128,750)

(80,000)

117,227

M. Sonand

–

35,000

–

35,000

R.A. Taylor

–

41,000

–

41,000

M.J. Ford B.A. Hannagan 5

No performance rights were exercised during the year 30 June 2007. 1 2 3 4 5 6

P.R. Moore retired from the Company effective 1 January 2008. S.W. Audsley resigned from the Company effective 5 October 2007. I.C. Barton ceased in the role of Group General Manager, Home Comfort effective 30 November 2007 and resigned from the Company effective 30 April 2008. M.S. Daniel resigned from the Company, effective 2 May 2008. B.A. Hannagan was appointed Group General Manager, Underwear and Hosiery effective 29 January 2008. R.A. Taylor was appointed Group General Manager, Home Comfort effective 1 December 2007.

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PACIFIC BRANDS AR08

Notes to the Financial Statements 29

KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED)

Movements in shares The movement during the year in the number of ordinary shares in Pacific Brands Limited held, directly, indirectly or beneficially, by each key management personnel, including their related parties, is as follows: HELD AT 30 JUNE 2006

PURCHASES

SALES

HELD AT 30 JUNE 2007

PURCHASES

SALES

HELD AT 30 JUNE 2008

R.P. Handley

1,364,305

26,341

–

1,390,646

34,766

(500,000)

925,412

P.R. Moore

1,320,001

–

1,320,001

625,000

–

N/A1

200,400

–

200,400

160,937

–

361,337

Directors

S.M. Morphet S.J. Tierney

400,001

–

400,001

193,125

(200,000)

393,126

A.D. Cummins

297,500

19,889

–

317,389

175,708

(20,000)

473,097

M.G. Ould

72,815

10,663

–

83,478

19,344

–

102,822

M.A. Plavsic

43,202

10,845

–

54,047

114,700

–

168,747

–

2,011

–

2,011

12,056

–

14,067

N/A

–

1,636

–

1,636

S.W. Audsley 3

201,800

–

201,800

160,937

–

N/A3

I.C. Barton

120,400

–

120,400

128,750

–

N/A4

1,250

–

1,250

D.G. Fisher J.A.C. MacKenzie

Executives

Y.K. Cheong 5

N/A

–

100,000

–

100,000

M.S Daniel 7

120,443

–

120,470

120,000

–

N/A7

M.J. Ford

215,528

–

215,555

132,462

(1,250)

346,767

N/A

470

–

504

M.M. Clark

B.A. Hannagan 8

200,429

–

(50,000)

150,429

128,750

–

279,179

M. Sonand

M.E Keely

–

4,000

–

4,000

3,994

–

7,994

R.A. Taylor

N/A

109,587

399

–

109,986

1 2 3 4 5 6 7 8 9

P.R. Moore retired from the Company effective 1 January 2008. J.A.C. MacKenzie was appointed as a director of the Company on 27 May 2008. S.W. Audsley resigned from the Company effective 5 October 2007. I.C. Barton ceased in the role of Group General Manager, Home Comfort effective 30 November 2007 and resigned from the Company effective 30 April 2008. Y.K. Cheong was appointed Group General Manager, Supply and Operations effective 10 March 2008. M.M. Clark was appointed Group General Manager, Workwear effective 26 May 2008. M.S. Daniel resigned from the Company, effective 2 May 2008. B.A. Hannagan was appointed Group General Manager, Underwear and Hosiery effective 29 January 2008. R.A. Taylor was appointed Group General Manager, Home Comfort effective 1 December 2007.

NON-KEY MANAGEMENT PERSONNEL DISCLOSURES

It is the Consolidated Entity’s policy that 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 Pacific Brands Limited to Pacific Brands (Australia) Pty Ltd on 6 April 2004 to enable it to acquire Pacific 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. It is the Consolidated Entity’s policy that 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.

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PACIFIC BRANDS AR08

Financial Report to Shareholders

Notes to the Financial Statements 30

NON-KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) THE COMPANY 2008

2007

$â&#x20AC;&#x2122;000

70,000

100,000

37,156

48,618

1,203,714

The aggregate amounts included in the before income tax expense/(benefit) that resulted from transactions with controlled entities are: Dividend revenue Wholly-owned controlled entity Aggregate amounts receivable from controlled entities are: Amounts receivable other than trade receivables Current Wholly-owned controlled entity Non-current Wholly-owned controlled entity (interest-free)

EVENTS SUBSEQUENT TO REPORTING DATE

There has not arisen in the interval between the end of the financial year and the date of this report, any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company to affect significantly the operations of the Consolidated Entity, the results of those operations, or the state of affairs of the Consolidated Entity, in future financial periods. Dividends For dividends declared after 30 June 2008, refer Note 21.

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PACIFIC BRANDS AR08

Directors’ Declaration 1.

In the opinion of the directors of Pacific Brands Limited (the ‘Company’): (a) the financial statements and notes and the remuneration disclosures contained in the Remuneration Report in the Directors’ Report, set out on pages 57 to 110, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Company’s and the Consolidated Entity’s financial position as at 30 June 2008 and of their performance, for the financial year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; (b) the financial report also complies with International Financial Reporting Standards as disclosed in note 1 (a); and (c) the remuneration disclosures that are contained in the Remuneration Report in the Directors’ Report comply with Australian Accounting Standard AASB 124 Related Party Disclosures, the Corporations Act 2001 and the Corporations Regulations 2001; and (d) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Chief Executive Officer and Chief Financial Officer for the financial year ended 30 June 2008.

Dated at Melbourne this 20th day of August 2008.

Signed in accordance with a resolution of the directors:

Pat Handley Chairman

Sue Morphet Chief Executive Officer

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PACIFIC BRANDS AR08

Financial Report to Shareholders

Independent Auditor’s Report to the Members of Pacific Brands Limited Report on the financial report We have audited the accompanying financial report of Pacific Brands Limited (the Company), which comprises the balance sheets as at 30 June 2008, and the income statements, statements of changes in equity and cash flow statements for the year ended on that date, a summary of significant accounting policies and other explanatory notes 1 to 31 and the directors’ declaration of the consolidated entity comprising the company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In note 1, the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial report, comprising the financial statements and notes, complies with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards (including the Australian Accounting Interpretations), a view which is consistent with our understanding of the Company’s and the consolidated entity’s financial position and of their performance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Auditor’s opinion In our opinion: (a) the financial report of Pacific Brands Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Company’s and the Consolidated Entity’s financial position as at 30 June 2008 and of their performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001. (b) the financial report also complies with International Financial Reporting Standards as disclosed in note 1. Report on the remuneration report We have audited the Remuneration Report included in pages 57 to 70 of the directors’ report for the year ended 30 June 2008. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with Section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with auditing standards. Auditor’s opinion In our opinion, the remuneration report of Pacific Brands Limited for the year ended 30 June 2008, complies with Section 300A of the Corporations Act 2001.

KPMG Melbourne, 20 August 2008

Don Pasquariello Partner

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PACIFIC BRANDS AR08

Shareholdersâ&#x20AC;&#x2122; Statistics as at 20 August 2008

DISTRIBUTION OF ORDINARY SHAREHOLDERS AND SHAREHOLDINGS SIZE OF HOLDING

NUMBER OF HOLDERS

NUMBER OF SHARES

1,000

9,158

29.2%

4,948,886

1.0%

1,001

5,000

16,756

53.4%

40,048,992

8.0%

5,001

10,000

3,442

10.9%

26,104,509

5.2%

10,001

100,000

1,927

6.1%

40,748,133

8.1%

108

3.4%

390,427,332

77.7%

31,391

100.0%

502,277,852

100.0%

% OF TOTAL

100,001 and over Total

Included in the above total are 1,911 shareholders holding less than a marketable parcel of 248 shares.

TWENTY LARGEST ORDINARY FULLY PAID SHAREHOLDERS

J P Morgan Nominees Australia Limited

105,452,045

20.99%

HSBC Custody Nominees (Australia) Limited

80,049,623

15.94%

National Nominees Limited

64,894,778

12.92%

Citicorp Nominees Pty Limited

28,866,573

5.35%

ANZ Nominees Limited <Cash income A/C>

12,777,683

2.54%

Cogent Nominees Pty Limited

12,582,439

2.50%

Australian Reward Investment Alliance

9,673,152

1.93%

Citicorp Nominees Pty Limited <CFS WSLE 452 AUST Share A/C>

8,551,010

1.70%

UBS Nominees Pty Ltd

7,888,653

1.57%

AMP Life Limited

4,369,104

0.87%

ANZ Nominees Limited

4,236,000

0.84%

Cogent Nominees Pty Limited <CFSIL CWLTH Aust Shs 18 A/C >

3,932,589

0.78%

RBC Dexia Investor Services Australina Nominees Pty Limited <GSJBW A/C>

3,472,647

0.69%

Citicorp Nominees Pty Limited <CFSIL CWLTH SML COS 3 A/C>

3,457,515

0.69%

Queensland Investment Corporation

3,070,856

0.61%

ANZ Nominees Limited <SL Cash Income A/C>

2,390,049

0.48%

Citicorp Nominees Pty Limited <CFSIL CFSWS GEAR 452 AU A/C>

2,232,400

0.44%

RBC Dexia Investor Services Australia Nominees Pty Limited <MLCI A/C>

1,961,479

0.39%

ES Group Operations Pty Ltd <HEIL A/C>

1,500,000

0.30%

Invia Custodian Pty Limited <GSJBW Managed A/c>

1,481,889

0.20%

360,840,484

71.83%

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: 21-02-08

452 Capital Pty Limited

9.61%

30-04-08

AXA Asia Pacific Holdings Limited

7.52%

03-12-07

Commonwealth Bank of Australia

11.11%

14-06-07

Dimensional Fund Advisors Inc

5.06%

27-06-08

Franklin Resources Inc

5.20%

27-06-08

IOOF Holdings Limited

8.03%

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PACIFIC BRANDS AR08

Financial Report to Shareholders

Shareholders’ Information Annual General Meeting

Change of name and/or address

10.00am, Tuesday 21 October 2008. Level 17, RACV Club, 501 Bourke Street, Melbourne, Australia.

For issuer-sponsored holdings, please notify the Share Registry in writing if you change your name and/or address. When advising the Share Registry of a change of name, please supply details of your new/previous name, your new/previous address, your SRN and supporting documentation evidencing your change of name. You can also change your address details online at the Share Registry’s website at www.computershare.com.au. Changes of address relating to shareholdings in a single name can be made over the phone by calling 1300 132 632 (Australia only). Please note that this does not apply to shareholdings held jointly or in a company name.

Stock exchange listing Pacific Brands shares are listed on the Australian Stock Exchange (ASX) and New Zealand Stock Exchange (NZX) and are traded under the code ‘PBG’. Pacific Brands Share Registry Australia Computershare Investor Services Pty Limited Yarra Falls, 452 Johnston Street Abbotsford Victoria 3067 Australia GPO Box 2975 Melbourne Victoria 3001 Australia New Zealand Computershare Investor Services Limited Level 2, 159 Hurstmere Road Takapuna, Auckland New Zealand Telephone: Australia: New Zealand: International: Facsimile: Email:

For CHESS/broker-sponsored holdings, please notify your broker in writing if you change your name and/or address. Share enquiries Shareholders seeking information about their shareholding or dividends should contact the Share Registry. Contact details are above. Pacific Brands’ communications Pacific Brands internet site, www.pacificbrands.com.au offers information about the Company, news releases, announcements to ASX and NZX and addresses by the Chairman and CEO. The website provides essential information about the Company and an insight into Pacific Brands’ businesses. Registered office ABN 64 106 773 059

1300 132 632 (09) 488 8777 (61 3) 9415 4184 (61 3) 9473 2500 web.queries@computershare.com.au

Tax and dividend payments For Australian registered shareholders who have not quoted their Tax File Number (‘TFN’), exemption or Australian Business Number (‘ABN’), the Company is obliged to deduct tax at the top marginal tax rate plus Medicare levy from unfranked and/or partially franked dividends. If you have not already provided your TFN/ABN, you may do so by contacting the Share Registry or by registering your TFN/ABN at the Share Registry’s website at www.computershare.com.au. Dividend payments Your dividends will be paid in Australian currency credited directly into your nominated bank account. If you have not nominated a bank account, a dividend cheque will be mailed to the address recorded on the share register less an administration fee of $1.00. If you wish to elect to receive your dividends by way of direct credit but have not done so, you should complete an application form available by contacting the Share Registry or enter the details at the Share Registry’s website at www.computershare.com.au. Dividend Reinvestment Plan The Dividend Reinvestment Plan enables Pacific Brands’ fully paid ordinary shareholders having a registered address or being resident in Australia or New Zealand to reinvest all or part of their dividends in additional Pacific Brands fully paid ordinary shares. Applications are available from the Share Registry. Consolidation of multiple holdings If you have multiple issuer-sponsored holdings that you wish to consolidate into a single account, please notify the Share Registry in writing, quoting your full registered names and Security Reference Numbers (SRNs) for these accounts and nominating the account to which the holdings are to be consolidated.

Pacific Brands Limited Level 3, 290 Burwood Road Hawthorn Victoria 3122 Telephone: Fascimile: Email: Website:

(61 3) 9947 4900 (61 3) 9947 4951 enquiries@pacbrands.com.au www.pacificbrands.com.au

Investor relations Telephone: Email: Auditors KPMG

(61 3) 9947 4900 investorrelations@pacbrands.com.au

PACIFIC BRANDS AR08

Pacific Brands Annual Report Company Directory CHAIRMAN

Pat Handley CHIEF EXECUTIVE OFFICER

Sue Morphet CHIEF FINANCIAL OFFICER

Stephen Tierney

PACIFIC BRANDS LIMITED REGISTERED OFFICE

Level 3, 290 Burwood Road Hawthorn, Victoria 3122 Telephone: (61 3) 9947 4900 Facsimile: (61 3) 9947 4951 Email: enquiries@pacbrands.com.au PACIFIC BRANDS NEW ZEALAND

NON- EXECUTIVE DIRECTORS

Andrew Cummins Dominique Fisher Max Ould Maureen Plavsic James MacKenzie

Greenlane Level 1, 308 Great South Road Greenlane, Auckland 1005 New Zealand Telephone: (64 9) 523 7800 Facsimile: (64 9) 523 7801

COMPANY SECRETARY

PACIFIC BRANDS (ASIA) LIMITED

John Grover

Langham Place, Level 40 Office Tower, 8 Argyle Street Kowloon Hong Kong Telephone: (852) 2956 6688 Facsimile: (852) 2956 1778

ACCESS PACIFIC BRANDS ON THE WEB

All Pacific Brands announcements and reports, including an electronic version of this Annual Report are available online at www.pacificbrands.com.au. You can also nominate to receive email notification of future announcements by registering at Email Updates in the Investor Relations section of the site. (www.pacificbrands.com.au/join-us.asp)

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

This Annual Report is printed on environmentally responsible paper The cover and editorial sections are printed on Monza Satin, an environmentally responsible paper manufactured using 55% recycled and Forest Stewardship Council (FSC) certified virgin fibre. Produced under ISO 14001 Environmental Accreditation. The financial section is printed on Ecostar, a 100% post-consumer recycled paper.

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