tFS Corporation Ltd annual report - Quintis · Indian Sandalwood is the world’s most expensive tropical hardwood and continues to ... Richard Alston will become the ... 8 TFS CORPORATiOn

a n n u a l r e p o r tt F S C o r p o r a t i o n L t d

Director’s Report

Corporate DirectoryDirectorsMr Frank Wilson (Chairman)Mr Ronald EacottMr Blake Myles (Resigned 1 July 2011)Mr Ian Murchison (Resigned 1 July 2011)Mr Ian ThompsonMr Timothy CrootMr Richard Alston (Appointed 1 July 2011)

Mr Adam Gilchrist (Appointed 1 July 2011)

Company SecretaryMr Quentin Megson

AuditorsBentleys Level 1, 12 Kings Park Road, West Perth WA 6005

Registered Office / Principal Place of Business169 Broadway, Nedlands WA 6009Telephone: 08 9386 3299 Facsimile: 08 6389 1546 Email: [email protected] Website: www.tfsltd.com.au

Share RegisterLink Market Services Limited Level 12, 680 Georges Street, Sydney NSW 2000 Telephone: 02 8280 7001

ContentsChairman’s Report ........................................................... 3

TFS Group Profile ............................................................. 4

Director’s Review ....................................................... 6-13

Directors Report ....................................................... 14-24

Corporate Governance Statement ............................. 25-28

Sustainability Overview .............................................. 29-31

Directors’ Declaration .................................................... 32

Auditor’s Independence Declaration .............................. 33

Consolidated Statement of Comprehensive Income ....... 34

Consolidated Statement of Financial Position ................. 35

Consolidated Statement of Changes in Equity ................. 36

Consolidated Statement Cashflows ................................ 37

Notes to the Accounts .............................................. 38-87

Independent Audit Report ........................................ 88-89

Additional Stock Exchange Information ..................... 90-91

Historical Consolidated Statistics .................................... 92

T F S C O R P O R A T i O n L i m i T e D 2 0 1 1 A n n u A l R e p o R t

Director’s Report

“2011 marked a year of record cash flow for TFS with cash receipts up 119% on FY10.”


Chairman’s Report

Dear Shareholder,

2011 marked a year of record cash flow for tFS with cash receipts up 119% on FY10. tFS has made a successful transition away from MIS to the extent that MIS sales have now been reduced to approximately 5% of tFS revenues.

Standout performances of the 2011 year include:

1. The $65m turnaround in operating cash flow to reach a positive $40m from -$25m the previous year. This reflected successful conversion of wholesale sales into cash. The turnaround in operating cash flow was also reflected in the improvement in cash receipts by 119% over the previous year to $104.9m.

2. Validation of the forestry model arrived in the form of the results of the Forest Product Commission (FPC) trials of harvesting 90 mature trees to examine heartwood and oil content. The FPC results show that trees are producing oil in the predicted quantity as well as meeting the ISO specification used to identify Indian Sandalwood Oil. The trial results serve to de-risk TFS’ understanding of future harvest production, and supports TFS’ basic model assumptions.

3. TFS secured its balance via US$150m Senior Secured Note Debt facility which has provided the business with certainty in business planning, necessary to develop the long-term land opportunities that have opened up for TFS.

TFS expects its cash flow from operations in FY12 to continue to improve.

Two new board appointments with another potential appointment being reviewed, will serve to develop an independent board at TFS, preparing the business to take the next step in preparation for harvesting and producing finished sandalwood products.

Again I would like to thank all our staff members and our board of directors and in particular Ian Murchison and Blake Myles who have both recently resigned from the Board. Without their hard work, loyalty and dedication we would not have been able to achieve such a successful transition in our business model, and at the same time continuing to improve our overall cash flow position to one of record status since TFS’ inception.

Frank Wilson Executive Chairman

T F S C O R P O R A T i O n L i m i T e D 2 0 1 1 A n n u A l R e p o R t 3

Director’s Report

TFS Group ProfileTFS Corporation (“TFS”) is an owner and manager of Indian sandalwood plantations in the east Kimberley region of Western Australia. As part of its vision to be a vertically integrated producer of finished sandalwood products, TFS owns a significant proportion of the plantations in its own right and in 2008 acquired Mount Romance Australia (MRA), the Albany based sandalwood processor and oil distributor.

TFS was founded in 1997 to exploit the success of 15 years of government trials into the plantation growth of Indian Sandalwood in the Ord River Irrigation Area (ORIA) of north-east Western Australia.

TFS’ first planting was in 1999 and it now manages the largest area of Indian sandalwood plantations in the world, with approximately 5,000 hectares planted in the ORIA and neighbouring areas. The majority of the TFS plantations are managed on behalf of retail and wholesale investors, with 337 hectares owned by TFS itself. The retail investors invest through Managed Investment Schemes that are regulated by ASIC and the ATO.

The TFS land bank has reduced significantly from historic levels but new funding will result in re-building the land bank to record levels.

TFS is committed to adopting and maintaining the highest environmental and ethical standards in all aspects of its business. All plantations are grown on land that has previously been used for agricultural or horticultural production. As the first ORIA land owner to recycle its water, TFS was the winner of the 2006 State Regional Water Award.

In 2009 TFS was recognised in the prestigious Forbes Asia Pacific’s “Best under a Billion” award. This award acknowledges the top 200 companies from more than 25,326 publicly listed firms in the Asia/Pacific region with revenue of less than US$1 billion.

TFS employs over 100 full time and several hundred part time staff and services over 4,000 plantation investors. Nearly 5,000 investors own shares in TFS.

TFS’ core business revolves around the commodity of Indian Sandalwood which has a history as a tradeable commodity spanning thousands of years, but is now endangered due to the illegal harvest of wild trees throughout the world. As a result, Indian Sandalwood is the world’s most expensive tropical hardwood and continues to increase in value each year. Its heartwood currently trades for in excess of $115,000 per tonne, having risen at a compound rate of over 18% pa over the past 18 years.

Indian Sandalwood Oil is a globally important ingredient in fine fragrances, cosmetics and toiletries, incense stick markets. It is used for medicinal purposes (aromatherapy and traditional medicine) and research is in progress as to potential applications within the global pharmaceutical sector. The wood is also used for high quality carvings.

Indian Sandalwood has a well entrenched market throughout the world, particularly in India and China, two of the fastest growing economies in the world.

T F S C O R P O R A T i O n L i m i T e D 2 0 1 1 A n n u A l R e p o R t4


Director’s Review

Cash flow is the key The Directors are pleased with the cash flow performance of TFS Corporation Limited and its controlled entities (TFS) in the exceptionally challenging and difficult market and economic conditions that prevailed for much of 2010/11.

The lower profit result reflected a combination of an unexpected accounting treatment on a large sale to a wholesale investor as well as expensing the one-off transaction costs of the US$150m Senior Secured Note debt facility and associate warrants.

The Wholesale investment product contributed strongly to the cash flow result and more than compensated for the significant decline in the Retail MIS product which continues to experience extremely difficult trading conditions.

The processing and oil distribution business MRA, which TFS acquired in 2008, contributed another solid result but earnings performances been impeded by constraints in the supply of raw material as well as continued strength of the Australian currency.

The success of the TFS Wholesale investment product in conjunction with the continuing contribution of the MRA business has resulted in the completion of the transition of the TFS business model, which commenced three years ago.

Sales from the traditional MIS product now account for only approximately 5% of total TFS revenue. TFS’ wholesale and production businesses now result in revenues being diversified on a geographic basis as well, with investors and customers spanning Europe, Asia and the US. TFS has a strong pipeline of wholesale investors into its plantation investment business with investment sourced from blue chip global investors that appreciate the exceptional fundamentals of investing in Sandalwood as a commodity and within the alternative investment asset class.

Since inception, TFS has achieved many milestones and negotiated a number of challenges. As TFS moves forward and prepares for the next phase of its development, it is embarking on a renewal of the board of directors to strengthen its corporate governance and finance skills sets. To this end, Richard Alston and Adam Gilchrist have been appointed to the board with the appointments to be ratified at the forthcoming AGM. Richard Alston will become the new Non-Executive Independent

Chairman of TFS. Ian Murchison and Blake Myles have retired from the Board effective 01 July 2011. TFS is also broadening its skill set and focus as the company prepares for first harvest and

opening up key new markets such as the traditional home of Indian Sandalwood, India.

6 T F S C O R P O R A T i O n L i m i T e D 2 0 1 1 A n n u A l R e p o R t

New Board Structure to take TFS to next phase

Diversify wholesale customer base and land bank

Planning commences for first harvest

Indian Sandalwood Oil sells for

~US$2,500 per kg

IPO with market cap of $31m

Paid a DPS of 2.0 cps

2007 – Large scale project for 2,000 ha at Kingston Rest (KR)

Management practices improve leading to rapid rise in survival rates

Record plantings and survival rates

Acquire MRA for vertical integration strategy

Invest in forestry R&D

Develop global sales team for Sandalwood product markets

2009 – Create Wholesale Investment Product to diversify from MIS

KR becomes Australia’s largest irrigation project development and is completed on a schedule and budget and fully committed

Indian Sandalwood Oil sells for

~US$2,000 per kg

Annual planting capacity reaches 1,500 ha

Secures balance sheet with US$150m debt raising

Achieves record cash flows

Trial harvest validates basic forestry assumptions

1999 2004 2008 2010 2011 2012+

Using Government research and tax incentives to establish first plantings in ORIA

Indian Sandalwood Oil sells for ~US$360 per kg


Director’s Review

Until recently, TFS was largely known as a plantation manager. The acquisition of the processing operation, MRA in 2008 turned TFS into a vertically integrated Sandalwood products company with the ability to deliver a complete solution up and down the value chain.

As TFS reaches first harvest, greater visibility of our skill sets in distribution of finished product to the wholesale market and distribution of consumer products in the retail sector will become more apparent. At TFS, our motto is “from soil to oil”.

Wholesale Distribution of Oil and By-Product to Global Brands

Processor/Distiller/Manufacturer of Oil/High Value By-Products

Forestry Management/ Maintenance Service Provider

Establishment/Planting Service Provider

Seedling Supply

Land Owner

Retail Distributor of Consumer Products through

Albany/Kununurra/Broome Tourism Facility

T F S C O R P O R A T i O n L i m i T e D 2 0 1 1 A n n u A l R e p o R t8

Full year profit summary

Cash Flow/Net profitGroup performance for the year ended 30 June 2011 is summarised below:

• Operating Cash Flow increased to $40.4m (2010: -$25.1m) a large positive turnaround of $65m over the previous corresponding period and a record year for TFS

• Cash receipts rose to $104.9m, an increase of 118.6%

• Statutory revenue declined to $111.0m (2010: $116.5m), a fall of 4.7%

• Cash operating revenue declined to $91.0m (2010: $97.4m), a fall of 6.6%

• Cash EBITDA declined to $25.4m (2010: $41.5m), a fall of 38.8%

• Cash Net Profit After Tax (NPAT) declined to $14.5m (2010: $26.7m), a fall of 45.9%

• Total Comprehensive Income after Tax declined to $20.2 (2010: $35.2m) a fall of 42.6%.

TFS believes the Cash NPAT result provides a more meaningful picture of underlying performance by the Group, as the Comprehensive and Statutory results contain significant non-cash items. Further dividends are paid out of the Cash NPAT result.

TFS’ cash flow result reflected the conversion of previous wholesale sales into cash confirming the success of the transition from an MIS business to an institutional investor base where the key driver is the investment fundamentals of the commodity of Indian Sandalwood.

The lower profit results reflected two key themes –

• The application of accounting standards provided that the sale of a wholesale investment of 610 hectares could not be treated as revenue in FY11 as TFS had yet to secure rights over attributable land. This treatment only related to a timing issue. Since balance date, TFS has secured the necessary land for this sale. Subsequently, the sale will be treated at 100% for revenue recognition purposes in FY12, as all work under the provision of services accounting standard, will be completed in the current financial year.

• One-off transaction costs from the issue of Senior Secured Notes and associated warrants.

Cash earnings per shareCash earnings per share fell 50.9% to 6.0 cents (2010: 12.1 cents). The result reflected the fall in reported profit as referred above and the partial impact from the equity issue that raised net $35.8m during the year ended 30 June 2011.

FY08 FY09 FY10 FY11 FY11 v FY10

$m $m $m $m % change

Total Cash Operating RevenueCash EBITDA

56.730.6

78.337.0

97.441.5

91.025.4

-6.6%-38.8%

EBITDA MarginEBITInterest ExpenseNPBTTax

54.0%29.8

2.427.4

7.9

47.2%35.6

3.132.5

9.2

42.6%39.8

3.836

9.3

27.9%21.9

3.818.1

3.6

-45.0%

Cash NPAT 19.5 23.3 26.7 14.5 -45.7%

Underlying Cash EBITDAUnderlying EBITDA MarginUnderlying Cash NPAT

30.653.9%

19.5

3747.2%

23.3

41.542.6%

26.7

34.738.1%

20.9

-16.4%

-21.5%

NB. Underlying result reflects add back of one-off cash transaction costs from Senior Secured Note Facility in 2011.

9T F S C O R P O R A T i O n L i m i T e D 2 0 1 1 A n n u A l R e p o R t

Full year profit analysis and performance reviewTFS’ operating results were impacted by the combination of both the treatment on revenue recognition over a sale of 610 hectares to a wholesale investor and the one-off transaction costs from the Senior Secured Note Facility. If not for these two factors, the operating result would have shown considerable earnings growth. While TFS is disappointed with the reported results, in underlying terms the business continues to build solid foundations.

The Wholesale investment business has been in operation for three years. A number of early teething issues have been resolved and cash flows are now being generated. The pipeline of institutional interest in Sandalwood as an investment continues to build. In addition, TFS has developed a distribution relationship with a large European Bank to foster take-up of Sandalwood investment.

The MRA business performed slightly below the previous year due to supply constraints and currency impacts but produced a solid result.

MIS sales now represent approximately 9% of total revenue and this reflects the completion of the transition of the business model to one that is geared toward the fundamental investment features of Sandalwood and the future production of finished Sandalwood products distributed to the open market.

Cash EBITDA declined by 38.8% to $25.4m (2010: $41.5m). The decline was due to the lower reported revenues and the one-off cash transaction costs from the Senior Secured Note Facility. In underlying terms operating costs were flat over the previous year reflecting strict management controls over costs.

Given that 100% of the 610 hectares sale referred to earlier, will be recognised in FY12, which sets up the year for a strong result, the margin reduction should only be temporary. Further new pricing of the Wholesale investment product should support margins.

Manufacturing division – Mt. romance (MrA)

FY09 FY10 FY11 FY11 v FY10

$m $m $m % change

Oil Volume (t)RevenueEBITDA

10.611.3

3.4

19.218.3

5.4

19.618.8

5.2

2.1%2.8%

-3.7%

EBITDA Margin (%) 29.8% 29.4% 27.7%

MRA is TFS’ manufacturing business which processes Australian native sandalwood tree logs (Santalum Spicatum “Spicatum”) into sandalwood oil which is used across the global fragrance industry and in various products across Asia. The MRA business will ultimately be the driving force behind TFS future earnings capacity as it processes the trees from Indian Sandalwood plantations into oil and other by-products and sells those products into global markets.

MRA’s divisional earnings reached a plateau in FY12. Sales volumes only grew slightly and there was some margin erosion. Performance of the business would have been better, were it not for the 20% depreciation of the Indian Rupee and USD v AUD. However, the key constraint for MRA is the supply of Native Sandalwood for processing.

MRA’s processing plant has a capacity of 1,200 tonnes pa of wood. At present, MRA can only source approximately 800 tonnes. In the year ahead, constraints in supply are likely to deepen due to structural deficiencies in the industry. Further, sourcing wood from both public and private sources is likely to cost more in the year ahead. Supply and cost pressures are likely to lead to materially lower divisional results if they cannot be addressed in the short term.

MRA is however experiencing strong interest for its products and believes that inherent demand outstrips supply by a factor of several times.

Director’s Review


plantation Management division

FY09 FY10 FY11 FY11 v FY10

$m $m $m % change

Hectare (Ha) SalesCash Revenue Cash EBITDA

1,02765.531.7

1,08876.433.3

91068.216.1

-16.4%-10.7%-51.7%

EBITDA Margin (%) 48.4% 43.6% 23.6%

Underlying Cash EBITDA 31.7 33.3 25.3 -24.0%

Underlying EBITDA Margin (%) 48.4% 43.6% 37.1%

NB. Underlying result reflects the add back of the one-off cash transaction costs from the Senior Secured Note Facility in 2011.

The Plantation Management division encompasses the traditional Retail MIS product as well as the new Wholesale investment product. This division is at the heart of the first phase of the TFS business model, creating the basis for MRA as a major production centre.

The Plantation Management business continues to develop strong foundations in the midst of a difficult investment climate. The bulk of earnings have now transitioned to TFS’ wholesale investment product.

The Plantation Management business reported lower sales as a result of revenue recognition treatments referred to earlier. Subsequently, revenue and earnings were lower than the previous year.

The revenue recognition treatment that affected the FY11 result is only a timing issue and as such the sale of 610 hectares is to be recognised in the FY12 result, providing a strong start to current year performance.

The significant contraction in EBITDA margins should correct itself in FY12. Cost management remains disciplined and new pricing in the current wholesale product should support margin outcomes.

WholesaleTFS’ wholesale product continues to build as expected and performed exceptionally well, notwithstanding that a 610 hectares sale is now being recognised in FY12. Wholesale investment flows resulted in sales of 832 hectares, a 6.4% increase on the 782 hectares sold in the previous year. Institutional investment flow was generated from the US, Europe and Australia. TFS continues to experience very strong institutional demand across different regions generating positive signs about the long-term trend.

The current global investment climate exhibits high levels of volatility and risk. In this climate TFS believes that its Sandalwood investment product will appeal to investors that require long duration hard assets that are likely to generate superior returns with lower volatility than conventional asset classes.

retailMIS sales were poor contributing only 88 hectares compared with 306 hectares in the previous year. This result reflected the continuing difficult retail investment climate resulting from the collapse of five competitors and depressed credit markets.

TFS is conducting a strategic review of this business. TFS does believe there is a place in its investment product mix for an appropriate retail investment offering subject to identifying and implementing the right structure to cater for both growers and shareholders.

TFS expects to have a retail offering in FY12.


Balance sheetIn FY11 TFS engaged in two key funding transactions that serve to eliminate restrictive traditional bank debt from the balance sheet and enable TFS to engage in long-term business planning with appropriate resources.

TFS raised net $35.8m via an institutional placement and entitlement offer in March 2011 which paid out its former lender the CBA and a short-term director’s loan.

Subsequent to this, TFS sought funding from international capital markets via 144A Private Placement of Senior Secured Notes. TFS raised US$150m with a headline rate of 11% pa. The Notes were subscribed for by a range of international institutions and provide substantial liquidity for the business.

It is important to note that this facility does not carry any maintenance covenants and so it offers TFS certainty around its balance sheet. This funding will enable TFS to develop a significant land bank to pursue the opportunities that are presenting in the wholesale investment market, to secure multi-year contracts. TFS is confident that Sandalwood developments that apply this funding will achieve returns above its cost of capital.

The Foreign Currency (FX) risk inherent in the debt facility is to be managed by the establishment of expert Treasury Committee advising the board. TFS’ hedging policy relies on natural hedges as TFS’ functional currency for core operations is USD. TFS’ wholesale investment flows can be transacted in USD and the oil values on the balance sheet, as well as those for commercial sales are priced in USD.

The natural hedge on TFS’ balance sheet mitigates the exposure of the debt to FX risk. Further by the end of the term of the Senior Notes, the balance sheet exposure to FX risk should be neutralised, due to the biological growth of the plantations owned by TFS.

The 55.5m warrants that were also issued as part of the bond raising and are exercisable at a share price of $1.28, reflect the long-term appeal of TFS equity for the note holders.

While TFS holds a net cash position at balance date, this reflects that debt funds have yet to be deployed. Once the new debt funding has been fully deployed, TFS’ gearing should rise beyond historic levels but will still remain relatively modest. It should be noted that TFS is prevented from acquiring more debt unless it has and can maintain a Cash EBITDA interest cover ratio of greater than 2.5:1.

LandLand is a critical aspect of TFS’ operations and sourcing new land is an ongoing exercise. TFS has developed strong skills in this endeavour which has enabled the Group to maintain a land bank worth two year’s sales volume, until recently.

TFS’ land bank is nearly exhausted with only 660 hectares of land available for planting in the current financial year. In order for TFS to continue to support sales of wholesale/retail investment products, TFS needs to re-build its land bank. The US$150m Senior Secured Note facility is designed to do just that as it provides TFS with the necessary long term funding to plan for future sales and map out an appropriate land acquisition program.

TFS has now established approximately 5,000 hectares of Indian Sandalwood plantations for investors and 337 hectares on its own account. TFS now owns about 35% of the entire plantable real estate which established solid foundations for security of land tenure and the balance sheet. TFS’ portion is reducing as land planted for the wholesale investor base becomes the prominent segment of the portfolio.

Director’s Review


Owned Leased Wholesale Total

Category Ha Ha Ha Ha

Planted 1,327 2,225 1,451 5,003Available 660 0 0 660Unavailable 1,998 765 0 2,763

Total 3,985 2,990 1,451 8,426

Unavailable: 1,500 ha relates to KR. 678 ha from Leucaena farm is being sub-leased to rice production

FY09 FY10 FY11

Number of Trees owned by TFS 73,088 89,825 98,459

The 2010 Annual Report referred to the prospects of suitable land for sandalwood development in the stage 2 development of the Ord River Irrigation Area (ORIA). In the past year, further analysis of the soil profile of this region has led TFS to the conclusion that only a small area of stage 2 would be suitable for planting Sandalwood trees.

Subsequent to management’s conclusions about the prospects of stage 2 of the ORIA, TFS has been seeking alternative sources of land. The land acquisition team has conducted extensive due diligence on land in Northern Queensland and the Northern Territory. TFS has deemed there are significant areas of land suitable to develop new provinces for plantation development. Post balance date, TFS has secured the rights to 610 hectares of land in Northern Queensland and is continuing to secure further parcels of land in this region during FY12.

OutlookTFS believes the outlook for FY12 is positive. Operating cash flow will continue to build as wholesale settlements catch up to sales. TFS’ balance sheet is in a strong position and gearing is expected to remain modest as a guiding management principle.

TFS has a strong pipeline of institutional investors for its wholesale investment products and with the funding now in place the company is well positioned to take advantage of land acquisition opportunities, both in WA and in other parts of Northern Australia to expand the business.

The development of a significant land bank ensures that TFS has the ability to develop wholesale investment flows on a multi-year contractual basis.

The outlook for the Sandalwood market continues to be strong on the back of Indian demand for oil and wood. The global price for Indian Sandalwood Oil set a record pace in the past year with a rise of approximately 39% to US$2,500 per kg. The rise reflects the tight supply conditions and the inherent demand that is unable to be met. Over the past twenty years, the price of oil has outpaced inflation by a significant margin.

TFS is in a strong position in the global sandalwood market with critical supply coming on line in two to three years, just as supply from Indian native forests is rapidly diminishing.

Frank Wilson

Executive Chairman


Your Directors present the financial report on the company and its controlled entities (“the economic entity” or “the Group”) for the financial year ended 30 June 2011.

DirectorsThe names of the Directors in office any time during or since the end of the year are:-

Mr Frank Cullity Wilson Mr Ian Ross ThompsonMr Ronald Lionel Eacott Mr Timothy CrootMr Blake William Myles (Resigned 1 July 2011) Mr Richard Kenneth Robert Alston (Appointed 1 July 2011)Mr Ian MacKenzie Murchison (Resigned 1 July 2011) Mr Adam Craig Gilchrist (Appointed 1 July 2011)

Directors have been in office since the start of the financial year to the date of this report unless otherwise stated.

Company SecretaryThe following person held the position of company secretary at the end of the financial year:

Mr Quentin Heath Megson

Mr Megson joined the TFS Group in January 2005 as Chief Financial Officer. Prior to that he was a partner in the tax and business services division of chartered accounting firm - Pitcher Partners. He has been a chartered accountant for approximately 20 years.

Dividends Paid Dividends paid or declared for payment are as follows:

Ordinary dividend of $0.035 in respect of year ended 30 June 2010, paid on 31 January 2011 $7,957,638Interim ordinary dividend of $0.0125 per share paid on 17 June 2011 $3,447,374Final ordinary dividend yet to be announced

Principal ActivitiesThe principal activities during the year of entities within the economic entity were:

• Promotion of sandalwood plantation investment to institutional offshore investors;• Promotion of sandalwood managed investment schemes;• Management and maintenance of sandalwood plantations;• Manufacture and distribution of Australian sandalwood oil and related products;• Ownership, sale and leasing of land;• Ownership of sandalwood plantations; and• Provision of finance.

There have been no significant changes in the nature of activities undertaken during the year.

Review of Operations

operating resultsThe consolidated comprehensive income of the economic entity for the financial year after providing for income tax decreased 42.6% to $20.2m (2010: $35.2m).

TFS generated establishment fees across both wholesale and retail products of $43.5m (2010: $55.5m). Wholesale sales volume increased 6% to 832 hectares, whereas the retail MIS product experienced a significant decline to 88 hectares. The strong performance of the wholesale product was a pleasing result, given the product is only in its third year since launch. The decline in MIS sales reflected the downturn in the industry and difficult retail investment climate.

TFS’s production business, Mt Romance Australia, delivered a solid result with revenue up 2.8% to $18.8m (2010: $18.3m) but divisional earnings were down 3.7% to $5.2m (2010: $5.4m).

Director’s Report


Group overviewTFS Corporation Ltd was incorporated on 28 March 2000. On 1 May 2000, TFS Corporation Ltd acquired 100% of the shares in TFS Properties Ltd, Tropical Forestry Services Ltd, Arwon Finance Pty Ltd and TFS Leasing Pty Ltd. Sandalwood International Pty Ltd and Fieldpark Pty Ltd were subsequently acquired by TFS Corporation. Both of those companies are currently dormant. TFS Corporation Ltd was listed on the Australian Stock Exchange on 21 December 2004.

TFS Corporation Ltd acquired the Mt Romance Holdings Ltd group on 24 July 2008. The Mt Romance results have been consolidated as part of the TFS group since acquisition.

The Group also acquired a 50% interest in incorporated joint ventures - Northern Development Corporation Pty Ltd and Natural Gulf Supply Co. during the 30 June 2009 year. These investments are accounted for in the economic entity’s financial statements in accordance with the equity accounting method.

promotion of Wholesale Agricultural projects and retail Managed Investment SchemesDuring the year the Group entered into a contract to establish and manage a further 832 hectares (2010: 782 hectares) of Indian sandalwood plantation for institutional wholesale investors. In addition the Group promoted its new project titled TFS Sandalwood Project 2011. A total of 88 hectares was subscribed during the 2011 year (2010: 305 hectares).

Manufacture and Distribution of Australian sandalwood oil and related productsThe Mt Romance business was acquired in July 2008. The Mt Romance group is in the business of manufacture and distribution of Australian sandalwood oil and related products to the international market.

Mt Romance generated earnings before interest, tax and depreciation (“EBITDA”) of $5.2m (2010: $5.4m).

Management and Maintenance of plantations The trees in each of the plantations are growing well with no major concerns. Though the company’s earliest plantations have had poor survival rates recent plantation establishment programs have resulted in high survival rates. Maintenance of the company’s plantations is conducted in accordance with a detailed management plan. As previously advised, sample testing of 8 year old trees indicate that heartwood development places the plantations on track to meet predicted oil yields. Further yield testing is continually being performed. During the financial year trial harvesting of 19-23 year old experimental trees from the WA Forest Product Commission (FPC) showed that substantial heartwood and oil were presented in mature trees. The results of this trial harvest, serve to de-risk TFS Corporation Ltd’s understanding of future harvest production and supports TFS’ basic model assumptions.

ownership of landThe Group has planted approximately 5,000 hectares of Indian Sandalwood plantations on behalf of investors and TFS Corporation Ltd. Total land holdings are now over 8,000 hectares. Given the demand for Sandalwood plantation development from wholesale investors, the Group’s land bank has diminished to only 660 hectares. The recent US$150m funding transaction will enable the Group to re-build its land bank to foster expansion of the estate. Post balance date, the Group has acquired a further 610 hectares and is actively pursuing further purchases in the near term.

provision of FinanceArwon Finance Pty Ltd is a provider of finance, with the major focus being the provision of finance to persons investing in agricultural projects promoted and managed by the company. Arwon also continues to manage a loan portfolio that is owned by a subsidiary of the Commonwealth Bank of Australia.

ownership of Sandalwood plantationsIn addition to managing and maintaining sandalwood plantations on behalf of investors in the MIS, TFS has continued to increase its own investment in sandalwood plantations and expects to derive long term value from this investment. TFS is also earning a deferred interest in many of the grower lots from those investors who have chosen or contracted to defer the payment of their annual lease and management fees.


Director’s Report

Financial PositionThe net assets of the economic entity have increased by $46.8m to $242.2m (2010: $195.3m). This increase has largely resulted from the following factors:

– capital raising of net $35.8m via an institutional placement and entitlement offer in March 2011;

– appreciation of the Group’s sandalwood trees; and

– recognition of the Group’s future entitlement to deferred fees from its grower’s investments of $14.0m (before tax).

During the year the Group’s working capital declined to $56.6m from $78m. This is primarily as a result of a reduction in the receivables attributable to the Wholesale product commitment and the TFS Sandalwood 2011 - 12 month interest free loan terms available to investors. Working capital is classified as Trade & Other receivables (current) plus Inventory less Trade & Other payables (current). The non-cash warrant costs of $8.5m have been excluded from the current year’s working capital calculation.

The directors believe that the Group is in a strong and stable financial position to expand and grow its current operations.

Risk management The Group takes a pro-active approach to risk management. The Board is responsible for ensuring that risks, and also opportunities, are identified on a timely basis and that the Group’s objectives and activities are aligned with the risks and opportunities identified by the Board. Following the completion of the US$150m Senior Secured Note facility, TFS Corporation Ltd has established an expert treasury committee to advise the board on managing the FX risk inherent in the facility.

Significant Changes in the State of AffairsThere were no significant changes in the state of affairs of the parent company during the financial year.

Post Balance Date eventsPost balance date, the Group acquired 610 hectares of land in Northern Queensland. This purchase will enable the group to fully account for a sale of a wholesale investment of 610 hectares in the current year, which was not recognised in the year to 30 June 2011.

Future Developments, Prospects and Business StrategiesThe Directors foresee that for the 2012 financial year, the most significant areas for change will be in:

• The continued expansion of the institutional non MIS plantation establishment and maintenance project. This project will be offered together with a retail sandalwood project, and as a result diversify the forestry management base.

• The continued expansion of the distribution market for TFS sandalwood related products and oil via the Mt Romance brand, and the Gulf Natural Supply joint venture in the UAE.

• The continued development of the Group’s infrastructure in Kununurra, Albany and other parts of Northern Australia via land acquisition and plantation development in new provinces.

environmental managementThe economic entity’s operations are subject to significant environmental regulations under the laws of the Commonwealth and State.

The Directors have considered the National Greenhouse and Energy Reporting Act 2007 (the NGER Act) which introduces a single national reporting framework for the reporting and dissemination of information about the greenhouse gas emissions, greenhouse gas projects, and energy use and production of corporations. At the current stage of development, the directors have determined that the NGER Act will have no effect on the company for the current or subsequent financial year. The director will reassess this position as and when the need arises.


Frank Cullity WilsonExecutive Chairman (Executive)

Qualifications: Bachelor of Laws

Experience: Mr Wilson is the founding Chairman of the TFS group having been appointed on 28 March 2000. In December 2006 he was appointed to the role of Executive Chairman, having previously held the Chairmanship in a non-executive capacity. He was previously the Managing Partner of the legal firm Wilson & Atkinson, which specialises in taxation, property and commercial law. Mr Wilson is an experienced businessman, who has a long standing involvement in the forestry industry. He is also a governor of the University of Notre Dame.

Interest in shares and options: 44,988,379 ordinary shares in TFS Corporation Ltd (16.27% of the company) at 27 September 2011.

Interests in TFS Projects: 163.7 ha (2010: 163.7 ha) of interests held in TFS Indian Sandalwood projects.

Special responsibilities: Director of Gulf Natural Supply Co, Member of Audit & Risk Committee.

Directorships held in other listed entities: None

ronald Lionel eacottDirector (Non-executive & Independent)

Qualifications: Diploma of Mechanical Engineering, Diploma of Export Management & Marketing

Experience: Mr Eacott was appointed to the Board on 28 March 2000. He is the current Managing Director of Expo Document Copy Centre (WA) Pty Ltd, a leading company in the reprographic industry.

Mr Eacott is highly experienced in company management with previous positions including State Manager of Union Steel (seven years) and national Manager (New Zealand) for Elders Pastoral (three years). Mr Eacott was the former State Manager (Western Australia) of Boral Steel and later Boral Cyclone over an 18 year period and plays an active role in the community. Mr Eacott is a Fellow of the Australian Institute of Export and is a past State President for the institute.



Special responsibilities: Member of Audit & Risk Committee (Chairman from 1 July 2011) and member of Remuneration Committee. Board member representative on Compliance committee.


Blake William MylesDirector (Non – Executive & Independent) – Resigned 1 July 2011

Qualifications: Nil

Experience: Mr Myles was appointed to the Board on 7 November 2005. Since 1987 Mr Myles has been an investment adviser in Sydney, London, New York and Perth. Mr Myles has lived in Perth since August 2000 where he works as a Senior Investment Adviser at Bell Potter Securities. Mr Myles has wide experience in finance and capital markets both here and in overseas markets. He was actively involved in the initial public offering of TFS Corporation Ltd on the ASX in December 2004.

Interest in shares and options: 2,176,679 ordinary shares in TFS Corporation Ltd (0.79% of the company) at resignation.


Special responsibilities: Member of Remuneration Committee and member of Audit & Risk Committee (Resigned 1 July 2011)


information on Directors


Director’s Report

Ian MacKenzie MurchisonDirector (Non-executive & Independent) – Resigned 1 July 2011

Qualifications: Bachelor of Commerce, Fellow of the Institute of Chartered Accountants, Diploma of Nautical Science.

Experience: Mr Murchison was appointed to the Board on 27 February 2006. He is a Chartered Accountant and was a founding partner of the WA based equity investment fund, Foundation Capital. He is also a former director and chairman of Mt Romance Australia Pty Ltd an Australian sandalwood products manufacturing company. He is a non –executive director of several other public listed and private companies.

Interest in shares and options: 75,570 ordinary shares in TFS Corporation Ltd (0.03% of the company) at resignation.

Special responsibilities: Chairman of Audit & Risk Committee and member of Remuneration Committee (Resigned 1 July 2011).

Directorships held in other listed entities: Atlas South Sea Pearls Limited (from 2003 to present).

Ian ross thompsonDirector (Executive Director of Communications)

Qualifications: Nil

Experience: Mr Thompson was appointed to the Board on 27 February 2006. He is a former senior executive of News Corporation in the capacities as chief executive officer of Community Newspapers Perth Print and chief executive director of Super League Perth. Among his achievements was the building and commissioning of a $100m printing works for Perth Print.



Special responsibilities: Executive Director of Communications; Director of Gulf Natural Supply Co; Director of Northern Development Corporation Pty Ltd; Member of Remuneration Committee.


timothy CrootDirector (Executive Director)

Qualifications: Nil

Experience: Mr Croot was appointed to the Board on 18 October 2007. He holds over 39 years of experience in the agricultural industry developing a range of horticultural, agricultural, wholesaling, nursery and pastoral businesses throughout Australia. Since 1991 Mr Croot has lived in Kununurra and has been an active member of the Kununurra community, holding senior positions on a variety of regional agricultural organisations. He is a part owner of a large nursery business that supplies Indian Sandalwood seedlings to the Kununurra Indian Sandalwood industry.


Interest in Contract: Mr Croot as an interest in a contract to lease land to the Group. He also is a shareholder in The Fruit Tree Factory Pty Ltd which has a contract with the Group to provide seedlings.

Special responsibilities: Consultant on forestry operations, Member of Audit & Risk Committee and member of Remuneration Committee.


information on Directors (continued)


richard Kenneth robert Alston Director (Non-Executive & Independent)

Qualifications: Bachelor degrees in Law, Arts and Commerce, Masters degrees in Law and Business Administration.

Experience: Mr Alston was appointed to the Board on 1 July 2011. He is a non-executive director of UK listed public company Chime PLC and a director of Australian based companies CQS (Investment Management) Australia Pty Ltd, Nanuk Asset Management Pty Ltd and Balmoral Gardens Pty Ltd. He is also a member of the International Advisory Board of London based hedge fund CQS LLP and a member of the Asia-Pacific Regional Advisory Board of Alcatel-Lucent. Since 2004 he has been an Adjunct Professor of Information Technology at Bond University, Queensland. From 2005-08 he was Australian High Commissioner (Ambassador) to the United Kingdom and from 1996-2003 he was the Federal Minister for Communications, IT and the Arts in the Australian Parliament. He served as a Senator for Victoria from 1986-2004 and was Deputy Leader in the Senate for more than ten years. Prior to taking up his London post he was a director of Hansen Technologies Ltd, UCMS Pty Ltd and Broadcasting Services Australia Ltd, of which he served as Chairman.

Interest in shares and options: 269,833 ordinary shares in TFS Corporation Ltd (0.10% of the company) at 27 September 2011.

Special responsibilities: Chairman-elect of the board

Directorships held in other listed entities: Chime PLC (UK listed company)

Adam Craig Gilchrist Director (Non-Executive & Independent)

Qualifications: Nil

Experience: Mr Gilchrist was appointed to the Board on 1 July 2011. He is one of Australia’s best known international cricketers (retired from international cricket since 2008) and is the only wicketkeeper in Australia to have captained the Australian Test and One Day teams. He is acknowledged for his leadership, sportsmanship and outstanding contribution to Australian cricket industry. As the Global Ambassador for TFS Corporation since June 2010, he has been involved in the promotion of sandalwood-based products in high-growth countries on the sub-continent such as India, and has an understanding of TFS products and their potential in new markets. He is also a member of the Local Steering Committee for the Commonwealth Business Forum, to be held prior to the Commonwealth Heads of Government Meeting (CHOGM) in Perth in October 2011, and is currently Chairman of the National Australia Day Council, appointed by the Prime Minister in 2008. He was a Non-Executive Director of Travelex Australasia from 2003-2008.

Interest in shares and options: 1,039,578 ordinary shares in TFS Corporation Ltd (0.38% of the company) at 27 September 2011, with an option to purchase a further 250,000 ordinary shares.


information on Directors (continued)


Director’s Report

meetings of Directors During the financial year, 13 meetings of directors (including committees of directors) were held. Attendances by each director during the year were as follows:

Directors MeetingsCommittee Meetings

Audit Committee Remuneration Committee

Number eligible to

attendNumber attended

Number eligible to


Number eligible to


Frank Cullity Wilson 9 8 1 1 - -

Ronald Lionel Eacott 9 9 2 1 2 2

Blake William Myles 9 9 2 1 2 2

Ian MacKenzie Murchison 9 9 2 2 2 2

Ian Ross Thompson 9 9 1 1 - -

Timothy Croot 9 9 - - - -

indemnifying Officers or AuditorNo indemnities have been given or insurance premiums paid, during or since the end of the financial year, for any person who is or has been an officer or auditor of the economic entity, other than the following:

The company has paid premiums to insure each of the directors against liabilities for costs and expenses incurred by them in defending any legal proceedings arising out of their conduct while acting in the capacity of director of the company. The cover included professional indemnity as well as directors and officers insurance.

Options & Warrants At the date of this report, the unissued ordinary shares of TFS Corporation Ltd under option or warrants are as follows:

Grant Date Date of expiry Exercise priceNumber under

option/warrants

21 February 2008 31 December 2014* $1.80 1,000,000

1 August 2011 15 July 2018** $1.28 55,500,000

*The date of expiry is dependent upon when the first commercial delivery of sandalwood oil takes place and therefore the above date can change. ** See note 17(b) (Warrant liability) for more detail.

Option holders do not have any rights to participate in any issues of shares or other interest in the company or any other entity.

There have been no unissued shares or interests under option of any controlled entity within the economic entity during or since reporting date.


non-Audit ServicesThe board of directors, is satisfied that the provision of non-audit services during the year is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the services disclosed below did not compromise the external auditor’s independence for the following reasons:

• all non-audit services are reviewed and approved by the audit committee prior to commencement to ensure they do not adversely affect the integrity and objectivity of the auditor; and

• the nature of the services provided do not compromise the general principles relating to auditor independence in accordance with APES 110: Code of Ethics for Professional Accountants set by the Accounting Professional and Ethical Standards Board.

During the year, there were audit services provided to the economic entity by the auditors of the company related to the audits of the managed investment schemes accounts. The audit firm Bentleys was paid $66,150 (2010: $54,600) for these services. The auditors also provided services relating to the 11% Senior Secured Notes comfort letter for which the firm Bentleys got paid $76,000.

Proceedings on Behalf of CompanyNo person has applied for leave of Court to bring proceedings on behalf of the company or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for all or any part of those proceedings.

Auditor’s independence DeclarationThe lead auditor’s independence declaration for the year ended 30 June 2011 has been received and can be found on page 33 of the annual report.

ASiC Class Order 98/100 Rounding of AmountsThe company is an entity to which ASIC Class Order 98/100 applies and accordingly, amounts in the financial statements and Directors’ report have been rounded to the nearest thousand dollars.

RemUneRATiOn RePORTThis report details the nature and amount of the remuneration for each director of TFS Corporation Ltd and for the executives receiving the highest remuneration.

Remuneration policyThe company’s policy for determining the nature and amount of emoluments of board members and senior executives of the company is as follows:

The remuneration of the non-executive directors is determined by the Board within the maximum amount approved by shareholders. Other benefits include employer superannuation contributions required by law. The remuneration paid to a non-executive director recognises any additional representation by them on committees that are considered to be over and above their normal role as a director. Any further services provided by non-executive directors that they may be requested to perform for the company by the Executive Chairman that are outside of the normal expected duties of a director is remunerated at an agreed arm’s length day rate.

The remuneration structure for executive officers, including executive directors is based on a number of factors including experience of the individual concerned, executive market conditions, and the overall performance of the company. The nature of the remuneration for key executives and management is monitored and recommended by the remuneration committee. The executive remuneration contains the following key elements:

• A fixed component to attract and retain quality management. This may include cash salary plus other benefits including the provision of superannuation.

• A performance linked bonus for reaching or exceeding a range of measures. The bonus plan potentially enables certain executives to earn up to an additional 50% of their fixed remuneration.

• Eligibility for participation in the TFS employee share acquisition plan as approved by shareholders.


Director’s Report

The contracts for service between the company and specified directors and executives are on a continuing basis, the terms of which are not expected to change in the immediate future. There are no conditions in the contracts that provide for any specific amounts payable on termination.

The remuneration committee regularly reviews the level of executive remuneration and in particular the level of any performance bonuses. In particular the committee is undertaking the following activities in order to ensure an appropriate remuneration structure is determined that will adequately incentivise key executives of the company, while ensuring the interests of the shareholders are maintained.

– Undertaking market reviews of executive salary structures and adopting benchmarking for key management salaries and incentives;

– Reviewing the company’s remuneration charter in consideration of further expansion once the company reaches critical milestones of harvesting and processing; and

– Reviewing the balance of internal equity of pay, bonuses and incentives and having these reviewed by remuneration consultants.

Performance based remunerationAs detailed above, The TFS group seeks to emphasise payment for results through providing various cash bonus reward schemes, specifically, the incorporation of incentive payments based on the key performance indicators of total shareholder return, net profit after tax and survival rates of its managed plantations. The bonuses included above are based on these targets. The objective of the reward schemes is to both reinforce the short and long term goals of the company and to provide a common interest between management and shareholders.

No bonuses for executive management were approved in respect of the year ended 30 June 2011. As such all remuneration figures contained in the annual report for the year in respect of key executives do not have any performance component. Parameters have been set by the remuneration committee and management for granting of bonuses for the 30 June 2012 year.

Company performance, shareholder wealth and director and executive remunerationThe remuneration policy has been tailored to increase goal congruence between shareholders, directors and executives. This has mainly been achieved through offering a performance based bonus based on key performance indicators. The company believes this policy has been effective in increasing shareholder wealth and in particularly ensuring that the company is able to adapt to changes in its industry and take advantage of opportunities to improve its business model.

The following table shows the gross revenue, profits and dividends for the last four years as well as the share price at the end of the respective years. Analysis of the figures shows that both reported revenue and profits have decreased in the 2011 year. Notwithstanding this the company achieved a record result for operating cashflow.

The board is of the opinion that the underlying shareholder wealth should ultimately increase as a result of the actions taken during the financial year. In line with the philosophy determined by the remuneration committee, the intention is to recognise the achievements by way of performance remuneration to executives once shareholder wealth is recognised.

2007 2008 2009 2010 2011

Total Revenue (A$’000) 41,390 63,458 94,852 116,492 111,037

Net Profit (A$’000) 16,606 24,143 34,838 35,154 20,166

Share price at year end $0.88 $1.15 $1.18 $0.84 $0.89

Dividends paid/payable in respect of financial year 3.4 cents 4.0 cents 4.25 cents 4.75 cents TBA


employment details of members of Key management Personnel and Other executivesThe following table provides employment details of persons who were, during the financial year, members of key management personnel of the consolidated group. The table also illustrates the proportion of remuneration that was performance based and the proportion of remuneration received in the form of options.

Proportion of elements of remuneration related to

performance

Proportion of elements of remuneration not

related to performance

Key Management

Personnel

Position held as at 30 June 2011 and

any change during the year

Contract details(duration &

termination)

Non-salary cash based incentives

%

Shares/ Units

%

Options/ Rights

%

Fixed Salary/Fees

%Total

%

Mr FC Wilson Executive Chairman No fixed term. Normal contracted terms apply as detailed below.

- - - 100 100

Mr IR Thompson Executive Director – Sales & Marketing

No fixed term. Normal contracted terms apply as detailed below.

- - - 100 100

Mr QH Megson Chief Financial Officer

No fixed term. Normal contracted terms apply as detailed below.

- - - 100 100

The employment terms and conditions of key management personnel and Group executives are generally formalised in contracts of employment. A contracted person deemed employed on a permanent basis may terminate their employment by providing notice in accordance with their contracted terms. The normal contracted notice period is generally between 2 and 4 weeks. No amounts for termination have been agreed or contracted and therefore are up to the discretion of the remuneration committee.

Details of remuneration for the year ended 30 June 2011

Short Term Benefits Post Employment

Directors

Cash, Salary & Fees

$

Cash profit share

$

Non cash

benefit$

Other benefit

$

Super- annuation

$Other

$

Share based

payment$

Termin-ation

benefits$

Otherlong term

benefit$

Total$

Perform-ance

Related%

Mr FC Wilson 622,692 - - - 50,000 - - - - 672,692 -

Mr RL Eacott 43,000 - - - 3,870 - - - - 46,870 -

Mr BW Myles 49,915 - - - 3,150 - - - - 53,065 -

Mr IR Thompson 404,904 - - - 36,441 - - - - 441,345 -

Mr IM Murchison 57,108 - - - - - - - - 57,108 -

Mr T Croot 230,746 - - - 2,880 - - - - 233,626 -

1,408,365 - - - 96,341 - - - - 1,504,706 -


Director’s Report


Other key management

Cash, Salary & Fees

$

Cash profit share

$

Non cash

benefit$

Other benefit

$

Super- annuation

$Other

$

Share based

payment$

Termin-ation

benefits$

Otherlong term

benefit$

Total$

Perform-ance

Related%

Mr QH Megson 285,815 - - - 25,723 - - - - 311,538 -

285,815 - - - 25,723 - - - - 311,538 -

Total 1,694,180 - - - 122,064 - - - - 1,816,244 -

Details of remuneration for the year ended 30 June 2010


Directors

Cash, Salary & Fees

$

Cash profit share

$

Non cash

benefit$

Other benefit

$

Super- annuation

$Other

$

Share based

payment$

Termin-ation

benefits$

Otherlong term

benefit$

Total$

Perform-ance

Related%

Mr FC Wilson 425,000 - - - 25,000 - - - - 450,000 -

Mr RL Eacott 43,000 - - - 3,870 - - - - 46,870 -

Mr BW Myles 35,000 - - - 3,150 - - - - 38,150 -

Mr IR Thompson 400,000 - - - 25,000 - - - - 425,000 -

Mr IM Murchison 38,317 - - - - - - - - 38,317 -

Mr T Croot 254,628 - - - 2,880 - - - - 257,508 -

1,195,945 - - - 59,900 - - - - 1,255,845 -


Other key management

Cash, Salary & Fees

$

Cash profit share

$

Non cash

benefit$

Other benefit

$

Super- annuation

$Other

$

Share based

payment$

Termin-ation

benefits$

Otherlong term

benefit$

Total$

Perform-ance

Related%

Mr QH Megson 275,229 - - - 24,771 - - - - 300,000 -

Mr M Di Lallo 288,393 - - - 20,807 - - - - 309,200 -

Mr TM Baker 160,000 - 50,869 - 14,400 - - - - 225,269 -

723,622 - 50,869 - 59,978 - - - - 834,469 -

Total 1,919,567 - 50,869 - 119,878 - - - - 2,090,314 -

No directors or executives own options in the company.

Signed in accordance with a resolution of the Board of Directors.

On behalf of the Directors

Frank WilsonExecutive Chairman

Dated this 30th day of September 2011


Corporate Governance Statement

The Board of TFS (“Board”) is committed to ensuring that the Company’s obligations and responsibilities to its various stakeholders are fulfilled through its corporate governance practices. The Directors and its executive management undertake to perform their duties with honesty, integrity, care and diligence, to act in good faith in the best interests of the Company in a manner that reflects the highest standards of corporate governance.

The Company has followed the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (2nd edition, 2008) (“ASX Principles and Recommendations”) where the Board has considered the recommendation to be an appropriate benchmark for its corporate governance practices.

Where, after due consideration, the Company’s corporate governance practices depart from a recommendation, the Board has offered full disclosure and reason for the adoption of its own practice, in compliance with the “if not, why not” regime.

Principle 1: Lay solid foundations for management and oversightCompanies should establish and disclose the respective roles and responsibilities of board and management.

Recommendation 1.1: Companies should establish the functions reserved to the board and those delegated to senior executives and disclose those functions.

The Company has established and disclosed on its website its Board Charter in accordance with this recommendation.

Recommendation 1.2: Companies should disclose the process for evaluating the performance of senior executives.

The performance of senior executives is monitored regularly on an informal basis and formally on an annual basis.

Recommendation 1.3: Companies should provide the information indicated in the Guide to reporting on Principle 1.

The Company makes the relevant material available in its Corporate Governance Statement within its Annual Report and its website disclosure, in accordance with this recommendation.

Principle 2: Structure the Board to add value Companies should have a board of effective composition, size and commitment to adequately discharge its responsibilities and duties.

Recommendation 2.1: A majority of the board should be independent directors.

The Company has three independent directors – Richard Alston, Adam Gilchrist and Ron Eacott. Frank Wilson, Ian Thompson and Timothy Croot are executive directors. The Company is in the process of identifying another independent Board member.

Recommendation 2.2: The chair should be an independent director.

The chairman elect of TFS is Richard Alston. It is expected that Mr Alston will be appointed as Chairperson at the next Annual General Meeting.

Recommendation 2.3: The roles of the chair and chief executive officer should not be exercised by the same individual.

Please see the explanation for recommendation 2.2 above.

Recommendation 2.4: The board should establish a nomination committee.

The Company does not currently have a Nomination Committee. The Board has decided that no efficiencies will be achieved by establishing a separate Nomination Committee. The full Board carries out the duties that would otherwise be undertaken by the Nomination Committee, including but not limited to the nomination and selection process for the appointment of the independent non-executive directors. Each director is requested to participate in the nomination process having in mind the range of skills, experience and expertise required for the effective functioning of the Board in discharging its responsibilities.

Recommendation 2.5: Companies should disclose the process for evaluating the performance of the board, its committees and individual directors.

The Board undertakes an annual evaluation of its effectiveness as a whole and in committee against a broad range of good practice criteria. The Chairman reviews the individual performance of each Board member prior to each Director being considered for re-election and may use the assistance of an external facilitator. The Chairman’s performance is evaluated periodically by the Board. The Board may involve an external facilitator for this purpose.



Recommendation 2.6: Companies should provide the information indicated in the Guide to Reporting on Principle 2.

The Company makes the relevant material available in the Corporate Governance Statement within its Annual Report and its website disclosure.

Information relating to directors of the Company, including whether they are independent, their skills, experience, expertise, their role in the Company and period of office they have held is contained in the Director’s report at page 17.

In determining the independence of Directors, the Company relies on the materiality thresholds outlined in the ASX Corporate Governance Council Best Practices Recommendations.

It is a policy of the Board that each Director has the right to seek independent professional advice at the company’s expense.The Board’s policy and procedure for the selection, nomination and appointment of new Directors and the re-election of incumbent Directors is as follows:

The Board oversees the appointment and induction process for Directors and the selection, appointment and succession planning process of the Company’s Chief Executive Officer. When a vacancy exists or there is a need for particular skills, the Board determines the selection criteria based on the skills deemed necessary.

The Board identifies potential candidates with advice from an external consultant if deemed necessary. Those nominated are assessed by the Board against background, experience, professional skills, personal qualities, whether the nominee’s skills and experience will augment the existing Board, and their availability to commit themselves to the Board’s activities. The Board then appoints the most suitable candidate. Board candidates must stand for election at the next general meeting of shareholders.

When Directors are due for re-election, the Board does not endorse the reappointment of a Director who is not satisfactorily performing the role.

Principle 3: Promote ethical and responsible decision-making Companies should actively promote ethical and responsible decision-making.

Recommendation 3.1: Companies should establish a code of conduct and disclose the code or a summary of the code as to the practices necessary to maintain confidence in the company’s integrity; the practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders; and the responsibility and accountability of individuals for reporting and investigating reports of unethical practices.

The Company has established and disclosed on its website its Code of Conduct in accordance with this recommendation. It is a policy of the Board that the Code of Conduct applies to Directors, officers, employees and consultants of the Company.

Recommendation 3.2: Companies should establish a policy concerning diversity and disclose the policy or a summary of that policy. The policy should include requirements for the board to establish measurable objectives for achieving gender diversity for the board to assess annually both the objectives and progress in achieving them.

The Company has a recently drafted a Diversity Policy as part of the implementation of the amendments to the ASX Principles. It is currently being reviewed by the Board and should be formally adopted in the next two to three months.

Recommendation 3.3: Companies should disclose in each Annual Report the measurable objectives for achieving gender diversity set by the board in accordance with the diversity policy and progress towards achieving them.

The adoption of the Diversity Policy is part of the implementation of the amendments to the ASX Principles. In light of these recent amendments, the board is currently considering suitable diversity targets to work towards achieving greater diversity at TFS at all levels of the workforce and the board. The objectives will be adopted by the board and will then be assessed by the board on an annual basis.

Recommendation 3.4: Companies should disclose in each Annual Report the proportion of women employees in the whole organisation, women in senior executive positions and women on the board.

Approximately 44% of TFS employees are women. Of the Company’s senior management positions 17% are women. TFS currently has no women on the Board.



The Company makes the relevant material available in the Corporate Governance Statement within its Annual Report and its website disclosure, in accordance with this recommendation.

Principle 4: Safeguard integrity in financial reporting Companies should have a structure to independently verify and safeguard the integrity of their financial reporting.

Recommendation 4.1: The board should establish an audit committee.

The Board has established an Audit Committee.

Recommendation 4.2: The audit committee should be structured so that it:

• consistsonlyofnon-executivedirectors;• consistsofamajorityofindependentdirectors;• ischairedbyanindependentchair,whoisnotchairoftheBoard;and• hasatleastthreemembers.

The Audit Committee established by the Board has three members. Two new independent directors were recently appointed to the Board and the Company is in the process of identifying another potential independent Board member. It is intended that once the Board composition is finalised the Audit Committee will comply with this recommendation.

Recommendation 4.3: The audit committee should have a formal charter.

The Audit Committee has a formal charter which is available on its website.

Recommendation 4.4: Companies should provide the information indicated in the Guide to reporting on Principal 4.


Principle 5: make timely and balanced disclosure Companies should promote timely and balanced disclosure of all material matters concerning the company.

Recommendation 5.1: Companies should establish written policies 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.

The Company has procedures in place to ensure that all price sensitive information is identified, reviewed and disclosed to the ASX in a timely manner and simultaneously made available for all shareholders on the Company’s website. The Company has formalized both its Continuous Disclosure and Shareholder Communications Policies, which are contained in the Corporate Governance Policy available on the website.



Principle 6: Respect the rights of shareholders Companies should respect the rights of shareholders and facilitate the effective exercise of those rights

Recommendation 6.1: Companies should design 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.

The Company has an Investor Communications Policy which is available on the Company’s website.




Principle 7: Recognise and manage riskCompanies should establish a sound system of risk oversight and management and internal control.

Recommendation 7.1: Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies.

The Company has established and disclosed on its website its Risk Management Policy in accordance with this recommendation.

Recommendation 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.

The board considers identification and management of key risks associated with the business as vital to maximise shareholder wealth. The Board determines the company’s risk profile and is responsible for overseeing and approving risk management strategy and policies, internal compliance and internal control. The Board has delegated the Audit and Risk Committee responsibility for implementing the risk management system. The Audit and Risk Committee follow the Audit and Risk Committee Charter which is available on the company’s website.

Recommendation 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.

The Chief Executive Officer and Chief Financial Officer confirm in writing that the declaration provided in accordance with s295A of the Corporations Act is founded on a sound system of risk management and internal compliance and control systems which, in all material respects, implement the policies which have been adopted by the Board of Directors either directly or through delegation to senior executives and that such systems are operating effectively and efficiently in all material respects in relation to financial reporting risks.



Principle 8: Remunerate fairly and responsiblyCompanies should ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to performance is clear.

Recommendation 8.1: The board should establish a remuneration committee.

The Board has established a Remuneration Committee.

Recommendation 8.2: The remuneration committee should be structured so that it:

• consistsofamajorityofindependentdirectors• ischairedbyanindependentchair• hasatleastthreemembers.

The Company recently appointed two new independent directors to the Board and is in the process of identifying another potential independent Board member. It is intended that once the Board composition is finalised the remuneration committee will comply with this recommendation.

Recommendation 8.3: Companies should clearly distinguish the structure of non-executive directors’ remuneration from that of executive directors and senior executives.

The Remuneration Committee Charter, which is available on the Company’s website, clearly distinguishes the remuneration of non-executive directors’ from that of executive directors and senior management.

Recommendation 8.4: Companies should provide the information indicated in the Guide to reporting on Principle 8




Sustainability Overview

Our Vision – sustainable from soil to oilAs the world’s largest grower and producer of Sandalwood, the TFS vision is to be sustainable, from soil to oil. In building our vertically integrated business we aim to make sustainability one of the core values of our supply chain, creating a more efficient and effective business into the future.

Corporate Social Responsibility is not a social tax, it is a commercial opportunityAt TFS we grow trees. That means as a company we think in decades, not weeks or months. This forms the basis of our CSR strategy, designed to create long-term sustainable benefits for our stakeholders both local and global.

By finding a healthy balance between economic, social and environmental factors we believe TFS can better achieve its business strategy – mitigating corporate risks, improving stakeholder relationships and delivering returns to shareholders.

Accreditation and ReportingAs an organisation TFS aims to work to international standards and achieve continual improvements in its operations. Since 2006 TFS has maintained certification in ISO (International Standard Organisation) 14001 (Environment), ISO 9001 (Quality) and AS/NZ 4801 (Health and Safety)[i]. In order to comply with these rigorous standards TFS maintains an integrated management system encompassing each of the three areas. This assists TFS in identifying and monitoring business indicators and risks while developing ways to improve outcomes. This system is both internally and externally audited twice a year to ensure TFS achieves continuous improvement and best practise.

The ISO certification involves the following:

1. Policy

2. Planning

3. Implementation and Operation

4. Performance

5. Improvement

6. Management Review

The process of ISO certification has assisted TFS to improve risk management, create efficiencies and promote continuous improvement throughout the organisation, ensuring we work to deliver the best returns to our shareholders, sustainably.

TFS is committed to working to international benchmarks. In line with this commitment the Kingston Rest property in Kununurra achieved pre-certification for ISO 14,001, 9,001 and AS/NZ 4,801 in FY2011 – we expect to achieve full certification in FY2012. In FY2011 TFS also made a commitment to work towards ISO certification at the Mount Romance Sandalwood processing facility in Albany.

In FY2012 TFS will work to further benchmark its operations against international standards and build capacity in this area.

[i] Certification applies to Tropical Forestry Services operations in Perth and Kununurra, excluding the Kingston Rest property.


Sustainability Overview

CSR Highlights TFS aims to achieve best practice when measured against each of the environmental, economic and social performance indicators associated with sustainability. While the company has a broad program of corporate social responsibility including sponsorships, environmental initiatives and staff programs, we have selected a case study from each performance indicator to highlight the company values. For a more detailed look at our sustainability vision visit our website www.tfsltd.com.au

environmental Diesel is an important energy source on the TFS plantations, helping the company to run pumps, tractors and vehicles. In 2009 TFS used a government grant to build a biodiesel plant that converts common cooking oil into biofuel. By mixing this biodiesel with existing diesel, TFS has been able to fuel machinery, plant and vehicles used for plantation-management.

With a capacity of just 120 litres per fortnight, this small plant was part of a trial to prove the viability of using renewable energy to supplement the company’s use of diesel. As part of the trial TFS advertised for raw materials and found that there was an abundance of waste vegetable oils in the local community. Based on this local supply TFS has built a new unit with the capacity to produce 1,000 litres of biodiesel per fortnight. This equates to around 26,000 litres of biodiesel each year.

According to the USA Environmental Protection Authority (EPA) one litre of biodiesel reduces net emissions of CO2 by over 67.7% relative to diesel. While the environmental benefits are significant there are also commercial benefits – with savings expected to be more than 25% per litre once operational. For TFS this represents a more efficient way of operating and provides a good example of sustainable business – delivering returns to the local community, creating financial efficiencies and reducing our environmental impact.

economic TFS is committed to creating long term, sustainable employment opportunities in the communities where we are based. This commitment by TFS directly benefits the economic development of these communities.

Our plantation team in Kununurra is led by full and part time staff who live and work in Kununurra. Our team is comprised of professional tertiary trained foresters, agronomists, horticulturists and agricultural and nursery personnel. The long term employment opportunities that TFS provides in this remote Kimberley region of Australia contributes to the sustainability of the local economy and stimulates allied industries including local nurseries, contract operations and services. TFS and our team are actively involved in the Kimberley community through sporting teams, volunteering and active involvement in local committees and organisations – helping to build the capacity of local communities.

Our Mount Romance operations in Albany create long term employment opportunities in Western Australia’s Great Southern region. Mount Romance’s highly skilled team includes chemists, lab assistants, engineers and retail and manufacturing personnel. By providing employment opportunities for the local community Mount Romance contributes to sustainable regional prosperity.


Comparison of Incidents for 2008/09, 2009/10 and 2010/11

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LTIF

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8

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0

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1

0

The above graph demonstrates the cumulative lost time (hours). TFS (dark green line) has consistently been below the Western Australian State average (light green line) for LTIFR.

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May May

10/11 1.11 0.00 0.00 0.00 0.00 0.00 3.85 1.27 1.37 0.00 1.46 0.85

09/10 2.41 4.44 1.96 1.94 1.05 0.00 0.00 0.00 1.25 3.77 0.95 0.97

08/09 2.94 1.16 1.16 2.88 0.94 2.06 0.97 1.11 2.08 6.00 2.94 1.15

Social TFS is committed to respecting our key stakeholders – our people, our customers and our community. At TFS our people are fundamental to the ongoing success of our business. In FY2011 TFS made great strides in improving the occupational health and safety of our people.

All TFS plantations comply AS/NZ 4801, a standard for Occupational health and safety management systems. We are working towards full AS/NZ 4801 certification in all Kununurra plantations, where policies and procedures are already in place.

As part of the management of safety within the organisation a Safety Plan is developed annually to identify the key areas of focus. The Safety Committee meets regularly and reviews incidents in accordance with the Safety Plan, and plays an important role in working with staff to raise awareness and develop solutions for areas of risk.

The following graphs demonstrate the improvements TFS has made in the areas of lost time to injuries and incidents. When measured against the Western Australian state average for the lost time injury frequency rate (LITFR), TFS had 45% less time lost to injury (year ending 29/08/2010 - 11/09/2011). The incident rate has reduced by approximately 60% over the past 3 years in part due to improved staff engagement and awareness of safety issues. TFS will continue to build on these successes in FY2012.

TFS - LTIFR

TFS Western Australian State average

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55


Directors’ Declaration

The directors of the company declare that:

1. the financial statements and notes, as set out on pages 34 to 87, are in accordance with the Corporations Act 2001:

(a) Financial statement and notes comply with the AASBs;

(b) giving a true and fair view of the Company’s financial position as at 30 June 2011 and of their performance for the year then ended;

(c) are in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board, as stated in note 1 to the financial statements; and

2. the Chief Executive Officer and Chief Financial Officer have each declared that:

(a) the financial records of the company for the financial year have been properly maintained in accordance with section 286 of the Corporations Act 2001;

(b) the financial statements and notes for the financial year comply with the Accounting Standards; and

(c) the financial statements and notes for the financial year give a true and fair view; and

3. in the directors’ opinion 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 Company and its two wholly owned subsidiaries Tropical Forestry Services Ltd and TFS Properties Ltd, have entered into a deed of guarantee under which the Company and its subsidiaries guarantee debts of each other. At the date of this declaration there are reasonable grounds to believe that the companies, which are party to this deed of cross guarantee will be able to meet any obligations or liabilities to which they, or may become subject to by virtue of the deed.

This declaration is made in accordance with a resolution of the Board of Directors.

On behalf of the Directors

Frank Wilson

Executive Chairman

Dated this 30th day of September 2011.


auditor’s Independence Declaration

To The Board of Directors

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

This declaration is made in connection with our audit of the financial report of T.F.S. Corporation Limited and Controlled Entities for the year ended 30 June 2011 and in accordance with the provisions of the Corporations Act 2001.

We declare that, to the best of our knowledge and belief, there have been:

no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit;

no contraventions of the Code of Professional Conduct of the Institute of Chartered Accountants in Australia in relation to the audit.

Yours faithfully

BENTLEYS PHILIP RIX FCA Chartered Accountants Director

DATED at PERTH this 29th day of September 2011

Bentleys Audit & Corporate (WA) Pty Ltd

Level 1, 12 Kings Park Road West Perth WA 6005 Australia

PO Box 44 West Perth WA 6872 Australia

ABN 33 121 222 802

T +61 8 9226 4500 F +61 8 9226 4300

bentleys.com.au

Accountants Auditors Advisors

A member of Bentleys, an association of independent accounting firms in Australia. The member firms of the Bentleys association are affiliated only and not in partnership. Liability limited by a scheme approved under Professional Standards Legislation.


F o r t h e y e A r e N D e D 3 0 j u N e 2 0 1 1

C o n s o l i d a t e d S t a t e m e n t o f

Comprehensive Income

ECONOMIC ENTITY

NOTE2011 $’000

2010 $’000

Revenue 2 104,505 108,139 Other income 2 6,532 8,353 Raw materials and consumables used (9,545) (9,878) Cost of land sold (9,495) (12,619) Cost of plantation sold (598) - Depreciation and amortisation expenses 3 (3,523) (1,742) Finance costs 3 (18,687) (917) Interest paid 3 (3,757) (2,938) Unrealised interest swap gain/(loss) - 156 Unrealised foreign exchange gain/(loss) 36 (221) Salaries and employees benefits expense (12,757) (11,483) Consulting expense (1,270) (1,585) Bad debts (expense)/recovered 3 (7) (2) Provision for impairment of receivables 3 105 (64) Commissions (4,782) (5,485) Marketing costs (1,518) (1,983) Direct plantation and nursery operations (7,499) (5,906) Rent/lease costs (3,190) (3,718) Water (905) (642) Repairs & maintenance (1,165) (1,234) Travel & accomodation (1,107) (1,181) Insurance (703) (582) Other expenses from ordinary activities (5,269) (3,937) Share of net profits of associates 14 60 190

Profit/(Loss) before income tax expense 25,461 50,721 Income tax expense relating to ordinary activities 4 (5,295) (13,612)

Profit for the year 20,166 37,109

Other comprehensive income Revaluation of land and building net of tax (1,955) Transfers within comprehensive income Net gain on reclassification of land and buildings previously revalued 645 4,269 Transfer to retained earnings from asset revaluation reserve (645) (4,269)

Other comprehensive income for the period, net of tax - (1,955)

Total comprehensive income for the year 20,166 35,154

Profit attributable to: Members of the parent entity 20,166 37,109

Total comprehensive income attributable to: Members of the parent entity 20,166 35,154

Earnings per share Basic earnings per share (cents per share) 28 8.36 16.98Diluted earnings per share (cents per share) 28 8.33 16.90

The accompanying notes form part of these financial statements.


A S At 3 0 j u N e 2 0 1 1


Financial Position

ECONOMIC ENTITY

NOTE2011 $’000

2010 $’000

CURRENT ASSETS Cash and cash equivalents 25(i) 76,903 20,161 Trade and other receivables 5 73,982 86,940 Inventories 6 5,296 11,992 Derivatives 7 - 25 Other financial assets 8 22,256 -

TOTAL CURRENT ASSETS 178,437 119,118

NON-CURRENT ASSETS Trade and other receivables 9 48,423 44,478 Other financial assets 10 50,629 5,563 Property, plant and equipment 11 58,076 57,609 Deferred tax assets 4(d) 6,697 3,344 Biological assets 12 48,007 41,520 Intangible assets 13 20,512 20,512 Investments accounted for using equity method 14 647 587 Other 16 54,870 41,163

TOTAL NON-CURRENT ASSETS 287,861 214,776

TOTAL ASSETS 466,298 333,894

CURRENT LIABILITIES Trade and other payables 17 31,185 20,845 Financial liabilities 19 54 25,706 Current tax liabilities 4(d) 1,478 5,262 Provisions 18 1,242 1,015 Unearned income 20 14,845 15,272

TOTAL CURRENT LIABILITIES 48,804 68,100

NON-CURRENT LIABILITIES Financial liabilities 21 140,788 41,575 Deferred tax liabilities 4(d) 32,733 26,625 Unearned income 22 1,872 2,253

TOTAL NON-CURRENT LIABILITIES 175,393 70,453

TOTAL LIABILITIES 224,197 138,553

NET ASSETS 242,101 195,341

EQUITY Issued capital 23 115,687 77,688 Asset revaluation reserve 8,106 8,751 Option reserve 478 478 Retained earnings 117,830 108,424

TOTAL EQUITY 242,101 195,341





Changes in Equity

ECONOMIC ENTITY NOTE

IssuedCapital$’000

RetainedEarnings

$’000

AssetRevaluation

$’000

OptionReserve

$’000Total$’000

Balance at 01.07.2009 43,014 76,617 14,975 478 135,084 Comprehensive IncomeMovement in revaluations during the year - - (1,955) - (1,955) Profit attributable to members of the entity - 37,109 - - 37,109 Transfer from asset revaluation reserve to retained earnings - 4,269 (4,269) - - Total comprehensive income for the period 43,014 117,995 8,751 478 170,238 Transactions with owners, in their capacity as owners, and other transfersShares issued during the year 34,674 - - - 34,674 Dividends provided for or paid 27 - (9,571) - - (9,571)

Balance at 30.06.2010 77,688 108,424 8,751 478 195,341

Balance at 01.07.2010 77,688 108,424 8,751 478 195,341 Comprehensive IncomeMovement in revaluations during the year - - - - - Profit attributable to members of the entity - 20,166 - - 20,166 Transfer from asset revaluation reserve to retained earnings - 645 (645) - -

Total comprehensive income for the period 77,688 129,235 8,106 478 215,507 Transactions with owners, in their capacity as owners, and other transfersShares issued during the year 37,999 - - - 37,999 Dividends provided for or paid 27 - (11,405) - - (11,405)

Balance at 30.06.2011 115,687 117,830 8,106 478 242,101





Cashflows

ECONOMIC ENTITY

NOTE2011 $’000

2010 $’000

CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Receipts from operations 104,920 47,987 Payments to suppliers ( 56,293) ( 56,148) (Issue)/Repayment of loans (to)/from growers ( 3,358) ( 6,027) Interest received 4,553 3,231 Interest paid ( 3,757) ( 2,938) Income tax paid ( 5,676) ( 11,197)

25(ii) 40,389 ( 25,092)

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Proceeds from sale of property, plant & equipment 29 96 Proceeds from sale of own plantation 442 - Payments for plant & equipment ( 5,047) ( 8,889) Payments for investment in own plantation ( 1,129) ( 2,566) Payments for land development ( 359) ( 5,567) (Payments)/Receipts (to)/from investments ( 198) 912 Payments for land & buildings ( 1,787) ( 2,108) Acquisition of subsidiary (net of cash acquired) 31 - ( 260)

( 8,049) ( 18,382)

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Proceeds from borrowings 2,007 41,575 Repayments of borrowings ( 69,290) ( 40,340) Proceeds from 11% Senior Secured Notes 25(v) 65,058 - Proceeds from issue of shares 35,832 31,526 Dividends paid ( 9,146) ( 7,897)

24,461 24,864

Net increase/(decrease) in cash held 56,801 ( 18,610) Cash at beginning of financial year 20,102 38,712

Cash at end of financial year 25(i) 76,903 20,102




N o t e s t o a n d Fo r m i n g p a r t o f t h e

Financial Statements

nOTe 1: Statement of Significant Accounting PoliciesThe financial report covers TFS Corporation Ltd as an individual parent entity and TFS Corporation Ltd and controlled entities as an economic entity (hereafter referred to as “the economic entity” or “the Group”). TFS Corporation Ltd is a listed public company, incorporated and domiciled in Australia.

Basis of preparationThe financial report is a general purpose financial report that has been prepared in accordance with Australian Accounting Standards; including Australian Accounting Interpretations and other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001.

Australian Accounting Standards set out accounting policies that the AASB has concluded would result in a financial report containing relevant and reliable information about transactions, events and conditions to which they apply. Compliance with Australian Accounting Standards ensures that the financial statements and notes also comply with International Financial Reporting Standards. Material accounting policies adopted in the preparation of this financial report are presented below. They have been consistently applied unless otherwise stated.

The financial report has been prepared on an accruals basis and is based on historical costs, except for the Group’s sandalwood tree plantations (which are biological assets) and land. This report does not take into account changing money values or, except where stated, current valuations of non-current assets. Cost is based on the fair values of the consideration given in exchange for assets.

Accounting policies(a) Principles of Consolidation

The consolidated financial statements incorporate the assets, liabilities and results of entities controlled by TFS Corporation Limited at the end of the reporting period. A controlled entity is any entity over which TFS Corporation Ltd has the capacity to dominate the decision making in relation to the financial and operating policies of another entity so that the other entity operates with TFS Corporation to achieve the objectives of TFS Corporation Ltd. Control will generally exist when the parent owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity. In assessing the power to govern, the existence and effect of holdings of actual and potential voting rights are also considered.

Where a controlled entity has entered or left the economic entity during the year, its operating results have been included from the date control was obtained or until the date control ceased. A list of controlled entities is contained in note 30 to the financial statements.

All inter-company balances and transactions between entities in the economic entity, including any unrealised profits or losses, have been eliminated on consolidation. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with those adopted by the parent entity.

Business Combinations

Business combinations occur where control over another business is obtained and results in the consolidation of its assets and liabilities. All business combinations, including those involving entities under common control, are accounted for by applying the acquisition method.

A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control. The acquisition method requires an acquirer of the business to be identified and for the cost of the acquisition and fair values of identifiable assets, liabilities, and contingent liabilities to be determined as at acquisition date, being the date that control is obtained. Cost is determined as the aggregate of fair values of assets given, equity issued and liabilities assumed in exchange for control together with costs directly attributable to the business combination. Any deferred consideration payable is discounted to present value using the entity’s incremental borrowing rate. In addition, contingent liabilities of the acquiree will be recognised where a present obligation has been incurred and its fair value can be reliably measured.





nOTe 1: Statement of Significant Accounting Policies (continued)

(a) Principles of Consolidation (continued)

Goodwill is recognised initially at the excess of cost over the acquirer’s interest in the net fair value of the identifiable assets, liabilities, and contingent liabilities recognised. If the fair value of the acquirer’s interest is greater than cost, the surplus is immediately recognised in profit or loss.

The acquisition date fair value of the consideration transferred for a business combination plus the acquisition date fair value of any previously held equity interest shall form the cost of the investment in the separate financial statements. Consideration may comprise the sum of the assets transferred by the acquirer, liabilities incurred by the acquirer to the former owners of the acquiree and the equity interests issued by the acquirer.

Fair value uplifts in the value of pre-existing equity holdings are taken to the statement of comprehensive income. Where changes in the value of such equity holdings had previously been recognised in other comprehensive income, such amounts are recycled to profit or loss.

Included in the measurement of consideration transferred is any asset or liability resulting from a contingent consideration arrangement. Any obligation incurred relating to contingent consideration is classified as either a financial liability or equity instrument, depending upon the nature of the arrangement. Rights to refunds of consideration previously paid are recognised as a receivable. Subsequent to initial recognition, contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. Contingent consideration classified as an asset or a liability is remeasured each reporting period to fair value through the statement of comprehensive income unless the change in value can be identified as existing at acquisition date.

All transaction costs incurred in relation to the business combination are expensed to the statement of comprehensive income.

(b) Cash and cash equivalents

Cash and cash equivalents include cash on hand, deposits held at call with banks, and other short term highly liquid investments with original maturities of three months or less, and bank overdrafts.

Bank overdrafts are shown within short term borrowings in current liabilities on the statement of financial position.

(c) Trade and other receivables

Trade receivables are recognised and carried at original invoice amount, or the amount due, less a provision for any uncollectible debts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. The amount provided for is the portion deemed uncollectible after the value of trees as security has been taken into account. Bad debts are written off as incurred. Amounts due from growers are recognised and carried at the amount stated in the loan agreement plus accrued interest, less any principal repayments received.

(d) Inventories

Inventories are measured at the lower of cost and net realisable value.

Raw materials are valued at weighted average cost. Work in progress and finished goods are valued at weighted average cost of direct materials and an appropriate portion of fixed and variable overhead expenses

Inventories consist of tree seedlings and seed stock intended for sale as part of the woodlots, which form the managed investments, by a wholly owned subsidiary of the parent company. It also includes stock of sandalwood related products and raw materials which are available for sale as well as some components of the company’s land that has been identified for sale in the ordinary course of business.

(e) Impairment of Assets

At each reporting date, the Group reviews the carrying values of its tangible and intangible assets to determine whether there is any indication that those assets have been impaired. If such an indication exists, the recoverable amount of the asset, being the higher of the asset’s fair value less costs to sell and value in use, is compared to the asset’s carrying value. Any excess of the asset’s carrying value over its recoverable amount is expensed to the statement of comprehensive income.






(e) Impairment of Assets (continued)

Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash generating unit to which the asset belongs.

Impairment testing is performed annually for goodwill and intangible assets with indefinite lives.

(f) Property plant and equipment

Each class of property, plant and equipment is carried at cost or fair value less, where applicable, any accumulated depreciation and impairment losses.

Increases in the carrying amount arising on revaluation of land and buildings are credited to a revaluation reserve in equity. Decreases that offset previous increases of the same asset are charged against fair value reserves directly in equity; all other decreases are charged to the statement of comprehensive income.

Plant & Equipment

Plant and equipment are measured on the cost basis.

The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows that will be received from the asset’s employment and subsequent disposal. The expected net cash flows have been discounted to their present values in determining recoverable amounts.

The cost of fixed assets constructed within the economic entity includes the cost of materials, direct labour, borrowing costs and an appropriate proportion of fixed and variable overheads.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of comprehensive income during the financial period in which they are incurred.

Depreciation

The depreciable amount of all fixed assets including building and capitalised lease assets, but excluding freehold land, is depreciable on either a straight line or diminishing balance basis over their useful lives to the economic entity commencing from the time the asset is held ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements.

The depreciation rates used for each class of depreciable assets are:

Buildings 2-4% Leasehold improvements 10-20% Plant and equipment 5-67%

An asset’s residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains and losses are included in the statement of comprehensive income. When revalued assets are sold, amounts included in the revaluation reserve relating to that asset are transferred to retained earnings.

Property

Freehold land and buildings are shown at their fair value (being the amount for which an asset could be exchanged between knowledgeable willing parties in an arm’s length transaction), based on periodic, but at least triennial valuations by external independent valuers.

The revaluation of freehold land and buildings has taken into account the potential tax on capital gains on sale of assets.






(f) Property plant and equipment (continued)

Land will be transferred from being classified as property held for own use to inventory as and when it is determined that the land has been set aside for sale in the ordinary course of the Group’s business. On transfer the fair value of the land will become the deemed cost for inventory valuation purposes. Land held as inventory is subsequently valued at the lower of cost (deemed) and net realisable value. Profits are brought to account on the signing of a contract of sale.

(g) Biological Assets

The economic entity has interests in sandalwood tree plantations (the biological assets) through plantation areas established and maintained on its own account and interests in some of the managed investment schemes which have reverted to the economic entity as a result of default by an original grower and forfeiture of their plantation interest.

Sandalwood trees are measured at the Director’s assessment of their net market value at each reporting date. The net market value is determined as being the net present value of the expected future cash flows (discounted at a risk adjusted rate).

Net increments or decrements in the market value of the sandalwood trees are recognised as income or expenses in the statement of financial performance, determined as the difference between the total net market values of the trees recognised as at the beginning of the period and the total net market values of the trees recognised as at the reporting date.

Key assumptions used to value the trees is set out in Note 12.

Costs incurred in maintaining or enhancing trees are recognised as expenses when incurred. Therefore, those costs are not included in the determination of the net increment in net market values.

(h) Trade and Other Payables

Liabilities for trade creditors and other amounts are carried at cost, which is the fair value of the consideration to be paid in the future for goods and services received, whether or not billed to the economic entity.

Payables to related parties are carried at the principal amount. Interest is recognised as an expense on an accruals basis. Deferred cash settlements are recognised at the present value of the outstanding consideration payable on the acquisition of an asset discounted at prevailing commercial borrowing rates.

(i) Leases

Leases of fixed assets where substantially all the risks and benefits incidental to the ownership of the asset, but not the legal ownership that is transferred to entities in the economic entity, are classified as finance leases.

Finance leases or Hire Purchase arrangements are capitalised by recording an asset and a liability at the lower of the amounts equal to fair value of the leased property or the present value of the minimum lease payments. Lease payments are allocated between the reduction of the lease or hire purchase liability and the lease interest for the period.

Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are charged as expenses in the periods which they are incurred.

(j) Borrowings

All loans are measured at the principal amount. Interest is charged as an expense as it accrues.

(k) Revenue and Other Income

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. All revenue is stated net of the amount of goods and services tax (GST). The following specific recognition criteria must also be met before revenue is recognised:

Operating Revenue

• Establishment fee revenues in connection with sale of timber lots under an MIS project or under other timberlot establishment contracts for are recognised in proportion to the establishment work performed at balance date. In arriving at the proportion of work performed to balance date all activities relating to product development, marketing and distribution, land procurement and development, seed collection and propagation, planting, and other establishment activities are taken into account.






(k) Revenue and Other Income (continued)

• Lease and Management Fees are recognised as revenue in the period to which they relate.

• Revenue from the sale of goods is recognised when the economic entity has transferred to the buyer the significant risks and rewards of ownership of the goods. For export sales revenue from sales made on commercial terms is recognised when title for the commodity transfers to the customer.

Deferred lease & management fees – Accrued Income receivable

The economic entity sells plantation investments where the investor has the option to pay lease and management fees either (i) annually, (ii) in advance as a prepayment, or (iii) to defer the payment of these fees as a proportion of the net harvest proceeds. The recognition of the deferred fees are classified as accrued income receivable in the financial statements.

Accrued income receivable is calculated as the amount of lease and/or management fees that would have been received up to balance date by the Company under the annual payment option had they not been deferred. The balance of the accrued income receivable should however not exceed the sum of the net present value of future revenues, which is calculated by multiplying the expected net harvest proceeds from the investors plantations by the Groups proportional entitlement to those revenues as agreed with the investors. The key assumptions used in calculating the future revenues and their present day value are set out in Note 12.

The movement in the value of the accrued income receivable from period to period is brought to account as revenue from ordinary activities.

Interest Revenue

Interest revenue is recognised when control of a right to receive interest has been attained.

Dividend Revenue

Dividend revenue is recognised when a right to receive a dividend has been established. Dividends received from associates and joint venture entities are accounted for in accordance with the equity method of accounting.

(l) Unearned Income

The unearned portion of the establishment fees that are not recognised as revenue for the year based on the percentage of completion method disclosed at Note 1(k) is deferred as unearned income.

Prepaid lease and management fees are treated as earned based on time (over the term of the project) as this is considered to closely approximate services provided. The unearned portion is deferred as unearned income.

(m) Income Tax

The income tax expense (revenue) for the year comprises current income tax expense (income) and deferred tax expense (income).

Current income tax expense charged to the profit or loss is the tax payable on taxable income calculated using applicable income tax rates enacted, or substantially enacted, as at the end of the reporting period. Current tax liabilities (assets) are therefore measured at the amounts expected to be paid to (recovered from) the relevant taxation authority.

Deferred income tax expense reflects movements in deferred tax asset and deferred tax liability balances during the year as well unused tax losses.

Current and deferred income tax expense (income) is charged or credited directly to equity instead of the profit or loss when the tax relates to items that are credited or charged directly to equity.

Deferred tax assets and liabilities are ascertained based on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets also result where amounts have been fully expensed but future tax deductions are available. No deferred income tax will be recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss.






(m) Income Tax (continued)

Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates enacted or substantively enacted at the end of the reporting period. Their measurement also reflects the manner in which management expects to recover or settle the carrying amount of the related asset or liability.

Deferred tax assets relating to temporary differences and unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised.

Where temporary differences exist in relation to investments in subsidiaries, branches, associates, and joint ventures, deferred tax assets and liabilities are not recognised where the timing of the reversal of the temporary difference can be controlled and it is not probable that the reversal will occur in the foreseeable future.

Current tax assets and liabilities are offset where a legally enforceable right of set-off exists and it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur. Deferred tax assets and liabilities are offset where a legally enforceable right of set-off exists, the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur in future periods in which significant amounts of deferred tax assets or liabilities are expected to be recovered or settled.

Tax Consolidation

TFS Corporation Ltd and its wholly owned Australian subsidiaries have formed an income tax consolidated group under the Tax Consolidation Regime. Each entity in the Group recognises its own current and deferred tax liabilities, except for any deferred tax liabilities resulting from unused tax losses and tax credits, which are immediately assumed by the parent entity. The current tax liability of each group entity is then subsequently assumed by the parent entity. The Group nominated to become consolidated for taxation purposes on 1 July 2003.

(n) Goods and Services Tax (GST)

Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Taxation Office. 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 in the statement of financial position are shown inclusive of GST.

Cash flows are presented in the cash flow statement on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows.

(o) Employee Benefits

Provision is made for the economic entity’s liability for employee benefits arising from services rendered by employees to balance date. Employee benefits expected to be settled within one year together with benefits arising from wages and salaries and annual leave, which will be settled after one year, have been measured at the amounts expected to be paid when the liability is settled plus related on-costs. Other employee benefits payable later than one year have been measured at the present value of the estimated future cash outflows to be made for these benefits. Contributions are made by the economic entity to employee superannuation funds and are charged as expenses when incurred.

(p) Earnings per share

Basic earnings per share is determined by dividing the net result after income tax attributable to members of the company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year.

Diluted earnings per share is determined by dividing the net result after income tax attributable to members of the company, excluding any costs of servicing equity other than ordinary shares, by the sum of the weighted average number of ordinary shares and the weighted average number of dilutive options outstanding during the financial year.






(q) Financial Instruments

Initial recognition and measurement

Financial assets and financial liabilities are recognised when the entity becomes a party to the contractual provisions to the instrument. For financial assets, this is equivalent to the date that the company commits itself to either the purchase or sale of the asset (i.e. trade date accounting is adopted).

Financial instruments are initially measured at fair value plus transaction costs, except where the instrument is classified ‘at fair value through profit or loss’, in which case transaction costs are expensed to profit or loss immediately.

Classification and subsequent measurement

Finance instruments are subsequently measured at either fair value, amortised cost using the effective interest rate method, or cost. Fair value represents the amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties. Where available, quoted prices in an active market are used to determine fair value. In other circumstances valuation techniques are adopted.

Amortised cost is calculated as:

a. The amount at which the financial asset or financial liability is measured at initial recognition;

b. Less principal payments;

c. Plus or minus the cumulative amortisation of the difference, if any, between the amount initially recognised and the maturity amount calculated using the effective interest method; and

d. Less any reduction for impairment.

The effective interest method is used to allocate interest income or interest expense over the relevant period and is equivalent to the rate that exactly discounts estimated future cash payments or receipts (including fees, transaction costs and other premiums or discounts) through the expected life (or when this cannot be reliably predicted, the contractual term) of the financial instrument to the net carrying amount of the financial asset or financial liability. Revisions to expected future net cash flows will necessitate an adjustment to the carrying value with a consequential recognition of an income or expense in profit and loss.

The Group does not designate any interest in subsidiaries, associates or joint ventures as being subject to the requirements of accounting standards specifically applicable to financial instruments.

Financial assets at fair value through profit and loss

A financial asset is classified in this category when they are either held for trading for the purpose of short term profit taking, derivatives not held for hedging purposes, or when they are designated as such to avoid an accounting mismatch or to enable performance evaluations where a group of financial assets is managed by key management personnel on a fair value basis in accordance with a documented risk management or investment strategy. Such assets are subsequently measured at fair value with changes in carrying value being included in profit or loss.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are stated at amortised cost.

Loans and receivables are included in current assets, except for those which are not expected to mature within 12 months after the end of the reporting period. (All other loans and receivables are classified as non-current assets.)

Held-to-maturity investments

These investments have fixed maturities, and it is the Group’s intention to hold these investments to maturity. Any held-to-maturity investments held by the Group are stated at amortised cost.

These investments are included in non-current assets, except for those which are expected to mature within 12 months after the end of the reporting period. (All other investments are classified as current assets.)






(q) Financial Instruments (continued)

Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets that are either not suitable to be classified into other categories of financial assets due to their nature or they are designated as such by management. They comprise investments in the equity of other entities where there is neither a fixed maturity nor fixed or determinable payments.

Available-for-sale financial assets are included in non-current assets, except for those which are expected to mature within 12 months after the end of the reporting period. (All other investments are classified as current assets.)

Financial Liabilities

Non-derivative financial liabilities (excluding financial guarantees) are subsequently measured at amortised cost.

Derivative instruments

TFS Corporation Ltd and its controlled entities designate certain derivatives as either:

i. Hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); or

ii. Hedges of highly probable forecast transactions (cash flow hedges).

At the inception of the transaction the relationship between hedging instruments and hedged items, as well as the Group’s risk management objective and strategy for undertaking various hedge transactions is documented.

Assessments, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items, are also documented.

Fair value hedge

Changes in the fair value of derivatives that are designated and qualified as fair value hedges are recorded in the statement of comprehensive income, together with any changes in the fair value of hedged assets or liabilities that are attributable to the hedged risk.

Cash flow hedge

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flows hedges is deferred to a hedge reserve in equity. The gain or loss relating to the ineffective portion is recognised immediately in the statement of comprehensive income.

Amounts accumulated in the hedge reserve in equity are transferred to the statement of comprehensive income in the periods when the hedged item will affect profit or loss.

Fair value

Fair value is determined based on current bid prices for all quoted investments. Valuation techniques are applied to determine the fair value for all unlisted securities, including recent arm’s length transactions, reference to similar instruments and option pricing models.

Impairment

At each reporting date, the Group assesses whether there is objective evidence that a financial instrument has been impaired. In the case of available-for-sale financial instruments, a prolonged decline in the value of the instrument is considered to determine whether an impairment has arisen. Impairment losses are recognised in the income statement.






(r) Investments in Associates

Associate companies are companies in which the Group has significant influence through holding, directly or indirectly, 20% or more of the voting power of the company. Investments in associate companies are recognised in the financial statements by applying the equity method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the Group’s share of net assets of the associate company. In addition the Group’s share of the profit or loss of the associate company is included in the Group’s profit or loss.

Profits and losses resulting from transactions between the Group and the associate are eliminated to the extent of the relation to the Group’s investment in the associate.

When the reporting dates of the Group and the associate are different, the associate prepares, for the Group’s use, financial statements as of the same date as the financial statements of the Group with adjustments being made for the effects of significant transactions or events that occur between that date and the date of the investor’s financial statements.

When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group discontinues recognising its share of further losses unless it has incurred legal or constructive obligations or made payments on behalf of the associate. When the associate subsequently makes profits, the Group will resume the recognisation of its share of those profits once its share of the profits equals the share of the losses not recognised.

Details of the Group’s investments in associates are shown at Note 15.

(s) Provisions

Provisions are recognised when the Group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured.

(t) Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of assets that necessarily take a substantial period of time to prepare for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

All other borrowing costs are expensed in the period in which they are incurred.

(u) Comparative Figures

When required by Accounting Standards, comparative figures have been adjusted to conform to changes in presentation for the current financial year.

(v) Intangibles

Supply Agreements

Supply Agreements are recognised at cost of acquisition. The supply agreements have a finite life and are carried at cost less any accumulated amortisation and any impairment losses. The supply agreements will be amortised over the life of the agreement, from the commencement of supply.

Research and Development

Expenditure during the research phase of a project is recognised as an expense when incurred. Development costs are capitalised only when technical studies identify that the project will deliver future economic benefits and these benefits can be measured reliably. Development costs have a finite life and are amortised on a systematic basis matched to the future economic benefits over the useful life of the project.






(v) Intangibles (continued)

Goodwill

Goodwill is carried at cost less accumulated impairment losses. Goodwill is calculated as the excess of the sum of:

(i) the consideration transferred;

(ii) any non-controlling interest; and

(iii) the acquisition date fair value of any previously held equity interest,

over the acquisition date fair value of net identifiable assets acquired.

The value of goodwill recognised on acquisition of each subsidiary in which the Group holds less than a 100% interest will depend on the method adopted in measuring the aforementioned non-controlling interest. The Group can elect to measure the non-controlling interest in the acquiree either at fair value (full goodwill method) or at the non-controlling interest’s proportionate share of the subsidiary’s identifiable net assets (proportionate interest method). The Group determines which method to adopt for each acquisition.

Under the full goodwill method, the fair values of the non-controlling interests are determined using valuation techniques which make the maximum use of market information where available. Under this method, goodwill attributable to the non-controlling interests is recognised in the consolidated financial statements.

Refer to Note 13 for information on the goodwill policy adopted by the Group for acquisitions.

Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisition of associates is included in investments in associates.

Goodwill is tested for impairment annually and is allocated to the Group’s cash generating units or groups of cash generating units, which represent the lowest level at which goodwill is monitored but where such level is not larger than an operating segment. Gains and losses on the disposal of an entity include the carrying amount of goodwill related to the entity sold.

Changes in the ownership interests in a subsidiary are accounted for as equity transactions and do not affect the carrying values of goodwill.

(w) Foreign Currency Transactions and Balances

Functional and presentation currency

The functional currency of each of the Group’s entities is measured using the currency of the primary economic environment in which that entity operates. The consolidated financial statements are presented in Australian dollars which is the parent entity’s functional and presentation currency.

Transactions and balances

Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated at the year-end exchange rate. Non-monetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Non-monetary items measured at fair value are reported at the exchange rate at the date when fair values were determined.

Exchange differences arising on the translation of monetary items are recognised in the income statement, except where deferred in equity as a qualifying cash flow or net investment hedge.

Exchange differences arising on the translation of non-monetary items are recognised directly in equity to the extent that the gain or loss is directly recognised in equity, otherwise the exchange difference is recognised in the income statement.

(x) Rounding of Amounts

The parent entity has applied the relief available to it under ASIC Class Order 98/100 and accordingly, amounts in the Financial report and Directors’ report have been rounded off to the nearest $1,000.






(y) Critical Accounting Estimates and Judgements

The directors evaluate estimates and judgements incorporated into the financial report based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based on current trends and economic data obtained both externally and within the Group.

Key Estimate and Judgement – Provision for Impairment of Receivables

The Group assesses the likelihood of any impairment of the Group’s receivables (including within the loan book) at each reporting date by evaluating those payments that are in arrears and making a judgement as to the likelihood of that receivable not being paid based on all knowledge available of the debtor. When recovery is assessed as doubtful, the Group estimates by how much the security held by the Group against the receivable will be insufficient to adequately cover the debt and records a provision accordingly. The total provision for impairment of receivables at year end are shown in Notes 3 and 5. The value “and adequacy” of security is determined using the following key estimate for Biological Asset valuation.

Key Estimate – Biological Asset valuation

As referred to in Note 1(g), as required under the Accounting Standards the directors make an estimate as to the

market value of the standing sandalwood trees held by the Group. The carrying value of the sandalwood trees at

year end is shown in Note 12. The market value is calculated as the net present value of expected future cashflows.

The estimates used in calculating the expected future cashflows include assumptions on yields of heartwood and oil

content of the trees, as well as assumptions as to the future price of sandalwood oil. All estimates are based on the

best information currently available and where there is any doubt the Group uses the more conservative estimates.

Key Estimate – Accrued Income Receivable

As detailed in Note 1(k) the Group recognises an estimate of future earnings from deferred fees as accrued income

receivable in the financial statements.

Accrued income receivable is calculated as the amount of lease and/or management fees that would have been

received up to balance date by the company under the annual payment option had they not been deferred.

The balance of the accrued income receivable should however not exceed the sum of the net present value of future

revenues, which is calculated by multiplying the expected net harvest proceeds from the investors plantations by the

Groups proportional entitlement to those revenues as agreed with the investors. The carrying value of the accrued

income receivable at year end is shown in Note 16.

Key Estimate – Land valuation

At year end the directors are required to make an assessment as to the market value of land held. In assessing the

market value of land held, the directors referred to an independent market appraisal done at year end. The value of

land at year end is shown in Note 11.

Key Estimate – Taxation

Balances disclosed in the financial statements and the notes thereto, related to taxation are based on the best

estimates of directors. These estimates take into account both the financial performance and position of the Group as

they pertain to current income tax legislation, and the directors understanding thereof. No adjustment has been made

for pending or future taxation legislation. The current income tax position represents that directors’ best estimate,

pending an assessment by the Australian Taxation Office.

Key Estimate – Operating Revenue

As detailed in Note 1(k) the Group recognises establishment fee revenues in connection with sale of timber lots under

a MIS project or other timber lot establishment contracts based on the proportion of establishment work performed at

balance sheet date.






(y) Critical Accounting Estimates and Judgements (continued)

In arriving at the proportion of work performed to balance sheet date all activities relating to product development,

marketing and distribution, land procurement and development, seed collection and propagation, planting, and other

establishment activities are taken into account.

Key Judgement – Environmental issues

Balances disclosed in the financial statements and notes thereto are not adjusted for any pending or enacted

environmental legislation and the directors understanding thereof. At the current stage of the company’s development

and its current environmental impact the directors believe such treatment is reasonable and appropriate.

(z) New Accounting Standards for Application in Future Periods

The AASB has issued new and amended Accounting Standards and Interpretations that have mandatory application dates for future reporting periods and which the Group has decided not to early adopt. A discussion of those future requirements and their impact on the Group is as follows:

• AASB 9: Financial Instruments (December 2010) (applicable for annual reporting periods commencing on or after 1 January 2013).

This Standard is applicable retrospectively and includes revised requirements for the classification and measurement of financial instruments, as well as recognition and derecognition requirements for financial instruments. The Group has not yet determined any potential impact on the financial statements.

The key changes made to accounting requirements include:

– simplifying the classifications of financial assets into those carried at amortised cost and those carried at fair value;

– simplifying the requirements for embedded derivatives;

– the tainting rules associated with held-to-maturity assets;

– removing the requirements to separate and fair value embedded derivatives for financial assets carried at amortised cost;

– allowing an irrevocable election on initial recognition to present gains and losses on investments in equity instruments that are not held for trading in other comprehensive income. Dividends in respect of these investments that are a return on investment can be recognised in profit or loss and there is no impairment or recycling on disposal of the instrument;

– requiring financial assets to be reclassified where there is a change in an entity’s business model as they are initially classified based on: (a) the objective of the entity’s business model for managing the financial assets; and (b) the characteristics of the contractual cash flows; and

– requiring an entity that chooses to measure a financial liability at fair value to present the portion of the change in its fair value due to changes in the entity’s own credit risk in other comprehensive income, except when that would create an accounting mismatch. If such a mismatch would be created or enlarged, the entity is required to present all changes in fair value (including the effects of changes in the credit risk of the liability) in profit or loss.

• AASB 1053: Application of Tiers of Australian Accounting Standards and AASB 2010–2: Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements [AASB 1, 2, 3, 5, 7, 8, 101, 102, 107, 108, 110, 111, 112, 116, 117, 119, 121, 123, 124, 127, 128, 131, 133, 134, 136, 137, 138, 140, 141, 1050 & 1052 and Interpretations 2, 4, 5, 15, 17, 127, 129 & 1052] (applicable for annual reporting periods commencing on or after 1 July 2013).






(z) New Accounting Standards for Application in Future Periods (continued)

• AASB 1053 establishes a revised differential financial reporting framework consisting of two tiers of financial reporting requirements for those entities preparing general purpose financial statements:

– Tier 1: Australian Accounting Standards; and

– Tier 2: Australian Accounting Standards – Reduced Disclosure Requirements.

Tier 2 of the framework comprises the recognition, measurement and presentation requirements of Tier 1, but contains significantly fewer disclosure requirements.

The following entities are required to apply Tier 1 reporting requirements (ie full IFRS):

– for-profit private sector entities that have public accountability; and

– the Australian Government and state, territory and local governments.

Since the Group is a for-profit private sector entity that has public accountability, it does not qualify for the reduced disclosure requirements for Tier 2 entities.

AASB 2010–2 makes amendments to Australian Accounting Standards and Interpretations to give effect to the reduced disclosure requirements for Tier 2 entities. It achieves this by specifying the disclosure paragraphs that a Tier 2 entity need not comply with as well as adding specific “RDR” disclosures.

• AASB 2009–12: Amendments to Australian Accounting Standards [AASBs 5, 8, 108, 110, 112, 119, 133, 137, 139, 1023 & 1031 and Interpretations 2, 4, 16, 1039 & 1052] (applicable for annual reporting periods commencing on or after 1 January 2011).

This Standard makes a number of editorial amendments to a range of Australian Accounting Standards and Interpretations, including amendments to reflect changes made to the text of IFRSs by the IASB. The Standard also amends AASB 8 to require entities to exercise judgment in assessing whether a government and entities known to be under the control of that government are considered a single customer for the purposes of certain operating segment disclosures. The amendments are not expected to impact the Group.

• AASB 2010–4: Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project [AASB 1, AASB 7, AASB 101 & AASB 134 and Interpretation 13] (applicable for annual reporting periods commencing on or after 1 January 2011).

This Standard details numerous non-urgent but necessary changes to Accounting Standards arising from the IASB’s annual improvements project. Key changes include:

– clarifying the application of AASB 108 prior to an entity’s first Australian-Accounting-Standards financial statements;

– adding an explicit statement to AASB 7 that qualitative disclosures should be made in the context of the quantitative disclosures to better enable users to evaluate an entity’s exposure to risks arising from financial instruments;

– amending AASB 101 to the effect that disaggregation of changes in each component of equity arising from transactions recognised in other comprehensive income is required to be presented, but is permitted to be presented in the statement of changes in equity or in the notes;

– adding a number of examples to the list of events or transactions that require disclosure under AASB 134; and

– making sundry editorial amendments to various Standards and Interpretations.

This Standard is not expected to impact the Group.






(z) New Accounting Standards for Application in Future Periods (continued)

• AASB 2010–5: Amendments to Australian Accounting Standards [AASB 1, 3, 4, 5, 101, 107, 112, 118, 119, 121, 132, 133, 134, 137, 139, 140, 1023 & 1038 and Interpretations 112, 115, 127, 132 & 1042] (applicable for annual reporting periods beginning on or after 1 January 2011).

This Standard makes numerous editorial amendments to a range of Australian Accounting Standards and Interpretations, including amendments to reflect changes made to the text of IFRSs by the IASB. However, these editorial amendments have no major impact on the requirements of the respective amended pronouncements.

• AASB 2010–6: Amendments to Australian Accounting Standards – Disclosures on Transfers of Financial Assets [AASB 1 & AASB 7] (applicable for annual reporting periods beginning on or after 1 July 2011).

This Standard adds and amends disclosure requirements about transfers of financial assets, especially those in respect of the nature of the financial assets involved and the risks associated with them. Accordingly, this Standard makes amendments to AASB 1: First-time Adoption of Australian Accounting Standards, and AASB 7: Financial Instruments: Disclosures, establishing additional disclosure requirements in relation to transfers of financial assets.

This Standard is not expected to impact the Group.

• AASB 2010–7: Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) [AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 120, 121, 127, 128, 131, 132, 136, 137, 139, 1023 & 1038 and Interpretations 2, 5, 10, 12, 19 & 127] (applies to periods beginning on or after 1 January 2013).

This Standard makes amendments to a range of Australian Accounting Standards and Interpretations as a consequence of the issuance of AASB 9: Financial Instruments in December 2010. Accordingly, these amendments will only apply when the entity adopts AASB 9.

As noted above, the Group has not yet determined any potential impact on the financial statements from adopting AASB 9.

• AASB 2010–8: Amendments to Australian Accounting Standards – Deferred Tax: Recovery of Underlying Assets [AASB 112] (applies to periods beginning on or after 1 January 2012).

This Standard makes amendments to AASB 112: Income Taxes.

The amendments brought in by this Standard introduce a more practical approach for measuring deferred tax liabilities and deferred tax assets when investment property is measured using the fair value model under AASB 140: Investment Property.

Under the current AASB 112, the measurement of deferred tax liabilities and deferred tax assets depends on whether an entity expects to recover an asset by using it or by selling it. The amendments introduce a presumption that an investment property is recovered entirely through sale. This presumption is rebutted if the investment property is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale.

The amendments brought in by this Standard also incorporate Interpretation 121 into AASB 112.

The amendments are not expected to impact the Group.

The financial report was authorised for issue on 30 September 2011 by the Board of Directors.





ECONOMIC ENTITY2011 $’000

2010 $’000

nOTe 2: RevenueSales revenue: Revenue from services 68,089 73,857 Revenue from land sales 13,190 13,305 Revenue from plantation sales 442 - Revenue from product sales 18,809 18,289 Interest on loans 3,975 2,688

Total sales revenue 104,505 108,139

Other income: Interest received - Other persons 579 542 Profit/(Loss) on disposal of plant & equipment (29) (143) Gain on agriculture produce 25 (51) Gain on revaluation of plantations 5,957 8,005

Total other income 6,532 8,353

Total revenue and other income from continuing operations – Attributal to members of the parent entity 111,037 116,492

(a) Interest revenue from:

– directors 245 242 – other persons 3,730 2,446

3,975 2,688

nOTe 3: Profit for the YearThe profit from ordinary operations before income tax includes the following items of expenditure whose disclosure is relevant in explaining the financial performance of the entity:

Finance costs – External 22,087 3,855– Directors 357 -

Total finance costs 22,444 3,855

Depreciation of non-current assets – Plant & equipment 2,850 1,737 – Leasehold improvements 9 5

Total depreciation of non-current assets 2,859 1,742

Amortisation of non-current assets – Expenditure on land & buildings 664 -

Total amortisation of non-current assets 664 -

Total depreciation & amortisation expenses 3,523 1,742

Operating lease rental – Minimum lease payments 26 2,681 3,265

Total operating lease rental 2,681 3,265

Bad debts and provision for impairment expense/(recouped) (98) 66 Employee benefits - superannuation 932 819





ECONOMIC ENTITY

NOTE2011 $’000

2010 $’000

nOTe 4: Taxation(a) Components of tax expense

The components of tax expense comprise: Current tax 3,289 5,186 Deferred tax 4(d) 3,988 9,661 (Over)/under provision in respect of prior years (1,982) (1,235)

Income tax expense attributable to entity 5,295 13,612

(b) Income Tax Expense

The prima facie tax payable on the operating profit/(loss) is reconciled to the income tax provided in the accounts as follows:

Prima facie income tax from ordinary activities at 30% (2010 - 30%) 7,638 15,216 Adjusted for tax effect of the following: – (Over)/under provision of prior year (1,982) (1,235) – Other (361) (369)

Income tax expense attributable to entity 5,295 13,612

The applicable weighted average effective tax rates are as follows: 21% 27%

(c) Tax effects relating to each component of comprehensive income

2011 2010

Before tax amount

$’000

Tax (expense) benefit$’000

Net of tax amount

$’000

Before tax amount

$’000

Tax (expense) benefit$’000

Net of tax amount

$’000

Economic entityGain on realisation of revalued land 922 (277) 645 4,244 (1,273) 2,971

Gain on reallocation of revalued land to inventory - - - 1,855 (557) 1,298

922 (277) 645 6,099 (1,830) 4,269






2010 $’000

nOTe 4: Taxation (continued)

(d) Tax assets and liabilities

CURRENT Current tax liabilities 1,478 5,262

NON-CURRENTOpening Balance

$’000

Charged to Income

$’000

Charged Directly

to Equity$’000

Changes in tax rate

$’000

Exchange Differences

$’000

Closing Balance

$’000

Economic entityDeferred tax liabilities

Sandalwood tree unrealised gain not assessable 8,647 2,721 - - - 11,368 Deferred income recognition 6,129 3,339 - - - 9,468 Unearned income not taxable 96 (96) - - - - Unrealised foreign exchange/interest swap 27 (20) - - - 7 Plant & equipment - tax depreciation allowance - 1,148 - - - 1,148 Revaluation adjustments 6,747 - (2,113) - - 4,634

Balance at 30 June 2010 21,646 7,092 (2,113) - - 26,625

Sandalwood tree unrealised gain not assessable 11,368 1,902 - - - 13,270 Deferred income accrual not assessable 9,468 4,204 - - - 13,672 Unearned income not taxable - - - - - - Unrealised foreign exchange/interest swap 7 27 - - - 34 Plant & equipment - tax depreciation allowance 1,148 808 - - - 1,956 Revaluation adjustments 4,634 - (833) - - 3,801

Balance at 30 June 2011 26,625 6,941 (833) - - 32,733

Deferred tax assets

Provisions and accruals 2,198 (773) - - - 1,425 Taxable unearned MIS income 3,300 (1,796) - - - 1,504 Transaction costs on equity issue 86 - 329 - - 415

Balance at 30 June 2010 5,584 (2,569) 329 - - 3,344

Provisions and accruals 1,425 (243) - - - 1,182 Taxable unearned MIS income 1,504 (999) - - - 505 Unrealised foreign exchange - 23 - - - 23 Transaction costs on equity issue 415 - 400 - - 815 Transaction costs on debt raising - 4,172 - - - 4,172

Balance at 30 June 2011 3,344 2,953 400 - - 6,697






2010 $’000

nOTe 5: Trade & Other Receivables (Current)Trade Debtors (a) 66,679 79,257 Provision for impairment of receivables (256) (327)

66,423 78,930

Loans to growers (b) 6,262 7,165 Bonds & deposits 5 45 Prepayments 1,292 800

73,982 86,940

(a) Included in Trade Debtors is an amount totalling $31.570m of which $12.100m relates to 2010 and an additional $19.470m relating to 2011 sales which are due from an institutional wholesale customer. These amounts relate to the sale & establishment of sandalwood trees as well as sub-divided land known as ‘Kingston Rest’. To facilitate a settlement with another institutional investor it was agreed with the debtor to allocate plantings to another block at Kingston Rest. As such, the plantings will occur in June 2012 and as a consequence it was agreed to change the settlement terms for repayment to June 2012.

Also included in Trade Debtors is an amount totalling $25.008m relating to sales, from another institutional wholesale customer, which were recognised in FY2010 The Group has agreed to extend the customer’s payment terms until December 2011. The directors believe that it is highly likely that this debt will be recovered in this timeframe as funds are currently being raised via prospectus that is being distributed by a large European bank. Since invoice date to report date the customer paid $1.401m towards settling the debt. The trees have been established at 30 June 2011 and serves as security over the outstanding debt. At balance date the value of the trees were $26.810m, this valuation is based on the assumptions as set out in Note 12.

(b) Aggregate amounts payable by related parties included in loans to growers:

Director and director-related entities – Director related 81 148

81 148

(c) Terms & conditions

The terms & conditions relating to the above financial instruments:

(i) Trade debtors are non interest bearing and generally of terms between 30 days and 12 months. (ii) Details of the terms & conditions of related party receivables are set out in Note 38. (iii) Loans to growers and trade debtors are secured by the right, title and interest in the sandalwood trees until the

loan and any outstanding accrued interest are discharged.

(d) Ageing of past due but not impaired

60 - 90 days 870 698 90 - 120 days 113 128 120+ days 32,056 2,684

Total 33,039 3,510

(e) Movement in the provision for impairment of receivables (current)

Balance at the beginning of the year 327 2,850 Impairment losses recognised on receivables 142 16 Amounts (written off) as uncollectible - (2,539) Amounts recovered during the year (79) - Impairment losses reversed (134) -

Balance at the end of the year 256 327





nOTe 5: Trade & Other Receivables (Current) (continued)

In determining the recoverability of a trade receivable, the Group considers the change in credit quality of the trade receivable from the date the credit was initially granted up to the reporting date. The Group also considers the underlying value of the security held by the company against the debtor which could be recovered to offset the debtor balance. The security will often be the value of the TFS tree lots that relate to the debtor balance. It is not unusual for debtors to extend beyond 120 days due to the availability of payment terms under the projects. See point (d) for amounts past due but not impaired.

The basis for estimating the market value of the tree lots is exactly the same as for Group owned trees. Referred to in Note 1(y), as required under the Accounting Standards the directors make an estimate as to the market value of the standing sandalwood trees held by the Group. The market value is calculated as the net present value of expected future cashflows. The estimates used in calculating the expected future cashflows are set out in Note 12.

ECONOMIC ENTITY

(f) Ageing of impaired trade receivables (current)2011 No.

2010 No.

60 - 90 days - - 90 - 120 days 3 4 120+ days 18 15

Total 21 19

ECONOMIC ENTITY

NOTE2011 $’000

2010 $’000

nOTe 6: inventories (Current) At cost: Land held for resale - 5,838 Finished goods 4,295 5,219 Seedlings at Cost 713 805 Seed Stock 133 108 Harvested trees 42 42 Raw materials 229 46 Provision for obsolete stock (116) (66)

5,296 11,992

nOTe 7: Derivatives Forward exchange contracts - hedges - 25

- 25

nOTe 8: Other Financial Assets (Current)

Cash Deposit - Escrow Accounts 10(a) 22,256 -

22,256 -

nOTe 9: Trade & Other Receivables (non-Current) Loans to growers (a) 43,101 38,840 Less: Provision for impairment of receivables (15) (49)

43,086 38,791

Loans to employees under share acquistion plan 5,337 5,687

5,337 5,687

Total receivables (non-current) 48,423 44,478






2010 $’000

nOTe 9: Trade & Other Receivables (non-Current) (continued)

(a) Loans to growers are due for repayment as follows – Later than one year but no later than five years (b) 19,010 16,732 – Due later than five years 24,091 22,108

43,101 38,840

(b) The loans to controlled entities are revolving facilities with no fixed term. Interest accrues at 11% per annum on loans provided after 31 May 2011. No interest accrues on loans provided pre 31 May 2011.

(c) Aggregate amounts payable by related parties included in the loans to growers:

Director & director related entities – Director related 2,963 3,007

2,963 3,007

(d) Ageing of past due but not impaired 60 - 90 days - - 90 - 120 days - - 120+ days - -

Total - -

(e) Movement in the provision for impairment of receivables (Non current)Balance at the beginning of the year 49 - Impairment losses recognised on receivables - 49 Amounts written off as uncollectible - - Amounts recovered during the year - - Impairment losses reversed (34) -

Balance at the end of the year 15 49

In determining the recoverability of a trade receivable, the Group considers the change in credit quality of the trade receivable from the date the credit was initially granted up to the reporting date. The Group also considers the underlying value of the security held by the company against the debtor which could be recovered to offset the debtor balance. The security will often be the value of the TFS tree lots that relate to the debtor balance. At balance date $944,872 (2010: $282,972) of grower loan repayments were in arrears, but not classified as impaired, due to the underlying tree value (security) being higher than the amounts in arrears.

The basis for estimating the market value of the tree lots is exactly the same as for Group owned trees. Refer to in Note 1(g), as required under the Accounting Standards the directors make an estimate as to the market value of the standing sandalwood trees held by the Group. The market value is calculated as the net present value of expected future cashflows. The estimates used in calculating the expected future cashflows are set out in Note 12.

(f) Ageing of impaired trade receivables (non-current) No. No.

60 - 90 days - - 90 - 120 days - - 120+ days 45 37

Total 45 37






2010 $’000

nOTe 10: Other Financial Assets (non-Current) Cash Deposit - First Loss Account 5,417 5,563 Cash Deposit - Bank Guarantee Facility 700 - Cash Deposit - Escrow Accounts (a) 44,512 -

50,629 5,563

(a) At the closing of the offering of the Notes 50% of the net proceeds (“Restricted Cash”) were deposited into an escrow account with The Bank of New York Mellon. One-third of the Restricted Cash will become available upon the issuer receiving shareholder approval for the issue of 55.5m warrants, this approval was granted on 1 August 2011. The remaining two-thirds of Restricted Cash will become available for use once the Group achieve at least US$100 million of revenue from wholesale establishment fees and land sales after 10 June 2011, provided that no more than 1,770 hectares of land are sold in order to achieve this revenue target.

nOTe 11: Property, Plant & equipment Plant & Equipment - at cost 29,528 24,401 Less: Accumulated depreciation (9,357) (6,722)

Total plant & equipment 20,171 17,679

Land & Buildings at fair value (a) 38,396 40,266 Less: Accumulated amortisation (491) (336)

Total property 37,905 39,930

Total property, plant & equipment 58,076 57,609

(a) Movements in carrying amounts

Movements in the carrying amount for each class of property, plant & equipment between the beginning and the end of the current financial period.

Land & Buildings Carrying amount at beginning of the year 39,930 54,440 Additions 1,787 2,108 Transfers to inventory (3,657) (13,678) Revaluation - (2,800) Amortisation expense (155) (140)

Carrying amount at the end of the year 37,905 39,930

Leasehold Improvements Carrying amount at beginning of the year 56 51 Additions 89 57 Disposals - (47) Depreciation expense (9) (5)

Carrying amount at the end of the year 136 56

Other plant & equipment Carrying amount at beginning of the year 17,623 10,036 Additions 5,167 9,545 Disposals (59) (362) Depreciation expense (2,696) (1,596)

Carrying amount at the end of the year 20,035 17,623






2010 $’000

nOTe 11: Property, Plant & equipment (continued)

(b) If land and buildings were stated at historical cost, amounts would be as follows:

Cost 26,326 27,436 Accumulated amortisation (155) (140)

26,171 27,296

(c) Carrying amount of plant & equipment in the course of construction - 30

(d) The land valuation was based on the director’s assessment of the property’s market value with reference to market appraisal obtained from an independent source. The market appraisal was based on recent sales history of similar properties in the area.

(e) BTA Institutional Services Australia Limited (the security trustee for the 11% Senior Secured Note holders) has fixed and floating security over all the assets of the Group, which includes a first registered mortgage over freehold properties owned by the Group. The freehold land is also subject to caveats which were lodge by the Group on behalf of sandalwood project investors. These caveats protect the growers’ leasehold interest in project land. The Group has registered collateral leases over the freehold land which further protects the growers’ interest in project land.

nOTe 12: Biological Assets Sandalwood plantation at cost: Opening balance 5,305 2,739 Additions 1,129 2,566 Disposal (65) -

Closing Balance 6,369 5,305

Sandalwood plantation at market value: Opening balance 36,215 28,210 Increments/(Decrements) 5,957 8,005 Disposal (534) -

Closing balance 41,638 36,215

Total carrying value 48,007 41,520

(a) Physical quantity of sandalwood trees owned No. No.

– Number of sandalwood trees 98,459 89,825

(b) Nature of the Asset

– The sandalwood plantations are situated at various locations all within 25km of the Western Australian township of Kununnurra.

– The net market value of the sandalwood trees has been determined in accordance with a directors valuation.– The sandalwood trees are subject to the normal agriculture risks associated with forestry operations such as fire, pest

and adverse weather conditions.

Significant assumptions made in determining the net market value of the trees are:

(i) 100% of the trees will be harvested and sold within 13 to 15 years of being planted.(ii) The price of sandalwood is constant in real terms and determined by market prices, being $2,500 USD/kg

(2010: $1,800 USD)(iii) Forecast heartwood production at 25kg to 30kg per sandalwood tree.





nOTe 12: Biological Assets (continued)

(iv) Projected oil content of 3.15% (2010: 3.15%) from forecast heartwood.

(v) The costs expected to arise on harvest are constant in real terms and consists of the following:

– Harvesting and processing (oil extraction) costs, estimated at $76,000 per hectare; and

– Marketing and sales costs, estimated at 5% of proceeds.

(vi) The pre-tax average real rate at which the net cash flows have been discounted range between 15%-17% per annum.

(vii) Cash flows exclude income taxes and are expressed in real terms.

(viii) US Dollar exchange rate used 0.938 AUD (2010: 1.173 AUD)

(c) Financial Risk

The economic entity is exposed to financial risks arising from changes in the price of sandalwood. The economic entity does not anticipate that the prices will significantly decline in the foreseeable future. This risk does not have an impact on the cashflows of the business in the short term as the sandalwood trees still have at least 2 years until harvested. Refer to Note 32 for more detail on financial risk arising from changes in the price of sandalwood.


2010 $’000

nOTe 13: intangible Assets Goodwill: Cost 20,034 20,034 Accumulated impaired losses - -

Net carrying value 20,034 20,034

Supply agreements: Cost 478 478 Accumulated impaired losses - -

Net carrying value 478 478

Total intangibles 20,512 20,512

Economic Entity:Goodwill

$’000

Supply Agreement

$’000

Balance at begininng of the year 19,774 478 Additions through acquisition 260 -

Year ended 30 June 2010 20,034 478

Balance at begininng of the year 20,034 478

Closing value at 30 June 2011 20,034 478

Intangible assets, other than goodwill, have finite useful lives. The current amortisation charges for intangible assets are included under depreciation and amortisation expense per the income statement. Goodwill has an indefinite life.

Impairment disclosures

Goodwill is allocated to cash generating units which are based on the Group’s reporting segments.






2010 $’000

nOTe 13: intangible Assets (continued)

Sandalwood products segment 20,034 20,034

Total 20,034 20,034

The recoverable amount of each cash generating unit above is determined based on value-in-use calculations. Value in use is calculated based on the present value of cash flow projections over a five year period with the period extending beyond one year extrapolated using an estimated growth rate. The cash flows are discounted using the yield of 10 year government bonds at the beginning of the budget period.

The following assumptions were used in the value-in-use calculations:

Growth rate

Discount rate

Sandalwood products segment 4.00% 11.00%

Management has based the value-in-use calculations on budgets for each reporting segment. These budgets use historical weighted average growth rates to project revenue. Costs are calculated taking into account historical gross margins as well as estimated weighted average inflation rates over the period which are consistent with inflation rates applicable to the locations in which the segments operate. Discount rates are pre-tax and are adjusted to incorporate risks associated with particular segments.

Management also performed sensitivity analysis on the assumptions used in the value-in-use calculaton and foresee no material impact in the assessment of goodwill impairment due to reasonable foreseeable changes to the assumptions.

ECONOMIC ENTITY

NOTE2011 $’000

2010 $’000

nOTe 14: investments Accounted for Using equity method Opening balance 15(a) 587 392 Investment - 5 Share of net profit for period 60 190

Associated companies 647 587

nOTe 15: Associated CompaniesInterests are held in the folowing associated companies:

NamePrincipal Activities

Country of Incorp Shares

Ownership Interest

Carry amount of Investment

Jun-11 %

Jun-10 %

2011 $’000

2010 $’000

Northern Development Corporation Ltd Land Development Australia Ord 50 50 330 258

Gulf Natural Supply Co. Sandalwood Oil distributor UAE Ord 49 49 317 329

647 587






2010 $’000

nOTe 15: Associated Companies (continued)

(a) Movements during the year in equity accounted investment in associated companies

Balance at begininning of the financial year 587 392 Add: Share of associated company’s profit after income tax 60 190 Share of associated company’s reserve increments arising during the year - 5

Balance at the end of finacial year 647 587

(b) Equity accounted profits of associates are broken down as follows:

Share of associate’s profit before income tax expense 92 223 Share of associate’s income tax expense (32) (33)

Share of associate’s profit after income tax 60 190

(c) Summarised presentation of aggregate assets, liabilities and performance of associates

Current assets 1,517 1,200 Non-current assets 755 217

Total assets 2,272 1,417

Current liabilities 739 373 Non-current liabilities 606 107

Total liabilities 1,345 480

Net assets 927 937

Revenues 6,561 5,686

Profit after income tax of associates 60 190

nOTe 16: Other Assets Water rights 1 1 Accrued Income Receivable 45,574 31,562

45,575 31,563

Land preparation costs 10,157 9,798 Less: Provision for Amortisation (862) (198)

9,295 9,600

Total Other Assets 54,870 41,163






2010 $’000

nOTe 17: Trade and Other Payables (Current) Unsecured: Trade Creditors 7,498 6,151 Goods & services tax payable 3,747 3,324 Dividends Payable 943 278 Other creditors and accrued expenses 10,483 11,092 Warrants liability (b) 8,514 -

31,185 20,845

Aggregate amounts payable to related entities:

Director and related entities - -

(a) Terms and conditions relating to the above financial instruments: (i) Trade creditors are non-interest bearing and are normally settled on 30 day terms (ii) Other creditors are non interest bearing and have an average term of twelve months (iii) Details of the terms & conditions of related party payables are set out in Note 37

(b) As part of securing the Note raise (refer to Note 21(b)) the Group agreed to issue 55.5m warrants (each warrant exercisable for one share). The issue of the warrants is subject shareholders approval, which was granted on 1 August 2011. The weighted average fair value of the warrants to be issued after balance date is $0.1534. This price was calculated using the Bloomberg warrants pricing model applying the following inputs:

Weighted average exercise price $1.28Anticipated expiry date 15 July 2018Underlying share price at date of issue $0.895Share price volatility 32.019%Dividend yield 6%

The calculated value of these warrants to be issued totalled $8.514m which have been considered a borrowing cost and included in financing costs (Note 3).

nOTe 18: Provisions (Current) Employee entitlements 1,242 1,015

1,242 1,015

No. No.

Number of permanent employees at balance date 115 116


2010 $’000

(a) Movements in carrying amounts

Employee entitlements

Opening balance at beginning of the year 1,015 780 Additional provisions 843 747 Amounts used (616) (512)

Balance at the end of the year 1,242 1,015





nOTe 18: Provisions (Current) (continued)

Provision for Employee entitlements

A provision has been recognised for employee entitlements relating to annual leave and long service leave. In calculating the present value of future cash flows in respect of long service leave, the probability of long service leave being taken is based on historical data. The measurement and recognition criteria relating to employee entitlements has been included in Note 1 to this report.

ECONOMIC ENTITY

NOTE2011 $’000

2010 $’000

nOTe 19: Financial Liabilities (Current) Secured: Bank overdraft - 59 Hire purchase liability 26 54 647 Borrowing secured by mortgage (a) - 25,000

54 25,706

(a) The CBA multi option facility (including the hire purchase agreements) has been fully repaid and cancelled during the year and as a result all the fixed and floating security over the assets of the Group held by CBA were released.

nOTe 20: Unearned income (Current) Unearned income 14,845 15,272

14,845 15,272

Represents lease & management fees received in advance of services being provided. The current classification represents that portion of unearned income where the service is to be provided within 12 months of balance date.

nOTe 21: Financial Liabilities (non-Current) Secured: Hire purchase liability 26 52 1,414 Borrowing secured by mortgage (a) - 40,066 11% Senior Secured Notes (b) 140,694 - Borrowing secured by trees 42 95

140,788 41,575

(a) refer to note 19

(b) US$150 million raised from international markets from issuance of 11% Senior Secured Notes, with a maturity date of 15 July 2018. This liability has been converted to AU dollars using an exchange rate of 0.9379. All principle in US dollars is payable at maturity date with interest to be paid semi-annually, in arrears on 15 January and 15 July of every year. On or after 15 July 2015 the Group may redeem some or all of the Notes at a premium that will decrease over time as set out below:

15 July 2015 to 14 July 2016 108%15 July 2016 to 14 July 2017 104%15 July 2017 to 14 July 2018 102%15 July 2018 100%

The notes are represented by one or more global notes and are listed on the Singapore Stock Exchange (SGX-ST) for trading. The notes is secured by a fixed and floating charge over all the assets of the Group, see note 11.






2010 $’000

nOTe 22: Unearned income (non-Current) Unearned Income 1,872 2,253

1,872 2,253

Represents lease and management fees received in advance of service being provided. The non current classification represents that portion of unearned income where the service is to be provided later than 12 months after balance date.

nOTe 23: issued Capital Issued ordinary fully paid with no par value 276,453,042 (30.06.10: 227,360,909) 115,687 77,688

No. No.

(a) Ordinary shares

At beginning of the period 227,360,909 191,272,208 Shares issued during the year – 10 September 2009 (i) 28,000,000 – 14 October 2009 (ii) 5,280,334 – 22 December 2009 (iii) 1,079,677 – 02 February 2010 (iv) 1,141,700 – 18 June 2010 (v) 586,990 – 22 December 2010 (vi) 1,036,188 – 11 March 2011 (vii) 34,259,564 – 13 April 2011 (viii) 13,132,833 – 17 June 2011 (ix) 663,548

At reporting date 276,453,042 227,360,909

Shares issued during the period:

(i) On 10 September 2009 the company issued 28,000,000 shares under its capital raise plan for $1.000 per share.(ii) On 14 October 2009 the company issued 5,280,334 shares under its share issue plan for $0.950 per share. (iii) On 22 December 2009 the company issued 1,079,677 shares under its dividend reinvestment plan for $0.952

per share.(iv) On 2 February 2010 the company issued 1,141,700 shares under its employee share plan for $1.017 per share(v) On 18 June 2010 the company issued 586,990 shares under its dividend reinvestment plan for $0.873 per share.(vi) On 22 December 2010 the company issued 1,036,188 shares under its dividend reinvestment plan for $0.965

per share.(vii) On 11 March 2011 the company issued 34,259,564 shares under its capital raise plan for $0.800 per share. (viii) On 13 April 2011 the company issued 13,132,833 shares under a rights issue for $0.800 per share. (ix) On 17 June 2011 the company issued 663,548 shares under its dividend reinvestment plan for $0.896 per share.

Ordinary shares participate in dividends and the proceeds of winding up of the parent in proportion to the number of shares held.

At the shareholders meetings each ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands.





nOTe 23: issued Capital (continued)

(b) Capital management

Management controls the capital of the Group in order to maintain an appropriate debt to equity ratio, provide the shareholders with adequate returns and ensure that the Group can fund its operations and continue as a going concern.

The Group’s debt and capital includes ordinary share capital and financial liabilities, supported by financial assets. There are no externally imposed capital requirements.

Management effectively manages the Group’s capital by assessing the Group’s financial risks and adjusting its capital structure in response to changes in these risks and in the market. These responses include the management of debt levels, distributions to shareholders and share issues.

There have been no changes in the strategy adopted by management to control the capital of the Group since the prior year. The gearing ratios for the current and past year ends are as follows:

ECONOMIC ENTITY

NOTE2011 $’000

2010 $’000

Total borrowings 19, 21 140,843 67,281 Less: Cash and cash equivalents 25(i) (76,903) (20,161) Escrow accounts linked to borrowings 8, 10 (66,768) -

Net debt/(Cash) (2,828) 47,120 Total equity 242,101 195,341

Total capital 239,273 242,461

Gearing ratio -1.18% 19.43%

nOTe 24: Reserves (a) Asset revaluation reserve

The asset revaluation reserve records revaluations of non-current assets. Under certain circumstances dividends can be declared from this reserve.

(b) Option reserve

The option reserve records amounts received on issue of options in the company.

nOTe 25: Cash Flow information (i) Reconciliation of cash

Cash balance comprises: Cash at bank 76,898 20,154

Cash on hand 5 7

Cash balance as per balance sheet 76,903 20,161

Less: Overdraft - (59)

Cash balance as per cash flow statement 76,903 20,102






2010 $’000

nOTe 25: Cash Flow information (continued)

(ii) Reconciliation of operating profit after income tax to the net cash flow provided by operating activities.

Operating profit/(loss) after income tax 20,166 37,109 Cashflows excluded from profit attributable to operating activities: Depreciation and amortisation 3,523 1,742 Borrowing Cost - 11% Senior Secured Notes (a) 17,383 - Reclassification of land to inventory 3,656 13,678 Share of net profits from associates (60) (190) Tax adjustment taken direct to equity/ARR 647 1,287 Unearned Forex Profit relating to Investments/Borrowings (112) -

Net cash provided by operating activities before change in assets and liabilities 45,203 53,626

Changes in operating assets and liabilities: Provision for taxation increase/(decrease) (3,783) (6,091) Provision for impairment increase/(decrease) (105) (2,475) Provision for deferred taxation increase/(decrease) 6,108 4,979 Future taxation benefit (increase)/decrease (3,352) 2,239 (Profit)/loss on sale of fixed assets 29 143 (Profit)/loss on sale of plantation (377) - (Profit)/loss on sale of investments (6) (26) (Increase)/decrease in trade debtors 12,618 (38,227) (Increase)/decrease in prepayments (452) (517) (Increase)/decrease in accrued income receivable (14,012) (11,131) (Increase)/decrease in grower loans (3,358) (6,027) (Increase)/decrease in inventories 6,695 (585) (Increase)/decrease in sandalwood tree market value (5,424) (8,005) (Increase)/decrease in foreign exhange/swap contracts 25 66 Increase/(decrease) in trade creditors and provisions 1,389 1,647 Increase/(decrease) in unearned income (809) (14,708)

Net cash flow from operating activities 40,389 (25,092)

(a) These costs reflect the non-cash portion of borrowing costs, represented by costs deducted prior to net loan funds being distributed and the fair value of warrants to be issued as referred to on Note 17(b).

(iii) Loan Facilities

At balance date the following financing facilities had been negotiated and were available:

Total facilities– overdraft - 2,000 – bank loans - 66,000 – 11% Senior Secured Notes 140,694 - Facilities used at balance date– overdraft - 59 – bank loans - 65,161 – 11% Senior Secured Notes 73,926 -

Unused credit facilities 66,768 2,780





nOTe 25: Cash Flow information (continued)

(iv) Non-cash financing and investing activities

– Dividend reinvestment plan (DRP). 1,699,736 (2010: 1,666,667) shares were issued to those shareholders who participated in the company’s

dividend reinvestment plan. This equated to a reduced dividend payout of $1,594,378 (2010: $1,540,122).

– Employee shares No shares (2010: 1,141,700) were issued under the company’s long term incentive plan for employees during

the year.

– During the year the economic entity acquired plant & equipment with an aggregate value of $207,026 (2010: $543,268) by means of finance leases. These acquisitions are not reflected in the cashflow statement.

(v) Proceeds from 11% Senior Secured Notes are stated after adjustment for note borrowing costs and cash deposits held in escrow accounts (see notes 8 & 10). The Group does not yet have access to these funds until certain conditions are met. These conditions include meeting agreed sales targets and using the funds to purchase land to develop more sandalwood plantations.


2010 $’000

nOTe 26: Capital and Leasing Commitments/entitlements Operating leases

Plantation land lease (non-cancellable) (a) Due not later than one year 4,002 3,124 Later than one year but not later than two years 3,648 3,136 Later than two years but not later than five years 10,205 8,953 Later than five years 26,745 25,020

44,600 40,233 (a) These commitments represent payments due for leased land under a non-cancellable operating lease.

The leases have terms of 15 - 16 years.The land can be used to plant and tend any agricultural or horticultural crop which will not have a detrimental effect on the value or future use of the leased area. The annual rent is reviewed annually. The payments above reflect any projected increase.

Finance leases

Payable: – not later than 1 year 61 772 – later than 1 year but not later than five years 61 1,542 – later than five years - -

Minimum lease payments 122 2,314 Less: future finance charges (16) (253)

Present value of minimum lease payments 106 2,061






2010 $’000

nOTe 26: Capital and Leasing Commitments/entitlements (cont.)

Plantation land restoration commitment Payable: – not later than 1 year 53 53 – later than 1 year but not later than five years 124 153 – later than five years 53 76

230 282

Committed lease payments receivable

Receivable: – not later than 1 year 180 176 – later than 1 year but not later than five years 657 689 – later than five years 335 493

1,172 1,358

The above committed lease payments receivable represent the minimum future lease payments receivable by the Group in respect of non cancellable lease agreements over timberlots entered into by investors in past projects.

Capital Expenditure Commitments

Capital expenditure commitments contracted for: – Land & buildings* 13,429 1,600

13,429 1,600

*$13.429m relates to two properties in the Burdekin Shire in Queensland.

nOTe 27: Dividends Distributions paid

Final fully franked dividend of 3.0 cents per share - 6,736 Interim fully franked dividend of 1.25 cents per share - 2,835 Final fully franked dividend of 3.5 cents per share 7,958 - Interim fully franked dividend of 1.25 cents per share 3,447 -

11,405 9,571

(a) Proposed final fully franked ordinary dividend to be announced (2010: 3.5 cents) franked at the tax rate of 30% (2010: 30%) - 7,958

(b) Balance of franking account at year end adjusted for franking credits arising from the payment of the provision for income tax 20,876 23,444 – Subsequent to year end the franking account would be reduced by the proposed dividend reflected per (a) as follows: - (3,410)

20,876 20,034





nOTe 28: earnings Per Share

Consolidated 12 months to 30 June 2011

$’000

Consolidated 12 months to 30 June 2010

$’000

Earnings (after tax) used in calculating basic and diluted earnings per share 20,166 37,109 Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share (‘000’s) 241,149 218,540 Weighted average number of ordinary shares used as the denominator in calculating diluted earnings per share (‘000’s) 242,149 219,540


2010 $’000

nOTe 29: Auditors’ Remuneration Remuneration of the auditor of the parent entity for: – auditing or reviewing the financial report 240 224 – other audit related services - audit of subsiduary and MIS projects 66 55 – other services - 11% Senior Secured Notes comfort letter 76 -

382 279

nOTe 30: Controlled entities

Country of Incorporation

Percentage (%) owned2011 2010

Parent Entity:TFS Corporation Ltd Australia - -

Subsidiaries of Parent:Tropical Forestry Services Ltd Australia 100 100TFS Leasing Pty Ltd Australia 100 100Arwon Finance Pty Ltd Australia 100 100TFS Properties Ltd Australia 100 100Sandalwood International Pty Ltd Australia 100 100Fieldpark Pty Ltd Australia 100 100Mt Romance Holdings Pty Ltd Australia 100 100Mt Romance Australia Pty Ltd Australia 100 100Australian Sandalwood Oil Co. Pty Ltd Australia 100 100Tribal Dreaming Pty Ltd Australia 100 100Beyond Carbon Pty Ltd (trustee company only) Australia 100 100





nOTe 31: Operating SegmentsSegment Information

Identification of reportable segments

The Group has identified its operating segments based on the internal reports that are reviewed and used by the board of directors (chief operating decision makers) in assessing performance and determining the allocation of resources.

The Group is managed primarily on the basis of product category and service offerings since the diversification of the Group’s operations inherently have notably different risk profiles and performance assessment criteria. Operating segments are therefore determined on the same basis.

Reportable segments disclosed are based on aggregating operating segments where the segments are considered to have similar economic characteristics and are also similar with respect to the following:

• the products sold and/or services provided by the segment;

• the manufacturing process;

• the type or class of customer for the products or service;

• the distribution method; and

• external regulatory requirements.

Types of products and services by segment

(i) Plantation Management

The plantation management segment is firstly responsible for the promotion and sales of Indian Sandalwood lots to investors, also called growers.

Secondly this segment is responsible for the establishment, maintenance and harvesting of Indian Sandalwood plantations on behalf of the growers and Group owned plantations.

Thirdly this segment is responsible for end market research and the establishment of end market agreements.

Significant plant & equipment, including tractors, motor vehicle and irrigation infrastructure form the basis for the operating assets in this segment.

(ii) Finance

The segment is responsible for providing finance to growers to purchase Sandalwood lots. This finance can either be via in house or by arranging external finance.

(iii) Sandalwood Products

This segment, which includes the 100% owned subsidiary Mt Romance Holdings Pty Ltd is responsible for the manufacture of Sandalwood Oil and products for resale both domestic and internationally.

Basis of accounting for purposes of reporting by operating segments

Accounting policies adopted

Unless stated otherwise, all amounts reported to the Board of Directors as the chief decision maker with respect to operating segments are determined in accordance with accounting policies that are consistent to those adopted in the annual financial statements of the Group.

Inter-segment transactions

An internally determined transfer price is set for all inter-entity sales. This price is reviewed on an ongoing basis and is based on what would be realised in the event the sale was made to an external party at arm’s-length. All such transactions are eliminated on consolidation for the Groups financial statements.





nOTe 31: Operating Segments (continued)

Corporate charges are allocated to the plantation management division, unless it can be assigned to a specific segment other than plantation management. The Board of Directors believes this is representative of likely consumption of head office expenditure that should be used in assessing segment performance and cost recoveries.

Inter-segment loans payable and receivable are initially recognised at the consideration received. This inter-segment loans are revolving facility with no fixed terms, interests free and repayable in full when the borrower is in a financial position to effect this.

Segment assets

Where an asset is used across multiple segments, the asset is allocated to the segment that receives the majority of economic value from the asset. In the majority of instances, segment assets are clearly identifiable on the basis of their nature and physical location.

Unless indicated otherwise in the segment assets note, investments in financial assets, deferred tax assets and intangible assets have been allocated to an operating segment.

Segment liabilities

Liabilities are allocated to segments where there is direct nexus between the incurrence of the liability and the operations of the segment. Borrowings and tax liabilities relating to the Group as a whole are allocated to the plantation management segment unless it can be assigned to a specific segment other than plantation management. Segment liabilities include trade and other payables and certain direct borrowings.

Unallocated Items

Currently the Group has no unallocated items.




Financial Statementsn

OT

e 3

1: O

pe

rati

ng

Se

gme

nts

(co

ntin

ued

)

The

cons

olid

ated

ent

ity’s

ope

ratio

ns in

volv

e th

e m

anag

emen

t an

d op

erat

ion

of f

ores

try

plan

tatio

ns, c

ultiv

atio

n an

d sa

le o

f ag

ricul

ture

pro

duce

, the

pro

visi

on o

f fin

ance

, and

the

pro

duct

ion

and

sale

of

Sand

alw

ood

Oil

and

rela

ted

prod

ucts

. All

oper

atio

ns a

re c

ondu

cted

in A

ustr

alia

.

Prim

ary

Rep

ort

ing

in B

usi

nes

s Se

gm

ents

Ind

ust

ry S

egm

ents

Plan

tati

on

Man

agem

ent

Fin

ance

San

dal

wo

od

Pr

od

uct

sC

on

soli

dat

ed

Gro

up

201

1 $’

00

02

010

$’0

00

201

1 $’

00

02

010

$’0

00

201

1 $’

00

02

010

$’0

00

201

1 $’

00

02

010

$’0

00

Rev

enu

e (a

ll r

elat

e to

ext

ern

al s

ales

)Es

tabl

ishm

ent

Fees

4

3,47

0 5

5,48

1

-

-

-

- 4

3,47

0 5

5,48

1

Land

Sal

es 1

3,19

0 1

3,30

5

-

-

-

- 1

3,19

0 1

3,30

5

Plan

tatio

n Sa

les

442

-

-

-

-

- 4

42

-

Leas

e &

man

agem

ent

Fees

9,3

04

6,0

93

-

-

-

-

9,3

04

6,0

93

Acc

rued

inco

me

reco

gniti

on 1

4,01

2 1

1,13

1

-

-

-

- 1

4,01

2 1

1,13

1

Prod

uct

sale

s

-

-

-

- 1

8,80

9 1

8,28

9 1

8,80

9 1

8,28

9

Sale

s of

agr

icul

ture

pro

duce

-

-

-

-

-

-

-

-

Inte

rest

- E

xter

nal

579

5

43

3,9

75

2,6

88

-

-

4,5

54

3,2

31

Inte

rest

- In

ter

segm

ent

4

2,1

98

-

-

-

-

4

2,1

98

Gai

n on

rev

alua

tion

of p

lant

atio

n 5

,957

8

,005

-

-

-

- 5

,957

8

,005

Oth

er

1,2

99

957

-

-

-

- 1

,299

9

57

Tota

l seg

men

t re

venu

e 8

8,25

7 9

7,71

3 3

,975

2

,688

1

8,80

9 1

8,28

9 1

11,0

41

118

,690

Reco

ncili

atio

n of

seg

men

t rev

enue

to G

roup

reve

nue

Inte

r se

gmen

t re

venu

e(4

) (2

,198

) U

nallo

cate

d re

venu

e

-

-

Tota

l Gro

up r

even

ue f

rom

ord

inar

y ac

tiviti

es 1

11,0

37

116

,492

Res

ult

Earn

ings

bef

ore

inte

rest

, tax

, dep

’n a

nd a

mor

t’n

(EBI

TDA

) 2

4,28

3 5

0,33

9 4

,101

2

,805

5

,215

5

,371

3

3,59

9 5

8,51

5

Seg

men

t re

sult

bef

ore

inco

me

tax

18,

063

47,

998

3,0

03

262

4

,339

4

,469

2

5,40

5 5

2,72

9




Financial StatementsIn

du

stry

Seg

men

ts

Plan

tati

on

Man

agem

ent

Fin

ance

San

dal

wo

od

Pr

od

uct

sC

on

soli

dat

ed

Gro

up

201

1 $’

00

02

010

$’0

00

201

1 $’

00

02

010

$’0

00

201

1 $’

00

02

010

$’0

00

201

1 $’

00

02

010

$’0

00

Reco

ncili

atio

n of

seg

men

t res

ult t

o G

roup

net

pr

ofit

befo

re ta

xIn

ter

segm

ent

reve

nue

(4)

(2,1

98)

Am

ount

s no

t in

clud

ed in

seg

men

t re

sults

but

re

view

ed b

y bo

ard

Una

lloca

ted

expe

nses

-

-

Shar

e of

net

pro

fits

of a

ssoc

iate

s 7

2 7

7

-

- (1

2)

113

6

0 1

90

Net

pro

fit b

efor

e ta

x fr

om c

ontin

ued

oper

atio

ns 2

5,46

1 5

0,72

1

Seg

men

t A

sset

sSe

gmen

t A

sset

s 4

47,5

39

295

,842

5

5,76

3 5

3,48

7 3

0,00

3 3

5,01

4 5

33,3

05

384

,343

Segm

ent

incr

ease

s fo

r th

e pe

riod:

Cap

ital e

xpen

ditu

re 3

,270

7

,044

-

--

- 3

,270

7

,044

A

cqui

sitio

ns 3

,132

3

,846

6

41

821

3

,773

4

,667

6,4

02

10,

890

-

-

641

8

21

7,0

43

11,

711

Incl

uded

in s

egm

ent

asse

ts a

re:

Equi

ty a

ccou

nted

ass

ocia

tes

and

join

t ve

ntur

es 3

30

258

-

- 3

17

329

6

47

587

Reco

ncili

atio

n of

seg

men

t ass

ets

to G

roup

ass

ets

Inte

r-se

gmen

t el

imin

atio

ns(6

7,00

7)

(50,

449)

U

nallo

cate

d as

sets

-

-

Tota

l Gro

up a

sset

s fr

om c

ontin

uing

ope

ratio

ns 4

66,2

98

333

,894

Seg

men

t Li

abil

itie

sSe

gmen

t Li

abili

ties

222

,516

1

09,8

55

46,

321

47,

373

13,

112

22,

519

281

,949

1

79,7

47

Reco

ncili

atio

n of

seg

men

t lia

bilit

ies

to G

roup

liab

ilitie

sIn

ter-

segm

ent

elim

inat

ions

(57,

752)

(4

1,19

4)

Una

lloca

ted

liabi

litie

s

-

- To

tal G

roup

liab

ilitie

s fr

om c

ontin

uing

ope

ratio

ns 2

24,1

97

138

,553

nO

Te

31:

Op

era

tin

g S

egm

en

ts (c

ont

inu

ed)





nOTe 31: Operating Segments (continued)

Major Customers

The Group has a number of customers to whom it provides both products and services, with the biggest contributing 17.39% to the Group’s external revenue. The next most significant customer accounts for 12.40% of external revenue.

The economic entity’s operations were all conducted in Australia and accordingly a segmentation of the operations along geographical boundaries is not applicable.

nOTe 32: Financial Risk management(a) Financial risk management

The Group’s financial instruments consist mainly of deposits with banks, short-term investments, accounts receivable and payable, loans to and from subsidiaries, notes, leases and derivatives.

The totals for each category of financial instruments, measured in accordance with AASB 139 as detailed in the accounting policies to these financial statements, are as follows:

ECONOMIC ENTITY

NOTE2011 $’000

2010 $’000

Financial assets: Cash and cash equivalents 25(i) 76,903 20,161

Held to maturity financial assets – Cash Deposit - First Loss, Bank Guarantee and Escrow accounts 8, 10 72,885 5,563

Loans and receivables 167,979 162,981 Financial assets at fair value through profit or loss – Derivatives (Hedging) - 25

Total Financial Assets 317,767 188,730

Financial Liabilities: Financial liabilities at amortised cost – Trade and other payables 31,333 22,965

– Borrowings 21 140,694 65,161

Total Financial Liabilities 172,027 88,126

(i) Treasury risk management

A treasury committee has been established to regularly review the treasury risk management strategies and to report to the CEO, CFO and the Board. The overall treasury risk management strategy is to assist the Group in meeting its financial targets, whilst minimising potential adverse effects on financial performance.

The risk management strategies are approved and reviewed by the Board on a regular basis. These include credit risk policies and future cash flow requirements.

(ii) Financial risk exposures and management

The main risks the Group is exposed to through its financial instruments are interest rate risk, liquidity risk, foreign currency risk, credit risk and price risk.

Interest rate risk

Exposure to interest rate risk arises on financial assets and financial liabilities recognised at the end of the reporting period whereby a future change in interest rates will affect future cash flows or the fair value of fixed rate financial instruments. The Group is also exposed to earnings volatility on floating rate instruments.

The Group regularly monitors its risk on interest rate exposure and considered interest rate hedging strategies if deemed necessary. The interest rate applicable to the 11% Senior Secured Notes is fixed over the full term of the notes.





nOTe 32: Financial Risk management (continued)

Liquidity risk

Liquidity risk arises from the possibility that the Group might encounter difficulty in settling its debts or otherwise meeting its obligations related to financial liabilities. The Group manages this risk through the following mechanisms:

– preparing forward looking cash flow analysis in relation to its operational, investing and financing activities;– monitoring undrawn credit facilities;– review alternative funding to diversify liquidity options; and – maintaining a reputable credit profile.

Foreign currency risk

Foreign exchange risk arises when future commercial transactions and recognised financial assets and financial liabilities are denominated in a currency that is not the entity’s functional currency.

The Group is primarily exposed to the fluctuations in the US dollar in relation to the US$150 million Senior Secured Notes, maturing 2018 and semi-annual US dollar interest payable. In addition, the Group is exposed to the fluctuations in foreign currencies in relation to its valuation of biological assets and the supply contracts for the sale of sandalwood oil and related products. The Group is mainly exposed to US dollars.

The Group aims to reduce and manage the foreign exchange risk on the US$150 million Senior Secured Notes and US dollar interest through natural hedges by generating US dollar denominated income and holding US dollar denominated assets. The Group also considers on a regular basis the practical and economic viability of foreign currency hedging instruments to hedge the risk of future foreign currency fluctuation.

Credit risk

The consolidated entity’s maximum exposures to credit risk at balance date in relation to each class of recognised financial assets is the carrying amount of those assets as indicated in the consolidated statement of financial position.

The company aims to minimise concentrations of credit risk in relation to trade receivables and loans to growers, connected with MIS business, by undertaking transactions with a large number of customers. Furthermore for the majority of the receivables and loans the Group holds security by way of the underlying sandalwood lots.

In event of any default by an investor in a plantation investment, TFS will seek to recover the outstanding amount by undertaking normal debt recovery procedures, but if necessary take possession of part or all, of the underlying plantation and either retain ownership or seek to on-sell.

Please refer to note 5(a) in relation to specified credit risk applicable to wholesale plantations.

Credit risk in trade receivables is managed in the following ways:

– a risk assessment process is completed before granting loans to customers;– timber lots are not allocated to an investor until the minimum initial payment is received; – payment terms are 30 days, unless 12 month payments terms are granted, in which case a signed payment plan

commitment is obtained from the customer, and– if any defaults are recognised the company can claim on its security by reclaiming the underlying sandalwood lot.

The credit risk for counterparties included in the trade and other receivables at 30 June 2011 is detailed below:


2010 $’000

Trade and other receivables AA rated counterparties - - Counterparties not rated 122,404 131,418

122,404 131,418






The credit risk related to balances with banks and other financial institutions is managed in accordance with Board policy. The following table provides information regarding the credit risk relating to cash and money market securities based on Standard & Poor’s counterparty credit ratings.


2010 $’000

Cash and cash equivalents AA rated counterparties 76,903 20,161 Counterparties not rated - -

76,903 20,161

Held to maturity security AA rated counterparties 72,885 5,563 Counterparties not rated - -

72,885 5,563

Price risk

Price risk relates to the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices largely due to demand and supply factors for commodities. The Group is exposed to commodity price risk in relation to its operations carried on by its sandalwood products division and in relation to is valuation of biological assets and specifically the Group owned sandalwood plantations. The Group does not anticipate that the sandalwood album or spicatum price will decline significantly in the foreseeable future.

(b) Financial instruments

(i) Forward Exchange Contract

The Group has no open forward exchange contracts at balance date. These contracts (if open) commit the Group to buy and sell specified amounts of foreign currencies in the future at specified exchange rates. Contracts are taken out with terms that reflect the underlying settlement terms of the commitment to the maximum extent possible so that hedge ineffectiveness is minimised.

The following table summarises the notional amounts of the Group’s commitments in relation to forward exchange contracts. The notional amounts do not represent amounts exchanged by the transaction counterparties and are therefore not a measure of the exposure of the Group through the use of these contracts. The parent entity does not have any contracts in place.

Notional Amounts Average Exchange Rate

Consolidated Group2011 $’000

2010 $’000

2011 $

2010 $

Buy USD/Sell AUDSettlement - less than 6 months - 3,151 - 0.8414 - 6 months to 1 year - - - -

Forward exchange contracts are measured at fair value with gains and losses taken through profit and loss.

(ii) Financial instrument composition and maturity analysis

The tables below reflect the undiscounted contractual settlement terms for financial instruments of a fixed period maturity, as well as management’s expectations of the settlement period for all other financial instruments. As such the amounts may not reconcile to the balance sheet.






Consolidated Group

2011 Fixed interest rate maturing in

Non-interest bearing

Weighted average

interest rateFinancial InstrumentsFloating

interest rate1 year or less

Over 1 to 5 years

More than 5 years Total

$’000 $’000 $’000 $’000 $’000 $’000 %

(i) Financial assetsCash 76,903 - - - - 76,903 0.01%-5.5%Employee Loans 5,337 - - - - 5,337 4.30%-8.47%Cash deposits** 72,885 - - - - 72,885 0.13%-5.6%Loans to growers 46,304 - - - - 46,304 10.66%Loans to growers - related parties 3,044 - - - - 3,044 10.66%Receivables - trade - - - - 66,364 66,364 N/AReceivables - related parties - - - - 59 59 N/A

Total financial assets 204,473 - - - 66,423 270,896

(ii) Financial liabilitiesBank Loan - - 42 - - 42 7.50%Secured Notes - - - 140,694 - 140,694 11.00%Trade creditors - - - - 7,498 7,498 N/AHP liabilities - 54 52 - - 106 6.8% - 9.5%Accounts payable - related parties - - - - - - N/ABank overdraft - - - - - - N/A

Total financial liabilities - 54 94 140,694 7,498 148,340

2010 Fixed interest rate maturing in

Non-interest bearing

Weighted average

interest rateFinancial InstrumentsFloating

interest rate1 year or less

Over 1 to 5 years

More than 5 years Total

$’000 $’000 $’000 $’000 $’000 $’000 %

(i) Financial assetsCash 20,161 - - - - 20,161 2.75% - 3.50%Employee loans 5,687 - - - - 5,687 3.81% - 7.58%Cash deposits** 5,563 - - - - 5,563 2.75%-5.00%Loans to growers 42,802 - - - - 42,802 10.38%Loans to growers - related parties 3,155 - - - - 3,155 10.38%Receivables - trade - - - - 78,458 78,458 N/AReceivables - related parties - - - - 472 472 N/A

Total financial assets 77,368 - - - 78,930 156,298

(ii) Financial liabilitiesBank Loan - 25,000 40,161 - - 65,161 3.87%-6.31%Trade creditors - - - - 6,151 6,151 N/AHP liabilities - 647 1,414 - - 2,061 6.8% - 9.5%Accounts payable - related parties - - - - - - N/ABank overdraft 59 - - - - 59 10.99- 15.49%

Total financial liabilities 59 25,647 41,575 - 6,151 73,432

** Cash deposits include the following: first loss, bank guarantees and escrow accounts






2010 $’000


Trade and sundry payables are expected to be paid as follows:

Less than 6 months 22,671 20,845 6 months to 1 year - - 1 to 5 years - - over 5 years - -

22,671 20,845

(iii) Net fair values

All financial assets and liabilities have been recognised at the balance date at their net fair values. The following methods and assumptions are used to determine the net fair values of financial assets and liabilities.

– Cash, cash equivalents and short-term investments: The carrying amount approximates fair value because of their short term maturity.

– Trade receivables and payables: The carrying amount approximates fair values.

– Short-term borrowings: The carrying amount approximates fair value because of their short-term to maturity.

– Long-term loans receivable: The fair values of long-term loans receivable are estimated using discounted cash flow analysis, based on current incremental borrowing rates for similar types of borrowing arrangements.

Aggregate net fair values and carrying amounts of financial assets and financial liabilities at balance date.

2011 2010Carrying amount

Net fair value

Carrying amount

Net fair value

$’000 $’000 $’000 $’000

Financial assets:Available for sale financial assets at fair value - - - - Held to maturity financial assets– Cash Deposit - First Loss, Bank Guarantee and Escrow Accounts 72,885 72,885 5,563 5,563 Loans and receivables 167,979 167,979 162,981 162,981 Financial assets at fair value through profit or loss– Derivatives (Hedging) - - 25 25

240,864 240,864 168,569 168,569

Financial liabilities:Debentures - - - - Bills of exchange and secured notes 140,694 140,694 65,161 65,161 Other loans and amounts due 31,333 31,333 22,965 22,965

172,027 172,027 88,126 88,126

Fair values are materially in line with carrying values.






(iv) Sensitivity Analysis – Interest rate risk, Foreign currency risk, Price risk, Heartwood yield risk

The Group has performed a sensitivity analysis relating to its exposure to interest rate risk, foreign currency risk, price risk and heartwood yield risk at balance date. This sensitivity analysis demonstrates the effect on the current year results and equity which could result from a change to these risks.

Interest rate sensitivity

At 30 June 2011, the effect on profit and equity as a result of changes in the after tax interest rate, with all other variables remaining constant would be as follows:


2010 $’000

Change in profit – increase in interest rate by 1% point 1,047 (291) – decrease in interest rate by 1% point (1,047) 291 Change in equity – increase in interest rate by 1% point 1,047 (291) – decrease in interest rate by 1% point (1,047) 291

Excluded from this sensitivity calculation is the effect of interest rate changes on the 11% Senior Secured Notes – interest rate on the notes is fixed.

Foreign currency risk sensitivity analysis

At 30 June 2011, the effect on profit and equity as a result of net changes in the after tax value of the Australian dollar to the US Dollar, with all other variables remaining constant would be as follows:

Change in profit – improvement in AUD to USD by 10% (2010: 5%) (2,804) (1,519) – decline in AUD to USD by 10% (2010: 5%) 2,804 1,519 Change in equity – improvement in AUD to USD by 10% (2010: 5%) (2,804) (1,519) – decline in AUD to USD by 10% (2010: 5%) 2,804 1,519

The increase in the sensitivity movement from 5% to 10% is due to the volatile nature of the AUD/USD exchange rate as at balance date.

Price risk sensitivity analysis

At 30 June 2011, the effect on profit and equity as a result of changes in the after tax price risk, with all other variables remaining constant would be as follows:

Change in profit – increase in sandalwood oil price by $100/kg 1,713 1,438 – decrease in sandalwood oil price by $100/kg (1,713) (1,438) Change in equity – increase in sandalwood oil price by $100/kg 1,713 1,438 – decrease in sandalwood oil price by $100/kg (1,713) (1,438)






2010 $’000


Heartwood yield risk sensitivity analysis

At 30 June 2011, the effect on profit and equity as a result of changes in the after tax heartwood yield risk, with all other variables remaining constant would be as follows:

Change in profit – increase in heartwood oil yield by 10% 4,016 3,037 – decrease in heartwood oil yield by 10% (4,016) (3,037) Change in equity – increase in heartwood oil yield by 10% 4,016 3,037 – decrease in heartwood oil yield by 10% (4,016) (3,037)

nOTe 33: Contingent LiabilitiesA controlled entity has a replanting commitment in relation to sandalwood projects to ensure a tree mortality rate of no more than 25% at the end of the first year of the project. Possible associated costs associated with this replanting have not been provided for. These possible future costs are not considered to be material.

nOTe 34: events After Balance DateAs per note 17 (Trade and Other Payables – Current) the Group agreed to issue 55.5m warrants (each warrant exercisable for one share) as part of securing the Note raise. The issue of the warrants is subject shareholders approval, which was granted on 1 August 2011at a special shareholders meeting. The impact of the warrant issue has been reflected in the financial statements for the year ended 30 June 2011.

The Group acquired 610ha of land in the Burdekin Shire in Queensland with settlement occurring on 9 September 2011. The Group also signed purchase agreements to acquire another 620ha of land in the Burdekin Shire in Queensland.

Apart from the above no other events have occurred since balance date which have or may significantly affect the economic entity’s operations, results of operations or state of affairs in future financial years.

nOTe 35: Share Based PaymentsThe following share based payment arrangements existed at 30 June 2011:

On 21 February 2008 the company entered into an agreement with Lush Ltd (“Lush”) for the future supply by the Group of sandalwood oil to Lush. In conjunction with entering into the agreement, the company issued to Lush 1,000,000 options to purchase ordinary shares in TFS Corporation Ltd. The options are exercisable any time within 3 years of first commercial sandalwood delivery. The first commercial sandalwood delivery is anticipated to occur in 2012 or 2013. The exercise price for each option $1.80.

ECONOMIC ENTITY2011 2010

No. of options

Weighted average exercise price ($)

No. of options

Weighted average exercise price ($)

Outstanding at the start of the year 1,000,000 1.80 1,000,000 1.80 Granted - - - - Forfeited - - - - Exercised - - - - Expired - - - -

Outstanding at year end 1,000,000 1.80 1,000,000 1.80

Exercisable at year end - - - -





nOTe 35: Share Based Payments (continued)

The weighted average fair value of the options granted during the year was $0.478. This price was calculated by using Black Scholes option pricing model applying the following inputs:

Weighted average exercise price $1.80Anticipated expiry date 31 December 2014Underlying share price at date of issue $1.06Share price volatility 48%Risk free interest rate 6.61%

nOTe 36: interests of Key management Personnel (“KmP”)Key management personnel for the year ended 30 June 2011

Parent Entity Directors Position

Mr FC Wilson Executive ChairmanMr RL Eacott Director (Non-executive & Independent)Mr BW Myles Director (Non-executive & Independent)Mr IM Murchison Director (Non-executive & Independent)Mr IR Thompson Executive Director of CommunicationsMr T Croot Executive Director

Other key management persons

Mr QH Megson Chief Financial Officer / Company Secretary

Refer to the Remuneration Report contained in the Report of the Directors for details of the remuneration paid or payable to each member of the economic entity’s key management personnel for the year ended 30 June 2011.

The totals of the remuneration paid to KMP of the company and the economic entity during the financial year are as follows:


2010 $’000

Short-term employee benefits 1,694,180 1,970,436Post-employment benefits 122,064 119,878Other long term benefits - -Termination benefits - -Share based payments - -

1,816,244 2,090,314

KMP Shareholdings

The number of ordinary shares in TFS Corporation Ltd held by each KMP of the economic entity during the financial year is as follows:

30 June 2011

Balance at beginning

of year Received as

CompensationOptions

exercisedNet Change

OtherBalance at end of year

Parent Entity DirectorsMr FC Wilson 40,866,648 - - 4,121,731 44,988,379Mr RL Eacott 4,605,333 - - 235,868 4,841,201Mr BW Myles 2,066,700 - - 109,979 2,176,679Mr IM Murchison 71,971 - - 3,599 75,570Mr IR Thompson 1,070,000 - - 53,500 1,123,500*Mr T Croot 2,035,000 - - 118,330 2,153,330

Other key management persons

Mr QH Megson 339,331 - - 2,203 341,534*

51,054,983 - - 4,645,210 55,700,193





nOTe 36: interests of Key management Personnel (“KmP”) (continued)

30 June 2010

Balance at beginning

of year

Granted as remuneration

in year

Issued on exercise of

options

Other changes during

the yearBalance at end of year

Parent Entity DirectorsMr FC Wilson 40,766,648 - - 100,000 40,866,648Mr RL Eacott 4,610,667 - - (5,334) 4,605,333Mr BW Myles 2,596,700 - - (530,000) 2,066,700Mr IM Murchison 61,971 - - 10,000 71,971Mr IR Thompson 1,070,000 - - - 1,070,000*Mr T Croot 2,000,000 - - 35,000 2,035,000

Other key management personsMr QH Megson 338,387 - - 944 339,331*Mr M Di Lallo 274,933 - - - 274,933*

Mr TM Baker 224,500 - - - 224,500*

51,943,806 - - (389,390) 51,554,416

All share transactions were at no more favourable terms or conditions than would be reasonably expected if dealing at arm’s length.

* 318,000 of shares held by Q Megson, 339,700 of the shares held by IR Thompson, 224,500 of the shares held by TM Baker and 209,600 of shares held by M Di Lallo are held subject to vesting requirements under the employee share plan.

Other KMP Transactions

There have been no other transactions involving equity instruments other than those described in the tables above. For details of other transactions with KMP, refer to Note 37: Related Party Transactions.

nOTe 37: Related Party TransactionsTransactions between related parties are on normal commercial terms and conditions are no more favourable than those available to other parties unless otherwise stated. Transactions include all payments excluding reimbursements.

(a) Transaction within the wholly owned group

The ultimate parent entity in the wholly owned group is TFS Corporation Ltd.

Amounts receivable or payable between the parent and the wholly owned controlled entities are disclosed in Note 38 to the financial statements.

(b) Loans and extended payment terms provided to key management persons

The directors and other key management persons borrow funds or are provided extended (12 month) payment terms from time to time as project subscribers (growers). These loans and extended payment terms are made at arm’s length and are made on terms and conditions no more favourable than those which apply to non-related project growers. Specifically, the loans are provided by a wholly owned subsidiary, Arwon Finance Pty Ltd and interest is payable on the same terms and conditions as other growers.





nOTe 37: Related Party Transactions (continued)

(i) Summary of loans to key management persons.

2011

Balance30.6.10

$

Amounts advanced

$

Principal Repayments

$

Interest Charged

$

Int. not charged

$

Prov’n for impairmt

$

Balance 30.6.11

$No. in group

Directors – Loans 3,154,623 9,717 120,449 245,211 - - 3,043,891 4Directors – 12 month payment term 472,234 300,736 713,825 - - - 59,145 4Other key management – loans 31,020 - 4,475 2,951 - - 26,545 1

Other key mgn’t – 12 month payment term - 13,361 13,361 - - - - 1

Total 3,657,877 323,814 852,110 248,162 - - 3,129,581

2010

Balance30.6.09

$

Amounts advanced

$

Principal Repayments

$

Interest Charged

$

Int. not charged

$


$

Balance 30.6.10

$No. in group

Directors – Loans 3,012,552 278,612 136,541 242,432 - - 3,154,623 4Directors – 12 month payment term 118,070 405,253 51,088 - - - 472,235 4Other key management – loans - 31,020 - - - - 31,020 1

Other key mgn’t – 12 month payment term - - - - - - - -

Total 3,130,622 714,885 187,629 242,432 - - 3,657,878

(ii) Directors/director related entities with loans above $100,000 in the reporting period.

2011

Balance30.6.10

$

Amounts advanced

$

PrincipalRepayments

$

Interest Charged

$

Int. not charged

$


$

Balance 30.6.11

$

Highest Balance

$

Directors:Frank Wilson – loans– terms

2,435,806 472,234

6,835 268,827

83,297 703,192

199,602 -

--

--

2,359,344 37,869

2,435,806 472,234

Ronald Eacott – loans– terms

124,041 -

2,882 10,633

5,642 10,633

6,926 -

--

--

121,281 -

124,041 10,633

Blake Myles – loans– terms

176,654 -

- 21,276

- -

4,098 -

--

--

176,654 21,276

176,654 21,276

Ian Thompson– loans– terms

418,122 -

- -

31,511 -

34,584 -

--

--

386,611 -

418,122 -






2010

Balance30.6.09

$

Amounts advanced

$

PrincipalRepayments

$

Interest Charged

$

Int. not charged

$


$

Balance 30.6.10

$

Highest Balance

$

Directors:Frank Wilson – loans– terms

2,331,614 98,000

203,357 374,235

99,165 -

199,284 -

--

--

2,435,806 472,235

2,435,806 472,235

Ronald Eacott – loans– terms

131,565 -

3,519 10,371

11,043 10,371

8,082 -

--

--

124,041 -

131,565 10,371

Blake Myles – loans– terms

135,938 20,070

40,716 20,646

- 40,716

- -

--

--

176,654 -

176,654 40,716

Ian Thompson– loans– terms

413,435 -

31,020 -

26,333 -

35,066 -

--

--

418,122 -

418,122 -

(c) Other Transactions with director related entities:

Transactions with, and amounts receivable from and payable to, specified Directors or their personally related entities occur within a normal employee, customer or supplier relationship on terms and conditions no more favourable than those which it is reasonable to expect the entity would have adopted if dealing with the director or personally related entity at arm’s length in the same circumstances.

– RL Eacott is a director of Expo Document Copy Centre (WA) Pty Limited. Expo Document Copy Centre (WA) Pty Limited provides printing, copying and machine hire services as required by the TFS Group. During the year to 30 June 2011 an amount of $23,356 (2010: $34,092) was charged to the Group.

– FC Wilson was a principal of Wilson & Atkinson and continues to be a part owner in the business. This company provided legal services on commercial terms to the Group during the period to 30 June 2011 for an amount of $462,855 (2010: $443,169). Frank Wilson neither directly nor indirectly received any financial benefit from these payments.

– T Croot leases land to the Group. The amount of lease fees received for the year ended 30 June 2011 was $685,137 (2010: $246,467). Currently the Group has two lease agreements in place, one that was in place prior to Mr Croot becoming a member of the board and one (at arm’s length) that commenced 1 April 2010.

– T Croot has an interest in the Fruit Tree Factory Pty Ltd. During the year ended 30 June 2011 the Fruit Tree Factory Pty Ltd provided the Group with seedlings to the value of $1,928,537 (2010: $1,320,000).

– Other transactions with directors as project subscribers (on terms no more favourable than other project subscribers).

– Total new project subscriptions by Directors and associated entities during the year ended 30 June 2011 was $0 (GST inclusive) (2010: $38,775).

– As a result of their direct project subscriptions, or direct sales to third parties Directors were entitled to commissions that were offset against the amounts payable for $0 (GST inclusive) (2010: $3,877)

– Project rent, management and insurance fees paid by directors during the year were $300,736 (GST inclusive) (2010: $405,252).






(d) Loans from directors/director related entities during the reporting period:

During the reporting period the following directors/director related entities made loans to the Group. These loans were made at arm’s length with the interest rate (15.74%) based on the Commonwealth Bank of Australia’s unsecured loan interest rate at the date the loan agreements were signed. These loans were made in support of an underwriting agreement relating to the issue of shares under the Group’s capital raise plan dated 11 March 2011.

2011

Balance30.6.10

$

Amounts advanced

$

PrincipalRepayments

$

Interest Charged

$

Balance 30.6.11

$

Highest Balance

$

Frank Wilson - 7,710,120 7,710,120 324,274 - 7,710,120Ian Thompson - 400,000 400,000 13,282 - 400,000Tim Croot - 500,000 500,000 16,602 - 500,000Ian Murchison - 100,000 100,000 3,320 - 100,000

Total - 8,710,120 8,710,120 357,478 - 8,710,120


2010 $’000

nOTe 38: Parent entity Disclosures (a) Financial position

Assets Current assets 91,139 432 Non-current assets 174,731 104,077

Total assets 265,870 104,509

Liabilities Current liabilities 11,802 6,027 Non-current liabilities 140,728 17,000

Total liabilities 152,530 23,027

Net Assets 113,340 81,482

Equity Issued Capital 115,687 77,688 Option reserve 478 478 Retained profits (2,825) 3,316

Total equity 113,340 81,482

(b) Financial performance

Profit for the year 9,198 15,094 Other comprehensive income - -

Total comprehensive income 9,198 15,094





nOTe 38: Parent entity Disclosures (continued)

(c) Guarantees entered into by the Parent Entity in relation to the debts of its subsidiaries:

TFS Corporation Limited (the Parent Entity) has entered into a deed of cross guarantee with two of its wholly-owned subsidiaries, Tropical Forestry Services Limited and TFS Properties Limited.

(d) Contingent liabilities of the Parent Entity

At balance sheet date the Parent Entity had no contingent liabilities.

(e) Commitments for the acquisition of Property, Plant and Equipment by the Parent Entity

At balance sheet date no such commitments existed for the Parent Entity.

nOTe 39: Company DetailsThe registered office of the company is:

169 Broadway Nedlands WA 6009

The principal places of business are:

Perth Office 169 Broadway Nedlands WA 6009

Plantation Lot 794, Weaber Plains Road Kununurra WA 6743

Mt Romance Lot 2 Down Road ALBANY WA 6330


Independent auditor’s Report

Bentleys Audit & Corporate (WA) Pty Ltd

Level 1, 12 Kings Park Road West Perth WA 6005 Australia

PO Box 44 West Perth WA 6872 Australia

ABN 33 121 222 802

T +61 8 9226 4500 F +61 8 9226 4300

bentleys.com.au

Accountants Auditors Advisors

A member of Bentleys, an association of independent accounting firms in Australia. The member firms of the Bentleys association are affiliated only and not in partnership. Liability limited by a scheme approved under Professional Standards Legislation.

independent Auditor’s Report

To the Members of T.F.S. Corporation Limited

We have audited the accompanying financial report of T.F.S. Corporation

Limited (“ the Company”) and Controlled Entities (“the Consolidated Entity”),

which comprises the consolidated statement of financial position as at 30 June

2011, and the consolidated statement of comprehensive income, consolidated

statement of changes in equity and consolidated statement of cash flows for

the year then ended, notes comprising a summary of significant accounting

policies and other explanatory information, and the directors’ declaration of the

Company and 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 and the Corporations Act 2001 and for

such internal control as the directors determine is necessary to enable the preparation of the financial

report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors

also state, in accordance with Accounting Standards AASB 101: Presentation of Financial Statements,

that the financial statements comply 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 judgment, 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 believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis

for our audit opinion.


Independence

In conducting our audit, we followed applicable independence requirements of Australian professional ethical

pronouncements and the Corporations Act 2001.

Auditor’s Opinion

In our opinion:

a. The financial report of T.F.S. Corporation Limited and Controlled Entities is in accordance with the

Corporations Act 2001, including:

i. giving a true and fair view of the Consolidated Entity’s financial position as at 30 June 2011 and of its performance for the year ended on that date; and

ii. complying with Australian Accounting Standards and the Corporations Regulations 2001;

b. The financial report also complies with International Financial Reporting Standards as disclosed in Note 1.

Emphasis of Matter

Without qualification to the opinion expressed above, the Consolidated Entity has recorded a receivable relating to a wholesale institutional customer totalling $25.008 million. As set out in Note 5(a) the recovery of this receivable is based upon funds currently being raised by the customer via a prospectus. There is uncertainty in regard to the likelihood of recoverability as it is dependant upon the successful capital raising via this prospectus.

This item represents a significant asset recorded by the Consolidated Entity, and at the date of this report, the outcome of this event remains uncertain. Therefore, there remains an inherent uncertainty with regard to the carrying value of this receivable.

Report on the Remuneration Report

We have audited the Remuneration Report included in directors’ report of the year ended 30 June 2011. 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 Australian Auditing Standards.

Auditor’s Opinion

In our opinion, the Remuneration Report of T.F.S. Corporation Limited for the year ended 30 June 2011, complies with section 300A of the Corporations Act 2001.

BENTLEYS PHILIP RIX FCA Chartered Accountants Director

DATED at PERTH this 29th day of September 2011

independent Auditor’s ReportTo the Members of T.F.S. Corporation Limited


A S At 7 S e p t e M B e r 2 0 1 1

additional Stock Exchange Information

number of Shares and Shareholders

276,453,042 fully paid ordinary shares are held by 5,071 shareholders.

Fully paid ordinary shares carry one vote per share and carry the right to dividends.

Distribution of Shareholders

RangeTotal

HoldersTotal No. of Shares

% of issued capital

1 – 1,000 733 283,430 0.10

1,001 – 5,000 1,421 4,019,828 1.46

5,001 – 10,000 824 6,200,014 2.24

10,001 – 50,000 1,558 34,759,893 12.57

50,001 – 100,000 314 21,646,218 7.83

100,001 and over 221 209,543,659 75.80

Total 5,071 276,453,042 100.00

There are no shareholdings classified as unmarketable parcels.

Substantial Shareholders (greater than 5%)

The names of the substantial shareholders listed in the holding company’s register as at 13 September 2011 are:

Shareholder Number% of issued

capital

Domenica Nominees Pty Ltd 44,568,379 16.12

HSBC Custody Nominees (Australia) Limited 22,954,604 8.30

Total 67,522,983 24.42


Twenty Largest Shareholders

Shareholder Number% of issued

capital

Domenica Nominees Pty Ltd 44,568,379 16.12

HSBC Custody Nominees (Australia) Limited 22,954,604 8.30

National Nominees Limited 13,124,292 4.75

Steynton Nominees Pty Ltd 12,465,000 4.51

UBS Nominees Pty Ltd 11,591,325 4.19

J P Morgan Nominees Australia Limited 7,009,141 2.54

Citicorp Nominees Pty Ltd 6,972,816 2.52

J P Morgan Nominees Australia Limited – Cash Income A/C 6,133,961 2.22

Mr Ronald Eacott – Eacott Superannuation Fund A/C 4,835,600 1.75

Perpetual Trustee Company Ltd – Alliance A/C 3,715,180 1.34

Mrs Anna Louise Coxon 3,453,519 1.25

Ms Nora Anne Atkinson 3,248,023 1.17

Mr Julius Luke Matthys 2,975,000 1.08

Queensland Investment Corporation 2,278,855 0.82

Mr Blake William Myles 2,176,679 0.78

Mr Timothy Croot & Ms Eileen Rae Croot 2,116,580 0.77

Mr Rob Boshammer 2,021,123 0.73

Mr Peter Hondros 2,000,000 0.72

Perpetual Trustee Company Limited 1,778,878 0.64

Cogent Nominees Pty Limited 1,586,165 0.57

157,005,120 56.77

Company Secretary

Quentin Heath Megson

Principal Registered Office

169 Broadway Nedlands WA 6009

Share Registry

Link Market Services Limited

Stock Exchange Listings

Quotation has been granted for all of the ordinary shares of the company on the Australian Stock Exchange.


Consolidated Historical Statistics

TFS Corporation Ltd’s consolidated results for the years ended 30 June 2011 2010 2009 2008

Total revenue from services ($’000) 66,405 74,880 63,859 52,538 Revenue from products sales ($’000) 18,809 18,289 11,299 129 Gain on tree valuation/deferred revenue ($’000) 19,995 19,085 16,503 6,642 Other revenue ($’000) 5,828 4,239 3,190 4,150 Earnings before interest & tax ($’000) 30,072 51,784 52,124 36,450 Net profit after tax ($’000) 20,166 35,154 34,838 24,143 Earnings per share (basic) (cents) 8.36 16.98 18.40 13.09Return on shareholders equity (% pa) 8.33 18.00 25.79 23.11Dividend per ordinary share (cents) TBA 4.75 4.25 4.00Dividend franking (% pa) 100 100 100 100Dividend payout ratio (%) TBA 30.72 23.33 31.03

Financial ratiosNet tangible assets per share (cents) 80.15 76.89 60.04 55.52Net interest cover (times) 6.52 13.43 16.77 11.73Net Debt / equity ratio (%) (1.17) 24.12 19.79 (5.00) Gearing ratio (net debt/debt + equity) (%) (1.18) 19.43 16.52 (5.26) Current asset ratio (times) 3.66 1.75 2.04 2.69

Balance sheet data as at 30 JuneCurrent Assets ($’000) 178,437 119,118 100,227 60,068 Non-current assets ($’000) 287,861 214,776 185,615 110,720 Total assets ($’000) 466,298 333,894 285,842 170,788 Current liabilities ($’000) 48,804 68,100 49,064 22,365 Non-current liabilities ($’000) 175,393 70,453 101,694 43,971 Total liabilities ($’000) 224,197 138,553 150,758 66,336 Net Assets ($’000) 242,101 195,341 135,084 104,452

Shareholders’ equityShare capital ($’000) 115,687 77,688 43,014 39,665 Reserves ($’000) 8,584 9,229 15,453 14,971 Retained profits/(accumulated losses) ($’000) 117,830 108,424 76,617 49,816 Total shareholders equity ($’000) 242,101 195,341 135,084 104,452

Other data as at 30 JuneCompany status Listed Public Listed Public Listed Public Listed PublicFully paid shares (000’s) 276,453 227,361 191,272 187,278 Number of shareholders 5,073 4,961 3,938 2,988

TFS’s share price:– years high (cents) 107.2 123.0 152.0 133.0– years low (cents) 74.8 80.0 67.5 70.0– close (cents) 88.5 84.0 118.0 115.0

Market Capitalisation ($’000) 244,661 190,983 225,701 215,370


TFS Corporation LtdABN 97 092 200 854

169 Broadway, Nedlands WA 6009Telephone: 08 9386 3299 Facsimile: 08 6389 1546

Email: [email protected] Website: www.tfsltd.com.au

Acccreditation number: E1510196AS

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