Biotron Limited Annual Report 2006

Plain-text annual report

Level 8, 261 George Street Sydney NSW 2000 Tel: (61-2) 9247 8212 Fax: (61-2) 9247 3932 E-mail: pnightingale@biotron.com.au Website: www.biotron.com.au (47 pages by email) 21 September 2006 The Manager Companies Australian Stock Exchange Limited 20 Bridge Street SYDNEY NSW 2000 Dear Madam RE: ANNUAL REPORT In accordance with Listing Rule 4.7, I attach the Company's Annual Report for the year ended 30 June 2005. I also attach a copy of the Company's Notice of Annual General Meeting to be held on 20 October 2006. Yours sincerely Peter J. Nightingale Company Secretary pjn3631 Biotron Limited ABN 60 086 399 144 Biotron Limited ABN 60 086 399 144 Biotron Limited Annual Report 2006 CONTENTS Chairman’s Report Operating and Financial Review Statement of Corporate Governance Directors’ Report Income Statement Statement of Recognised Income and Expenses Balance Sheet Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Audit Report Additional Stock Exchange Information Corporate Directory 1 2 – 6 7 – 8 9 – 14 15 16 17 18 19 – 31 32 33 34 – 35 36 Chairman’s Report I am pleased to present Biotron’s Annual Report for the year ended 30 June 2006. The last twelve months have seen major advances in progression of the Company’s projects – particularly the Virion anti-HIV drug development program. This program has made excellent progress, to the point where we are now approaching a human clinical trial with Biotron’s anti-HIV drug BIT225. This represents a ﬁ rst-in-class, new mode of action drug for treatment of HIV. New approaches to HIV therapy are needed to counteract the development of drug resistance that occurs with current therapies. Studies conducted during the last 12 months have demonstrated that BIT225 is active in vitro against strains of HIV that are resistant to other HIV drugs. Biotron’s BIT225 speciﬁ cally targets HIV in the viral reservoirs – immune cells where the virus hides for long periods when the patient otherwise seems to be carrying negligible viral loads. Existing HIV drugs have no effect on the underlying reservoir, which contributes to production of drug resistant virus and long term disease. Since selection of BIT225 as the Company’s anti-HIV lead compound in the second half of 2005, the Company’s drug development program has progressed through adaptation of the manufacturing process from the previous bench top scale to kilo-scale reactors at audited international regulatory standard, producing high grade BIT225 which will be used for the upcoming Phase I/IIa human clinical trial. Final preclinical safety and toxicology studies are in progress and are due to conclude before the end of 2006. The data from these preclinical studies will be submitted to appropriate hospital, ethics and regulatory authorities to support approval for commencement of a Phase I/IIa clinical trial early in 2007. Biotron’s Board is mindful of the need to realise the value of its wider antiviral drug portfolio. While the anti-HIV program remains the major focus of Company activities, the Virion technology has the potential to treat a wider range of viral diseases, substantially adding further to its value. Development of a lead compound for treatment of Hepatitis C virus (HCV) is following fast on the heels of the HIV program. During the year, Biotron raised $4.3 million (net) through an underwritten rights issue. These funds will support the Phase I/IIa human trial for BIT225, advance the Company’s HCV antiviral program through preclinical development towards the clinic and progress development of therapeutics for other viral diseases of interest. The Board is appreciative of the support of shareholders who participated in this recent capital raising. During the year, Biotron also received funds awarded under a number of competitive grants, including a grant from the ACT government to facilitate further commercial development of the Company’s cancer diagnostic program. Biotron has continued to optimise its assay methods and to identify differences in the free oligosaccharide and glycolipid expression proﬁ les between prostate and colorectal cancer patients and normal individuals. Analysis of a larger data set is currently in progress to validate earlier results. Biotron is also currently investigating the potential application of the C-Test diagnostic technology to a wider range of cancer types and other diseases including diabetes. The last ﬁ nancial year could be summed up as one of challenges and achievements. The next year offers immense hope and opportunity. On behalf of the shareholders and Directors, I would like to thank all Biotron staff for their untiring efforts during the year. Thanks to their commitment and dedication, your Company is well placed to meet the next stage of its development. Yours sincerely Michael J. Hoy Chairman Biotron Limited Annual Report 2006 1 Operating and Financial Review Overview During the year ended 30 June 2006 there has been a major focus on Biotron’s antiviral drug development program, with a particular emphasis on clinical development of its anti-HIV therapeutic candidate BIT225. The following signiﬁ cant events were achieved during the year under review: (cid:129) Selection of an anti-HIV lead compound, BIT225, for progression to manufacture and formal safety studies. A clinical development plan has been implemented for this drug, with the aim of commencing human clinical trials in early 2007. (cid:129) Review of the Company’s anti-HIV development program with BIT225, including clinical trial design, in the USA by a panel of eminent international HIV expert clinicians. (cid:129) BIT225 was shown to have activity against strains of HIV that are resistant to existing HIV drugs. (cid:129) BIT225 was shown to improve the activity of existing HIV therapies. (cid:129) Commencement and continuation of formal preclinical safety and toxicology studies for BIT225 at a leading European contract research organisation. 30 June 2006, BIT225 has progressed through a series of rigorous preclinical safety tests that are required before human clinical trials can be commenced. The program is on track for initiation of the ﬁ rst human testing in early 2007. Biotron has continued to receive funds from successful grant applications under the Federal Government’s BIF and Start grant programs. The Company also received funds under a $200,000 Knowledge Fund grant from the ACT Government for progressing the C-Test cancer diagnostic technology. Biotron’s success in obtaining these independently reviewed, competitive grants demonstrates the international competitiveness, innovation and commercial potential of the Company’s projects. In April 2006, the Company raised $4.3 million, after costs of the issue, by an underwritten rights issue of 19.9 million new fully paid ordinary shares. These funds will enable the Company to: (cid:129) Complete the pre-clinical development studies for the Company’s anti-HIV lead compound, BIT225. These safety studies are currently underway and due for completion before the end of 2006. (cid:129) Selection of a contract manufacturer for clinical (cid:129) Undertake a Phase I/IIa clinical trial for Biotron’s grade (GMP) BIT225, including scale-up and process development and the manufacture and supply of 2.5 kilograms of GMP grade BIT225. (cid:129) Initiation and continuation of chemical stability studies of BIT225. (cid:129) Development of numerous compound analogues to enhance Biotron’s library of compounds and further strengthen the Company’s patent position over the BIT225 structure. (cid:129) Demonstration of efﬁ cacy of several Biotron compounds against Inﬂ uenza A, including the H5N1 (bird ﬂ u) strain, and Inﬂ uenza B viruses. (cid:129) Continued development of the Company’s Hepatitis C antiviral development program. (cid:129) Further strengthening of the Company’s intellectual property portfolio through ﬁ ling of additional patent applications. (cid:129) Completion of an underwritten rights issue, raising $4.3 million (net) from the issue of 19.9 million shares. The Company’s efforts have been focused on commercial development of the Virion and C-Test Projects, with a speciﬁ c emphasis on development of the Company’s Virion antiviral platform. Excellent progress has been made with the anti-HIV development program, with a lead compound, BIT225, selected to progress into a clinical development program. During this 12 month period to 2 anti-HIV candidate BIT225, due to commence early in 2007. The trial design and location are currently being ﬁ nalised, and discussions are underway with regulatory authorities. (cid:129) Progress the Company’s Hepatitis C antiviral program through preclinical development towards a clinical development program. This program has substantial commercial potential, based on the Company’s antiviral platform technology, can be fast tracked because of the work already done to progress the Company’s anti-HIV lead compound. (cid:129) Expand the Company’s Virion antiviral platform technology into other viruses of interest. Several Biotron compounds have been shown to have activity against other viruses including the H5N1 (bird ﬂ u) strain of the inﬂ uenza A virus, SARS and dengue fever. Funds will be allocated to further characterise the antiviral activity of the Company’s library of compounds and progression of these compounds towards clinical development. (cid:129) Screening, testing and development of the Company’s library of compounds against a number of other viruses will be continued. (cid:129) Progress the Company’s C-Test project to a stage suitable for partnering. Operating and Financial Review Biotron’s model is to take projects such as Virion and C-Test through proof of concept studies into preclinical and early stage clinical development. The Company then aims to form partnerships and alliances with international pharmaceutical or biotechnology companies for further late stage clinical development and marketing of products. During the year under review, on-going discussions have been held with potential partners regarding the Virion technology and the C-Test project. Whilst keen to secure a partner to take the Company’s Virion compounds through into clinical development, Biotron can signiﬁ cantly increase the value of the technology by undertaking the proposed Phase I/IIa clinical trial with BIT225 before forming an alliance. This will translate into much higher returns to the Company in the form of upfront payments as well as increased milestone and royalty payments in the future. Biotron’s Projects Virion Project Human Immunodeﬁ ciency Virus Biotron’s Virion project has seen signiﬁ cant progress during the 12 months to 30 June 2006. In September 2005 Biotron announced that it had selected a lead compound, BIT225, to progress into a clinical development program heading towards clinical trials for treatment of HIV. This is a very signiﬁ cant milestone for the Company, and was the culmination of many months of robust testing of several lead candidate compounds, each of which had favourable characteristics in terms of safety, bioavailability and efﬁ cacy. Biotron’s Drug Development Pathway for BIT225 BIT225 represents a novel, ﬁ rst in class approach to the treatment of HIV. BIT225 targets a different HIV protein, Vpu, than those targeted by other existing HIV therapies. It is well recognised that new approaches to HIV therapy are needed to counteract the development of drug resistance that occurs with current therapies. By blocking a new pathway in HIV infectivity, BIT225 has the potential to combat drug resistant viral strains, in combination with highly active antiretroviral therapies (‘HAART’) and in monotherapy. Studies conducted during the last 12 months have demonstrated that BIT225 is active in vitro against strains of HIV that are resistant to other HIV drugs. BIT225 targets a different stage of the HIV life cycle Critically, BIT225 speciﬁ cally targets HIV in reservoir cells, in contrast to current therapies that work by reducing the levels of HIV in the blood to undetectable levels. However, these drugs have no effect on the underlying reservoir of infected cells where the HIV hides from the immune system. Over the lifetime of a patient virus from these reservoir cells rebounds into the blood, necessitating on- going treatment with antiretroviral drugs. Biotron Limited Annual Report 2006 3 Operating and Financial Review A. B. Electron micrographs of human cells infected with HIV A. Untreated B. Treated with BIT225 Currently, no therapies are active in these latent cells and elimination of this reservoir of HIV is essential if the virus is to be completely eliminated from the body. BIT225 is speciﬁ cally active in these reservoir cells and represents an opportunity to attack HIV at its source. BIT225 could be used in combination with existing antiretroviral therapies to achieve the dual effect of arresting viral replication and eliminating the viral reservoir to achieve total elimination of HIV in the body. Recent in vitro studies have demonstrated that BIT225 is able to improve the activity of current HIV therapies, further supporting the use of BIT225 in combination with other existing HIV drugs. Early in 2006, after a period of extensive review of quotations and capabilities of chemical manufacturers, Dr Reddy’s Laboratories Ltd, Hyderabad, India was contracted to manufacture and supply 5 kilograms of GMP-grade BIT225. The 5 kilograms of BIT225 will be manufactured in two batches of 2.5 kilograms, to minimise any risk associated with the manufacturing process and to validate the process. The manufacturing is being done to audited international regulatory standards and will be suitable for use in human clinical trials. The contract includes process development and scale up of the manufacturing process from the previous bench top scale to kilo-scale reactors. Process development and scale up has been successfully completed, and Biotron has received the ﬁ rst of two 2.5 kilogram batches of BIT225 made to GMP standards. Excellent results have been achieved in terms of product quality, demonstrating that BIT225 may be successfully scaled up from lab to commercial scale. Stability studies on the ﬁ nal product are in progress, and results to date have indicated that the product has good stability proﬁ les. The manufacturing is being done to audited international regulatory standards and will be suitable for use in human clinical trials. Biotron selected an international contract research organisation (‘CRO’) to undertake the ﬁ nal preclinical safety studies that must be completed before a human trial can commence. These studies will comply with international regulatory standards, and the results will form the basis of future regulatory approvals for Biotron’s drug with organisations including the Therapeutic Goods Administration (‘TGA’) in Australia and the Food and Drug Administration (‘FDA’) in the USA, which control approvals for new drugs in humans. These safety studies are being completed using the batches of BIT225 manufactured by Dr Reddy’s Laboratories. Final preclinical safety and toxicology studies are in progress with a leading European CRO and are due to conclude before the end of 2006. These have included a range of cell and animal-based studies to determine the safety proﬁ le and potential toxicities of the compound. Speciﬁ c tests have monitored cardiovascular, respiratory and neurological functions. The preclinical testing program is progressing very smoothly, with good results in the various pharmacokinetic, toxicology and safety studies performed to date. The success of BIT225 is largely due to the rigorous lead selection program that 4 Operating and Financial Review was implemented by Biotron in the selection of BIT225 as the lead candidate compound. The data from these preclinical studies will be submitted to appropriate hospital, ethics and regulatory authorities to support approval for commencement of a Phase I/IIa clinical trial, and will be used to determine the starting dosage for the human studies. Biotron is in the ﬁ nal stages of design of the human trial and is in discussions with doctors specialising in treatment of HIV as well as a site for the trial. The Investigators Brochure for BIT225, which is the prime document that forms the basis for ethics and regulatory approvals, is currently being ﬁ nalised. It is expected that the human trial will commence in early 2007 with commencement dependent on receipt of ﬁ nal reports from the CRO completing the preclinical studies and the ethics and regulatory approval process. Hepatitis C and Other Viruses Whilst Biotron’s prime focus is on its anti-HIV drug development program, speciﬁ cally with progression of BIT225 into a human clinical trial, development of therapeutics for viruses other than HIV continue with a focus on Hepatitis C virus (‘HCV’). Biotron has identiﬁ ed several compounds with activity against the HCV virus through screening of its rationally designed compound library in the Company’s proprietary assays. Lead optimisation is in process to identify a lead compound suitable for progression into clinical trials for HCV. HCV is a very attractive target for Biotron. It is estimated that in the US alone some 4 million people have been infected with Hepatitis C, with 2.7 million suffering from chronic infection. Worldwide, 170 million people are infected. Existing drugs for HCV are ineffective and toxic, leaving an unmet need for new therapies. The worldwide market is currently almost US$3 billion, but is estimated that this market will expand to over US$10 billion as safe, effective therapies enter the market. In addition to HCV, several Biotron compounds have been shown to be active against other commercially relevant viruses, from in-house assays as well as assays done in conjunction with overseas screening programs. The aim is to progress lead compounds from these other viral drug development programs into clinical trials. Earlier this year a number of Biotron’s proprietary antiviral compounds were tested against various strains of inﬂ uenza A and B viruses. Several compounds had activity against various inﬂ uenza A subtypes whilst one compound was shown to have good activity against a broad range of inﬂ uenza A subtypes, including the H5N1 strain, as well as against inﬂ uenza B. Further tests are being expedited. The H5N1 strain of inﬂ uenza A is a highly pathogenic avian inﬂ uenza subtype that is becoming endemic in Asia. In recent months several human cases of the disease have occurred with a high fatality rate. Countries around the world are currently stockpiling existing ﬂ u drugs in case of a worldwide pandemic of a human form of H5N1. Inﬂ uenza B is less common than type A, but also causes epidemics. The disease is milder than that produced by inﬂ uenza A, but is potentially more serious in elderly patients. Current inﬂ uenza drugs are ineffective against inﬂ uenza B. The broad range of activity of Biotron compounds against inﬂ uenza A and B suggests a new mode of action for Biotron’s drugs. In addition, Biotron has developed a high throughput assay to rapidly screen compound libraries for activity against drug resistant strains of inﬂ uenza A. This test will be a valuable tool in development of the next generation of inﬂ uenza drugs. C-Test Cancer cells have a number of characteristics that distinguish them from normal cells. Most tumour markers are neither sensitive nor speciﬁ c enough to screen for cancer or to diagnose the type of cancer without the support of other clinical tests. While a number of tumour markers have been identiﬁ ed in the past, they have generally been found to lack sensitivity and speciﬁ city for different types of cancers. There is a real need for new tests that allow unambiguous cancer diagnoses to be made at an early stage. The best tests will be simple and non-invasive assays that allow rapid and accurate diagnosis of the type of cancer and its stage. To address this need, Biotron is developing sensitive, rapid, non-invasive assays to detect and diagnose speciﬁ c types of cancer. Research undertaken by the C-Test project team has led to the proﬁ ling of sera from patients with different types of cancer, showing that the glycolipid expression pattern is unique between cancer types. The Company has developed proprietary technology for extraction and analysis of carbohydrates from blood, and has developed algorithms for analysing the expression proﬁ le of these molecules. Trials have been undertaken to demonstrate the utility of this glycomics approach for diagnosis of prostate and colorectal cancers. In 2005 Biotron was awarded a competitive grant of $200,000 from the ACT Government to facilitate further commercial development of C-Test for these diseases. During the last 12 months, Biotron has continued to optimise its assay methods and identify differences in the free oligosaccharide and glycolipid expression proﬁ les between cancer patients and normal individuals. Analysis of a larger data set is currently in progress to validate earlier results. Biotron Limited Annual Report 2006 5 Operating and Financial Review Biotron is currently investigating wider applications for its C-Test technology. The methodology has potential application for a wider range of diseases than cancer, including various immune based disorders such as diabetes. Muscion and Other Tier 2 Projects Muscion is a tier two project that is at an earlier stage of development compared to Virion and C-Test. Contraction of muscle, including heart muscle, depends on release of calcium from stores inside cells through calcium channels called ryanodine receptors. The Muscion project team is identifying compounds that selectively target ryanodine receptors in heart, skeletal and insect muscle. Biotron researchers are developing drugs to boost the output of a damaged or failing heart muscle and, as part of this process, have identiﬁ ed peptides that stimulate heart muscle contraction in vitro. During the past year, work has continued to be focused on characterisation of small molecule compounds, identiﬁ ed in collaboration with researchers at the Australian National University, which target the human ryanodine receptor. These compounds are potential therapeutics for cardiovascular disease, and are being assessed for their ability to reverse heart failure in appropriate disease models. The remaining projects are underpinned by a platform technology, research on ion channels in membranes. These projects are at an earlier stage of development than the Virion and C-Test projects and, as such, limited resources are committed due to the Company’s focus on commercial development of the Virion and C-Test projects. The Hypoxion project is focused on identifying compounds that prevent the symptoms of stroke and heart attack. Animal models of the diseases are being established. The GeneTrans project has generated a novel cell line that may have utility in drug screening tests to check the safety of new pharmaceutical drugs. The Gabion project is investigating compounds that act on the GABA receptor, which has been implicated in numerous neurological disorders. Patent Update Biotron recognises that the key to establishment of partnerships is the expansion and continued strengthening of Biotron’s intellectual property (IP) portfolio. Strong, defensible, international patents are essential to attract partners and to ensure a competitive advantage for our products in the marketplace. Biotron continues to build a strong defensible wall of patents around the Company’s intellectual property to maximise the value of the technology and to ensure Biotron’s competitive position. During the past year, Biotron expanded its compound library and generated a large number of analogues of BIT225 to further strengthen its patent position. In addition, an application was ﬁ led over a new surrogate assay for screening compounds for antiviral activity. A summary of Biotron’s patent portfolio is set out in the table below. TITLE STATUS PCT/AU99/00872 A method of modulating ion channel functional activity Granted in Australia, New Zealand and China. Under examination elsewhere. PCT/AU97/00638 A method of determining ion channel activity of a substance Granted in Australia and USA Under examination elsewhere. PCT/AU2004/000866 Antiviral compounds and methods PCT/AU2006/000800 Antiviral compounds and methods Entered into National Phase in all jurisdictions. International PCT application ﬁ led June 2006. Constructs and methods of identifying anti-viral agents Provisional patent application ﬁ led April 2006. PCT/AU01/00877 Method of identifying cancer markers and uses therefore in the diagnosis of cancer PCT/AU02/01113 A novel cancer marker and uses therefore in the diagnosis of cancer PCT/AU01/01093 Modiﬁ ed proteins, isolated novel peptides, and uses therefore PCT/AU02/00608 Method of modulating the activity of calcium channels in cardiac cells and reagents therefore 6 Granted in Australia, Singapore and South Africa. Under examination elsewhere. Granted in South Africa. Under examination elsewhere. Under examination in all jurisdictions. Granted in South Africa. Under examination elsewhere. Statement of Corporate Governance This statement outlines the main Corporate Governance practices that were in place throughout the ﬁ nancial year, which comply with the Australian Stock Exchange (‘ASX’) Corporate Governance Council recommendations, unless otherwise stated. Having regard to the current membership of the board and the size, organisational complexity and scope of operations of the consolidated entity, a Nomination Committee, a Remuneration Committee and an Audit Committee have not been established. Board of Directors The board of directors is responsible for the overall corporate governance of the Company including its strategic direction, setting remuneration, establishing goals for management and monitoring the achievement of these goals and ensuring the integrity of internal control and management information systems. It is also responsible for approving and monitoring ﬁ nancial and other reporting. The composition of the board has been determined on the basis of providing the Company with the beneﬁ t of a broad range of technical, administrative and ﬁ nancial skills, combined with an appropriate level of experience at a senior corporate level. The names and further information regarding the skills, experience, qualiﬁ cations and relevant expertise of the directors are set out in the Directors’ Report. The board is composed of a minimum of three directors. The composition of the board is monitored constantly to ensure that it provides the Company with the appropriate levels of both expertise and experience. The board comprises a majority of independent, non-executive directors including the Chairperson. The independence of directors is based on their capacity to put the best interests of the Company and its shareholders ahead of all other interests. When a board vacancy exists, through whatever cause, or where it is considered that the board would beneﬁ t from the services of a new director with particular skills, the board identiﬁ es a panel of candidates with appropriate expertise and experience. A selection procedure is then completed and the board appoints the most suitable candidate who must stand for election at the next general meeting of shareholders. Directors, other than the Managing Director, are subject to re-election by the shareholders at least every three years. Each director has the right to seek independent professional advice at the Company’s expense. Prior approval of the Chairman is required, but such approval is not unreasonably withheld. A copy of the advice received by the director is made available to all other members of the board. In the event that a potential conﬂ ict of interest may arise, involved directors must withdraw from all deliberations concerning the matter. Remuneration The remuneration of the directors is determined by the board as a whole, with the director to whom a particular decision relates being absent from the meeting during the time that the remuneration level is discussed and decided upon. For details on the amount of remuneration for each director, refer to the Key Management Personnel note to the ﬁ nancial statements and the Remuneration Report in the Directors’ Report. Internal Controls The board of directors acknowledges that it is responsible for the overall internal control framework, but recognises that no cost effective internal control system will preclude all errors and irregularities. The system of internal control adopted by the Company seeks to provide an appropriate division of responsibility and careful selection and training of personnel relative to the level of activities and size of the Company. The full board takes responsibility for reviewing ﬁ nancial reporting procedures, internal controls and the performance of the ﬁ nancial management. Selected internal control mechanisms employed to support the business include: (cid:129) Investment appraisal – the Company has documented guidelines for capital expenditure and investment appraisals. These include annual budgets, expenditure review procedures and appropriate levels of authority. (cid:129) Business planning, budgeting and reporting – a comprehensive business planning process includes evaluation of strategies, objectives, and risks resulting in an annual budget approved by the board. Monthly actual performance is reported against budget and revised forecasts for the year are prepared regularly. (cid:129) Quality and integrity of employees – there are clearly deﬁ ned accountabilities, performance measures, and reinforcement of values and ethics by management. Biotron Limited Annual Report 2006 7 Statement of Corporate Governance The CEO and CFO state in writing to the board that the Company’s ﬁ nancial statements present a true and fair view, in all material respects, of the Company’s ﬁ nancial condition and operational results and are in accordance with relevant accounting standards. External Auditors Board nominees review the performance of the external auditors and meet with them during the half yearly review and annual audit to discuss any issues that have arisen with respect to accounting policies, any signiﬁ cant operational issues and the level of proposed audit fees. KPMG, the Company’s auditors, were appointed on 20 November 2001. Ethical Standards All directors, managers and employees are expected to act with the utmost integrity and objectivity, endeavouring at all times to enhance the performance and reputation of the Company. Every employee has direct access to a director to whom they may refer any ethical issues that may arise from their employment. Directors, ofﬁ cers and employees are permitted to trade in the Company’s securities only in accordance with the provisions of the Corporations Act and ASX Listing Rules. The directors are under an obligation to report any dealings by them in the Company’s securities. The Role of Shareholders The board ensures that the shareholders are informed of all major developments affecting the Company by the following means: (cid:129) Distribution of the annual report to all shareholders which contains relevant information about the operations of the Company during the year in addition to disclosures required by the Corporations Act 2001. (cid:129) Lodgement of quarterly reports with the ASX which show summarised ﬁ nancial information for the quarter. Copies of these reports are available to shareholders on request. (cid:129) Lodgement of the half yearly report with the ASX which contains summarised and audit reviewed ﬁ nancial information. Copies of half yearly ﬁ nancial statements prepared in accordance with the Corporations Act are available to any shareholder on request. (cid:129) Lodgement of the annual report with the ASX which contains full audited ﬁ nancial information prepared in accordance with the Corporations Act. The annual report is distributed to all shareholders (unless a shareholder has speciﬁ cally requested not to receive the document). 8 (cid:129) Announcements to the ASX concerning any signiﬁ cant development in the Company’s operations, ﬁ nancing and administration. All announcements are immediately available to the general public. (cid:129) Disclosure of all major announcements to the ASX on the Company’s website. (cid:129) The Annual General Meeting is the main opportunity for the shareholders to hear the Managing Director and Chairman provide updates on the Company’s performance, ask questions of the board and to express views and vote on various matters of business on the agenda. The shareholders are responsible for voting on the appointment of directors. Risk Management The full board oversees the establishment, implementation and ongoing review of the Company’s risk management and internal control system. The internal control system covers ﬁ nancial, operational and compliance risks. Recommendations made by external auditors and other external advisers are investigated by the board, and, where necessary, appropriate action is taken to ensure that the Company has the internal control environment to manage the key risks identiﬁ ed. Ways of enhancing existing risk management strategies, including segregation of duties, employment and training of suitably qualiﬁ ed and experienced personnel are investigated by the board. Each director reviews the business risks affecting his particular area of expertise annually and reports to the board. The board then determines the appropriate actions to eliminate or minimise the identiﬁ ed business risks. The full board oversees the establishment, implementation and ongoing review of the Company’s risk management and internal control system. The internal control system covers ﬁ nancial, operational and compliance risks. Recommendations made by external auditors and other external advisers are investigated by the board and, where necessary, appropriate action is taken to ensure that the Company has the internal control environment to manage the key risks identiﬁ ed. Ways of enhancing existing risk management strategies, including segregation of duties, employment and training of suitably qualiﬁ ed and experienced personnel are investigated by the board. Performance Given the size and nature of the Company and the number of key executives, the board has adopted an informal and continuous performance evaluation process of its key executives. Directors’ Report The directors present their report together with the ﬁ nancial report of Biotron Limited (‘the Company’) for the year ended 30 June 2006 and the auditor’s report thereon. Directors The names and particulars of the directors of the Company at any time during or since the end of the ﬁ nancial year are: Mr Michael J. Hoy Independent and Non-Executive Chairman Mr Hoy has more than 30 years’ corporate experience in Australia, the United Kingdom, USA and Asia. He is Chairman of CityPrint Holdings Pty Limited, a director of Eiffel Technologies Limited and a former director of John Fairfax Holdings Limited and FXF Trust. He has been a director since 7 February 2000 and Chairman since 16 March 2000. Dr Michelle Miller BSc, MSc, PhD, GCertAppFin (Finsia) Managing Director Dr Miller has worked for over 20 years in the bioscience industry, with extensive experience in managing commercial bioscience research. She completed her PhD in the Faculty of Medicine at Sydney University investigating molecular models of cancer development. Her experience includes a number of years at Johnson and Johnson developing anti-HIV gene therapeutics through preclinical research to clinical trials. She has experience in early-stage start-ups from time spent as Investment Manager with a specialist bioscience venture capital fund. She was appointed as Managing Director on 21 June 2002. Dr Michael S. Hirshorn MBA, MB, BS Independent and Non-Executive Director Dr Hirshorn has over 20 years’ experience in the commercialisation of Australian Technology, particularly in the medical device industry, and extensive experience in collaboration with Australian research institutes. He played a major role in all commercial aspects of Cochlear Limited’s development, was a founding director of Resmed Inc., and Chief Executive Marketing for Polartechnics Limited. He has served on numerous government advisory committees, including the Start IT and T Committee, the Start Grants Biological Sciences Committee of the Department of Industry, Science and Resources and is currently an Investment Manager with a venture capital ﬁ rm, Nanyang Ventures. Dr Hirshorn was appointed as a director on 16 March 2000. Mr Bruce Hundertmark Independent and Non-Executive Director Mr Hundertmark is an independent businessman and company director with a wide range of experience in high technology based company start-up operations and promoting the formation of venture capital companies, including News Datacom Limited in Israel and PT Indo Bio Products in Indonesia. He is a director of Eiffel Technologies Limited and has been a director of News International PLC, Prudential Cornhill Insurance Limited and was Managing Director of IMFC Limited, a merchant bank. Mr Hundertmark was appointed as a director on 16 March 2000. Mr Peter G. Scott Non-Executive Director Mr Scott is a founding director of Biotron Limited with more than 30 years of commercial and entrepreneurial experience in Australia. He is a director of Scott’s Acorn Pty Ltd and was formerly Chairman and Managing Director of Scottcom Pty Ltd and Managing Director of ICAM Pty Ltd, audio visual and multimedia companies. Mr Scott has been a director since 23 February 1999. Professor Peter W. Gage MB ChB, PhD, DSc FAA Research Director Professor Gage was professor of Physiology at the John Curtin School of Medical Research at the Australian National University and President of the Australian Physiological and Pharmacological Society. He had more than 35 years’ experience in medical research, including training medical researchers, particularly PhD students. For the past 25 years his research focus had been on ion channels. Professor Gage was admitted as a fellow of the Australian Academy of Science in 1977 and was the recipient of an Award of a Special Research Centre by the government in 1982 for research on nerve and muscle ion channels. We were all saddened by the death during the ﬁ nancial year of Professor Peter Gage. He was an internationally acclaimed pioneer of the use of ion channels as a treatment for viral diseases and the Company is now privileged to have the opportunity to develop the outcomes of his research into treatments for life threatening diseases such as HIV and HCV. He was a director from 23 February 1999 to 13 August 2005. Biotron Limited Annual Report 2006 9 Directors’ Report Peter J. Nightingale Company Secretary Mr Nightingale graduated with a Bachelor of Economics degree from the University of Sydney and is a member of the Institute of Chartered Accountants in Australia. He has worked as a chartered accountant in both Australia and the USA. As a director or company secretary Mr Nightingale has, for the past 19 years, been responsible for the ﬁ nancial control, administration, secretarial and in-house legal functions of a number of private and public listed companies in Australia, the USA and Europe including Pangea Resources Limited, Timberline Minerals Inc., Perseverance Corporation Limited, Valdora Minerals N.L. and ETT Limited. Mr Nightingale is currently a director or company secretary of Bolnisi Gold NL, Cockatoo Coal Limited, IMD Group Limited, Planet Gas Limited and Palmarejo Silver and Gold Corporation. Directors’ Meetings The number of directors’ meetings held and number of meetings attended by each of the directors of the Company, while they were a director, during the year are: No. of Meetings Held No. of Meetings Attended Michael J. Hoy Michelle Miller Michael S. Hirshorn Bruce Hundertmark Peter G. Scott Peter W. Gage 6 6 6 6 6 1 6 6 6 6 6 1 Directors’ Interests At the date of this report, the beneﬁ cial interests of each director of the Company in the issued share capital of the Company and options, each exercisable to acquire one fully paid ordinary share of the Company are: Michael J. Hoy Michelle Miller Michael S. Hirshorn Bruce Hundertmark Fully Paid Ordinary Shares 1,316,314 - - - Peter G. Scott 8,895,014 Options 500,000 250,000 500,000 500,000 500,000 500,000 500,000 200,000 200,000 - Option Terms (Exercise Price and Term) $0.35 at any time up to 30 September 2010 $0.60 at any time up to 14 January 2007 $0.75 at any time up to 14 January 2007 $1.00 at any time up to 14 January 2007 $0.35 at any time up to 30 September 2010 $0.40 at any time from 30 September 2006 up to 30 September 2010 $0.45 at any time from 30 September 2006 up to 30 September 2010 $0.35 at any time up to 30 September 2010 $0.35 at any time up to 30 September 2010 - 10 Directors’ Report Option holdings The movement during the reporting period in the number of options over ordinary shares in the Company held directly, indirectly or beneﬁ cially, by each speciﬁ ed director, including their personally-related entities, is as follows Michael J. Hoy Michelle Miller Peter W. Gage Michael S. Hirshorn Bruce Hundertmark Peter G. Scott Held at 1 July 2005 500,000 1,250,000 - 200,000 200,000 - Granted as Remuneration 500,000 1,500,000 - 200,000 200,000 - Expired (500,000) - - (200,000) (200,000) - Held at 30 June 2006 Vested and Exercisable at 30 June 2006 500,000 2,750,000 - 200,000 200,000 - 500,000 1,750,000 - 200,000 200,000 - Equity holdings and transactions The movement during the reporting period in the number of ordinary shares in the Company held directly, indirectly or beneﬁ cially, by each speciﬁ ed director, including their personally-related entities, is as follows Held at 1 July 2005 Purchased Received on Exercise of Options Sales Michael J. Hoy Michelle Miller Peter W. Gage Michael S. Hirshorn Bruce Hundertmark Peter G. Scott 1,023,800 292,514 - 9,400,000 - - - - - - 8,573,800 321,214 - - - - - - - - - - - - Held at 30 June 2006 1,316,314 - 9,400,000 - - 8,895,014 Biotron Limited Annual Report 2006 11 Directors’ Report Remuneration Report The policy of remuneration of directors and senior executives is to ensure the remuneration package properly reﬂ ects the person’s duties and responsibilities, and that remuneration is competitive in attracting, retaining and motivating people of the highest quality. The board is responsible for reviewing its own performance. The non-executive directors are responsible for evaluating the performance of the executive directors who, in turn, evaluate the performance of all other senior executives. The evaluation process is intended to assess the Company’s business performance, whether long term strategic objectives are being achieved and the achievement of individual performance objectives Remuneration generally comprises salary and superannuation. Longer term incentives are able to be provided through the Company’s Incentive Option Plan which acts to align the directors and senior executives’ actions with the interests of the shareholders. The remuneration disclosed below represent the cost to the Company for the services provided under these arrangements. No directors or senior executives receive performance related remuneration. No bonuses were paid during the year. Details of director and senior executive remuneration and the nature and amount of each major element of the remuneration of each director and senior executive of the Company are: Directors Non-executive Michael J. Hoy (Chairman) Michael S. Hirshorn Bruce Hundertmark Peter G. Scott Executive Michelle Miller (Managing Director) Peter W. Gage Total, all speciﬁ ed directors Executives Peter J. Nightingale (Company Secretary) Total, all speciﬁ ed directors and executives Year 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 Primary Salary and Fees $ Post- Employment Superannuation Beneﬁ ts $ Equity Compensation Value of Options $ Total $ Options as a % of Remuneration 60,000 60,000 30,000 30,000 30,000 30,000 5,000 19,583 155,000 150,000 5,000 70,000 285,000 359,583 60,000 60,000 345,000 419,583 5,400 5,400 2,700 2,700 2,700 2,700 27,700 13,117 25,873 13,500 450 2,700 64,823 40,117 - - 64,823 40,117 24,016 - 9,606 - 9,606 - - - 46,361 - - - 89,589 - 9,606 - 99,195 - 89,416 65,400 42,306 32,700 42,306 32,700 32,700 32,700 227,234 163,500 5,450 72,700 439,412 399,700 69,606 60,000 509,018 459,700 27% - 23% - 23% - - - 20% - - - 20% - 14% - 19% - The fair value of the options at grant date was determined based on Black-Scholes formula. The model inputs were the share price of $0.17, expected volatility (based on historic volatility) of 50%, a nil dividend and risk-free interest rate of 5.25%. 12 Directors’ Report Options At the date of this report, unissued ordinary shares of the Company under option are: Number of Options Exercise Price Expiry Date 250,000 500,000 500,000 3,600,000 $0.60 $0.75 $1.00 $0.35 14 January 2007 14 January 2007 14 January 2007 30 September 2010 The options do not entitle the holder to participate in any share issue of the Company or any other body corporate. Principal Activities The principal activities of the Company during the ﬁ nancial year were the funding and management of intermediate and early applied biotechnology research and development projects. Financial Result and Review of Operations The operating loss of the Company for the ﬁ nancial year after income tax was $2,198,973 (2005 - $1,883,575). A review of the Company’s operations for the year is set out in the Operating and Financial Review. Impact of Legislation and Other External Requirements There were no changes in environmental or other legislative requirements during the year that have signiﬁ cantly impacted the results or operations of the consolidated entity. Dividends The directors recommend that no dividend be paid by the Company. No dividend has been paid or declared since the end of the previous ﬁ nancial year. State of Affairs In the opinion of the directors, signiﬁ cant changes in the state of affairs of the Company that occurred during the ﬁ nancial year under review were as follows: (cid:129) The continued advancement of the Company’s projects, particularly the Virion project. (cid:129) Completion of an underwritten rights issue, raising $4.3 million (net) from the issue of 19.9 million shares. Environmental Regulation The Company’s operations are not subject to signiﬁ cant environmental regulations under Commonwealth or State legislation in relation to its research projects. Events Subsequent to Balance Date There has not arisen in the interval between the end of the ﬁ nancial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to affect signiﬁ cantly the operations of the Company, the results of those operations, or the state of affairs of the Company, in future ﬁ nancial years. Likely Developments During the year ended 30 June 2006, the Company continued to fund and manage its research and development projects. The success of these research projects, which cannot be assessed on the same fundamentals as trading and manufacturing enterprises, will determine future likely developments. In the opinion of the directors, it would prejudice the interests of the Company to provide additional information, except as reported in this Annual Report, relating to likely developments in the operations of the Company. Indemniﬁ cation of Ofﬁ cers and Auditors During or since the end of the ﬁ nancial year, the Company has not indemniﬁ ed or made a relevant agreement to indemnify an ofﬁ cer or auditor of the Company against a liability incurred by such an ofﬁ cer or auditor. In addition, the Company has not paid or agreed to pay, a premium in respect of a contract insuring against a liability incurred by an ofﬁ cer or auditor. Non-audit Services During the year KPMG, the Company’s auditor, has performed certain other services in addition to their statutory duties. Biotron Limited Annual Report 2006 13 Directors’ Report The board has considered the non-audit services provided during the year by the auditor and is satisﬁ ed that the provision of those non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: (cid:129) all non-audit services were subject to the corporate governance procedures adopted by the Company and have been reviewed by the board to ensure they do not impact the integrity and objectivity of the auditor; and (cid:129) the non-audit services provided do not undermine the general principles relating to auditor independence as set out in Professional Statement F1 Professional independence, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards. A copy of the auditors’ independence declaration as required under Section 307C of the Corporations Act 2001 is included in the directors’ report. Details of the amounts paid to the auditor of the Company, KPMG, and its related practices for audit and non-audit services provided during the year are set out below. Statutory audit Auditors of the Company - audit and review of ﬁ nancial reports (KPMG Australia) Services other than statutory audit - Grant audit (KPMG Australia) 2006 $ 2005 $ 17,782 15,614 4,750 3,000 Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 The lead auditor’s independence declaration is set out below and forms part of the directors’ report for the year ended 30 June 2006. This report has been signed in accordance with a resolution of the directors and dated 13 September 2006: Michael J. Hoy Chairman Michelle Miller Managing Director Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of Biotron Limited: I declare that, to the best of my knowledge and belief, in relation to the audit for the ﬁ nancial year ended 30 June 2006, there have been: (i) no contravention of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit, and (ii) no contraventions of any applicable code of professional conduct in relation to the audit. KPMG 13 September 2006 S.J. Board Partner 14 Income Statement FOR THE YEAR ENDED 30 JUNE 2006 Other income 2 794,862 621,099 Notes 2006 $ 2005 $ Administration and consultants’ expenses Depreciation Employee and director expenses Direct research and development expenses Rent and outgoings expenses Legal expenses Other expenses from ordinary activities Operating loss before ﬁ nancing income Interest income Net ﬁ nancing income Loss before tax Income tax expense Loss for the year Basic loss per share attributable to ordinary equity shareholders Diluted loss per share attributable to ordinary equity shareholders (311,452) (83,040) (514,001) (327,995) (137,662) (446,669) (1,875,449) (1,404,084) (44,649) (16,584) (248,559) (82,641) (9,894) (228,674) (2,298,872) (2,016,520) 99,899 99,899 132,945 132,945 (2,198,973) (1,883,575) - - (2,198,973) (1,883,575) (3.00) cents (2.81) cents (3.00) cents (2.81) cents 3 5 4 4 Biotron Limited Annual Report 2006 15 Statement of Recognised Income and Expenses FOR THE YEAR ENDED 30 JUNE 2006 2006 $ 2005 $ Loss for the year (2,198,973) (1,883,575) Total recognised income and expense for the year (2,198,973) (1,883,575) Other movements in equity arising from transactions with owners as owners are set out in note 12. 16 Balance Sheet AS AT 30 JUNE 2006 Current assets Cash and cash equivalents Trade and other receivables Inventories Other Total current assets Non-current assets Property, plant and equipment Other Total non-current assets Total assets Current liabilities Trade and other payables Employee entitlements Total current liabilities Total liabilities Net assets Equity Issued capital Reserves Accumulated losses Total equity Notes 2006 $ 2005 $ 6 7 8 9 8 10 11 12 13 14 4,623,586 2,112,796 4,824 21,538 19,040 45,729 38,781 6,909 4,668,988 2,204,215 142,565 2,403 144,968 4,813,956 270,788 47,320 318,108 318,108 224,393 - 224,393 2,428,608 118,440 31,438 149,878 149,878 4,495,848 2,278,730 16,865,134 12,651,368 251,076 110,850 (12,620,362) (10,483,488) 4,495,848 2,278,730 Biotron Limited Annual Report 2006 17 Statement of Cash Flows FOR THE YEAR ENDED 30 JUNE 2006 Cash ﬂ ows from operating activities Cash receipts in the course of operations Payments for research and development Cash payments in the course of operations Cash generated from operations Interest received Net cash from operating activities Cash ﬂ ows from investing activities Payments for plant and equipment Net cash from investing activities Cash ﬂ ows from ﬁ nancing activities Proceeds from issue of shares Net cash from ﬁ nancing activities Net increase/(decrease) in cash and cash equivalents held Cash and cash equivalents at the beginning of the ﬁ nancial year Notes 2006 $ 2005 $ 874,347 669,528 (2,044,239) (1,530,451) (712,608) (982,718) (1,882,500) (1,843,641) 95,076 132,946 15 (1,787,424) (1,710,695) (1,212) (1,212) (546) (546) 4,299,426 4,299,426 2,510,790 2,112,796 1,206,408 1,206,408 (504,833) 2,617,629 Cash and cash equivalents at the end of the ﬁ nancial year 15 4,623,586 2,112,796 18 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2006 1. Statement of Signiﬁ cant Accounting Policies Biotron Limited (the ‘Company’) is a company domiciled in Australia. The ﬁ nancial report was authorised for issue by the directors on 13 September 2006 Statement of compliance This general purpose ﬁ nancial report has been prepared in accordance with Australian Accounting Standards (‘AASBs’), which are called the Australian equivalents to International Financial Reporting Standards (‘AIFRSs’) and the Corporations Act 2001. This is the Company’s ﬁ rst ﬁ nancial report prepared in accordance with AIFRS and AASB 1 ‘First Time Adoption of Australian Equivalents to International Financial Reporting Standards’ has been applied. An explanation of how the transition to AIFRS has affected the reported ﬁ nancial position, ﬁ nancial performance and cash ﬂ ows of the Company is provided in note 20. Basis of preparation The ﬁ nancial report is presented in Australian dollars and is prepared on the historical cost basis. The Company has elected to early adopt the following standards and amendments: (cid:129) AASB 119 Employee Beneﬁ ts (December 2004). (cid:129) AASB 2004-3 Amendments to Australian Accounting Standards (December 2004) amending AASB 1 First time Adoption of Australian Equivalents to International Financial Reporting Standards (July 2004), AASB 101 Presentation of Financial Statements and AASB 124 Related Party Disclosures. (cid:129) AASB 2005-1 Amendments to Australian Accounting Standards (May 2005) amending AASB 139 Financial Instruments: Recognition and Measurement. (cid:129) AASB 2005-3 Amendments to Australian Accounting Standards (June 2005) amending AASB 119 Employee Beneﬁ ts (either July or December 2004). (cid:129) AASB 2005-4 Amendments to Australian Accounting Standards (June 2005) amending AASB 139 Financial Instruments: Recognition and Measurement, AASB 132 Financial Instruments: Disclosure and Presentation, AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards (July 2004). (cid:129) AASB 2005-5 Amendments to Australian Accounting Standards (June 2005) amending AASB 1 First time Adoption of Australian Equivalents to International Financial Reporting Standards (July 2004), and AASB 139 Financial Instruments: Recognition and Measurement. (cid:129) AASB 2005-6 Amendments to Australian Accounting Standards (June 2005) amending AASB 3 Business Combinations. (cid:129) AASB 2006-1 Amendments to Australian Accounting Standards (January 2006) amending AASB 121 The Effects of Changes in Foreign Exchange Rates (July 2004). (cid:129) UIG 4 Determining whether an Arrangement contains a Lease. (cid:129) UIG 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds. (cid:129) UIG 8 Scope of AASB 2. The following standards and amendments were available for early adoption but have not been applied by the consolidated entity in these ﬁ nancial statements: (cid:129) AASB 7 Financial instruments: Disclosure (August 2005) replacing the presentation requirements of ﬁ nancial instruments in AASB 132. AASB 7 is applicable for annual reporting periods beginning on or after 1 January 2007. (cid:129) AASB 2005-9 Amendments to Australian Accounting Standards (September 2005) requires that liabilities arising from the issue of ﬁ nancial guarantee contracts are recognised in the balance sheet. AASB 2005-9 is applicable for annual reporting periods beginning on or after 1 January 2006. (cid:129) AASB 2005-10 Amendments to Australian Accounting Standards (September 2005) makes consequential amendments to AASB 132 Financial Instruments: Disclosures and Presentation, AASB 101 Presentation of Financial Statements, AASB 114 Segment Reporting, AASB 117 Leases, AASB 133 Earnings per Share, AASB 139 Financial Instruments: Recognition and Measurement, AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards, AASB 4 Insurance Contracts, AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts, arising from the release of AASB 7. AASB 2005-10 is applicable for annual reporting periods beginning on or after 1 January 2007. Biotron Limited Annual Report 2006 19 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2006 Property, plant and equipment Property plant and equipment are stated at their historical cost and are depreciated over their estimated useful lives using the reducing balance method from the date of acquisition at rates between 13% and 40% per annum. Research and development Grants Where a grant is received relating to research and development costs that have been expensed, the grant is recognised as revenue when there is reasonable assurance it will be received. Costs Expenditure on research activities, undertaken with the prospect of gaining new scientiﬁ c or technical knowledge and understanding, is recognised in the income statement as an expense as incurred. Expenditure on development activities, whereby research ﬁ ndings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalised if the product or process is technically and commercially feasible and the Company has sufﬁ cient resources to complete development. Trade and other payables Trade and other payables are stated at their amortised cost, are non-interest bearing and are normally settled within 60 days. Employee entitlements Wages, salaries, annual leave and sick leave Liabilities for employee entitlements for wages, salaries, annual leave and sick leave represent present obligations resulting from employees’ services provided to reporting date, calculated at undiscounted amounts based on remuneration wages and salary rates that the company expect to pay as to reporting date including related on-cost, such as workers compensation insurance and superannuation. The Company plans to adopt AASB 7, AASB 2005-9 and AASB 2005-10 in the 2007 ﬁ nancial year. The initial application of AASB 7 and AASB 2005-10 is not expected to have an impact on the ﬁ nancial results of the Company as the standard and the amendment are concerned only with disclosures. The initial application of AASB 2005-9 could have an impact on the ﬁ nancial results of the Company as the amendment could result in liabilities being recognised for ﬁ nancial guarantee contracts that have been provided by the Company. However, the quantiﬁ cation of the impact is not known or reasonably estimable in the current ﬁ nancial year as an exercise to quantify the ﬁ nancial impact has not been undertaken by the Company to date. The preparation of a ﬁ nancial report in conformity with Australian Accounting Standards requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The accounting policies set out below have been applied consistently to all periods presented in the ﬁ nancial report and in preparing an opening AIFRS balance sheet at 1 July 2004 for the purposes of the transition to AIFRSs. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Trade and other receivables Trade and other receivables are stated at their amortised cost less impairment losses. Inventory Inventory is carried at the lower of cost and net realisable value. 20 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2006 Taxation Income tax Income tax on the proﬁ t or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for ﬁ nancial reporting purposes and the amounts used for taxation purposes. The initial recognition of assets or liabilities that affect neither accounting nor taxable proﬁ t and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future are temporary differences are not provided for. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable proﬁ ts will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax beneﬁ t will be realised. Goods and services tax Revenue, expenses and assets are recognised net of the amount of goods and services tax (‘GST’), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the balance sheet. Cash ﬂ ows are included in the statement of cash ﬂ ows on a gross basis. The GST components of cash ﬂ ows arising from investing and ﬁ nancing activities which are recoverable from, or payable to, the ATO are classiﬁ ed as operating cash ﬂ ows. Revenue recognition Interest revenue Interest revenue is recognised as it accrues using the effective interest rate method. Earnings per share Basic earnings per share are calculated by dividing the net loss of the Company by the weighted average number of ordinary shares outstanding during the ﬁ nancial year. Incentive option plan The Incentive Option Plan allows the Company’s employees or directors, or individuals whom the Plan Committee determine to be employees for the purposes of the Plan, with the opportunity to acquire options over unissued shares in the Company. The fair value of options granted is measured at grant date and spread as an expense over the period during which the employees or directors become unconditionally entitled to the options. The fair value of the options granted is measured using Black-Scholes formula, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reﬂ ect the actual number of options that vest except where forfeiture is only due to share prices not achieving the threshold for vesting. Impairment The carrying amounts of the Company’s assets, other than deferred tax assets and inventories, are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement, unless an asset has previously been revalued, in which case the impairment loss is recognised as a reversal to the extent of that previous revaluation with any excess recognised through the income statement. The recoverable amount of assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash ﬂ ows are discounted to their present value using a pre-tax discount rate that reﬂ ects current market assessments of the time value of money and the risks speciﬁ c to the asset. For an asset that does not generate largely independent cash inﬂ ows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Biotron Limited Annual Report 2006 21 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2006 2006 $ 2005 $ 2. Other Income Research and development grants 794,862 621,099 3. Loss From Operating Activities Loss from ordinary activities has been arrived at after charging the following items: Auditors’ remuneration paid to KPMG - Audit and review of ﬁ nancial reports - Other audit services Depreciation - Ofﬁ ce equipment - Plant and equipment Direct research and development expenditure expensed as incurred Provision for employee entitlements 4. Loss Per Share 17,782 4,750 6,212 76,828 15,614 3,000 11,204 126,458 1,875,449 1,404,084 15,882 729 The calculation of basic loss per share at 30 June 2006 was based on the loss attributable to ordinary shareholders of $2,198,973 (2005 - $1,883,575 loss) and a weighted average number of ordinary shares outstanding during the ﬁ nancial year ended 30 June 2006 of 73,242,769 (2005 - 67,030,455), calculated as follows: Net loss for the year Issued ordinary shares at 1 July Effect of shares issued on 31 December 2004 Effect of shares issued on 28 April 2006 2,198,973 1,883,575 2006 Number 2005 Number 69,800,550 64,055,750 - 2,974,705 3,442,219 - Weighted average number of ordinary shares 73,242,769 67,030,455 Options disclosed in the Issued Capital note below are potential ordinary shares, but are not included in the calculation of diluted loss per share as they are not dilutive. 22 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2006 2006 $ 2005 $ 5. Income Tax Expense Numerical reconciliation between tax expense and pre-tax net proﬁ t Loss before tax - continuing operations (2,198,973) (1,883,575) Income tax using the domestic corporation tax rate of 30% (659,692) (565,072) Increase in income tax expense due to: - Non-deductible expenses - Effect of tax losses not recognised Income tax expense current and deferred Deferred tax assets have not been recognised in respect of the following items: Deductible temporary differences (net) Tax losses Net 6. Receivables Current Other debtors 7. Inventories Stores - at cost 8. Other Current prepayments Non-current prepayments 1,093 658,599 - 106,218 4,203,171 839 564,233 - - 3,374,650 4,309,389 3,374,650 4,824 45,729 21,538 38,781 19,040 6,909 2,403 - Biotron Limited Annual Report 2006 23 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2006 9. Plant and Equipment Ofﬁ ce equipment - at cost Accumulated depreciation Plant and equipment - at cost Accumulated depreciation 2006 $ 2005 $ 92,985 (80,435) 12,550 892,480 (762,465) 130,015 91,773 (74,223) 17,550 892,480 (685,637) 206,843 Total plant and equipment - net book value 142,565 224,393 Reconciliations Reconciliations of the carrying amounts for each class of plant and equipment are set out below: Ofﬁ ce equipment Carrying amount at the beginning of the ﬁ nancial year Additions Depreciation 17,550 1,212 (6,212) 28,208 546 (11,204) Carrying amount at the end of the ﬁ nancial year 12,550 17,550 Plant and equipment Carrying amount at the beginning of the ﬁ nancial year Depreciation 206,843 (76,828) 333,301 (126,458) Carrying amount at the end of the ﬁ nancial year 130,015 206,843 10. Payables Current Other creditors and accruals 11. Employee Entitlements Current Employee annual leave provision Number of employees at the end of the ﬁ nancial year 24 270,788 118,440 47,320 2006 Number 8 31,438 2005 Number 10 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2006 2006 $ 2005 $ 12. Issued Capital Issued and paid up capital 89,743,565 (2005 - 69,800,550) fully paid ordinary shares 16,865,134 12,651,368 During the year ended 30 June 2006, in excess of 425 shareholders participated in a share rights issue, resulting in the allotment of 19,943,015 new fully paid ordinary shares for a net cash consideration totalling $4,213,766 after issue cost of $373,128. Effective 1 July 1998, the Company Law Review Act abolished the concept of par value shares and the concept of authorised capital. Accordingly, the Company does not have authorised capital or par value in respect of its issued shares. Holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders’ meetings. In the event of winding up of the Company, ordinary shareholders rank after creditors and are fully entitled to any proceeds of liquidation. The following options were on issue at 30 June 2006, each exercisable to acquire one fully paid ordinary share: Nil (2005 - 900,000) at $0.50 at any time up to 30 September 2005. 250,000 (2005 - 250,000) at $0.60 at any time up to 14 January 2007. 500,000 (2005 - 500,000) at $0.75 at any time up to 14 January 2007. 500,000 (2005 - 500,000) at $1.00 at any time up to 14 January 2007. 3,600,000 (2005 - nil) at $0.35 at any time up to 30 September 2010. 500,000 (2005 - nil) at $0.40 at any time from 30 September 2006 up to 30 September 2010. 500,000 (2005 - nil) at $0.45 at any time from 30 September 2007 up to 30 September 2010. During the year ended 30 June 2006, 4,600,000 options were granted at a weighted average fair value at the grant date of $0.044 per option. Included in these options are 2,600,000 options granted to directors and key executives as described in note 17 and 2,000,000 options, each exercisable to acquire one fully paid ordinary share, with an exercise price of $0.35 at any time up to 30 September 2010, which were issued to a third party in exchange for underwriting the share rights issue. The fair value of these options at grant date, $85,660, which was determined based on Black- Scholes formula, was charged against issued capital as a cost of the share rights issue. The model inputs were the share price of $0.17, expected volatility (based on historic volatility) of 50%, a nil dividend and risk-free interest rate of 5.25%. The weighted average exercise price of options was $0.62 for options outstanding at the beginning of the ﬁ nancial year, $0.37 for options issued during the ﬁ nancial year, $0.50 for options that expired during the ﬁ nancial year, $0.46 for options outstanding at the end of the ﬁ nancial year and $0.47 for options exercisable at the end of the ﬁ nancial year. 13. Reserves Equity compensation Balance at the beginning of the ﬁ nancial year Issue of options Transfer to accumulated losses on lapse of options 110,850 202,326 (62,100) 110,850 - - Balance at the end of the ﬁ nancial year 251,076 110,850 This reserve represents the fair value, at the date of issue, of options issued as compensation. Biotron Limited Annual Report 2006 25 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2006 14. Accumulated Losses Accumulated losses at the beginning of the ﬁ nancial year Transfer from reserve Net loss attributable to members of the Company 2006 $ 2005 $ 10,483,488 8,599,913 (62,100) 2,198,973 - 1,883,575 Accumulated losses at the end of the ﬁ nancial year 12,620,361 10,483,488 15. Statement of Cash Flows Reconciliation of net loss from operating activities to net cash used in operating activities Loss from operating activities after tax (2,198,973) (1,883,575) Non-cash items Depreciation of plant and equipment Provisions Equity compensation Changes in assets and liabilities Decrease in receivables Decrease in inventories (Increase)/decrease in prepayments Increase/(decrease) in payables 83,040 15,882 99,195 40,906 2,936 17,243 152,347 137,662 (729) - 19,773 25,809 (6,909) (2,726) Net cash used in operating activities (1,787,424) (1,710,695) Reconciliation of cash For the purposes of the Statement of Cash Flows, cash includes cash on hand and at bank and cash on deposit net of bank overdrafts and excluding security deposits. Cash at the end of the ﬁ nancial year as shown in the Statement of Cash Flows is reconciled to the related items in the Balance Sheet as follows: Cash 4,623,586 2,112,796 26 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2006 16. Key Management Personnnel Disclosures The following were key management personnel of the Company at any time during the reporting period: Non-executive directors Michael J. Hoy (Chairman) Michael S. Hirshorn Bruce Hundertmark Peter G. Scott Executive directors Michelle Miller (Managing Director) Peter W. Gage (deceased on 13 August 2005) Executive Peter J. Nightingale (Company Secretary) The following table provides the details of all key management personnel of the Company for the entire reporting period. Directors Non-executive Michael J. Hoy (Chairman) Michael S. Hirshorn Bruce Hundertmark Peter G. Scott Executive Michelle Miller (Managing Director) Peter W. Gage Total, all speciﬁ ed directors Executives Peter J. Nightingale (Company Secretary) Total, all speciﬁ ed executives Year 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 Primary salary and fees $ Post-employment superannuation beneﬁ ts $ Equity compensation value of options $ 60,000 60,000 30,000 30,000 30,000 30,000 5,000 19,583 155,000 150,000 5,000 70,000 285,000 359,583 60,000 60,000 60,000 60,000 5,400 5,400 2,700 2,700 2,700 2,700 27,700 13,117 25,873 13,500 450 2,700 64,823 40,117 - - - - 24,016 - 9,606 - 9,606 - - - 46,361 - - - 89,589 - 9,606 - 9,606 - Total $ 89,416 65,400 42,306 32,700 42,306 32,700 32,700 32,700 227,234 163,500 5,450 72,700 439,412 399,700 69,606 60,000 69,606 60,000 Biotron Limited Annual Report 2006 27 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2006 Options and rights over equity instruments granted as remuneration Details of relevant interests of key management personnel of the Company and their related entities in shares and options of the Company at year end are as follows: Fully paid ordinary shareholdings and transactions - 2006 Held at 1 July 2005 Purchased Received on exercise of options Sales Held at 30 June 2006 Directors Michael J. Hoy Michelle Miller Michael S. Hirshorn Bruce Hundertmark Peter G. Scott Executives 1,023,800 292,514 - - - - - - 8,573,800 321,214 Peter J. Nightingale 1,000,000 610,497 Fully paid ordinary shareholdings and transactions - 2005 - - - - - - - - - - - - 1,316,314 - - - 8,895,014 1,610,497 Held at 1 July 2004 Purchased Received on exercise of options Sales Held at 30 June 2005 Directors Michael J. Hoy Michelle Miller Peter W. Gage Michael S. Hirshorn Bruce Hundertmark Peter G. Scott Executives 1,000,000 23,800 - 9,400,000 - - - - - - 8,550,000 23,800 Peter J. Nightingale 1,000,000 - - - - - - - - - - - - - - - 1,023,800 - 9,400,000 - - 8,573,800 1,000,000 28 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2006 Option holdings - 2006 Directors Michael J. Hoy Michelle Miller Peter W. Gage Michael S. Hirshorn Bruce Hundertmark Peter G. Scott Executives Peter J. Nightingale Option holdings - 2005 Directors Michael J. Hoy Michelle Miller Peter W. Gage Michael S. Hirshorn Bruce Hundertmark Peter G. Scott Executives Peter J. Nightingale Held at 1 July 2005 Granted as remuneration Expired Held at 30 June 2006 Vested and exercisable at 30 June 2006 500,000 500,000 (500,000) 500,000 500,000 1,250,000 1,500,000 - 200,000 200,000 - - - 200,000 200,000 - 200,000 - - (200,000) (200,000) - - 2,750,000 1,750,000 - 200,000 200,000 - - 200,000 200,000 - 200,000 200,000 Held at 1 July 2004 Granted as renumeration Exercised Held at 30 June 2005 Vested and exercisable at 30 June 2005 500,000 1,250,000 - 200,000 200,000 - - - - - - - - - - - - - - - - 500,000 500,000 1,250,000 1,250,000 - 200,000 200,000 - 200,000 200,000 - - - - During the year ended 30 June 2006, key management personnel purchased 1,224,225 fully paid ordinary shares for total amount of $281,572 pursuant to the Company’s 2 for 7 Rights Issue and neither purchased nor sold any options in the Company. During the year ended 30 June 2006, Peter Gage ceased to be the director of the Company on 13 August 2005 and his holding of Company shares was transferred to the Estate of Peter Gage. During the year ended 30 June 2006, Michael J. Hoy had an interest in an entity, CityPrint Pty Limited, which provided printing services to the Company. Payments to CityPrint Pty Limited, which were in the ordinary course of business and on normal terms and conditions, amounted to $29,909 (2005 - $15,479). During the year ended 30 June 2006, Peter J. Nightingale had an interest in an entity, Mining Services Trust, which provided full administrative services, including rental accommodation, administrative staff, services and supplies, to the consolidated entity. Fees paid to Mining Services Trust during the year, which were in the ordinary course of business and on normal terms and conditions, amounted to $120,000 (2005 - $120,000). Biotron Limited Annual Report 2006 29 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2006 During the year ended 30 June 2006, Peter J. Nightingale, had an interest in an entity, Rosignol Consultants Pty Limited, which rendered ﬁ nancial and administrative services to the Company. Fees paid to Rosignol Consultants Pty Limited during the year, which were in the ordinary course of business and on normal commercial terms and conditions, amounted to $69,606 (2005 - $60,000). 17. Employee and Director Incentive Option Plan At 30 June 2006, the Company had 8 employees (2005 - 10). All other personnel are contracted by the Company on a consultancy basis. The Company has an Incentive Option Plan to provide eligible persons, being employees or directors, or individuals whom the Plan Committee determine to be employees for the purposes of the Plan, with the opportunity to acquire options over unissued ordinary shares in the Company. The number of options granted or offered under the Plan will not exceed 10% of the Company’s issued share capital and the exercise price of options will be the greater of the market value of the Company’s shares as at the date of grant of the option or such amount as the Plan Committee determines. Options have no voting or dividend rights. In the event that the employment or ofﬁ ce of the optionholder is terminated, any options which have not reached their exercise period will lapse and any options which have reached their exercise period may be exercised within three months of the date of termination of employment. Any options not exercised within this three month period will lapse. During the year ended 30 June 2006, 2,600,000 options were granted to directors and key executives. No ordinary shares have been issued as a result of the exercise of any option granted pursuant to the Incentive Option Plan. The fair value of the options at grant date, $116,666, was determined based on Black-Scholes formula. The model inputs were the share price of $0.17, expected volatility (based on historic volatility) of 50%, a nil dividend and risk-free interest rate of 5.25%. These options are not listed and accordingly have no market value at year end. The market value of the ordinary shares under option at 30 June 2006 was $0.195 (2005 - $0.13) each. The amount recognised in the ﬁ nancial statements in relation options issued during the ﬁ nancial year was $99,195 (2005 - $0). Options issued are summarised below: Number of Options Grant Date Exercise Date Expiry Date Exercise Price 30 June 2005 On Issue 30 June 2006 On Issue 30 June 2006 Vested 06/02/02 28/06/03 28/06/03 14/10/05 14/10/05 14/10/05 06/02/02 30/06/03 30/06/04 14/10/05 30/09/06 30/09/07 14/01/07 14/01/07 14/01/07 30/09/10 30/09/10 30/09/10 $0.60 $0.75 $1.00 $0.35 $0.40 $0.45 250,000 500,000 500,000 900,000 250,000 500,000 500,000 250,000 500,000 500,000 1,600,000 1,600,000 - - 500,000 500,000 - - 30 Notes to the Financial Statements FOR THE YEAR ENDED 30 JUNE 2006 18. Financial Instruments Disclosure Interest rate risk The Company’s exposure to interest rate risk and repricing periods are the effective weighted average interest rate for classes of ﬁ nancial assets and ﬁ nancial liabilities as follows: 2006 Financial assets Cash assets Receivables Financial liabilities Payables and employee beneﬁ ts 2005 Financial assets Cash assets Receivables Financial liabilities Payables and employee beneﬁ ts Note 6 10 and 11 Note 6 10 and 11 Effective interest rate % Floating interest rate 6 months or less $ Non-interest bearing $ Total $ 3.39 4,623,586 - - - - - 4,824 4,623,586 61,706 318,108 310,595 Effective interest rate % Floating interest rate 6 months or less $ Non-interest bearing $ Total $ 4.38 2,112,796 - 2,112,796 - - - - 45,729 45,729 149,879 149,879 Credit risk exposure The credit risk exposure on ﬁ nancial assets of the Company which have been recognised in the balance sheet is the carrying amount, net of any impairment loss. Credit risk on cash assets is minimised by dealing with Australian regulated banks. Net fair values of ﬁ nancial assets and liabilities The carrying amounts of ﬁ nancial assets and liabilities approximate their net fair values given the variable interest rates and/or short term to maturity. 19. Financial Reporting by Segments The Company operates in the biotechnology industry in Australia. 20. Impact of Adopting Australian Equivalents to International Financial Reporting Standards As stated in note 1, these are the Company’s ﬁ rst annual ﬁ nancial Statements prepared in accordance with Australian Accounting Standards – AIFRS. The accounting policies in note 1 have been applied in preparing the ﬁ nancial statements for the year ended 30 June 2006, the comparative information for the year ended 30 June 2005, and the preparation of an opening AIFRS balance sheet at 1 July 2004 (the Company’s date of transition). The transition to AIFRS has no material impact on the Company’s ﬁ nancial position, ﬁ nancial performance or cash ﬂ ows; hence the consolidated entity has made no adjustments to amounts reported previously in ﬁ nancial statements prepared in accordance with its previous basis of accounting (previous GAAP). Biotron Limited Annual Report 2006 31 Directors’ Declaration Directors’ Declaration In the opinion of the directors of Biotron Limited: (a) the ﬁ nancial statements and notes thereto, set out on pages 15 to 31, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the ﬁ nancial position of the Company as at 30 June 2006 and of its performance, as represented by the results of its operations and cash ﬂ ows for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. (c) The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the chief executive ofﬁ cer and chief ﬁ nancial ofﬁ cer for the ﬁ nancial year ended 30 June 2006. This report has been signed in accordance with a resolution of the directors and is dated 13 September 2006: Michael J. Hoy Chairman Michelle Miller Managing Director 32 Independent Audit Report We formed our audit opinion on the basis of these procedures, which included: (cid:129) examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the ﬁ nancial report, and (cid:129) assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of signiﬁ cant accounting estimates made by the directors. While we considered the effectiveness of management’s internal controls over ﬁ nancial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls. Audit opinion In our opinion, the ﬁ nancial report of Biotron Limited is in accordance with: (a) the Corporations Act 2001, including: (i) giving a true and fair view of the Company’s ﬁ nancial position as at 30 June 2006 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards the Corporations Regulations 2001; and (b) other mandatory ﬁ nancial reporting requirements in Australia. KPMG 13 September 2006 S.J. Board Partner Independent Audit Report to the Members of Biotron Limited Scope The ﬁ nancial report and directors’ responsibility The ﬁ nancial report comprises the income statement, balance sheet, statement of recognised income and expense, statement of cash ﬂ ows, accompanying notes 1 to 20 to the ﬁ nancial statements, and the directors’ declaration for Biotron Limited for the year ended 30 June 2006. The directors of the Company are responsible for the preparation and true and fair presentation of the ﬁ nancial report in accordance with the Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the ﬁ nancial report. The directors are also responsible for preparing the relevant reconciling information regarding the adjustments as required under the Australian Accounting Standard AASB 1 “First- time Adoption of Australian equivalents to International Financial Reporting Standards”. Audit approach We conducted an independent audit in order to express an opinion to the members of the Company. Our audit was conducted in accordance with Australian Auditing Standards in order to provide reasonable assurance as to whether the ﬁ nancial report is free of material misstatement. The nature of an audit is inﬂ uenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected. We performed procedures to assess whether in all material respects the ﬁ nancial report presents fairly, in accordance with the Corporations Act 2001, Australian Accounting Standards and other mandatory ﬁ nancial reporting requirements in Australia, a view which is consistent with our understanding of the Company’s ﬁ nancial position, and of its performance as represented by the results of its operations and cash ﬂ ows. Biotron Limited Annual Report 2006 33 Additional Stock Exchange Information Additional Stock Exchange Information Home Exchange The Company is listed on the Australian Stock Exchange Limited. The home exchange is Sydney. Use of Cash and Assets Since the Company’s listing on the Australian Stock Exchange, the Company has used its cash and assets in a way consistent with its stated business objectives. Class of Shares and Voting Rights There is only one class of shares in the Company, fully paid ordinary shares. The rights attaching to shares in the Company are set out in the Company’s Constitution. The following is a summary of the principal rights of the holders of shares in the Company. Every holder of shares present in person or by proxy, attorney or representative at a meeting of shareholders has one vote on a vote taken by a show of hands, and, on a poll every holder of shares who is present in person or by proxy, attorney or representative has one vote for every fully paid share registered in the shareholder’s name on the Company’s share register. A poll may be demanded by the chairperson of the meeting, by at least 5 shareholders entitled to vote on the resolution or shareholders with at least 5% of the votes that may be cast on the resolution on a poll. Substantial Shareholders As at the date of the Directors’ Report, the Register of Substantial Shareholders showed the following: Estate Late Peter Gage Rigi Investment Pty Ltd Peter G. Scott Gail S. Scott 9,200,000 fully paid ordinary shares 4,380,145 fully paid ordinary shares 4,250,000 fully paid ordinary shares 4,249,550 fully paid ordinary shares Australian National University 4,216,222 fully paid ordinary shares Distribution of Equity Securityholders As at 31 August 2006, the distribution of each class of equity was as follows: Range 1- 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Fully Paid Ordinary Shares 14 January 2007 $0.60 Options 14 January 2007 $0.75 Options 14 January 2007 $1.00 Options 30 September 2010 $0.35 Options 53 487 360 581 114 1,595 - - - - 1 1 - - - - 1 1 - - - - 1 1 6 6 At 31 August 2006, 179 shareholders held less than a marketable parcel of 2,326 shares. Lost Ark Nominees Pty Limited No 99 A/c is the holder of 2,000,000 30 September 2010 $0.35 options. 34 Additional Stock Exchange Information Twenty Largest Quoted Shareholders At 31 August 2006 the twenty largest fully paid ordinary shareholders held 48.27% of fully paid ordinary as follows: Name Estate Late Peter Gage Rigi Investments Pty Ltd Peter Scott Gail Scott Australian National University Angela Dulhunty Chris and Bhama Parish Philip and Marylyn Board Bray Chan Michael John Hoy Merrill Lynch (Australia) Nominees Pty Ltd Berndale A/c Peter Nightingale Jey Investments Pty Ltd Lost Ark Nominees Pty Ltd MYA Super A/c ANZ Nominees Limited Cash Income A/c CBDF Pty Ltd Canberra Bus Dev Fund A/c Forbar Custodians Limited UOB Kay Hian Pte Ltd Clients A/c Shano Developments Pty Ltd Chiﬂ ey Portfolios Pty Ltd D&P Hannon Retirement A/c 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 There are no current on-market buy-backs. Fully Paid Ordinary Shares 9,200,000 4,380,145 4,250,000 4,249,550 4,124,700 2,400,000 2,100,000 1,799,950 1,400,000 1,316,314 1,206,159 1,175,714 849,656 842,319 826,294 737,743 676,286 642,857 570,000 561,546 % 10.25 4.88 4.74 4.74 4.60 2.67 2.34 2.01 1.56 1.47 1.34 1.31 0.95 0.94 0.91 0.82 0.75 0.72 0.64 0.63 Biotron Limited Annual Report 2006 35 Corporate Directory Directors: Mr Michael J. Hoy (Chairman) Dr Michelle Miller (Managing Director) Dr Michael S. Hirshorn Mr Bruce Hundertmark Mr Peter G. Scott Company Secretary: Mr Peter J. Nightingale Registered Ofﬁ ce: Level 8, 261 George Street SYDNEY NSW 2000 Phone: 61-2 9247 8212 Fax: 61-2 9247 3932 E-mail: enquiries@biotron.com.au Homepage: www.biotron.com.au Share Registrar: Computershare Investor Services Pty Limited PO Box 523 BRISBANE QLD 4001 Phone: 61-7 3237 2100 Fax: 61-7 3229 9860 Auditors: KPMG Level 30, Central Plaza One 345 Queen Street BRISBANE QLD 4000 Home Exchange: Australian Stock Exchange Limited 20 Bridge Street SYDNEY NSW 2000 Solicitors: Minter Ellison 88 Phillip Street SYDNEY NSW 2000 Biotron Limited, incorporated and domiciled in Australia, is a publicly listed company limited by shares. 36 CONTENTS Chairman’s Report Operating and Financial Review Statement of Corporate Governance Directors’ Report Income Statement Statement of Recognised Income and Expenses Balance Sheet Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Audit Report Additional Stock Exchange Information Corporate Directory 1 2 – 6 7 – 8 9 – 14 15 16 17 18 19 – 31 32 33 34 – 35 36 Biotron Limited ABN 60 086 399 144 Biotron Limited ABN 60 086 399 144 Biotron Limited Annual Report 2006 Level 8, 261 George Street Sydney NSW 2000 Tel: (61-2) 9247 8212 Fax: (61-2) 9247 3932 E-mail: pnightingale@biotron.com.au Website: www.biotron.com.au NOTICE OF ANNUAL GENERAL MEETING Notice is hereby given that the Annual General Meeting of members is to be convened at Level 15, 37 York Street, Sydney, NSW, 2000 on 20 October 2006 at 9.00 am. AGENDA ORDINARY BUSINESS To receive and consider the Company's annual financial report, the directors' report and the auditors' report for the year ended 30 June 2006. To consider and, if thought fit, pass the following resolutions, with or without amendment: Resolution 1. 'That the Remuneration Report for the year ended 30 June 2006 be and is hereby adopted.' Resolution 2. 'That Mr Michael J. Hoy be and is hereby re-elected as a Director.' Resolution 3. 'That Mr Michael S. Hirshorn be and is hereby re-elected as a Director.' Resolution 4. 'That the Biotron Incentive Option Plan is approved for the purposes of ASX Listing Rule 7.2, Exception 9.' To transact any other business that may be brought forward in accordance with the Company's Constitution. By order of the Board Peter J. Nightingale Company Secretary 18 September 2006 Notes: The Company has determined, in accordance with regulation 7.11.37 of the Corporations Regulations 2001 (Cth), that the Company's shares quoted on the Australian Stock Exchange Limited at 7.00 pm Sydney time on 18 October 2006 are taken, for the purposes of the Annual General Meeting to be held by the persons who held them at that time. Accordingly, those persons are entitled to attend and vote (if not excluded) at the meeting. Voting Exclusion Statement The Company will disregard any votes cast on Resolution 4 by: • • any Directors of the Company; and any associates of those persons. However, the Company need not disregard a vote if: • • it is cast by a person as proxy for a person who is entitled to vote, in accordance with the directions on the proxy form; or it is cast by the person chairing the meeting as proxy for a person who is entitled to vote, in accordance with a direction on the proxy form to vote as the proxy decides. pjn3608 2 Level 8, 261 George Street Sydney NSW 2000 Tel: (61-2) 9247 8212 Fax: (61-2) 9247 3932 E-mail: pnightingale@biotron.com.au Website: www.biotron.com.au EXPLANATORY MEMORANDUM This is the Explanatory Memorandum Notice referred to in the Notice of Annual General Meeting of Biotron Limited to be convened at Level 15, 37 York Street, Sydney, NSW, 2000 on 20 October 2006 at 9.00 am. Resolution 1 Adoption of the Remuneration Report The Remuneration Report, which can be found on page 12 of the Company's 2006 Annual Report, contains certain prescribed details, sets out the policy adopted by the Board of Directors and discloses the payments to key management personnel, Directors and senior executives. In accordance with section 250R of the Corporations Act, a resolution that the Remuneration Report be adopted must be put to the vote. The resolution is advisory only and does not bind Directors. Resolution 2 Re-election of Michael J. Hoy as a Director In accordance with Article 58 of the Company's Constitution and the Corporations Law, Michael J. Hoy retires as a Director by rotation and, being eligible, offers himself for re-election. Resolution 3 Re-election of Michael S. Hirshorn as a Director In accordance with Article 58 of the Company's Constitution and the Corporations Law, Michael S. Hirshorn retires as a Director by rotation and, being eligible, offers himself for re-election. Resolution 4. Approval of the Biotron Incentive Option Plan for the purposes of ASX Listing Rule 7.2 Exception 9 The Biotron Incentive Option Plan ('Plan') has been in existence since before the listing of the Company on the ASX. The terms of the Plan were disclosed in the Company's prospectus. The purpose of this resolution is to refresh the shareholder's approval of the Plan. ASX Listing Rule 7.2 Exception 9(b) provides that ASX Listing Rule 7.1, which prohibits the Company issuing equity securities which in aggregate exceed 15% of the fully paid ordinary share capital of the Company in a 12 month period, does not apply in respect of the issue of securities by the Company under an employee incentive scheme if, within 3 years before the date of issue of the securities, the shareholders of the Company have approved the issue of securities under the plan. The options which may be granted under the Plan will form part of eligible directors' and employees' remuneration packages and are intended to provide an incentive to those eligible directors and employees and to recognise their contribution to the Company's success. The Directors consider that the incentive represented by these options is a cost effective and efficient incentive offered by the Company when compared with alternative forms of incentive such as cash bonuses or increased remuneration. From the inception of the Plan, a total of 3,650,000 options have been granted under the Plan and 2,400,000 of these options expired unexercised. A summary of the terms of the Plan is set out in Attachment A. The Company will disregard any votes cast on Resolution 4 by: • • any Directors of the Company; and any associates of those persons. However, the Company need not disregard a vote if: • • it is cast by a person as proxy for a person who is entitled to vote, in accordance with the directions on the proxy form; or it is cast by the person chairing the meeting as proxy for a person who is entitled to vote, in accordance with a direction on the proxy form to vote as the proxy decides. Summary of the Terms of the Biotron Incentive Option Plan Attachment A The Biotron Incentive Option Plan ('Plan') is to provide an employee or a director of Biotron Limited ('Biotron'), or an individual who at any time in the previous 6 months would have been an employee or a director ('Eligible Persons') with the opportunity to acquire an option to subscribe for a share in the capital of Biotron ('Option') in accordance with the rules of the Plan ('Rules'). The Rules are to be interpreted subject to the Company’s constitution, the ASX Listing Rules, the Corporations Act and any other applicable laws. The number of Options granted or offered under the Plan, or any other employee share or option scheme of Biotron, will not exceed 10% of Biotron's issued share capital. Subject to the Rules, the Board of Biotron or any committee of the Board to which power to administer the Plan has been delegated ('Plan Committee') may from time to time make an offer of Options to any Eligible Person. The Options are exercisable during the period: (a) (b) commencing, unless otherwise specified in an offer, on the earlier of: (i) (ii) the date which is 1 year from the date of the grant; and the date of termination (other than by way of redundancy) or death or permanent disablement ('Special Circumstances') of the Option holder; and ending, unless otherwise specified in an offer, the date which is 5 years from the date of the grant or, if Special Circumstances arise in respect of the Option holder, then the date which is 8 months after such Special Circumstances arise. The exercise price in respect of an Option ('Exercise Price) will be an amount equal to the greater of: (a) (b) the market value of a share as at the date of grant of that Option (as determined in a reasonable manner by the Plan Committee): or such amount as the Plan Committee determines before or at the time of the grant of the Option. An Eligible Person may accept the invitation constituted by an offer by giving to Biotron an application form within the period specified in the offer. An offer not accepted accordingly will lapse unless the Plan Committee determines otherwise. Subject to the Rules, each Option confers on its holder the entitlement to subscribe for and be issued one fully paid ordinary share ('Share') at the Exercise Price. Subject to these Rules and the Listing Rules, Biotron must issue a Share on exercise of an Option. Shares issued on the exercise of Options will rank equally with all existing Shares on and from the date of issue in respect of all rights issues, bonus share issues and dividends which have a record date for determining entitlements on or after the date of issue of those Shares. Biotron is not obliged to issue any Shares on exercise of any Options until a cheque received in payment of the Exercise Price has been honoured on presentation. Subject to the Corporations Act and the ASX Listing Rules, Options held by an Option holder are personal to him or her and may not be transferred to or exercised by any other person. Options granted under the Plan will lapse on the earlier of: (a) (b) (c) (i) (ii) (i) (ii) unless otherwise specified in an offer, the date which is 5 years from the date of grant of Options to that Option holder; a determination of the Plan Committee that an Option holder: has been dismissed or removed from office for a reason which entitles Biotron or its group companies to dismiss that person without notice or where that person has committed an act of fraud, defalcation or gross misconduct in relation to the affairs of that body corporate; or has done any act which brings Biotron or its group companies into disrepute; unless otherwise determined by the Plan Committee, upon termination of employment: three months after the date of termination if the Options have reached their exercise period; or the date of termination if the Options have not reached their exercise period. Biotron will not seek official quotation of any Options. Biotron must apply to the ASX for quotation of Shares issued on exercise of Options if other Shares of Biotron are officially quoted by ASX at that time. Level 8, 261 George Street Sydney NSW 2000 Tel: (61-2) 9247 8212 Fax: (61-2) 9247 3932 E-mail: pnightingale@biotron.com.au Website: www.biotron.com.au FORM OF PROXY I/we . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . being a member/members of Biotron Limited HEREBY APPOINT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . or failing him, the Chairman of the Meeting, as my/our Proxy to vote for me/us and on my/our behalf at the Annual General Meeting of Members of the Company to be held at 9.00 am on 20 October 2006 and at any adjournment thereof. The Proxy is directed by me/us to vote as indicated by the marks in the appropriate boxes below: RESOLUTION 1. Adoption of the Remuneration Report 2. Re-election of Michael J. Hoy as a Director 3. Re-election of Michael S. Hirshorn as a Director 4. Approval of the Biotron Incentive Option Plan FOR □ □ □ □ AGAINST □ □ □ □ ABSTAIN □ □ □ □ If no directions are given, the Proxy may vote as the Proxy thinks fit or may abstain. If you do not wish to direct your Proxy how to vote, please place a mark in the box: By marking this box, you acknowledge that the Chairman may exercise your proxy even if he has an interest in the outcome of the resolution and votes cast by him other than as proxy holder will be disregarded because of that interest. The Chairman intends to vote undirected proxies in favour of each item. □ Dated this . . . . . . day of . . . . . . . . . . . . . . . . . . . . . . 2006 Signatures of Member(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . THE COMMON SEAL of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A.C.N. . . . . . . . . . . . . . . . . . . . . was hereunto affixed in accordance with its Constitution in the presence of: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director Secretary PROXY INSTRUCTIONS A member entitled to attend and vote is entitled to appoint not more than 2 proxies. 1. 2. Where more than 1 proxy is appointed, each proxy must be appointment to represent a specified proportion of the 3. 4. 5. 6. 7. 8. 9. member's voting rights. A proxy need not be a member. Companies must sign under seal. All joint holders must sign. All executors of deceased estates must sign. The Company will disregard any votes cast on each of Resolution 4 by: • • any Directors of the Company; and any associates of those persons. However, the Company need not disregard a vote if: • • it is cast by a person as proxy for a person who is entitled to vote, in accordance with the directions on the proxy form; or it is cast by the person chairing the meeting as proxy for a person who is entitled to vote, in accordance with a direction on the proxy form to vote as the proxy decides. The Company has determined, in accordance with regulation 7.11.37 of the Corporations Regulations 2001 (Cth), that the Company's shares quoted on the Australian Stock Exchange Limited at 7.00 pm Sydney time on 18 October 2006 are taken, for the purposes of the Annual General Meeting to be held by the persons who held them at that time. Accordingly, those persons are entitled to attend and vote (if not excluded) at the meeting. Proxy forms must be received at the Company's registered office, Level 8, 261 George Street, Sydney, NSW, 2000, or by facsimile on (61-2) 9247 3932, not less than 48 hours before the time appointed for holding the meeting. pjn3608

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