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2023 Reportintegrated research Integrated Research Limited > ABN 76 003 588 449 Annual Report 2008 Performance monitoring software for business-critical systems Contents 2008 Highlights Letter from the Chairman Chief Executive Officer’s Report Review of operations and activities Directors and Senior Management Directors’ Report Remuneration Report Corporate Governance Statement Financial Report Notes to the financial statements Directors’ Declaration Independent Audit Report Lead Auditor’s independence declaration ASX additional Information Corporate Directory This report is printed on Envirocare 100% Recycled paper, which is made entirely from waste paper (65% post consumer and 35% pre consumer waste) with no virgin fibre used reducing land fill and is Elemental Chlorine free. 1 2 8 10 14 20 26 35 45 50 85 86 88 89 91 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 2008 Highlights Financial summary: In millions of AUD (except earnings per share) Year ended 30 June Revenue from licence fees Total revenue Net profit after tax Net assets Cash at balance date Americas revenue Europe revenue Asia Pacific revenue 2008 19.6 37.4 5.8 23.8 11.1 23.1 6.4 7.4 Earnings per share (cents per share) 3.47¢ 3.27¢ 2007 % Change 19.5 36.4 5.4 24.2 11.7 21.7 7.0 7.2 1% 3% 6% 2% 5% 6% 9% 3% 6% Total revenue (Dollars in millons) Net profit after tax (Dollars in millons) $37.4 $36.4 $34.5 $7.0 $5.8 $5.4 Revenue from licence fees (Dollars in millons) $19.5 $19.6 $18.6 2006 2007 2008 2006 2007 2008 2006 2007 2008 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 1 Letter from the chairman Dear fellow shareholders, I am pleased to report that, due mainly to a strong first half result, we experienced growth in both revenue and profit in the 2008 financial year. This is despite tough market conditions created by the global liquidity crisis. Profits after tax increased 6% over the previous financial year to $5.8 million. Total revenue for the company increased 3% over the prior year to $37.4 million. Growth in revenue and profit would have been substantially higher except for the relative strength of the Australian dollar against both the US dollar and the UK Pound Sterling. The Company’s currency hedging efforts during the course of the year partially offset the impact of the rising Australian dollar, however underlying revenue growth would have increased by approximately $3.9 million and after tax profits by approximately $1.8 million after taking into account the impact of currency exchange rates over the prior year. Our traditional HP NonStop management market remained buoyant this year, and the strategy of promoting our other server management products into the existing HP NonStop customer base has proved successful, with an increase in revenue of 90%. Revenues from these Windows, UNIX and Linux management products were assisted by the decision of a major US credit card provider to standardize on PROGNOSIS. We will continue to cross-sell from our HP NonStop base and expect to have continued success into the future. The IP telephony sales performance remains fragmented. We are, however, committed to maintaining and developing market leadership with our IP telephony products. The company achieved mixed success in the 2008 financial year: the IP telephony segment saw revenues grow in the US, but decline in Asia Pacific and Europe. This left the overall result relatively flat in comparison to the prior year. The addition of PROGNOSIS support for Avaya and Nortel IP telephony platforms provides us with a strong base to grow our IP telephony revenues and market share in the 2009 financial year. Our support for the three largest IP telephony vendors now allows us to position PROGNOSIS strongly as a holistic, multi-vendor solution. As a result, we expect to engage more distribution partners, and to more effectively target large enterprise IP telephony deployments to broaden our market penetration. 2 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 The addition of PROGNOSIS support for Avaya and Nortel IP telephony platforms provides us with a strong base to grow our IP telephony revenues and market share in the 2009 financial year. During the 2008 financial year we invested heavily in R&D to promote innovation and drive new product development and revenue growth. We will energetically seek to reap the reward from this investment and continue well-targeted R&D investment in the coming years. Despite adverse economic conditions, the underlying business and strategic direction of the company remain robust. Our strong balance sheet leaves the company well positioned for the future. The Board is pleased to announce a final dividend of 1.5 cents per share, unfranked, bringing the total unfranked dividend for the year to 3.0 cents per share, which is unchanged from the prior year. Thank you for your continued support. Steve Killelea Chairman Our traditional HP NonStop management market remained buoyant this year, and the strategy of promoting our other server management products into the existing HP NonStop customer base has proved successful, with an increase in revenue of 90%. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 3 PROGNOSIS for IP telephony VoIP for big business... how do you manage that? By giving companies the specialised tools they need to monitor and measure call quality, and to identify and resolve problems within the supporting computer-based infrastructure, PROGNOSIS is helping big businesses eliminate the risk of migrating to Voice over IP (VoIP). “As more organisations adopt larger scale deployments, the ability for PROGNOSIS to manage highly distributed or very large environments will position the company as leading vendor for a variety of deployment sizes” George Hamilton, Director, Yankee Group Customers include >> AT&T > Accenture > Airbus > Alpha West/Optus > ARUP > BAE Systems > BellSouth > Brigham Young University > British Airways > British Telecom > Del Monte > Dimension Data > Equant > Fannie Mae > France Telecom > General Motors > IBM > HSBC > Intel > NASDAQ > NCR > Salesforce.com > Singapore Polytechnic > Sprint > Standard Life > State of Arizona > TD Financial Corp. > Tecnologico de Monterey > Thiess > Time Warner Cable > Touchbase > Verizon > T-Systems 4 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 PROGNOSIS for ATM/POS Why do the world’s financial institutions bank on PROGNOSIS? From retail EFTPOS systems to automated teller machine networks, PROGNOSIS gives IT support teams the insight they need to identify and fix transaction problems, to uncover the details of cardholder issues in seconds, and to better manage ATM maintenance processes. “When cardholders present their cards for payment, they expect them to work every time. PROGNOSIS helps us deliver that level of performance to our clients and their customers.” Phillip Patrick, Director of Technical Support, TSYS Customers include >> ANZ Bank > Arab National Bank > Bankserv South Africa > BNI Bank Indonesia > Burgan Bank Kuwait > Citibank > Emirates Bank UAE > Fiserv > Global Trust Bank India > HDFC Bank > ICICI Bank India > Kmart > KNET Kuwait > Kotak Mahindra Bank > Kuwait Finance House > Link UK > MasterCard > Qatar Central Bank > Royal Bank of Canada > Standard Bank South Africa > Target > Walgreens > Washington Mutual > Westpac Bank INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 5 PROGNOSIS for IT Infrastructure Ensuring the health of critical computer systems... it’s in our DNA When computer systems perform poorly it can either be a small inconvenience, a matter of life and death, or financial ruin. PROGNOSIS offers hospitals and healthcare providers, stock exchanges and insurers, power companies and telcos the tools they need to monitor, diagnose and troubleshoot critical computer systems that simply must keep running. “The real benefit for us is the ability to deliver services to our patients and physicians as promised... even a short delay in returning test results to a physician or availing prescribed medication to a patient could have serious repercussions.” Barbara Baldwin, CIO, University of Virginia’s Medical Center Customers include >> AstraZeneca > AT&T > BT Syntegra > Bank of Tokyo > Bank Verlag > Charles Schwab > E-Funds > Exxon > France Telecom > First Data International > GE Healthcare (IDX) > Henry Ford Health Systems > Mayo Clinic > Mercy Health Plans > MasterCard > NASDAQ > Royal Bank of Canada > Optus > Sabre Systems > South Western Bell > SK Telecom > Sprint > Sungard > Toronto Stock Exchange > University of Virginia Health > Verizon > Vodacom 6 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 PROGNOSIS for Web Applications How can travel agencies know if their customers are able to book online? While we’re all becoming more reliant on the internet for booking flights and accommodation, for conducting internet banking, or for online shopping, we’re quick to give up on a website that’s slow or simply doesn’t work. By measuring the quality of user experience, PROGNOSIS offers organisations unique insight into how well their revenue generating web-based applications are functioning for their customers. “This is an innovative approach to measuring quality of service for online customers...another fine example of this company’s ability to leverage its expertise in business-critical technology.” Senator Stephen Conroy, Australian Shadow Minister for Communications and Information Technology Customers include >> Duetsche Telecom > Swiss Federal Department of Justice and Police > GE Healthcare (IDX) > Minneapolis Public Housing Authority > Sungard Financial Services INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 7 Chief Executive Officer’s Report Dear shareholders, I am pleased to report a solid result for you in my first year as CEO of Integrated Research. It has been a year characterised by change and challenge and one in which the resilience and innovative spirit of our business was tested. Foremost amongst these challenges was the strength of the Australian dollar. With the majority of our revenue being derived offshore in foreign currency, the strong Australian dollar reduced the value of nearly every sale relative to last year. Despite this however, we managed to increase revenue and profit – and deliver a strong profit margin – for a number of reasons: > > > Our largest region, the Americas, grew sales by 21%. 44% of our revenue was derived from maintenance fees that continue to provide a strong recurring revenue foundation. Our products show clear differentiation and value against major competitors, evidenced by the number of large, enterprise deals closed in the year. Our wins against major competitors are particularly satisfying and demonstrate our advantage in our key markets. This advantage continues to be the unique architecture of our product, PROGNOSIS, and its ability to capture deeper, more meaningful data from mission critical systems and applications in real time. The real time capabilities of PROGNOSIS address the growing need in businesses to operate constantly and consistently for their customers. Companies that connect to their customers via the internet, that operate 24x7 and that rely on split-second operation, all rely on real-time performance management. IP Telephony and Unified Communications are the ‘ultimate’ real-time computing applications. Voice and video must operate in real time to be effective. Process and productivity demands are driving businesses to IP Telephony – directly or with managed services vendors – and we are well positioned in both these segments to benefit from this trend. 8 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Our wins against major competitors are particularly satisfying and demonstrate our advantage in our key markets. This market however continues to develop and our IPT sales this year were below our expectations. We are confident in the market though, and are investing in sales coverage, channels and capability for growth in FY09. Overall though, we only see an increasing need from businesses for real-time management of their critical systems, so we will continue to invest in the development and sale of all of our products to benefit from this. I am encouraged by the demand for our products and although we anticipate further turbulence in global markets there is adequate opportunity for growth for Integrated Research. I would like to thank our management team and hardworking staff for the results achieved in a difficult year and pass on their thanks to you for your continued support. Mark Brayan CEO The real time capabilities of PROGNOSIS address the growing need in businesses to operate constantly and consistently for their customers. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 9 Review of operations and activities Principal activities The company’s principal activities during the year were the design, development and sale of systems and applications management computer software for business-critical computing and IP telephony networks. There were no significant changes in the nature of these activities during the year. Group overview Integrated Research has a twenty-year heritage of providing performance monitoring and diagnostics software solutions for business-critical computing environments. Since its establishment in 1988, the company has provided its core PROGNOSIS products to a cross section of large organisations requiring high levels of computing performance and reliability. The PROGNOSIS product range is an integrated suite of monitoring and management software, designed to give an organisation’s technical personnel operational insight into their HP NonStop, Windows, UNIX and Linux servers, and the business applications that run on these computers. Typical business environments where PROGNOSIS is used include automated teller machine (ATM) and Point Of Sale (POS) transaction systems, web applications such as online banking or online shopping, hospital systems, emergency services, stock trading applications, and telecommunications systems. PROGNOSIS also offers a suite of IP telephony performance monitoring products for the emerging, high-growth enterprise Voice over IP (VoIP) market. The company has developed its PROGNOSIS products around a fault-tolerant, highly distributed software architecture, designed to achieve high levels of functionality, scalability and reliability with a low total cost of ownership. Integrated Research services customers in more than 50 countries through direct sales offices in the USA, UK, Germany and Australia, and via a global, channel-driven distribution network. The company’s customer base consists of many of the world’s largest organisations and includes major stock exchanges, banks, credit card companies, telecommunications companies, computer companies and hospitals. The company generates most of its revenue from upfront licence fees, recurring maintenance and recurring licence fees. 10 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Revenue in 2008 was impacted by a strong Australian dollar, particularly in the second half of the financial year. In US dollar terms total revenue grew by 14%. Review and results of operations Revenue The Company achieved a 6% increase in net profit Revenue for the year was $37.4 million, an increase after tax over the previous financial year to $5.8 of 3% over 2007. Licence fees made up 52% of million. Total revenue for the Company increased revenue, increased by 1% whilst maintenance fees 3% over the prior year to $37.4 million. The financial increased by 3%. performance of the Company was impaired by a strong Australian dollar and difficult trading conditions in the second half created by the global liquidity crisis. The Company continued its strong commitment to research and development by increasing its net expenditure by 37% to $8.7 million over the Revenue in 2008 was impacted by a strong Australian dollar. In US dollar terms total revenue grew by 14%. Both the Americas and Asia Pacific regions recorded growth on the prior year of 6% and 3% respectively. Revenue in Europe declined by 9% over the prior year. equivalent prior year. New products were released The Windows, Unix and Linux products performed during the year and further innovative developments strongly in 2008. The Company achieved 90% are in the pipeline to respond to customer needs growth over the equivalent prior year as key strategic and market demands. accounts were won against much larger competitors on the quality and capabilities of PROGNOSIS and proved the value of PROGNOSIS in high performance environments. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 11 Review of operations and activities Expenses Total expenses for the year were $30.2 million, an increase of 3% over the prior year. Staff numbers increased from 134 at 30 June 2007 to 147 at 30 June 2008. Gross spending on research and development for the year ended 30 June 2008 was $10.1 million which represents a 29% increase over the prior year. Amortisation expense increased by 47% to $5.9 million following the release of new products toward the end of calendar year 2007. Net research and development expenses were $8.7 million, representing 23% of revenue, and are made up of: In thousands of AUD Gross research and development spending Capitalisation of development expenses Amortisation of capitalised expenses Net research and development expenses 2008 10,098 (7,255) 5,874 8,717 2007 7,831 (5,454) 3,992 6,369 Shareholder returns Returns to shareholders increased through the payment of unfranked dividends: Net profit Basic EPS Dividends per share Return on equity 2008 2007 2006 $5,776,000 $5,433,000 $6,975,000 3.47¢ 3.0¢ 24.3% 3.27¢ 3.0¢ 22.5% 4.22¢ 2.5¢ 30.1% 12 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Financial position The consolidated entity continues to hold a strong financial position being free of debt and with cash at 30 June 2008 of $11.1 million, compared to $11.7 million at the same time last year. Net cash flow provided by operating activities was $5.9 million, compared to $7.6 million for the same period last year. Net cash flow provided by operating activities $5,946,000 $7,638,000 $5,085,000 Current ratio (current assets to current liabilities) Net tangible asset backing per ordinary share 1.85 6.69¢ 1.86 7.85¢ 1.95 8.27¢ 2008 2007 2006 Outlook and Strategy for 2009 The company’s products continue to deliver value for our customers by supporting the performance management of their mission-critical, high availability computing environments. Our traditional (HP NonStop) business remains healthy. Many of our customers continue buying and upgrading their HP Servers for more processing capacity which in turn drives PROGNOSIS sales. The Windows, Unix and Linux products performed strongly in 2008. The Company achieved 90% growth over the equivalent prior year as key strategic accounts were won against much larger competitors on the quality and capabilities of PROGNOSIS and proved the value of PROGNOSIS in high performance environments. We will continue to focus our efforts in this market on similar opportunities and are planning for comparable sales in 2009. Our IP Telephony product’s growth profile continues in spurts due to the lumpiness of sales. Whilst current year performance was relatively flat compared to the prior year, compound annual growth in new sales for the last four years remains at a healthy 44%. We have increased our IPT product lines with the addition of support for the Nortel platform and have other initiatives in the pipeline. IPT remains the growth opportunity for Integrated Research and additional sales investment in 2009 will drive growth. We will continue to improve our critical operational processes for sales and software development, the latter of which drove greater innovation in 2008 than previous years. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 13 Directors Steve Killelea MAICD Non-Executive Director and Chairman Mark Brayan MBA Managing Director and Chief Executive Officer Clyde McConaghy B.Bus., MBA, MAICD, MIOD - UK Non-Executive Director Steve founded Integrated Research in August 1988 and held the position of Managing Director and Chief Executive Officer until retiring from his executive position in November 2004. He was appointed as a Non-Executive Director in November 2004 and elected Chairman in July 2005. Steve’s current term will expire no later than the close of the 2010 Annual General Meeting. Former listed companies directorships held in the past three years: None. Age 59 years. Clyde was appointed a Director in December 2007. He has two decades of international strategic market development experience in the technology, media and online industries. Mr McConaghy is managing director of Smarter Capital Pty Limited, another company associated with Mr Steve Killelea, Chairman of Integrated Research. Clyde’s current term will expire no later than the close of the 2011 Annual General Meeting. Former listed companies directorships held in the past three years: None. Age 46 years. Mark Brayan joined Integrated Research in September 2007 and is responsible for the overall strategy and leadership of the company. Mark has over twenty years experience in the software industry, most recently he was COO of outsourcer Talent2 and previously CEO of the listed software company Concept Systems before its merger with Talent2. Mark has a strong understanding of the systems management market through his time with BMC Software. As Managing Director, Mark is not required to seek re-election to the Board. Former listed companies directorships held in the past three years: None. Age 44 years. 14 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Kate Costello LLB, FAICD Independent Non-Executive Director John Brown B Com, FCA, MAICD Independent Non-Executive Director David Boyles BA, MA, MBA,MAICD Independent Non-Executive Director and Deputy Chairman David has been a Director since July 2003 and was appointed Deputy Chairman in September 2005. He has over twenty years senior management experience with US and Australian multinational companies. David’s current term will expire no later than the close of the 2009 Annual General Meeting. Former listed companies directorships held in the past three years: director of ERG Group from December 2003 to June 2005, and was appointed a director of Infosys Technologies in July 2005. Age 59 years. David Leighton, MBA, FCPA, ACIS David is a member of Chartered Secretaries Australia. He has been Company Secretary since October 2000. Kate was appointed as a Director in August 2005. She is a lawyer and has over twenty years experience in corporate governance and strategy development. She is also a Director of Governance Matters Pty Ltd, listed company, LabTech Systems Ltd, and a number of other private companies. Kate’s current term will expire no later than the close of the 2008 Annual General Meeting. Former listed companies directorships held in the past three years: None. Age 56 years. Keith Andrews, BBM, FAICD Managing Director and Chief Executive Officer (Resigned from office September 2007). Keith was appointed as Managing Director and Chief Executive Officer in November 2004. He has over twenty years experience at senior levels in the IT industry in Australia and overseas, having previously held senior corporate positions in Asia and the US. Former listed companies directorships held in the past three years: None. Age 48 years. John was appointed a Director in July 2007. John was a partner with KPMG for over 26 years, where previous roles included Partner in charge of the Information Risk Management practice in Australia, Chairman of the firm’s IT Committee, and Australian firm’s representative on KPMG’s International IT and Information Risk Management Committees. John is a Director and Chair of the Audit Committee of Sydney Water Corporation. John’s current term will expire no later than the close of the 2010 Annual General Meeting. Former listed companies directorships held in the past three years: None. Age 60 years. Alex Kennedy, M.Mgt, Dip CM, FAICD Independent Non-Executive Director (Resigned from office September 2007). Alex had been a director since May 2003. He has nearly 35 years of specialist and executive management experience across a broad range of industries. Former listed companies directorships held in the past three years: None. Age 60 years. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 15 Senior management Peter Adams B.Com, CA Chief Financial Officer Peter joined Integrated Research in March 2008 and is responsible for overseeing the company’s finance and administration, including regulatory compliance and investor relations. Peter is a Qualified Chartered Accountant with over 20 years experience. He has held a number of senior accounting and finance roles, including seven years as CFO with Infomedia (an ASX-listed technology company), six years with Renison Goldfields (ex ASX top 100 Resources Company) and two years with Transfield Pty Ltd. Peter’s career began with Arthur Andersen, where he was responsible for managing large audit clients. Alex Baburin B.App. Sc General Manager Research and Development Alex Baburin joined Integrated Research in November 2006 and is responsible for the company’s software development activities, overseeing the core development teams of more than 50 personnel. Alex has 20 years experience in the development, creation and management of high-technology hardware and software products for Honeywell and Siemens. For the past 6 years he was responsible for general management of the Siemens Access Control product line globally and for much of that time was based in Germany. Rick Ferguson Vice President Asia Pacific Rick joined Integrated Research in April 2008 and is responsible for all business operations in the Asia Pacific region. Rick has over 20 years experience in the IT industry and has worked in Europe, Africa, Asia Pacific and Australia. Rick was previously Vice President of Sales and Marketing for Asia Pacific for Wyse Technology. Prior to Wyse, Rick held a number of senior management positions for Unisys and Cisco Systems. Rick has a wealth of IP networking experience, and has overseen the deployment of VoIP and IP Telephony solutions to enterprises and SMBs across the region. 16 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Kurt Roscow BA, MBA Vice President Americas Based in the company’s American headquarters in Denver, Colorado, Kurt joined the company in October 2003. He is responsible for leading and developing the business operations in the Americas and is President of Integrated Research, Inc. Prior to joining Integrated Research his roles included senior sales and channel management positions with IBM, Oracle and JD Edwards. Pierre Semaan BEng, MBA General Manager Product Management Pierre joined Integrated Research in June 2008 and is responsible for the management and strategic direction of all product lines. Pierre has over 15 years international experience managing teams delivering technology innovations. He was most recently the Senior Vice President of Technology for Sage CRM solutions, which included leading the ACT!, SalesLogix and Mobility R&D organizations. Prior to Sage, Pierre worked at Citrix as the Chief of Operations & Director of the CTO Office and Advanced Products Group. David Stark BA, MBA Vice President Europe Based in the company’s European headquarters in Windsor, England, David joined Integrated Research in March 2008. He is responsible for all business operations across Europe and the UK. David has previously held senior management and sales positions at NCR, ICL, AT&T, QAD, PeopleSoft, Siebel and Princeton Softech. He served as the Vice President and Managing Director of Siebel for the UK, South Africa and Ireland and Vice President for Northern EMEA with Princeton Softech. David has established and led highly successful teams that have achieved market-leading revenue and profit growth. Belinda York Vice President Marketing Belinda York joined Integrated Research in October 2002 and is responsible for managing the company’s global marketing strategy. Belinda draws on more than twenty years in the IT industry, including positions as Australian Managing Director for Borland International, Avid Technology, Onyx Software and FairMarket. She was responsible for launching and managing these subsidiary businesses and building their position and opportunity in fast-growing markets. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 17 integrated research Proud developers of PROGNOSIS performance monitoring software for business-critical computer systems > Founded in 1988 > Customers in 50+ countries > Clients include 35% of Global 1000 companies > Dominant share of HP NonStop performance monitoring market > Emerging as dominant performance monitoring solution for large-scale VoIP deployments 18 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Financials > Directors’ Report > > Remuneration Report Corporate Governance Statement 20 26 35 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 19 Directors’ Report The directors present their report together with the Financial Report of Integrated Research Limited (“the company”) and of the consolidated entity, being the company and its controlled entities, for the year ended 30 June 2008 and the Auditor’s Report thereon. Results The net profit of the consolidated entity for the 12 months ended 30 June 2008 after income tax expense was $5.8 million. Dividends Dividends paid or declared by the company since the end of the previous financial year were: Final 2007 – Ordinary shares Interim 2008 – Ordinary shares Final 2008 – Ordinary shares Unfranked Unfranked Unfranked 2.0 1.5 1.5 3,326 2,500 2,501 14 Sep 2007 7 Mar 2008 12 Sep 2008 Cents Per Share Total Amount $’000 Date of Payment Events subsequent to reporting date For dividends declared after 30 June 2008 see Note 21 in the financial statements. The financial effect of dividends declared and paid after 30 June 2008 has not been brought to account in the financial statements for the year ended 30 June 2008 and will be recognised in subsequent financial reports. No other transaction or event of a material or unusual nature has arisen in the interval between the end of the financial year and the date of this report which is likely, in the opinion of the directors of the company, to affect significantly the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity, in future financial years. Future developments Likely developments in the operations of the consolidated entity in future financial years and the expected results of those operations are referred to generally in the Review of Operations and Activities Report. Further information on likely developments including expected results would in the Directors’ opinion, result in unreasonable prejudice to the company and has therefore not been included in this Report. 20 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Directors and company secretary Details of current directors’ qualifications, experience, age and special responsibilities are set out on page 14. Details of the company secretary and his qualifications are set out on page 15. Officers who were previously partners of the audit firm No officers of the company during the financial year were previously partners of the current audit firm. Directors’ meetings The numbers of meetings of the company’s board of directors and of each board committee held during the year ended 30 June 2008, and the numbers of meetings attended by each director were: Board Meetings Audit Committee Meetings Nomination and Remuneration Committee Meetings Strategy Committee Meetings Keith Andrews David Boyles Mark Brayan Kate Costello Alex Kennedy Steve Killelea Clyde McConaghy John Brown A 2 12 10 12 3 12 7 12 B 2 12 10 12 3 12 7 12 A - 3 - 1 - - 1 3 B - 3 - 2 - - 1 3 A - 3 - 3 - 3 - - B - 3 - 3 - 3 - - A - 1 1 1 - 1 - - B - 1 1 1 - 1 - - A: Number of meetings attended. B: Number of meetings held during the time the directors held office or was a member of the committee during the year. State of affairs In the opinion of the directors there were no significant changes in the state of affairs of the consolidated entity that occurred during the financial year under review. Environmental regulation The consolidated entity’s operations are not subject to significant environmental regulations under either Commonwealth or State legislation. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 21 Directors’ Report Directors’ interests The relevant interest of each director in the shares or options over such shares issued by the companies in the consolidated entity and other relevant bodies corporate, as notified by the directors to the Australian Stock Exchange in accordance with S205G(1) of the Corporations Act 2001, at the date of this report is as follows: Ordinary shares Options Directly held Beneficially held Total Number of Options 1,700,000 25,000 - - 94,497,339 - - - 50,000 200,000 337,612 - 1,700,000 25,000 50,000 200,000 94,834,951 - - 1,000,000 - - - - David Boyles Mark Brayan John Brown Kate Costello Steve Killelea Clyde McConaghy Share options Options granted to directors and senior executives During or since the end of the financial year, the company granted options for no consideration over unissued ordinary shares in Integrated Research Limited to the following named executive officers of the consolidated entity as part of their remuneration: Peter Adams Mark Brayan Rick Ferguson David Stark Number of options granted Exercise price Expiry date 350,000 1,000,000 300,000 350,000 $0.38 $0.42 $0.38 $0.43 Feb 2013 Sep 2012 Apr 2013 Mar 2013 No options were granted to any non-executive directors of the consolidated entity during or since the end of the financial year. The options were granted under the Integrated Research Limited Employee Share Option Plan. 25% of options vest and may be exercised from each of the first to fourth anniversaries of the issue date. In addition, the ability to exercise options is conditional on the consolidated entity achieving certain performance hurdles. Unexercised options expire five years after the issue date or 3 months after termination of the employee’s employment. 22 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Unissued shares under option Unissued ordinary shares of Integrated Research Limited under option at the date of this report are as follows: Expiry date Aug 2008 Feb 2009 Apr 2009 May 2009 July 2009 Nov 2009 Feb 2010 Apr 2010 Sep 2010 Exercise price $0.22 $0.26 $0.46 $0.33 $0.40 $0.57 $0.52 $0.46 $0.54 Number of shares 115,250 198,510 300,000 205,365 278,000 400,000 336,500 200,000 510,000 Expiry date May 2011 Aug 2011 Jan 2012 Jun 2012 Sep 2012 Feb 2013 Mar 2013 Apr 2013 Exercise price $0.41 $0.44 $0.50 $0.48 $0.42 $0.38 $0.43 $0.38 Number of shares 654,000 170,000 160,000 848,000 1,000,000 350,000 350,000 300,000 Total unissued ordinary shares of Integrated Research Limited under option 6,375,625 Options do not entitle the holder to participate in any share issue of the company or any other body corporate. Shares issued on the exercise of options During or since the end of the financial year, the company issued ordinary shares as a result of the exercise of options as follows (there were no amounts unpaid on the shares issued): Number of shares Amount paid on each share 192,855 131,125 117,250 65,750 20,625 5,000 0.24 0.12 0.22 0.26 0.33 0.40 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 23 Directors’ Report Indemnification and insurance of officers Indemnification The company has agreed to indemnify the directors of the company on a full indemnity basis to the full extent permitted by law, for all losses or liabilities incurred by the director as an officer of the company including, but not limited to, liability for negligence or for reasonable costs and expenses incurred, except where the liability arises out of conduct involving a lack of good faith. Insurance During the financial year Integrated Research Limited paid a premium of $24,728 to insure the directors and officers of the consolidated entity and related bodies corporate. The liabilities insured include costs and expenses that may be incurred in defending civil or criminal proceedings that may be brought against officers in their capacity as officers of the consolidated entity. The company has not otherwise, during or since the financial year, indemnified or agreed to indemnify an officer or auditor of the company or any related body corporate against a liability incurred as such on officer or auditor. Remuneration report The company’s Remuneration Report, which forms part of this Directors’ Report, is on pages 26 to 34. Corporate governance A statement describing the company’s main corporate governance practices in place throughout the financial year is on pages 35 to 43 of this Annual Report. Non-audit services During the year Deloitte Touche Tohmatsu, the company’s auditor, has performed certain other services in addition to their statutory duties. The board has considered the non-audit services provided during the year by the auditor and in accordance with written advice provided by resolution of the audit committee, is satisfied 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: > > All non-audit services were subject to the corporate governance procedures adopted by the company and have been reviewed by the audit committee to ensure they do not impact the integrity and objectivity of the auditor, and The non-audit services provided do not undermine the general principles relating to auditor independence as set out in Professional Statement F1 Professional independence, as they did not involve reviewing or auditing the auditor’s own work, acting in 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 is attached on page 88 of the annual report and forms part of the Directors’ Report. 24 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Rounding of amounts to nearest thousand dollars The company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class order, amounts in the Financial Report and the Directors’ Report have been rounded off to the nearest thousand dollars, unless otherwise stated. This report is made in accordance with a resolution of the directors. Steve Killelea Chairman Mark Brayan Chief Executive Officer Dated at North Sydney this 22nd day of September 2008 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 25 Remuneration report (Audited) Remuneration policies Remuneration levels for key management personnel and secretaries of the company, and relevant key management personnel of the consolidated entity are competitively set to attract and retain appropriately qualified and experienced directors and senior executives. The remuneration committee obtains independent advice on the appropriateness of remuneration packages given trends in comparative companies both locally and internationally and the objectives of the company’s remuneration strategy. Key management personnel (including directors) have authority and responsibility for planning, directing and controlling the activities of the company and the consolidated entity. The remuneration structures explained below are designed to attract suitably qualified candidates, reward the achievement of strategic objectives, and achieve the broader outcome of creation of value for shareholders. The remuneration structure takes into account: > > > The capability and experience of the directors and senior executives The directors and senior executives ability to control the relevant segment’s performance The consolidated entity’s performance including: - - The consolidated entity’s earnings The growth in share price and returns on shareholder wealth Remuneration packages include a mix of fixed and variable remuneration and short and long-term performance based incentives. Fixed remuneration Fixed remuneration consists of base remuneration (which is calculated on a total cost basis and includes any FBT charges related to employee benefits including motor vehicles), as well as employer contributions to superannuation funds. Remuneration levels are reviewed annually through a process that considers individual, segment and overall performance of the consolidated entity. In addition, external consultants provide periodic analysis and advice to ensure the directors’ and senior executives’ remuneration is competitive in the market place. A senior executive’s remuneration is also reviewed on promotion. Performance-linked remuneration Performance linked remuneration includes both short-term and long-term incentives and is designed to reward executive directors and senior executives for exceeding their financial and personal objectives. The short-term incentive (STI) is an “at risk” bonus provided in the form of cash, while the long-term incentive (LTI) is provided as options over ordinary shares of Integrated Research Limited under the rules of the Employee Share Option Plan (ESOP). 26 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Short-term incentive bonus The nomination and remuneration committee is responsible for setting the key performance indicators (KPI’s) for the chief executive officer, and for approving the KPI’s for the senior executives who report to him. The KPI’s generally include measures relating to the consolidated entity, the relevant segment, and the individual, and include financial, people, customer, strategy and risk measures. The measures are chosen as they directly align the individual’s reward to the KPI’s of the consolidated entity and to its strategy and performance. The financial performance objectives vary with position and responsibility and are aligned with each respective years’ budget. The non-financial objectives vary with position and responsibility and include measures such as achieving strategic outcomes and staff development. At the end of the financial year the nomination and remuneration committee assesses the actual performance of the CEO against the KPI’s set at the beginning of the financial year. A percentage of the predetermined maximum amounts for each KPI is awarded depending on results. The committee recommends the cash incentive to be paid to the CEO for approval by the board. Long-term incentive Options are issued to executive directors and other senior executives under the Employee Share Option Plan. The ability of executive directors and other senior executives to exercise options is conditional on the consolidated entity achieving certain profit after tax (PAT) performance hurdles over the vesting period. PAT was considered the most appropriate performance hurdle given its intrinsic link to creating shareholder wealth. Consequences of performance on shareholder wealth In considering the consolidated entity’s performance and benefits for shareholder wealth, the nomination and remuneration committee has regard to the following indices in respect of the current financial year and the previous four financial years: 2008 2007 2006 2005 2004 New licences Net profit $19,623,000 $19,517,000 $18,633,000 $17,790,000 $15,842,000 $5,776,000 $5,433,000 $6,975,000 $6,238,000 $4,455,000 Dividends paid $5,826,000 $4,152,000 $4,146,000 $3,310,000 $1,239,000 Change in share price ($0.23) $0.185 ($0.005) $0.05 $0.23 Net profit and new licence sales are considered in setting the STI, as two of the financial performance targets are “profit after tax” and “new sales”. Dividends and changes in share price are included in the TSR calculation for the LTI. The nomination and remuneration committee considers that the above performance linked structure is generating the desired outcomes. Currently, the Board has no specific policy governing how key management personnel minimise their exposure to risk associated with the share-based payments. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 27 Remuneration report (Audited) Key Management Personnel The following were key management personnel of the consolidated entity at any time during the reporting period and unless otherwise indicated were key management personnel for the entire period: Non-executive directors Steve Killelea (Chairman) David Boyles John Brown (appointed July 2007) Kate Costello Alex Kennedy (resigned July 2007) Clyde McConaghy (appointed December 2007) Executive directors Keith Andrews (CEO, resigned September 2007) Mark Brayan (CEO, appointed September 2007) Other key management personnel (full year) Other key management personnel (part year) David Leighton (Company Secretary) Peter Adams (CFO, appointed March 2008) Kurt Roscow (VP, Americas) Nathan Brumby (CTO, resigned November 2007) Steve Douglas (VP, Europe, resigned December 2007) Rick Ferguson (GM, AsiaPac, appointed March 2008) Stephen Rorie (CFO, resigned November 2007) David Stark, (VP, Europe, appointed March 2008) David Taylor (GM AsiaPac, resigned October 2007) Service agreements Service contracts for executive directors and senior executives are unlimited in term but capable of termination by either party according to a period specified in the employment contract and the consolidated entity retains the right to terminate the contract immediately by payment in lieu of notice or a severance payment or an amount for redundancy equal to the scale of payments prescribed in the NSW Employment Protection Act. Mr Mark Brayan, Chief Executive Officer, has a contract of employment with Integrated Research Limited dated 29 August 2007, which provides for specific notice and severance understandings of up to four months compensation depending on the particular circumstances. Mr Brayan can terminate his employment by giving four months prior notice in writing. Mr Peter Adams, Chief Financial Officer, has a contract of employment with Integrated Research Limited dated 23 January 2008, which provides for specific notice and severance understandings of up to three months compensation depending on the particular circumstances. Mr Adams can terminate his employment by giving three months prior notice in writing. Mr Rick Ferguson, General Manager Asia Pacific, has a contract of employment with Integrated Research Limited dated 20 February 2008, which provides for specific notice and severance understandings of up to three months compensation depending on the particular circumstances. Mr Ferguson can terminate his employment by giving three months prior notice in writing. 28 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Mr David Stark, Vice President Europe, has a contract of employment with Integrated Research Limited dated 22 January 2008, which provides for specific notice and severance understandings of up to three months compensation depending on the particular circumstances. Mr Stark can terminate his employment by giving three months prior notice in writing. Non-executive directors Total remuneration for all non-executive directors last voted upon at a special meeting of shareholders in October 2000 is not to exceed $500,000 per annum. Directors’ base fees are presently $45,000 per annum plus compulsory superannuation. The chairman receives the base fee by a multiple of two and the deputy chairman receives the base fee by a multiple of 1.5. Directors’ fees cover all main board activities and committee membership. Directors can elect to salary sacrifice their directors fees into superannuation. Non-executive directors do not receive performance related compensation or retirement benefits. Directors’ and executive officers’ remuneration Details of the nature and amount of each major element of the remuneration of each director of the company and each of the executives and relevant group executives receiving the highest remuneration are reported below. The estimated value of options disclosed is calculated at the date of grant using the Binomial option pricing model, adjusted to take into account the inability to exercise options during the vesting period. Further details of options granted during the year are set out above under “Share options”. “Executive officers” are officers who are involved in, or who take part in, the management of the affairs of Integrated Research Limited and/or related bodies corporate. Remuneration for overseas-based employees has been translated to Australian dollars at the average exchange rates for the year. No director or executive appointed during the year received a payment as part of his or her consideration for agreeing to hold the position. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 29 Remuneration report (Audited) Short Term Salary & fees $ Non-cash benefits $ Bonus $ In AUD Post- employment Super- annuation contribution* $ Share- based payments Value of options (A) $ Other compen- sation Termina- tion benefit $ Proportion of remuneration Perfor- mance related Value of options Total $ Directors: Non-executive David Boyles 2008 - John Brown (appointed July 2007) Kate Costello Alex Kennedy (resigned September 2007) 2007 67,500 2008 42,676 2007 2008 2007 2008 2007 - - - - - Steve Killelea 2008 90,000 Clyde McConaghy (appointed December 2007) Ian Winlaw (resigned December 2006) 2007 90,000 2008 2007 2008 - - - 2007 22,500 2008 86,886 Directors: Executive Keith Andrews (resigned September 2007) Mark Brayan (appointed September 2007) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 73,575 6,075 3,841 - 49,050 49,050 9,997 49,050 8,100 8,100 28,613 - - 2,025 12,136 5,444 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 73,575 73,575 46,517 - 49,050 49,050 9,997 49,050 98,100 98,100 28,613 - - 24,525 250,000 354,466 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2007 369,565 50,000 58,541 32,662 2008 329,556 85,000 2,833 13,149 2007 - - - - 7,500 6,216 - - - - 518,268 11% 436,754 21% - - 1% 1% - * Superannuation contribution contain salary sacrifice. 30 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Short Term Salary & fees $ Bonus $ Non-cash benefits $ In AUD Executive officers (excluding directors) Post- employment Super- annuation contribution $ Share- based payments Value of options (A) $ Other compen- sation Termina- tion benefit $ Proportion of remuneration Perfor- mance related Value of options Total $ 5,240 754 - 5,057 9,104 4,163 - - - 1,777 547 - 4,050 1,020 - - 2,192 75,465 15% 1% - - - - - - - - - - - 148,143 295,579 - 21% 25% 67,028 26% - 107,570 33,750 169,333 313,347 - - - 12% 16% - 5,287 11,629 4,090 13,646 - - - - - - - 50,000 122,765 9% 1,433 - 513 539 540 953 - - - - - - - - 200,006 30% 176,716 34% 341,694 38% 305,283 38% 366,350 126,047 - 47% 27% - - - 1% 1% - 1% - - 1% - 1% - - - - - - David Leighton 2008 102,500 2007 33,750 - - - 2008 58,221 11,250 2007 - - - - 2008 110,140 30,500 2,446 2007 209,944 74,754 2008 44,818 17,500 2007 - 2008 124,817 20,000 19,229 2007 219,732 48,750 31,044 2008 58,198 10,477 - 2007 121,127 59,712 4,088 Kurt Roscow 2008 187,881 116,863 2008 115,762 60,954 2007 210,488 130,693 2007 192,771 173,039 2008 91,386 33,708 2007 - - - - - - - - - - - - - The Company Peter Adams (appointed March 2008) Nathan Brumby (resigned November 2007) Rick Ferguson (appointed March 2008) Stephen Rorie (resigned November 2007) David Taylor (resigned October 2007) Consolidated Steve Douglas (resigned December 2007) David Stark (appointed March 2008) Total compensation: key management (consolidated) Total compensation: key management (company) 2008 1,442,841 386,252 36,644 219,656 10,029 300,000 2,395,422 2007 1,537,377 536,948 93,673 181,341 13,955 - 2,363,294 2008 1,047,812 174,727 36,644 219,656 8,537 300,000 1,787,376 2007 1,134,118 233,216 93,673 181,341 12,902 - 1,655,250 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 31 Remuneration report (Audited) Analysis of bonuses included in remuneration Details of the vesting profile of the short-term incentive cash bonuses awarded as remuneration to each director of the company and each of the named company executives and relevant group executives are detailed below: Included in remuneration $ (A) % vested in year % forfeited in year (B) Short term incentive bonuses Directors Mark Brayan Executives Peter Adams Steve Douglas Rick Ferguson Stephen Rorie Kurt Roscow David Stark David Taylor 85,000 11,250 60,954 17,500 20,000 116,863 33,708 10,477 43% 90% 62% 50% 80% 63% 63% 32% 57% 10% 38% 50% 20% 37% 37% 68% (A) Amounts included in remuneration for the financial year represents the amount that vested in the financial year based on achievement of personal goals and satisfaction of specified performance criteria. No amounts vest in future financial years in respect of the short-term incentive bonus scheme for the 2008 financial year. (B) The amounts forfeited are due to the performance or service criteria not being met in relation to the current financial year. Equity instruments All options refer to options over ordinary shares of Integrated Research Limited, which are exercisable on a one-for-one basis under the Employee Share Option Plan (ESOP). Options and rights over equity instruments granted as compensation Details of options over ordinary shares in the company that were granted as compensation to each key management person during the reporting period and details on options that were vested during the reporting period are as follows: Executives Grant date Number of options granted in 2008 Number of options vested during 2008 Fair value of option at grant date Exercise price per option Expiry date Peter Adams 350,000 Mar 2008 Mark Brayan 1,000,000 Sep 2007 Rick Ferguson 300,000 Apr 2008 David Stark 350,000 Mar 2008 - - - - $0.17 $0.14 $0.17 $0.17 $0.38 $0.42 $0.38 $0.43 Feb 2013 Sep 2012 Apr 2013 Mar 2013 No options have been granted to named executives since the end of the financial year. The above options were provided at no cost to the recipients. 32 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 All options expire on the earlier of their expiry date or termination of the individual’s employment, except for termination due to retirement. The options are exercisable on an annual basis on the first to fourth anniversaries of the grant date. In addition to a continuing employment service condition, the ability of executives to exercise options is conditional on the consolidated entity achieving certain profit after tax performance hurdles. Further details, including grant dates and exercise dates regarding options granted to executives under the ESOP are in note 18 to the financial statements. Exercise of options granted as compensation During the reporting year the following shares were issued on the exercise of options previously granted as compensation: Executive Steve Douglas Number of shares Amount paid per share 11,250 $0.26 There were no amounts unpaid on the shares issued as a result of the exercise of the options. Analysis of movement in options The movement during the reporting period, by value, of options over ordinary shares in the company held by each company director and each of the named company executives and relevant group executives is detailed below: In AUD Directors Mark Brayan Executives Peter Adams Steve Douglas Rick Ferguson Kurt Roscow David Stark Granted in year (A) $ Exercised in year (B) $ Forfeited in year (C) $ Total options value in year (D) $ Value of options 140,000 59,500 - 51,000 - 59,500 310,000 - - 2,925 - - - 2,925 - - - - - - - 6,216 754 - 547 13,648 953 22,118 (A) The value of options granted in the year is the fair value of the options calculated at the grant date using a binomial option-pricing model. The total value of the options granted is included in the table above. This amount is allocated to remuneration over the vesting period, and is before adjusting the value for the probability the options will vest. (B) The value of options exercised during the year is calculated as the market price of shares of the company on the Australian Stock Exchange as at the close of trading on the date the options were exercised after deducting the price paid to exercise the option. (C) There were no options forfeited during the year, except for those held by executives whose employment was terminated during the year. No value has been assigned to those options as either the exercise price exceeded the market price of the company’s shares, or had not vested. (D) Total options value in year represents the fair value of options granted apportioned over the vesting period, adjusting the value for the probability the options will vest. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 33 Remuneration report (Audited) Analysis of options and rights over equity instruments granted as compensation Details of vesting profile of the options granted to each director of the company and each of the named executives are detailed below: Options granted Number Date % vested in year % Forfeited in Directors Mark Brayan 1,000,000 Sep 2007 Keith Andrews 1,000,000 Aug 2006 Executives Peter Adams 350,000 Mar 2008 Stephen Rorie 300,000 Aug 2006 Rick Ferguson 300,000 Apr 2008 David Stark 350,000 Mar 2008 - - - - - - year (A) - 100% - 100% - - Value yet to vest ($) Min (B) Max (C) Financial year in which grant vests 2012 - 2013 - 2013 2013 nil nil nil nil nil nil $140,000 n/a $59,500 n/a $51,000 $59,500 (A) The percentage forfeited in the year represents the reduction from the maximum number of options available to vest due to the performance hurdles not being achieved or due to the resignation of the executive. (B) The minimum value of options yet to vest is $nil as the executives may not achieve the required performance hurdles or may terminate their employment prior to vesting. (C) The maximum values presented above are based on the values calculated using the Binomial option pricing model as applied in estimating the value of options for employee benefit expense purposes. 34 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Corporate Governance Statement This statement outlines the main corporate governance practices that were in place throughout the financial year, which comply with the ASX Corporate Governance Council recommendations, unless otherwise stated. Board of directors and its committees Role of the board The board’s primary role is the protection and enhancement of long-term shareholder value. To fulfil this role, the board is responsible for the overall corporate governance of the consolidated entity including formulating its strategic direction, approving and monitoring capital expenditure, setting remuneration, appointing, removing and creating succession policies for directors and senior executives, establishing and monitoring the achievement of management goals and ensuring the integrity of internal control and management information systems. It is also responsible for approving and monitoring financial and other reporting. Details of the board’s charter are located on the company’s website (www.ir.com). Board process To assist in the execution of its responsibilities, the Board has established a number of board committees including a Nomination and Remuneration Committee, an Audit Committee and a Strategy Committee. These committees have written mandates and operating procedures, which are reviewed on a regular basis. The board has also established a framework for the management of the consolidated entity including a system of internal control, a business risk management process and the establishment of appropriate ethical standards. The full board currently holds twelve scheduled meetings each year, plus strategy and any extraordinary meetings at such other times as may be necessary to address any specific matters that may arise. The agenda for its meetings is prepared in conjunction with the chairman, chief executive officer and company secretary. Standing items include the CEO’s report, financial reports, strategic matters, governance and compliance. Submissions are circulated in advance. Executives are regularly involved in board discussions and directors have other opportunities, including visits to operations, for contact with a wider group of employees. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 35 Corporate Governance Statement During the 2008 financial year the board undertook a formal performance evaluation of itself and of individual directors and the Chairman to identify governance and performance strengths and areas for improvement. The Chairman discussed individual director results with each director agreeing appropriate development actions, and tabled his own results for discussion and agreement with the board. The board implemented changes to its governance practices as a consequence of the evaluation. The board increased the scheduling of executive presentation sessions at board meetings to ensure the board is continuously updated on operational and strategic issues and has the opportunity to meet and work with management in Australia from the company’s overseas operations. Director education The consolidated entity follows an induction process to educate new directors about the nature of the business, current issues, the corporate strategy and expectations of the consolidated entity concerning performance of directors. Directors also have the opportunity to visit consolidated entity facilities and meet with management to gain a better understanding of business operations. In addition executives make regular presentations to the board to ensure its familiarity of operational matters. Directors are expected to access external continuing education opportunities to update and enhance their skills and knowledge. Independent advice and access to company information Each director has the right of access to all relevant company information and to the company’s executives and, subject to prior consultation with the chairman, may seek independent professional advice from a suitably qualified adviser at the consolidated entity’s expense. A copy of the advice received by the director is made available to all other members of the board. Composition of the board The names of the directors of the company in office at the date of this report are set out on page 14 of this report. The company’s constitution provides for the board to consist of between three and twelve members. At 30 June 2008 the board members were comprised as follows: > > > > > > Mr Steve Killelea – non executive director (Chairman). Mr David Boyles – independent non executive director (Deputy Chairman). Mr John Brown – independent non executive director. Ms Kate Costello – independent non executive director. Mr Clyde McConaghy – non executive director. Mr Mark Brayan – executive director (Chief Executive Officer). Mr Alex Kennedy retired from his position as an independent non executive director in September 2007. Mr John Brown was appointed as an independent non executive director in July 2007 and Mr Clyde McConaghy was appointed as a non executive director in December 2007. Mr McConaghy is Managing Director of Smarter Capital Pty Limited, another company associated with Mr Steve Killelea, Chairman of Integrated Research. Mr Keith Andrews resigned from his position of executive director in September 2007 and Mr Mark Brayan was appointed as an executive director in September 2007. 36 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Following the appointment of Mr McConaghy, the Board consists of three independent non executive directors, two non executive directors who are not independent (Mr McConaghy and Mr Killelea) and one executive director (Mr Brayan). This does not comply with the ASX Corporate Governance Council recommendation that the majority of directors be independent. However, the board considers the appointment of Mr McConaghy who has two decades of international strategic market development experience in the technology, media and online industries, to be beneficial to the company and that he will exercise independent judgement as a non executive director. The election of Mr Killelea, who holds a majority of the company’s issued shares, as non-executive chairman does not comply with the ASX Corporate Governance Council recommendation that the chairman be an independent director. However, the board considers the appointment of Mr Killelea to be beneficial to the company and will enable it to continue to build on the experience and knowledge gained through his long involvement with Integrated Research and his associations throughout the information industry. Mr Killelea founded Integrated Research in 1988 and was the CEO and managing director of the company until his retirement in November 2004. The board recognises the need for directors to exercise unfettered and independent judgement and in September 2005 appointed Mr David Boyles as deputy chairman. In this role Mr Boyles acts as lead independent director. At each Annual General Meeting one-third of directors, any director who has held office for three years and any director appointed by directors in the preceding year must retire, then being eligible for re-election. The chief executive officer is not required to retire by rotation. The composition of the board is reviewed on a regular basis to ensure that the board has the appropriate mix of expertise and experience. When a vacancy exists, through whatever cause, or where it is considered that the board would benefit from the services of a new director with particular skills, the Nomination and Remuneration Committee will, in conjunction with the board, determine the selection criteria for the position based on the skills deemed necessary for the board to best carry out its responsibilities. The committee would then select a panel of candidates and the board would then appoint the most suitable candidate who must stand for election at the next general meeting of shareholders. Nomination and Remuneration Committee The Nomination and Remuneration Committee is a committee of the board of directors and is empowered by the board to assist it in fulfilling its duties to shareholders and other stakeholders. In general, the committee has responsibility to: 1) ensure the company has appropriate remuneration policies designed to meet the needs of the company and to enhance corporate and individual performance and 2) review board performance, select and recommend new directors to the board and implement actions for the retirement and re-election of directors. Responsibilities Regarding Remuneration The Committee reviews and makes recommendations to the board on: > > > > > > > The appointment, remuneration, performance objectives and evaluation of the chief executive officer. The remuneration packages for senior executives. The company’s recruitment, retention and termination policies and procedures for senior executives. Executive remuneration and incentive policies. Policies on employee incentive plans, including equity incentive plans. Superannuation arrangements. The remuneration framework and policy for non-executive directors. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 37 Corporate Governance Statement > Remuneration levels are competitively set to attract and retain the most qualified and experienced directors and senior executives. The Remuneration Committee obtains independent advice on the appropriateness of remuneration packages, given trends in comparative companies and industry surveys. Remuneration packages include a mix of fixed remuneration, performance-based remuneration and equity-based remuneration. Responsibilities Regarding Nomination The Committee develops and makes recommendations to the board on: > > > > > > > > The CEO and senior executive succession planning The range of skills, experience and expertise needed on the board and the identification of the particular skills, experience and expertise that will best complement board effectiveness. A plan for identifying, reviewing, assessing and enhancing director competencies. Board succession plans to maintain a balance of skills, experience and expertise on the board. Evaluation of the board’s performance. Appointment and removal of directors. Appropriate composition of committees. The terms and conditions of the appointment of non-executive directors are set out in a letter of appointment, including expectations for attendance and preparation for all board meetings, expected time commitments, procedures when dealing with conflicts of interest, and the availability of independent professional advice. The members of the Nomination and Remuneration Committee during the year were: > > > Kate Costello (Chairperson) – Independent Non-Executive David Boyles – Independent Non-Executive Steve Killelea – Non-Executive The Nomination and Remuneration Committee meets at least twice a year and as required. The Committee met five times during the year under review. Audit Committee The Audit Committee has a documented charter, approved by the board. All members must be non-executive directors with a majority being independent. The chairman may not be the chairman of the board. The committee advises on the establishment and maintenance of a framework of internal control and appropriate ethical standards for the management of the consolidated entity. The members of the Audit Committee during the year were: > > > > 38 David Boyles (Chairman until February 2008) – Independent Non-Executive John Brown (appointed in July 2007 and Chairman from February 2008) – Independent Non-Executive Kate Costello – Independent Non-Executive (until April 2008) Clyde McConnaghy (appointed April 2008) INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 The external auditor, chief executive officer and chief financial officer are invited to Audit Committee meetings at the discretion of the committee. The committee met three times during the year and committee members’ attendance record is disclosed in the table of directors’ meetings on page 21. The external auditor met with the audit committee/board three times during the year, two of which included time without the presence of executive management. The chief executive officer and the chief financial officer declared in writing to the board that the company’s financial reports for the year ended 30 June 2008 comply with accounting standards and present a true and fair view, in all material respects, of the company’s financial condition and operational results. This statement is required annually. The Audit Committee’s charter is available on the company’s website and includes information on procedures for selection and appointment of the external auditor, and for rotation of external audit engagement partners. The main responsibilities of the Audit Committee include: > > > > > > > Reviewing the annual and half-year financial reports and other financial information distributed externally, including new accounting policies to ensure compliance with Australian Accounting Standards and generally accepted accounting principles. Assessing whether non-audit services provided by the external auditor are consistent with maintaining the external auditor’s independence. Each reporting period the external auditor provides a declaration of independence. Providing advice to the board in respect of whether provision of the non-audit services by the external auditor is compatible with the general standards of independence of auditors imposed by the Corporations Act 2001. Reviewing the nomination and performance of the external auditor. Monitoring the establishment of an appropriate internal control framework, and appropriate ethical standards. Monitoring the procedures to ensure compliance with the Corporations Act 2001 and ASX Listing Rules and all other regulatory requirements. Addressing any matters outstanding with auditors, Australian Tax Office, overseas tax authorities, Australian Securities and Investments Commission and financial institutions. The Audit Committee reviews the performance of the external auditors on an annual basis and normally meets with them during the year as follows: > To discuss the external audit plans, identifying any significant changes in structure, operations, internal controls or accounting policies likely to impact the financial statements and to review the fees proposed for the audit work to be performed. > Prior to announcement of results: - To review the half-year and preliminary final report prior to lodgement with the ASX, and any significant adjustments required as a result of the auditor’s findings. - To recommend the Board approval of these documents. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 39 Corporate Governance Statement > To finalise half-year and annual reporting: - Review the results and findings of the auditor, the adequacy of accounting and financial controls, and to monitor the implementation of any recommendations made. - Review the draft financial report and recommend board approval of the financial report. > As required, to organise, review and report on any special reviews or investigations deemed necessary by the board. The full board has retained responsibility for monitoring the corporate risk assessment processes and fraud control. Strategy Committee The Strategy Committee has a documented charter, approved by the board and is responsible for reviewing strategy and recommending strategies to the board to enhance the company’s long-term performance. The committee is comprised of at least three members, including the chairman of the board and the chief executive officer. The board appoints a member of the committee to be chairman. The members of the Strategy Committee during the year were: > > > > > Steve Killelea (Chairman) – Non-Executive Keith Andrews (resigned September 2007) – Executive Mark Brayan (appointed September 2007) – Executive David Boyles – Independent Non-Executive Kate Costello – Independent Non-Executive The Strategy Committee is responsible for: > > > > Working with management on the articulation of any strategic plan for recommendation to the board. Assisting in identifying and assessing strategic opportunities including: - Mergers and acquisitions proposals - Intellectual property developments or acquisitions - Changes in business models - Partnering arrangements - Entry into new markets Staying close to business challenges and risks Recommending specific (eg product) strategies, including business cases and mechanisms to measure progress results, to the board. The Committee met once during the year under review. 40 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Risk management The board reviews the status of business risks to the consolidated entity through integrated risk management programs ensuring risks are identified, assessed and appropriately managed. Major business risks arise from such matters as actions by competitors, government policy changes and the impact of exchange rate movements. Comprehensive policies and procedures are established such that: > > > > Capital expenditure above a certain size requires Board approval. Financial exposures are controlled, including the use of forward exchange contracts. Risks are identified and managed, including internal audit, privacy, insurances, business continuity and compliance. Business transactions are properly authorised and executed. The chief executive officer and the chief financial officer have declared, in writing to the board that the company’s financial reports are founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the board. Internal control framework The board is responsible for the overall internal control framework, but recognises that no cost effective internal control system will preclude all errors and irregularities. The board has instigated the following internal control framework: > > > > > Financial reporting – Monthly actual results are reported against budgets approved by the directors and revised forecasts for the year are prepared monthly. Continuous disclosure – Identify matters that may have a material effect on the price of the Company’s securities, notify them to the ASX and post them to the Company’s website. Quality and integrity of personnel – Formal appraisals are conducted at least annually for all employees. Operating unit controls – Operating units are required to confirm compliance with financial controls and procedures including information systems controls detailed in procedures manuals. Investment appraisals – Guidelines for capital expenditure include annual budgets, detailed appraisal and review procedures and levels of authority. Internal Audit The company does not have an internal audit function but utilises its financial resources as needed to assist the board in ensuring compliance with internal controls. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 41 Corporate Governance Statement Ethical standards All directors, managers and employees are expected to act with the utmost integrity and objectivity, striving at all times to enhance the reputation and performance of the consolidated entity. Every employee has a nominated supervisor to whom they may refer any issues arising from their employment. Conflict of interest Directors must keep the board advised, on an ongoing basis, of any interest that could potentially conflict with those of the company. Where the board considers that a significant conflict exists the director concerned does not receive the relevant board papers and is not present at the meeting whilst the item is considered. The board has developed procedures to assist directors to disclose potential conflicts of interest. Details of director related entity transactions with the company and consolidated entity are set out in Note 27. Code of conduct The consolidated entity has advised each director, manager and employee that they must comply with the code of conduct. The code aligns behaviour of the board and management with the code of conduct by maintaining appropriate core values and objectives. It may be reviewed on the company’s website and includes: > > > > > Responsibility to the community and fellow employees to act with honesty and integrity, and without prejudice. Compliance with laws and regulations in all areas where the company operates, including employment opportunity, occupational health and safety, trade practices, fair dealing, privacy, drugs and alcohol, and the environment. Dealing honestly with customers, suppliers and consultants. Ensuring reports and other information are accurate and timely. Proper use of company resources, avoidance of conflicts of interest and use of confidential or proprietary information. Trading in company securities by directors and employees Directors and employees may acquire shares in the company, but are prohibited from dealing in company shares whilst in possession of price sensitive information, and except in the periods: > > From 24 hours to 28 days after the release of the company’s half-yearly results announcement or following the wide dissemination of information on the status of the corporation and current results. From 24 hours after the release of the company’s annual results announcement to a maximum of 28 days after the annual general meeting. Directors must obtain the approval of the chairman of the board and notify the company secretary before they buy or sell shares in the company, subject to board veto. The company advises the ASX of any transactions conducted by directors in shares in the company. The consolidated entity’s trading policy may be reviewed on the company’s website. 42 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Communication with shareholders The board provides shareholders with information using a comprehensive continuous disclosure policy which includes identifying matters that may have a material effect on the price of the company’s securities, notifying them to the ASX, posting them on the company’s website (www.ir.com), and issuing media releases. Disclosures under this policy are in addition to the periodic and other disclosures required under the ASX Listing Rules and the Corporations Act. More details of the policy are available on the company’s website. The chief executive officer and the chief financial officer are responsible for interpreting the company’s policy and where necessary informing the board. The company secretary is responsible for all communication with the ASX. The board encourages full participation of shareholders at the Annual General Meeting to ensure a high level of accountability and identification with the consolidated entity’s strategy and goals. Important issues are presented to the shareholders as single resolutions. The external auditor is requested to attend the Annual General Meetings to answer any questions concerning the audit and the content of the auditor’s report. The shareholders are requested to vote on the appointment and aggregate remuneration of directors, the granting of options and shares to directors, the Remuneration report and changes to the Constitution. Copies of the Constitution are available to any shareholder who requests it. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 43 This page intentionally left blank. 44 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Financial Report > Income statements > Statements of recognised income and expense > Balance sheets > Statements of cash flows > Notes to the financial statements 1. Significant accounting policies 2. Segment reporting 3. Other income 4. Expenses 5. Personnel expenses 6. Auditors’ remuneration 7. Income tax expense 8. Earnings per share 9. Cash and cash equivalents 10. Trade and other receivables 11. Other current assets 12. Investments 13. Other financial assets 14. Property, plant and equipment 15. Deferred tax assets and liabilities 16. Intangible assets 17. Trade and other payables 18. Employee benefits 19. Provisions 20. Other liabilities 21. Capital and reserves 22. Financial instruments 23. Operating leases 24. Consolidated entities 25. Reconciliation of cash flows from operating activities 26. Key management personnel disclosures 27. Related parties 28. Subsequent events 46 47 48 49 50 50 57 59 59 59 60 60 61 62 62 63 63 63 64 65 67 68 68 72 72 73 75 78 78 79 80 84 84 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 45 Financial Report Income statements For the year ended 30 June 2008 In thousands of AUD Revenue Revenue from licence fees Revenue from maintenance fees Consolidated The Company Notes 2008 2007 2008 2007 19,623 19,517 13,299 13,109 16,344 15,856 11,603 9,408 Revenue from consulting and other services 1,417 1,004 759 421 Total revenue Research and development expenses Sales and marketing expenses General and administration expenses Total expenses Results from operating activities Other income Profit before tax Income tax expense Profit for the year Basic earnings per share (AUD cents) Diluted earnings per share (AUD cents) 37,384 36,377 25,661 22,938 8,717 17,114 4,345 6,369 18,923 8,717 7,874 4,103 2,958 6,369 8,145 2,693 30,176 29,395 19,549 17,207 6,112 1,613 7,725 1,362 6,363 5,731 280 6,011 1,319 4,692 7,208 462 7,670 1,894 5,776 3.47¢ 3.47¢ 6,982 471 7,453 2,020 5,433 3.27¢ 3.24¢ 3 7 8 8 The income statements are to be read in conjunction with the notes to the financial statements set out on pages 50 to 84. 46 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Statements of recognised income and expense For the year ended 30 June 2008 Consolidated The Company In thousands of AUD Notes 2008 Effective portion of changes in fair value of cash flow hedges Foreign exchange translation differences Net income recognised directly in equity Profit for the year Total recognised income and expense for the year 21 21 - (520) (520) 5,776 5,256 2007 12 (523) (511) 5,433 4,922 2008 2007 - - - 12 - 12 6,363 6,363 4,692 4,704 Other movements in equity arising from transactions with owners as owners are set out in note 21. The amounts recognised directly in equity are disclosed net of tax – see note 15 for tax effect. The statements of recognised income and expense are to be read in conjunction with the notes to the financial statements set out on pages 50 to 84. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 47 Financial Report Balance sheets As at 30 June 2008 In thousands of AUD Current assets Cash and cash equivalents Trade and other receivables Other current assets Total current assets Non-current assets Investments Other financial assets Property, plant and equipment Deferred tax assets Intangible assets Total non-current assets Total assets Current liabilities Trade and other payables Provisions Other current liabilities Total current liabilities Non-current liabilities Deferred tax liabilities Provisions Other non-current liabilities Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity Consolidated The Company Notes 2008 2007 2008 2007 9 10 11 12 13 14 15 16 17 19 20 15 19 20 21 21 21 11,148 10,157 1,926 11,704 11,300 2,014 23,231 25,018 5,279 5,045 10,833 10,954 1,204 17,316 1,605 17,604 - 1,765 2,405 284 12,641 17,095 40,326 2,448 1,139 8,995 12,582 - 1,670 2,893 249 11,365 16,177 41,195 2,165 983 10,279 13,427 54 1,690 2,208 - 12,631 16,583 54 1,583 2,454 - 11,323 15,414 33,899 33,018 1,669 938 5,534 8,141 1,255 741 6,384 8,380 3,141 2,656 3,141 2,656 514 298 3,953 16,535 23,791 497 462 3,615 17,042 24,153 490 105 3,736 11,877 473 232 3,361 11,741 22,022 21,277 794 (482) 680 (570) 794 509 680 415 23,479 24,043 20,719 20,182 23,791 24,153 22,022 21,277 The balance sheets are to be read in conjunction with the notes to the financial statements set out on pages 50 to 84. 48 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Statements of cash flows For the year ended 30 June 2008 In thousands of AUD Notes 2008 2007 2008 2007 Consolidated The Company Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Cash generated from operations Income taxes paid Net cash provided by operating activities 25 Cash flows from investing activities Payments for property, plant and equipment Payments for intellectual property purchases Interest received Dividends received Net cash used in investing activities Cash flows from financing activities Proceeds from issuing of shares Payment of dividend Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at 1 July Effects of exchange rate changes on cash Cash and cash equivalents at 30 June 38,420 40,073 23,541 24,733 (31,341) (31,500) (18,489) (17,731) 7,079 (1,133) 5,946 (198) (160) 462 - 104 8,573 (935) 7,638 (2,103) (361) 471 - (1,993) 5,052 (425) 4,627 (134) (160) 231 1,382 1,319 7,002 (812) 6,190 (1,945) (327) 280 - (1,992) 114 85 114 85 21 (5,826) (4,152) (5,826) (4,152) (5,712) (4,067) (5,712) (4,067) 338 1,578 234 11,704 10,736 5,045 131 4,914 - (894) 11,148 (610) 11,704 9 - 5,279 5,045 The statements of cash flows are to be read in conjunction with the notes to the financial statements set out on 50 to 84. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 49 Notes to the Financial Statements For the year ended 30 June 2008 Note 1. Significant accounting policies Integrated Research Limited (the “Company”) is a company domiciled in Australia. The financial report of the Company for the year ended 30 June 2008 comprises the Company and its subsidiaries (together referred to as the “consolidated entity”). The financial report was authorised for issue by the directors on 22nd September 2008. a) Statement of Compliance The financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards, and Interpretations and the Corporations Act 2001. Accounting Standards include Australian Equivalent to International Financial Reporting Standards (“AIFRS”). Compliance with AIFRS ensures the financial reports of the consolidated entity and the company also comply with the measurement requirements of International Financial Reporting Standards and interpretations adopted by the International Accounting Standards Board. b) Basis of Preparation The financial report is presented in Australian dollars and is prepared on the historical cost basis, with the exception of cash flow hedges, which are at fair value. The company is of a kind referred to in ASIC Class Order (CO) 98/100 dated 10 July 1998 (updated by CO 05/641 effective 28 July 2005 and CO 06/51 effective 31 January 2006) and in accordance with that Class Order, amounts in the financial report and Directors’ Report have been rounded off to the nearest thousand dollars, unless otherwise stated. The preparation of a financial report in conformity with Australian Accounting Standards requires management to make judgements, 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 judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. These accounting policies have been consistently applied by each entity in the consolidated entity. 50 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 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. Standards and Interpretations issued not yet effective At the date of authorisation of the financial report, a number of Standards and Interpretations were in issue but not yet effective. Initial application of the following Standards will not affect any of the amounts recognised in the financial report, but will change the disclosures presently made in relation to the consolidated entity and the company’s financial report: Standard AASB 101 ‘Presentation of Financial Statements’ (revised September 2007), AASB 2007-8 ‘Amendments to Australian Accounting Standards arising from AASB 101’ AASB 8 ‘Operating Segments’, AASB 2007-3 ‘Amendments to Australian Accounting Standards arising from AASB 8’ AASB 123 ‘Borrowing Costs’ (revised), AASB 2007-6 ‘Amendments to Australian Accounting Standards arising from AASB 123’ AASB 3 ‘Business Combinations’ (2008), AASB 127 ‘Consolidated and Separate Financial Statements’ and AASB 2008-3 ‘Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127’ AASB 2008-1 ‘Amendments to Australian Accounting Standard - Share-based Payments: Vesting Conditions and Cancellations’ AASB 2008-2 ‘Amendments to Australian Accounting Standards - Puttable Financial Instruments and Obligations arising on Liquidation’ AASB Interpretation 12 ‘Service Concession Arrangements’, AASB Interpretation 4 ‘Determining whether an Arrangement contains a Lease’ (revised), AASB Interpretation 129 ‘Service Concession Arrangements: Disclosure’ (revised), AASB 2007-2 ‘Amendments to Australian Accounting Standards arising from AASB Interpretation 12’ Effective for annual reporting periods beginning on or after Expected to be initially applied in the financial year ending 1 January 2009 30 June 2010 1 January 2009 30 June 2010 1 January 2009 30 June 2010 30 June 2010 AASB 3 (business combinations occurring after the beginning of annual reporting periods beginning 1 July 2009), AASB 127 and AASB 2008-3 (1 July 2009) 1 January 2009 30 June 2010 1 January 2009 30 June 2010 1 January 2008 30 June 2009 AASB Interpretation 13 ‘Customer Loyalty Programmes’ 1 July 2008 AASB Interpretation 14 ‘AASB 119 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’ 1 January 2008 Improvements to IFRSs (2008) Amendments to IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’ and IAS 27 ‘Consolidated and Separate Financial Statements - Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate’ 1 January 2009 1 January 2009 30 June 2009 30 June 2009 30 June 2010 30 June 2010 IFRIC 15 ‘Agreements for the Construction of Real Estate’ 1 January 2009 IFRIC 16 ‘Hedges of a Net Investment in a Foreign Operation’ 1 October 2008 30 June 2010 30 June 2010 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 51 Notes to the Financial Statements The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial report. Where relevant, the accounting policies applied to the comparative period have been disclosed if they differ from the current period policy. c) Basis of consolidation Subsidiaries are entities controlled by the company. Control exists when the company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial report from the date that control commences until the date that control ceases. Investments in subsidiaries are carried at their cost of acquisition in the company’s financial statements. Intragroup balances and any gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. d) Foreign currency Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Australian dollars at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Australian dollars at foreign exchange rates ruling at the dates the fair value was determined. The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation are translated to Australian dollars at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations, are translated to Australian dollars at rates approximating the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on retranslation are recognised directly in a separate component of equity. e) Derivative financial instruments The consolidated entity uses derivative financial instruments to hedge its exposure to foreign exchange risks arising from operational activities. In accordance with its treasury policy, the consolidated entity does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are recognised initially at cost. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised immediately in profit or loss. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. 52 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 f) Hedging On entering into a hedging relationship, the consolidated entity normally designates and documents the hedge relationship and risk management objective and strategy for undertaking the hedge. The documentation included identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they are designated. For cash flow hedges, the associated cumulative gain or loss is removed from equity and recognised in the income statement in the same period or periods during which the hedged forecast transaction affects profit or loss. The ineffective part of any gain or loss is recognised immediately in the income statement. g) Property, plant and equipment Items of property, plant and equipment are stated at cost or deemed cost less accumulated depreciation and impairment losses (see accounting policy (k)). The cost of acquired assets includes (i) the initial estimate at the time of installation and during the period of use, when relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and (ii) changes in the measurement of existing liabilities recognised for these costs resulting from changes in the timing or outflow of resources required to settle the obligation or from changes in the discount rate. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Depreciation is provided on property plant and equipment. Depreciation is calculated on a straight line basis so as to write off the net cost of each asset over its expected useful life to its estimated residual value. Leasehold improvements are depreciated over the period of the lease or estimated useful life, whichever is the shorter, using the straight line method. The estimated useful lives, residual values and depreciation method are reviewed annually, with the effect of any changes recognised on a prospective basis. The following useful lives are used in the calculation of depreciation: > > Leasehold improvements 6 to 10 years Plant and equipment 4 to 8 years h) Intangible Assets Research and development Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the income statement as an expense as incurred. Expenditure on development activities, whereby research findings 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 consolidated entity has sufficient resources to complete development. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Other development expenditure is recognised in the income statement as an expense as incurred. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses (see accounting policy (k)). Amortisation is charged to the income statement on a straight-line basis over the estimated useful life, but no more than three years. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 53 Notes to the Financial Statements Intellectual property Intellectual property acquired from third parties is amortised over its estimated useful life. Computer software Computer software is stated at cost and depreciation on a straight-line basis over 2½ years. i) Trade and other receivables Trade and other receivables are stated at their amortised cost less impairment losses. The carrying amount of uncollectible trade receivables is reduced by an impairment loss through the use of an allowance account. Provision for returns is offset against trade receivables for estimated warranty claims based upon historical experience. j) Cash and cash equivalents Cash and cash equivalents comprises cash balances and call deposits with an original maturity of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the consolidated entity’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. k) Impairment The carrying amounts of the consolidated entity’s assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. For intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date. 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 the asset has previously been revalued, in which case the impairment loss is recognised as a reversal to the extent of that previous revaluation with any excess recognised through the income statement. Impairment of receivables is not recognised until objective evidence is available that a loss event has occurred. Significant receivables are individually assessed for impairment. Impairment testing is performed by placing non-significant receivables in portfolios of similar risk profiles, based on objective evidence from historical experience adjusted for any effects of conditions existing at each balance date. The recoverable amount of other assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. l) Employee benefits Superannuation Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as incurred. There are no defined benefit plans in operation. Long-term service benefits The consolidated entity’s net obligation in respect of long-term service benefits, other than pension plans, is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using expected future increases in wage and salary rates including related on-costs and expected settlement dates, and is discounted using the rates attached to the Commonwealth Government bonds at the balance sheet date which have maturity dates approximating to the terms of the consolidated entity’s obligations. 54 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Share-based payment transactions The share option programme allows the company and the consolidated entity employees to acquire shares of the Company. The fair value of options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using a binomial option pricing model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest except where forfeiture is only due to share prices not achieving the threshold for vesting. Wages, salaries, annual leave, and non-monetary benefits Liabilities for employee benefits for wages, salaries and annual leave represent present obligations resulting from employees’ services provided to reporting date, calculated at undiscounted amounts based on remuneration wage and salary rates that the consolidated entity expects to pay as at reporting date including related on-costs, such as, workers compensation insurance and payroll tax. m) Provisions A provision is recognised in the balance sheet when the consolidated entity has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. n) Trade and other payables Trade and other payables are stated at their amortised cost. o) Revenue The consolidated entity allocates revenue to each element in software arrangements involving multiple elements based on the relative fair value of each element. The typical elements in the multiple element arrangement are licence and maintenance fees. The company’s determination of fair value is based on the price charged when the same element is sold separately. Revenue from the sale of licences, where the consolidated entity has no post delivery obligations to perform is recognised in the income statement at the date of delivery of the licence key. Revenue from maintenance contracts is recognised rateably over the term of the service agreement, which is typically one year. Maintenance contracts are typically priced based on a percentage of licence fees and have a one year term. Services provided to customers under maintenance contracts include technical support and supply of software updates. Revenue from multiple element software arrangements, where the fair value of an undelivered element cannot be reliably measured are recognised over the period the undelivered services are provided. Revenue from consulting services is recognised over the period the services are provided. No revenue is recognised if there are significant uncertainties regarding the recovery of the consideration due, the costs incurred or to be incurred cannot be measured reliably, there is a risk of return of goods or there is continuing management involvement with the goods. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 55 Notes to the Financial Statements p) Expenses Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense and spread over the lease term. Net financing costs Net financing costs comprise interest payable on borrowings calculated using the effective interest method, interest receivable on funds invested, dividend income, foreign exchange gains and losses, and gains and losses on hedging instruments that are recognised in the income statement (see accounting policy 1(f)). q) Segment reporting A segment is a distinguishable component of the consolidated entity that is engaged in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. r) Income tax Income tax on the income statement for the periods presented comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. 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 financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend. s) Goods and Services Tax Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST), or similar taxes, 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 or payable is included as a current asset or liability in the balance sheet. Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities, which are recoverable or payable are classified as operating cash flows. 56 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 t) Significant accounting judgements, estimates and assumptions The carrying amounts of certain assets and liabilities are often determined based on estimates and assumptions of future events. The key estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of certain assets and liabilities within the next annual reporting period are: Intangible assets An intangible asset arising from development expenditure on an internal project is recognised only when the economic entity can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the development and the ability to measure reliably the expenditure attributable to the intangible asset during its development. Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure so capitalised is amortised over the period of expected benefits from the related project commencing from the commercial release of the project. The carrying value of an intangible asset arising from development expenditure is tested for impairment annually when the asset is not yet available for use or more frequently when an indication of impairment arises during the reporting period. Share based payment transactions The consolidated entity measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by using a binomial option pricing model and applying management determined probability factors relating to non-market vesting conditions. Note 2. Segment reporting The consolidated entity operates predominantly in a single business segment, being computer software products business segment. Segment information is presented in respect of the consolidated entity’s geographic segments, which are the primary basis of segment reporting. The geographic segment reporting format reflects the consolidated entity’s management and internal reporting structure. Inter-segment pricing is determined on an arm’s length basis. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise inter segment revenue less unallocated head office expenses, corporate and inter segment assets and liabilities. Segment capital expenditure is the total cost incurred during the year to acquire segment assets that are expected to be used for more than one period. The consolidated entity is managed on a worldwide basis, but operates in the following three geographical segments: > > > The Americas. Operating from the United States with responsibility for the countries in North, Central and South America. Europe. Operating from the United Kingdom with responsibility for the countries in Europe. Asia Pacific. Operating from Australia with responsibility for the countries in the rest of the world, including Head Office revenue and expenses. In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of the assets. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 57 Notes to the Financial Statements Geographic segments In thousands of AUD Sales to customers outside the consolidated entity Inter- segment sales Total segment revenue Total revenue Segment results Results from operating activities Financing income Income tax expense Profit for the period Segment assets Total assets Segment liabilities Total liabilities Capital expenditure Total capital expenditure Depreciation and amortisation expenditure Total depreciation and amortisation expenditure Americas Europe Asia Pacific Corporate Australia* Eliminations Consolidated 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 23,050 21,672 6,428 6,975 7,358 7,198 548 259 - 273 37,384 36,377 - - - - - - 17,555 15,481 (17,555) (15,481) - - 23,050 21,672 6,428 6,975 7,358 7,198 18,103 15,740 (17,555) (15,208) 37,384 36,377 37,384 36,377 918 774 202 204 796 326 5,292 5,405 - 273 7,208 6,982 7,208 6,982 462 471 (1,894) (2,020) 5,776 5,433 15,981 15,351 4,302 5,126 5,473 4,742 28,426 28,276 (13,856) (12,300) 40,326 41,195 40,326 41,195 15,121 13,363 3,393 4,207 5,747 4,550 6,130 7,192 (13,856) (12,270) 16,535 17,042 52 53 12 139 29 24 265 2,248 133 154 54 40 51 40 6,436 4,526 16,535 17,042 358 2,464 358 2,464 6,674 4,760 - - - - 6,674 4,760 * Corporate Australia includes both the corporate head office and development functions of the Company. 58 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Note 3. Other income In thousands of AUD Interest income Dividends received Note 4. Expenses Total expenses include: In thousands of AUD Depreciation and amortisation Operating lease rental expenses Net foreign exchange (gain)/loss Note 5. Personnel expenses In thousands of AUD Wages and salaries Other associated personnel expenses Superannuation contributions Employee options and share grant Increase in liability for annual leave Increase in liability for long service leave Consolidated The Company 2008 2007 462 - 462 471 - 471 2008 231 1,382 1,613 2007 280 - 280 Consolidated The Company Notes 2008 2007 2008 2007 6,674 4,760 6,487 4,566 1,304 273 1,316 63 940 (32) 919 150 Consolidated The Company Notes 2008 2007 2008 2007 18 21,666 19,165 13,705 11,069 1,226 837 174 167 6 1,972 818 85 35 71 1,005 837 174 208 6 1,504 818 85 86 71 24,076 22,146 15,935 13,633 Personnel expenses are shown before the capitalisation of development costs. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 59 Notes to the Financial Statements Note 6. Auditors’ remuneration 2008 – Deloitte Touche Tohmatsu 2007 – DTT NSW In thousands of AUD Consolidated The Company 2008 2007 2008 2007 Remuneration for audit and review of the financial reports of the Company or any entity in the consolidated entity: Audit and review of financial reports: Auditors of the company Other auditors 129,335 129,000 86,654 87,000 25,521 - - - Remuneration for other services by the auditors of the Company or any entity in the consolidated entity: Taxation services: Auditors of the company Other auditors Other services: 47,544 27,500 47,544 12,000 2,813 - - - Auditors of the company (sundry accounting advice) 9,495 5,000 9,495 5,000 Note 7. Income tax expense Recognised in the income statement In thousands of AUD Current tax expense: Current year Prior year adjustments Deferred tax expense: Origination and reversal of temporary differences 15 Total income tax expense in income statement Consolidated The Company Note 2008 2007 2008 2007 1,388 56 1,444 450 1,894 1,071 353 1,424 596 2,020 806 71 877 485 1,362 768 156 924 395 1,319 60 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Note 7. Income tax expense (continued) Numerical reconciliation between income tax expense and profit before tax In thousands of AUD Profit before tax Income tax using the domestic corporate tax rate of 30% Increase in income tax expense due to: Non-deductible expenses Effect of tax rates in foreign jurisdictions Decrease in income tax expense due to: R&D tax incentive Foreign sourced income (net of expense) Prior year adjustments Income tax expense Note 8. Earnings per share Consolidated The Company 2008 7,670 2,301 98 97 2007 7,453 2,236 84 29 (658) (682) - 56 - 353 2008 7,725 2,318 46 - (658) (415) 71 2007 6,011 1,804 41 - (682) - 156 1,894 2,020 1,362 1,319 The calculation of basic and diluted earnings per share at 30 June 2008 was based on the profit attributable to ordinary shareholders of $5,776,000 (2007: $5,433,000); a weighted number of ordinary shares outstanding during the year ended 30 June 2008 of 166,504,416 (2007: 166,020,868); and a weighted number of ordinary shares (diluted) outstanding during the year ended 30 June 2008 of 166,600,781(2007:167,401,517), calculated as follows: In thousands of AUD Profit for the year Weighted average number of shares used as the denominator (Number) Number for basic earnings per share: Ordinary shares Effect of employee share options on issue Number for diluted earnings per share Basic earnings per share (AUD cents) Diluted earnings per share (AUD cents) Consolidated 2008 5,776 2007 5,433 Consolidated 2008 2007 166,504,416 166,020,868 96,365 1,380,649 166,600,781 167,401,517 3.47¢ 3.47¢ 3.27¢ 3.24¢ INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 61 Notes to the Financial Statements Note 9. Cash and cash equivalents In thousands of AUD Cash at bank and on hand Note 10. Trade and other receivables In thousands of AUD Trade debtors Less: Allowance for doubtful debts Less: Provision for returns GST receivable Receivable from controlled entities Consolidated The Company 2008 2007 11,148 11,704 2008 5,279 2007 5,045 Consolidated The Company 2008 2007 10,576 11,606 (187) (333) - (402) 2008 1,508 (80) (41) 10,056 11,204 1,387 101 - 96 - 101 9,345 2007 3,628 - (97) 3,531 96 7,327 10,157 11,300 10,833 10,954 The credit period on sales ranges from 30 to 90 days. No interest is charged on trade debtors. Ageing of past due but not impaired: In thousands of AUD Past due 90 days Consolidated The Company 2008 2,047 2007 1,912 2008 87 2007 666 The movement in the allowance for doubtful debts in respect of trade receivables is detailed below: In thousands of AUD Balance at beginning of year Amounts written off during the year Increase/(decrease) in provision Balance end of year Consolidated The Company 2008 2007 2008 2007 - - 187 187 - - - - - - 80 80 - - - - The allowance for doubtful debts has been estimated based upon specific debtor accounts where the estimated future cashflow is less than the carrying amount. For all other accounts that are greater than 90 days past due, no further provisioning has been made as a result of historical collection patterns. 62 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Note 11. Other current assets In thousands of AUD Franking deficit tax offset benefit Income taxes receivable Other prepayments Note 12. Investments In thousands of AUD Consolidated The Company 2008 292 1,006 628 1,926 2007 2008 2007 788 744 482 292 570 342 789 525 291 2,014 1,204 1,605 Consolidated The Company 2008 2007 2008 2007 Shares in controlled entities at cost (refer Note 24) - - 54 54 Note 13. Other financial assets In thousands of AUD Deposits Consolidated The Company 2008 1,765 2007 1,670 2008 1,690 2007 1,583 Deposits are term deposits which are held to secure a bank guarantee on leased premises and a foreign exchange facility. The carrying amount of other financial assets is a reasonable approximation of their fair value. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 63 Notes to the Financial Statements Note 14. Property, plant and equipment Plant and Equipment In thousands of AUD Carrying amount at start of year Additions Depreciation expense Carrying amount at end of year Leasehold Improvements In thousands of AUD Carrying amount at start of year Additions Disposals Depreciation expense Carrying amount at end of year Consolidated The Company 2008 2007 2008 2007 835 193 (341) 687 869 453 (487) 835 682 129 (250) 561 624 369 (311) 682 Consolidated The Company 2008 2,058 5 (151) (194) 1,718 2007 268 2,017 (21) (206) 2,058 2008 1,772 5 - (130) 1,647 2007 48 1,945 (21) (200) 1,772 Carrying amounts In thousands of AUD Consolidated The Company Plant and Equipment Leasehold Improvements Balance at 30 June 2007 Balance at 30 June 2008 835 687 2,058 1,718 Total 2,893 2,405 Plant and Equipment Leasehold Improvements 682 561 1,772 1,647 Total 2,454 2,208 64 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Note 15. Deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Consolidated In thousands of AUD Property, plant and equipment Intangible assets Trade and other payables Employee benefits Provisions Other current liabilities Unrealised foreign exchange loss Deferred tax assets/liabilities Set off of deferred tax asset Net deferred tax assets/liabilities The Company In thousands of AUD Property, plant and equipment Intangible assets Trade and other payables Employee benefits Provisions Other current liabilities Unrealised foreign exchange loss Deferred tax assets/liabilities Set off of deferred tax asset Net deferred tax assets/liabilities Assets Liabilities Net 2008 2007 2008 2007 2008 2007 50 - 67 372 281 40 100 910 86 67 23 315 259 18 115 883 (626) 284 (634) 249 - - 50 86 3,754 3,280 (3,754) (3,214) - - - 13 - - - - 10 - 67 372 281 27 100 23 315 259 9 115 3,767 (626) 3,141 3,290 (634) 2,656 (2,857) (2,407) - - (2,857) (2,407) Assets Liabilities Net 2008 2007 2008 2007 2008 2007 37 - 26 318 145 - 100 626 29 66 23 256 145 - 115 634 (626) (634) - - - - 37 29 3,754 3,280 (3,754) (3,214) - - - 13 - - - - 10 - 26 318 145 (13) 100 23 256 145 (10) 115 3,767 (626) 3,141 3,290 (634) 2,656 (3,141) (2,656) - - (3,141) (2,656) INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 65 Notes to the Financial Statements Note 15. Deferred tax assets and liabilities (continued) Movement in temporary differences during the year: For year ended 30 June 2008 Consolidated The Company In thousands of AUD Property, plant and equipment Intangible assets Balance 1 Jul 07 Recognised in income Balance 30 Jun 08 Balance 1 Jul 07 Recognised in income Balance 30 Jun 08 86 (36) 50 29 8 37 (3,214) (540) (3,754) (3,214) (540) (3,754) Trade and other payables Employee benefits Provisions Other current liabilities Unrealised foreign exchange loss 23 315 259 9 115 44 57 22 18 (15) 67 372 281 27 100 23 256 145 (10) 115 3 62 - (3) (15) 26 318 145 (13) 100 (2,407) (450) (2,857) (2,656) (485) (3,141) For year ended 30 June 2007 Consolidated The Company In thousands of AUD Balance 1 Jul 06 Recognised in income Balance 30 Jun 07 Balance 1 Jul 06 Recognised in income Balance 30 Jun 07 Trade and other receivables Property, plant and equipment Intangible assets Trade and other payables Employee benefits Provisions Other current liabilities Unrealised foreign exchange loss 4 56 (2,654) 257 370 105 51 - (4) 30 (560) (234) (55) 154 (42) 115 - 86 4 - (4) 29 - 29 (3,214) (2,654) (560) (3,214) 23 315 259 9 115 - 272 96 21 - 23 (16) 49 (31) 115 23 256 145 (10) 115 (1,811) (596) (2,407) (2,261) (395) (2,656) There were no deferred tax adjustments recognised directly in equity (2007: $ nil). 66 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Note 16. Intangible assets The amortisation and impairment charge is recognised in the following line item in the income statement: In thousands of AUD Research and development expenses Consolidated The Company 2008 6,138 6,138 2007 4,067 4,067 2008 6,107 6,107 2007 4,055 4,055 Cost In thousands of AUD Balance at 1 July 2006 Fully amortised & offset Internally developed Acquired Balance at 30 June 2007 Balance at 1 July 2007 Internally developed Acquired 13,916 (23) 5,454 16 19,363 19,363 7,255 - Balance at 30 June 2008 26,618 Consolidated The Company Software develop- ment Patents & trade- marks Third party software Total Software develop- ment Patents & trade- marks Third party software Total 33 546 14,495 13,916 - - - 33 33 - - 33 - - 395 941 (23) (23) 5,454 5,454 411 16 20,337 19,363 941 20,337 19,363 - 160 7,255 160 7,255 - 1,101 27,752 26,618 - - - - - - - - - 484 14,400 - - 350 834 (23) 5,454 366 20,197 834 20,197 - 160 994 7,255 160 27,612 Amortisation In thousands of AUD Consolidated The Company Software develop- ment Patents & trade- marks Third party software Total Software develop- ment Patents & trade- marks Third party software Total Balance at 1 July 2006 Fully amortised & offset Amortisation for year Balance at 30 June 2007 4,358 (23) 3,992 8,327 Balance at 1 July 2007 8,327 Fully amortised & offset Amortisation for year 5,874 Balance at 30 June 2008 14,201 24 - 1 25 25 8 33 546 4,928 - 74 620 (23) 4,067 8,972 4,358 (23) 3,992 8,327 620 8,972 8,327 257 877 6,139 15,111 5,874 14,201 - - - - - - - 484 4,842 - 63 547 (23) 4,055 8,874 547 8,874 233 780 6,107 14,981 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 67 Notes to the Financial Statements Note 16. Intangible assets (continued) Carrying amounts In thousands of AUD Balance at 30 June 2007 Balance at 30 June 2008 Consolidated The Company Software develop- ment 11,036 12,417 Patents & trade- marks Third party software Total Software develop- ment Patents & trade- marks Third party software Total 8 - 321 224 11,365 12,641 11,036 12,417 - - 287 214 11,323 12,631 Note 17. Trade and other payables In thousands of AUD Payable to controlled entities Trade and other creditors The average credit period on trade and other payables is 30 days. Note 18. Employee benefits Current In thousands of AUD Liability for untaken annual leave Liability for long service leave Non-current In thousands of AUD Liability for long service leave Consolidated The Company 2008 2007 2008 - 2,448 2,448 - 2,165 2,165 - 1,669 1,669 2007 68 1,187 1,255 Consolidated The Company 2008 2007 2008 2007 983 156 1,139 816 167 983 782 156 938 574 167 741 Consolidated The Company 2008 130 2007 113 2008 130 2007 113 68 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Pension plans Employees of the consolidated entity accumulate pension benefits through statutory contributions by the entities in the consolidated entity as required by the laws of the jurisdictions in which they operate, supplemented by individual contributions. The consolidated entity does not provide any defined benefit pension plans. Share based payments On 4 October 2000, the consolidated entity established a share option programme that entitles employees to purchase shares in the entity. In accordance with this programme, options are exercisable at the market price of the shares at the date of grant. The terms and conditions of the grants made and number outstanding at 30 June 2008 are as follows: > > > > All options vest at the rate of 25% per annum, starting on the first anniversary of the grant date The contractual life of each option is five years from the grant date Exercises are settled by physical delivery of shares Grants marked (*) include performance hurdles as conditions for vesting Grant date Aug 2003 Feb 2004 Apr 2004 (*) May 2004 Jul 2004 Nov 2004 Feb 2005 Apr 2005 (*) Sep 2005 Exercise Price Number of Instruments Outstanding Grant date Exercise Price Number of Instruments Outstanding $0.22 $0.26 $0.46 $0.33 $0.40 $0.57 $0.52 $0.46 $0.54 115,250 198,510 May 2006 Aug 2006 (*) 300,000 Jan 2007 (*) 205,365 278,000 400,000 336,500 200,000 510,000 Jun 2007 Sep 2007 (*) Mar 2008 (*) Mar 2008 (*) Apr 2008 (*) $0.41 $0.44 $0.50 $0.48 $0.42 $0.38 $0.43 $0.38 654,000 170,000 160,000 848,000 1,000,000 350,000 350,000 300,000 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 69 Notes to the Financial Statements Note 18. Employee benefits (continued) The number and weighted average exercise prices of share options is as follows: Weighted Average exercise price Number of options Weighted Average exercise price Number of options In thousands of AUD Outstanding at the beginning of the year Forfeited during the year Exercised during the year Granted during the year Outstanding at the end of the year Exercisable at the end of the year (vested) 2008 $0.44 $0.48 $0.21 $0.41 $0.44 $0.44 2008 7,280 (2,371) (533) 2,000 6,376 2,607 2007 $0.45 $0.51 $0.28 $0.47 $0.44 $0.48 2007 7,824 (2,960) (298) 2,714 7,280 3,349 The options outstanding at 30 June 2008 have an exercise price in the range of $0.22 to $0.57 and a weighted average contractual life of five years. During the year ended 30 June 2008, 532,605 options were exercised (2007: 298,020). The fair values of services received in return for share options granted to employees is measured by reference to the fair value of share options granted. The estimate of the fair value of the services received is measured based on the Binomial option-pricing model. The contractual life of the option (five years) is used as an input into this formula. Expectations of early exercise are incorporated into the Binomial formula. Fair value of share options and assumptions For year ended 30 June 2008 Grant date Fair value at measurement date Share price Exercise price Expected volatility (expressed as weighted average volatility used in the modelling under the Binomial formula) Option life (expressed as weighted average life used in the modelling under the Binomial formula) 9 Sept 07 3 Mar 08 31 Mar 08 14 Apr 08 $0.14 $0.42 $0.42 65% $0.16 $0.38 $0.38 64% $0.13 $0.43 $0.43 64% $0.16 $0.38 $0.38 64% 5 years 5 years 5 years 5 years Expected dividends 5% 5% 5% 5% Risk-free interest rate (based on national government bonds) 7.25% 7.25% 7.25% 7.25% 70 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Fair value of share options and assumptions For year ended 30 June 2007 Grant date 7 Aug 2006 15 Aug 2006 1 Nov 2006 23 Jan 2007 23 Jan 2007 Fair value at measurement date Share price Exercise price Expected volatility (expressed as weighted average volatility used in the modelling under the Binomial formula) Option life (expressed as weighted average life used in the modelling under the Binomial formula) Expected dividends Risk-free interest rate (based on national government bonds) $0.14 $0.44 $0.44 47% $0.16 $0.46 $0.46 47% $0.19 $0.57 $0.57 46% $0.18 $0.50 $0.50 46% $0.17 $0.48 $0.48 46% 5 years 5 years 5 years 5 years 5 years 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share options), adjusted for any expected changes to future volatility due to publicly available information. Share options are granted under a service condition and, for grants to key management personnel, a non-market performance condition related to profitability of the consolidated entity. Such conditions are not taken into account in the grant date fair value measurement of the services received. There are no market conditions associated with the share option grants. The fair value of the options at grant date is determined based on the Binomial formula using the above model inputs. During the year ended 30 June 2008, the company and consolidated entity recognised expense of $174,000 related to the fair value of options granted (2007: $85,000 in company and consolidated entity). INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 71 Notes to the Financial Statements Note 19. Provisions Current In thousands of AUD Employee benefits Non-current In thousands of AUD Employee benefits Lease make good Other Note 20. Other liabilities Current In thousands of AUD Deferred revenue Non-current In thousands of AUD Deferred revenue Consolidated The Company 2008 1,139 2007 983 2008 938 2007 741 Consolidated The Company 2008 2007 2008 2007 130 360 24 514 113 360 24 497 130 360 - 490 113 360 - 473 Consolidated The Company 2008 8,995 2007 10,279 2008 5,534 2007 6,384 Consolidated The Company 2008 298 2007 462 2008 105 2007 232 72 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Note 21. Capital and reserves Reconciliation of movement in capital and reserves attributed to equity holders in the parent: Consolidated In thousands of AUD Share capital Hedging reserve Translation reserve Employee benefit reserve Retained earnings Total Balance at 1 July 2006 538 - - - 142 - 680 680 - - - 114 - 794 Total recognised income and expense Expensed employee options Lapsed employee options Shares issued Dividends to shareholders Balance at 30 June 2007 Balance at 1 July 2007 Total recognised income and expense Transfer from translation reserve to retained earnings Expensed employee options Shares issued Dividends to shareholders Balance at 30 June 2008 The Company In thousands of AUD (12) 12 (462) (523) - - - - - - - - - - - - - - - - (985) (985) (520) 514 - - - (991) 482 - 85 (100) (52) - 415 415 - - 174 (80) - 509 22,662 5,433 - 100 - (4,152) 24,043 24,043 5,776 (514) - - 23,208 4,922 85 - 90 (4,152) 24,153 24,153 5,256 - 174 34 (5,826) 23,479 (5,826) 23,791 Share capital Hedging reserve Translation reserve Employee benefit reserve Retained earnings Total Balance at 1 July 2006 538 Total recognised income and expense Expensed employee options Lapsed employee options Shares issued Dividends to shareholders Balance at 30 June 2007 Balance at 1 July 2007 Total recognised income and expense Expensed employee options Shares issued Dividends to shareholders Balance at 30 June 2008 - - - 142 - 680 680 - - 114 - 794 (12) 12 - - - - - - - - - - - - - - - - - - - - - - - - 482 - 85 (100) (52) - 415 415 - 174 (80) - 509 19,542 4,692 20,550 4,704 - 100 - 85 - 90 (4,152) 20,182 (4,152) 21,277 20,182 6,363 - - (5,826) 20,719 21,277 6,363 174 34 (5,826) 22,022 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 73 Notes to the Financial Statements Note 21. Capital and reserves (continued) Share capital In thousands of shares On issue 1 July Issued for cash against employee options exercised under ESOP On issue 30 June Ordinary shares 2008 2007 166,203 165,905 532 298 166,735 166,203 Effective 1 July 1998, the Company Law Reform 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. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All shares rank equally with regard to the Company’s residual assets. Hedging reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred. Translation reserve The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations where their functional currency is different to the presentation currency of the reporting entity, as well as from the translation of liabilities that hedge the Company’s net investment in a foreign subsidiary. Employee benefit reserve The employee benefit reserve arises on the grant of share options to employees under the consolidated entity’s Employee Share Option Plan. Amounts are transferred out of the reserve and into share capital when the options are exercised. Refer to note 18 for further detail. Dividends Dividends paid in the current year by the company are: In thousands of AUD Cents per share Total amount Franked/unfranked Date of payment 2008 Final 2007 Interim 2008 Total amount 2007 Final 2006 Interim 2007 Total amount 2.0¢ 1.5¢ 1.5¢ 1.0¢ 3,326 2,500 5,826 2,490 1,662 4,152 Unfranked Unfranked 14 Sep 07 7 Mar 08 Unfranked Unfranked 15 Sep 06 16 Mar 07 74 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 After the balance sheet date, the following dividend was proposed by the directors. The declaration and subsequent payment of dividends has no income tax consequences. The financial effect of this dividend has not been brought to account in the financial statements for the year ended 30 June 2008 and will be recognised in subsequent financial reports: In thousands of AUD Cents per share Total amount Franked/ unfranked Date of payment Final 2008 1.5 2,501 Unfranked 12 Sep 08 Note 22. Financial instruments Capital risk management The company and consolidated entity manages its capital to ensure that controlled entities will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of treasury management. The capital structure of the company and consolidated entity consists of cash and cash equivalents and equity attributable to equity holders of the company, comprising issued capital, reserves, and retained earnings as disclosed in Notes 9 and 21 respectively. Significant accounting policies Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in Note 1 to the financial statements. Financial risk management objectives The Board of Directors has overall responsibility for the establishment and oversight of the company and consolidated entity’s financial management framework. The Board has an established Audit Committee, which is responsible for developing and monitoring the consolidated entity’s financial management policies. The Committee provides regular reports to the Board of Directors on its activities. The Audit Committee oversees how Management monitors compliance with risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks. The main risk arising from the company and consolidated entity’s financial instruments are currency risk, credit risk, liquidity risk and cash flow interest rate risk. The company and consolidated entity seeks to minimise the effects of these risks, where deemed appropriate, by using derivative financial instruments to hedge these risk exposures. The use of financial derivatives is governed by the company and consolidated entity’s policies on foreign exchange risk, credit risk, the use of financial derivatives and non-derivative financial instruments, and the investment of excess liquidity. The company and consolidated entity does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 75 Notes to the Financial Statements Note 22. Financial instruments (continued) Market risk The company and consolidated entity’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates. The company and consolidated entity enters into foreign exchange forward contracts to hedge the exchange rate risk arising from transactions not recorded in an entity’s functional currency. Foreign currency risk management The company and consolidated entity undertakes certain transactions denominated in foreign currencies, hence exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters utilising forward foreign exchange contracts. The carrying amount of the company and the consolidated entity’s foreign currency denominated monetary assets and monetary liabilities at the reporting date that are denominated in a currency that is different to its functional currency are as follows: In thousands of AUD Consolidated The Company Liabilities Assets Liabilities Assets 2008 2007 - - - - 2008 1,201 - 2007 2,662 - 2008 2007 - - - - 2008 9,108 1,437 2007 8,258 1,730 US Dollar UK Sterling (i) Foreign currency sensitivity At 30 June 2008, if the US Dollar and UK sterling weakened against the Australian dollar by the percentage shown, with all other variables held constant, net profit for the year would increase (decrease) by: In thousands of AUD USD Impact UK Sterling Impact Consolidated The Company Consolidated The Company 2008 2007 133 133 295 295 2008 1,012 1,012 2007 2008 2007 2008 2007 918 918 158 158 193 193 158 158 193 193 Net profit Retained earnings Change in currency (i) – 10% decrease (i) This has been based on the change in the exchange rate against the Australian dollar in the financial years ended 30 June 2008 and 30 June 2007. The sensitivity analysis has been based on the sensitivity rates used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the possible change in foreign exchange rates based on historical volatility. 76 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 In management’s opinion, the sensitivity analysis is not fully representative of the inherent foreign exchange risk as the year end exposure does not necessarily reflect the exposure during the course of the year. The consolidated entity includes certain subsidiaries whose functional currencies are different to the consolidated entity presentation currency. The main operating entities outside of Australia are based in the United States and the United Kingdom. These entities transact primarily in their functional currency and do not have significant foreign currency exposures due to outstanding foreign currency denominated items. As stated in the company and consolidated entity’s accounting policies per Note 1, on consolidation the assets and liabilities of these entities are translated into Australian dollars at exchange rates prevailing on the balance sheet date. The income and expenses of these entities is translated at the average exchange rates for the year. Exchange differences arising are classified as equity and are transferred to a foreign exchange translation reserve. The company and consolidated entity’s future reported profits could therefore be impacted by changes in rates of exchange between the Australian Dollar and the United States Dollar and the Australian Dollar and the UK Sterling. (ii) Forward foreign exchange contracts The company and consolidated entity is exposed to foreign currency risk on sales and purchases that are denominated in a currency other than the AUD. The currencies giving rise to this risk are primarily United States Dollar and UK Sterling. The company and consolidated entity uses forward exchange contracts to hedge its foreign currency risk. The forward exchange contracts have maturities of less than one year after the balance sheet date. Where necessary, the forward exchange contracts are rolled over at maturity. The company and consolidated entity classifies its forward exchange contracts hedging forecasted transactions as cash flow hedges and measures them at fair value. The fair value of hedge contracts at 30 June 2008 is $nil (30 June 2007: fair value: $Nil). The company and consolidated entity did not have any forward exchange contracts at either 30 June 2008 or 30 June 2007. Interest rate risk management The company and the consolidated entity are not exposed to interest rate risk due to the absence of interest bearing debt, other than cash in bank. Credit risk management Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in financial loss to the company and consolidated entity. The company and consolidated entity has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of accounts. The company and consolidated entity does not have any significant credit risk exposure to any single counterparty or any consolidated entity of counterparties having similar characteristics. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 77 Notes to the Financial Statements Note 22. Financial instruments (continued) Liquidity risk management Ultimate responsibility for liquidity risk management rests with the board of directors, who have built an appropriate liquidity risk management framework for the management of the company and consolidated entity’s short, medium and long-term funding and liquidity management requirements. The company and consolidated entity manages liquidity risk by maintaining adequate reserves, by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. All creditor and other payables shown in note 17 for both 2008 and 2007 carry no interest obligation and have a maturity of less than three months. Fair value of financial instruments The carrying value of financial assets and financial liabilities of the company and consolidated entity is a reasonable approximation of their fair value. Note 23. Operating leases Non-cancellable operating lease rentals is for office space with payables as follows: In thousands of AUD Less than one year Between one and five years Greater than five years Note 24. Consolidated entities Parent entity: Integrated Research Limited Subsidiaries: Integrated Research, Inc Integrated Research UK Limited Consolidated The Company 2008 1,016 3,371 - 4,387 2007 1,120 4,072 542 5,374 2008 813 2,983 - 2007 813 3,254 542 3,796 4,609 Country of incorporation Ownership interest 2008 2007 Australia USA UK 100% 100% 100% 100% In the financial statements of the company, investments in controlled entities are measured at cost. 78 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Note 25. Reconciliation of cash flows from operating activities In thousands of AUD Profit for the year Depreciation and amortisation Provision for doubtful debts Allowance for returns Interest received Dividend received Net exchange differences Change in operating assets and liabilities: (Increase)/decrease in trade debtors (Increase)/decrease in future income tax benefit Consolidated The Company 2008 5,776 6,674 187 (69) (462) - 894 1,030 (35) 2007 5,433 4,760 112 - (471) - (62) 4,308 395 2008 6,363 6,487 80 (56) (231) (1,382) - 2007 4,692 4,566 59 - (280) - (150) 2,120 2,977 - - (Increase)/decrease in other operating assets (7,086) (5,923) (8,984) (5,877) Increase/(decrease) in trade creditors Increase/(decrease) in other operating liabilities Increase/(decrease) in provision for income taxes payable Increase/(decrease) in provision for deferred income taxes Increase/(decrease) in other provisions Increase/(decrease) in reserves Net cash from operating activities 253 (1,448) - 485 173 (426) 5,946 (213) 436 (926) 201 72 (484) 7,638 414 (977) - 485 214 94 426 492 (429) (395) 70 39 4,627 6,190 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 79 Notes to the Financial Statements Note 26. Key management personnel disclosures The following were key management personnel of the consolidated entity at any time during the reporting period and unless otherwise indicated were key management personnel for the entire period: Non-executive directors Steve Killelea (Chairman) David Boyles John Brown (appointed July 2007) Kate Costello Alex Kennedy (resigned July 2007) Clyde McConaghy (appointed December 2007) Executive directors Keith Andrews (CEO, resigned September 2007) Mark Brayan (CEO, appointed September 2007) Other key management personnel (full year) Other key management personnel (part year) David Leighton (Company Secretary) Peter Adams (CFO, appointed March 2008) Kurt Roscow (VP, Americas) Nathan Brumby (CTO, resigned November 2007) Steve Douglas (VP, Europe, resigned December 2007) Rick Ferguson (GM, AsiaPac, appointed March 2008) Stephen Rorie (CFO, resigned November 2007) David Stark, (VP, Europe, appointed March 2008) David Taylor (GM AsiaPac, resigned October 2007) Key management personnel compensation The key management personnel compensation included in “personnel expenses” (see note 5) are as follows: In AUD Short-term benefits Post-employment benefits Termination benefits Consolidated The Company 2008 2007 2008 2007 1,865,737 2,167,998 1,259,183 1,461,007 219,656 300,000 181,341 - 219,656 300,000 181,341 - Equity compensation benefits 10,029 13,955 8,537 12,902 2,395,422 2,363,294 1,787,376 1,655,250 Individual directors and executives compensation disclosures Information regarding individual directors and executives compensation is provided in the remuneration report on pages 26 to 34. Apart from the details disclosed in this note, no director has entered into a material contract with the company or the consolidated entity since the end of the previous financial year and there were no material contracts involving directors’ interests existing at year-end. 80 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Key management personnel transactions with the company or its controlled entities It is the consolidated entity’s policy that service contracts for executive directors and senior executives be unlimited in term but capable of termination by either party on one month’s notice and that the consolidated entity retains the right to terminate the contract immediately by payment in lieu of notice or a severance payment equal to three months remuneration or up to an amount for redundancy equal to the scale of payments prescribed in the NSW Employment Protection Act. Information regarding individual key management personnel’s service contracts is provided in the remuneration report on pages 26 to 34. Equity instruments All options refer to options over ordinary shares of Integrated Research Limited, which are exercisable on a one-for-one basis under the Employee Share Option Plan (ESOP). Options and rights over equity instruments granted as compensation The movement during the reporting year in the number of options over ordinary shares in Integrated Research Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: Current Year Held at 1 July 2007 Granted as compensation Exercised Other changes* Held at 30 June 2008 Vested during the year Vested and exercisable at 30 June 2008 Directors Keith Andrews 1,000,000 Mark Brayan Executives Peter Adams - - 1,000,000 350,000 Nathan Brumby 200,000 Steve Douglas 300,000 - - Rick Ferguson - 300,000 Stephen Rorie 300,000 Kurt Roscow 300,000 - - David Stark - 350,000 David Taylor 200,000 - - - - - (1,000,000) - - - (200,000) 1,000,000 350,000 - - (11,250) (288,750) - - - - - - 300,000 (300,000) - - - 300,000 350,000 (200,000) - - - - - - - - - - - - - - - - - - 75,000 - - INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 81 Notes to the Financial Statements Note 26. Key management personnel disclosures (continued) Prior Year Directors Held at 1 July 2006 Granted as compensation Exercised Other changes* Held at 30 June 2007 Vested during the year Vested and exercisable at 30 June 2007 Keith Andrews 1,000,000 1,000,000 Executives Nathan Brumby 200,000 Steve Douglas 300,000 - - Stephen Rorie - 300,000 Kurt Roscow 300,000 - David Taylor - 200,000 - - - - - - (1,000,000) 1,000,000 - - - - - 200,000 300,000 300,000 300,000 200,000 - - - - 75,000 75,000 - - 75,000 75,000 - - * Other changes represent options that expired or were forfeited during the year Options granted as compensation in the current year were: Options Granted Grant Date Expiration Date Expiration Date Exercise Price per Share $ Market Value per Share $ Earliest Exercise Date Peter Adams Mark Brayan 350,000 1,000,000 Rick Ferguson 300,000 David Stark 350,000 Mar 2008 Sep 2007 Apr 2008 Mar 2008 Feb 2013 Sep 2012 Apr 2013 Mar 2013 $0.38 $0.42 $0.38 $0.43 $0.38 $0.42 $0.38 $0.43 Mar 2009 Sep 2008 Apr 2009 Mar 2009 25% of options granted vest annually on the anniversary of the grant date, and may also be subject to the consolidated entity achieving certain performance hurdles. Options expire on the earlier of their expiry date or termination of the individual’s employment. No options have been granted since the end of the financial year. The options were provided at no cost to the recipients. No options held by key management personnel are vested but not exercisable. Exercise of options and shares granted as compensation During the reporting period no shares were issued granted as compensation. There are no amounts unpaid on the shares issued as a result of the exercise of the options. 82 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Movements in shares The movement during the reporting period in the number of ordinary shares in Integrated Research Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: Held at 1 July 2007 Purchases Received on exercise of options Received as compensation Sales Held at 30 June 2008 Current Year Directors Non-executive David Boyles 1,700,000 - John Brown Kate Costello Alex Kennedy - 50,000 200,000 350,000 Steve Killelea 94,834,951 Clyde McConaghy Executive Mark Brayan - - - - - - 25,000 - - - - - - - - - - - - - - - - - - - - - 1,700,000 50,000 200,000 350,000 94,834,951 - 25,000 Held at 1 July 2006 Purchases Received on exercise of options Received as compensation Sales Held at 30 June 2007 Prior Year Directors Non-executive David Boyles 1,600,000 100,000 Kate Costello Alex Kennedy 200,000 350,000 Steve Killelea 94,834,951 Executive Keith Andrews 145,000 - - - - - - - - - - - - - - - - - - - 1,700,000 200,000 350,000 94,834,951 145,000 Shareholdings at the date of the Directors’ Report remain unchanged. Other transactions with the company or its controlled entities There were no other transactions between the key management personnel, or their personally-related entities, and the company or its controlled entities. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 83 Notes to the Financial Statements Note 27. Related parties The company has a related party relationship with its subsidiaries (see note 24) and its key management personnel (see note 26). During the financial year ended 30 June 2008, subsidiaries purchased goods from the Company in the amount of $17,555,000 (2007: $15,481,000) and at 30 June 2008 subsidiaries owed the consolidated entity $9,345,000 (2007: $7,259,000) Refer notes 10 and 17. The net amounts owed are non interest bearing and repayable at call. Transactions with subsidiaries are priced on an arm’s length basis. At 30 June 2008 Mr Steve Killelea, the Chairman of the Company, owned either directly or indirectly 56.88% of the Company (2007: 57.06%). Note 28. Subsequent events For dividends declared after 30 June 2008 see Note 21 in the financial statements. The financial effect of dividends declared and paid after 30 June 2008 have not been brought to account in the financial statements for the year ended 30 June 2008 and will be recognised in subsequent financial reports. No other transaction or event of a material or unusual nature has arisen in the interval between the end of the financial year and the date of this report any item, likely, in the opinion of the directors of the company, to affect significantly the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity, in future financial years. 84 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Directors’ declaration In the opinion of the directors of Integrated Research Limited (“the Company”): a) the financial statements and notes, set out in pages 46 to 84, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the financial position of the Company and consolidated entity as at 30 June 2008 and of their performance, as represented by the results of their operations and their cash flows, for the year ended on that date; and (ii) complying with Accounting Standards in Australia 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 under Section 295(5) of the Corporations Act 2001 from the chief executive officer and the chief financial officer for the financial year ended 30 June 2008. Dated at North Sydney this 22nd day of September 2008. Signed in accordance with a resolution of the directors: Steve Killelea Chairman Mark Brayan Chief Executive Officer INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 85 Independent Auditor’s Report Independent Auditor’s Report to the Members of Integrated Research Limited Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1219 Australia DX 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au Report on the Financial Report We have audited the accompanying financial report of Integrated Research Limited which comprises the balance sheet as at 30 June 2008, and the income statement, cash flow statement and statement of recognised income and expense for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration of the consolidated entity comprising the company and the entities it controlled at the year’s end or from time to time during the financial year as set out on pages 46 to 85. Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that compliance with the Australian equivalents to International Financial Reporting Standards ensures that the financial report, comprising the financial statements and notes, complies with International Financial Reporting Standards. Auditor’s Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. Liability limited by a scheme approved under Professional Standards Legislation. 86 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Auditor’s Independence Declaration In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s Opinion In our opinion: (a) the financial report of Integrated Research Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the company and consolidated entity’s financial position as at 30 June 2008 and of their performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1. Report on the Remuneration Report We have audited the Remuneration Report included in pages 26 to 34 of the directors’ report for the year ended 30 June 2008. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Auditor’s Opinion In our opinion the Remuneration Report of Integrated Research Limited for the year ended 30 June 2008, complies with section 300A of the Corporations Act 2001. DELOITTE TOUCHE TOHMATSU Michael Kaplan Partner Chartered Accountants Sydney, 22 September 2008 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 87 Lead Auditor’s Independence Declaration Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1219 Australia DX 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au The Board of Directors Integrated Research Limited Level 9, 100 Pacific Highway, NORTH SYDNEY, NSW, 2000 22 September 2008 Dear Board Members Integrated Research Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Integrated Research Limited. As lead audit partner for the audit of the financial statements of Integrated Research Limited for the financial year ended 30 June 2008, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU Michael Kaplan Partner Chartered Accountants Sydney, 22 September 2008 Liability limited by a scheme approved under Professional Standards Legislation. 88 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 ASX Additional Information Shareholder information Analysis of numbers of equity security holders by size of holding at 31 August 2008 Class of equity security Ordinary shares Shares Options 1 1,001 5,001 10,001 - - - - 1,000 5,000 10,000 100,000 100,001 and over 86 873 516 772 70 2,317 - 2 13 51 13 79 Equity security holders Twenty largest quoted equity security holders The names of the twenty largest holders of quoted equity securities as at 31 August 2008 are listed below: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Stephen John Killelea Andrew Rhys Rutherford UBS Nominees Pty Ltd JP Morgan Nominees Australia Limited HSBC Custody Nominees ANZ Nominees Limited Vicki Maree Lewis and David William Lewis B&R James Investments Pty Limited David Leroy Boyles Citicorp Nominees Pty Ltd Five Talents Limited Bell Potter Nominees Ltd Howard Securities Pty Ltd Ralph Chiarella Richard Ewan Bromley Mews and Wee Khoon Mews Belinda York and Hugh Webster Forbar Custodians Limited Sporran Lean Pty Ltd Carlos Gil 20 Bipeta Pty Ltd Ordinary Shares Number held Percentage of issued shares 94,497,339 56.66 5,486,589 4,983,327 4,082,412 2,813,500 2,284,833 2,265,000 2,235,162 1,700,000 658,139 595,000 500,000 500,000 492,563 463,460 404,594 381,500 366,641 364,261 337,612 3.29 2.99 2.45 1.69 1.37 1.36 1.34 1.02 0.39 0.36 0.30 0.30 0.30 0.28 0.24 0.23 0.22 0.22 0.20 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 89 ASX Additional Information Unquoted equity securities Options issued under the Integrated Re- search Limited Employee Option Plan to take up ordinary shares Number on issue * Number of holders 6,375,625 79 *Number of unissued ordinary shares under the options. No person holds 20% or more of these securities. On-market buy-back There is no current on-market buy-back. Substantial holders Substantial holders in the Company are set out below: Stephen John Killelea 94,497,339 56.66 Number held Percentage Voting rights The voting rights attaching to each class of equity securities are set out below: 1. Ordinary shares. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. 2. Options. No voting rights. Other information Integrated Research Limited, incorporated and domiciled in Australia, is a publicly listed company limited by shares. 90 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Corporate Directory Directors Steve Killelea Chairman and Non-Executive Director Mark Brayan Managing Director and CEO David Boyles Independent Non-Executive Director and Deputy Chairman John Brown Independent Non-Executive Director Kate Costello Independent Non-Executive Director Clyde McConaghy Non-Executive Director Secretary David Leighton Registered Office Level 9, 100 Pacific Highway North Sydney, NSW, 2060 Phone: (+61 2) 9966 1066 Share Registry Computershare Investor Services Pty Limited Auditors Solicitors Deloitte Touche Tohmatsu 225 George Street Sydney, NSW, 2000 Dibbs Abbott Stillman Level 8, Angel Place 123 Pitt Street Sydney, NSW, 2000 Bankers Westpac Banking Corporation Stock Exchange Listing Country of Incorporation Australian Stock Exchange Code IRI Integrated Research Limited, incorporated and domiciled in Australia, is a publicly listed company limited by shares. Notice of Annual General Meeting The Annual General Meeting of Integrated Research Limited will be held at 3:00pm on Tuesday, 11th November 2008, at the Museum of Sydney, Corner of Phillip and Bridge Streets, Sydney. INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 91 This page intentionally left blank. 92 INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 Office locations Americas - Headquarters Integrated Research Inc. 8055 East Tufts Avenue, Suite 950 Denver, CO 80237 t: +1 (303) 390 8700 f: +1 (303) 390 8777 e: info.usa@prognosis.com Americas - East Coast Integrated Research Inc. 2325 Dulles Corner Bvd Suite 500 Herndon, VA 20171 t: +1 (703) 788 6500 f: +1 (703) 788 6589 e: info.usa@prognosis.com United Kingdom Integrated Research UK Ltd Orchard Lea, Winkfield Lane Windsor Berkshire SL4 4RU t: +44 (0) 1344 894 200 f: +44 (0) 1344 890 851 e: info.europe@prognosis.com www.prognosis.com Germany Integrated Research Ltd Bockenheimer Landstr. 17-19 D-60325, Frankfurt t: +49 (69) 710 455 255 f: +49 (69) 710 455 450 e: info.germany@prognosis.com Asia Pacific/M.East/Africa Integrated Research Ltd Level 9, 100 Pacific Hwy North Sydney NSW 2060 Australia t: +61 (2) 9966 1066 f: +61 (2) 9966 1042 e: info.ap@prognosis.com Singapore Integrated Research Ltd - Asia HQ Level 34, Centennial Tower 3 Temasek Avenue Singapore 039190 t: +65 6549 7738 f: +65 6549 7011 e: info.ap@prognosis.com INTEGRATED RESEARCH AND ITS CONTROLLED ENTITIES > ANNUAL REPORT 2008 For more information visit our website at www.prognosis.com or email info@prognosis.com
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