Providing Business Insight Integrated Research Annual Report 2012 ABN 76 003 588 449 Contents Directors 2012 Highlights Directors’ Report Senior Management Remuneration Report Letter from the Chairman Chief Executive Officer’s Report Review of Operations and Activities 2 4 8 10 14 16 18 24 32 38 43 74 75 Independent Auditor’s Report Lead Auditor’s Independence Declaration 77 78 81 Corporate Governance Statement Notes to the Financial Statements ASX Additional Information Directors‘ Declaration Financial Statements Corporate Directory Access your Annual Report 2012 online. Visit ir.com/annualreports2012 This report is printed on Impress paper which is FSC certified. Fibre is sourced from well managed forest plantations and controlled sources. 2 | Integrated Research and its controlled entities | Annual Report 2012 Independent Audit ReportFinancial StatementsCorporate Governance StatementRemuneration ReportDirectors’ ReportDirectors and Senior ManagementChief ExecutiveOfficer’s ReportLetter from the Chairman 2 2012 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 Earnings per share (cents per share) In millions of local currency Year ended 30 June Americas revenue (USD) Europe revenue (UK Sterling) Asia Pacific revenue (AUD) 2012 28.9 48.6 9.0 29.2 12.0 31.9 7.2 8.7 5.41 2012 33.1 4.7 8.7 2011 % Change 25.0 44.6 7.5 27.4 11.6 26.7 7.1 8.9 4.47 2011 26.5 4.4 8.9 Ç 15% Ç 9% Ç 21% Ç 7% Ç 3% Ç 19% Ç 1% È 2% Ç 21% % Change Ç 25% Ç 6% È 2% Total revenue (AUD millions) Net profit after tax (AUD millions) Revenue from licence sales (AUD millions) $48.6 $44.6 $42.7 $37.4 $38.2 $9.0 $7.9 $7.5 $5.8 $5.4 $28.9 $25.0 $21.7 $19.6 $18.4 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2 | Integrated Research and its controlled entities | Annual Report 2012 4 Letter from the Chairman We support the changing needs of our customers today, and grow with those who will be our customers tomorrow.” Dear fellow shareholders, I’m very pleased to report another year of strong growth for Integrated Research for the financial year to June 2012. The Company continues to build on its solid foundation of world-class R&D through increases in its product lines, most noticeably the expansion of its VoIP product range into the management of Unified Communications, which approximately doubles the company’s addressable market. Despite the strength in the Australian dollar which caused an adverse 4% appreciation against the US dollar, the Company achieved a 21% increase in annual after tax profit over the prior year to $9.0 million. Licence sales increased by 15% to $28.9 million, while total revenue increased by 9% to $48.6 million. The Company derived 95% of its revenue from outside of Australia, with the Americas representing over 65% of total revenue. For the first time the Company revenue exceeded $50 million in underlying USD equivalents. In local currency the Americas grew by 25% with Europe up 6%. 2012 was a more difficult year for Asia Pacific, with revenue down 2%. The Company’s Unified Communications (UC) products achieved a 26% increase in revenue to $21.4 million, becoming the Company’s highest revenue product line. Prognosis is well- positioned to become a leading product in the rapidly evolving UC market. During FY 2012 this evolution made significant progress as the Company expanded the number of supported platforms to include Microsoft Lync. The addition of the Microsoft Lync platform resulted in the largest sale the Company has ever recorded. Consulting services showed strong growth for the third year in a row, with revenue increasing by 26% to $3.3 million, representing 12% of new licence sales. This is primarily due to a closer alignment between product sales and consulting. The company will continue its focus The Board is pleased to announce a final dividend of 3.0 cents per share, franked to 70 per cent, bringing the total dividend for the year to 5.0 cents per share franked at 58%. This compares with total dividends of 4.0 cents per share, of which 65% was franked, for the prior financial year. I would especially like to thank you our valued shareholders, customers and employees for your continued support. Steve Killelea Chairman on consulting and expects to increase the percentage of consulting revenue to sales in the ensuing years. The Company’s financial results were further strengthened by strong growth in our Payments products, with licence sales up 60% on the prior year to $2.3 million while HP NonStop licence sales remained solid, showing a 2% increase. The strong results in recent years are further validated by the growth in the Company’s customers, with the number of enterprise customers doubling in the last five years. In the current environment, we are fortunate to be a company built on a number of strengths. Our core values are strong, and our business fundamentals are solid and improving; we generated robust cash flow from licences, maintenance and consulting. Integrated Research continues to maintain a strong financial position and remains free of debt with a total cash position at 30 June 2012 of $12.0 million. With a healthy balance sheet, global reach and strong partner relationships and alliances the company is positioned for further solid growth, we hold leadership positions in both our traditional business line, HP Nonstop, and our emerging high-growth markets including Unified Communications. 4 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 5 Letter from the Chairman | page 4 – 5Independent Audit ReportFinancial StatementsCorporate Governance StatementRemuneration ReportDirectors’ ReportDirectors and Senior ManagementChief ExecutiveOfficer’s ReportLetter from the Chairman IR: innovating solutions for our customers in global markets Integrated Research is a global success story, with market- leading products and prominent customers all around the world. Our international network of offices, partnerships and strategic alliances allows us to support customers of any size – from small businesses to the largest enterprises, service providers and government departments. As business conditions change and technologies advance, IR continues to optimise and enhance our products and services portfolio to ensure customers have the insight they need to run their business today and into the future. Who we are Integrated Research IR is the leading global provider of Prognosis performance management solutions for Unified Communications, Payments and IT Infrastructure. What we do Capabilities Prognosis provides availability and performance management, diagnostics and insight for mission-critical systems. Why we succeed Competitive Advantage P Prognosis is real-time, scalable, extensible and flexible P Prognosis supports multiple platforms, vendors and applications P IR has 1,000 enterprise customers globally P IR has a world-class R&D capability P IR is profitable, debt-free and growing Why customers buy Value Proposition Prognosis increases technology performance, minimises outages, reduces cost and ensures user satisfaction. Annual Report 2012 | Integrated Research and its controlled entities | 7 8 With the growth in size, complexity and criticality of networks there is a greater need for real-time performance management than ever before.” Dear Shareholders, Integrated Research has once again delivered a strong performance. Revenue was up 9% to $48.6 million and profit after tax up 21% to $9.0 million. Integrated Research is well positioned in high growth markets and the Company’s future is very promising. The growth of revenue and profit in 2012 can be attributed to the successful execution of the Company’s strategy. This strategy continues to focus on the creation, sale and support of Prognosis-based products into the Unified Communications (UC), Payments and Infrastructure markets, as well as opening new high-growth markets. The size, criticality and increasing complexity of technology in these markets requires the scalable, real-time management capabilities of Prognosis to ensure their ongoing operation and quality of service. With over 1,000 enterprise customers, Prognosis has proven that it is ideally and uniquely suited to these environments. As enterprises increasingly adopt UC, our strategy continues to yield results: UC is now the Company’s highest revenue product line. Sales rose 26% in 2012 and we added 156 new customers. UC market growth is fueled by a number of significant drivers: the ongoing rise in IP endpoints – accelerated now with the entry of Microsoft Lync – and the shift from Voice over IP (VoIP) to UC, which incorporates multiple methods of communication including voice, video, messaging, mobility and presence. UC functionality increases the complexity of communications networks and the need for proactive management. Projected growth for the UC market is significant, with Gartner1 estimating that there will be 250 million UC endpoints by 2017. Each endpoint requires multiple UC applications to be managed, which increases the opportunity for Integrated Research. Our Payments products also delivered encouraging revenue growth of 32%. The Company continues to invest in this market and our strategic partnership with ACI, as we develop and extend our monitoring solutions for wholesale payments and fraud detection. The Payments market is projected to expand considerably, heightened by the demand on back-end processing, and increasing governance regulation and complexity. This means that effective performance management and monitoring are more vital than ever. The Boston Consulting Group2 estimates that global payments transaction volumes will more than double between 2010 and 2020. This growth is fueled by the rise in micro-payments, payments through new channels including the internet and mobile phones, and the growth of electronic payments in developing economies. Revenue from our Infrastructure products, including the Company’s bedrock HP NonStop line, delivered a solid result of $20.5 million. HP NonStop licence sales grew 2% on last year, illustrating the ongoing need for the platform. All of our product lines benefited from our Consulting services, helping customers implement Prognosis quicker and more effectively to meet their business needs. Our success in 2012 and the strength of our markets mean that we will continue to invest in sales and marketing in all regions to capture the opportunities there. We have hired additional headcount in the Americas, we are expanding our presence in Germany to benefit from the strength of the strongest European economy, and we will open an office in Singapore to capture market share in Asia. We will maintain our investment in R&D, at 21% of revenue, which is in-line with historical averages. Our pervasive use of the Agile development methodology continues to deliver high quality products at greater levels of productivity. The productivity of our Australian cost base is particularly important given the high Australian dollar; it means we can produce innovative products very quickly to support our customers and stay ahead of competitors. Our graduate program has once again provided a great pool of talent. By supporting the Australian education system and harnessing the latest ideas and enthusiasm we increase our R&D capability and help cement our position as a thriving market leader now and in the future. I would like to thank our talented and hardworking staff for our results in FY12 and I look forward to working with them to deliver further growth for you in FY13. Thank you for your support. 1 Source Gartner (June 2012) Forecast: Enterprise Telephony Equipment, Worldwide, 2007-2016, 2Q12 Update 2 Source BCG Report, Global Payments 2011, “Winning After the Storm” Mark Brayan Chief Executive Officer 8 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 9 Chief Executive Officer’s Report | page 8 – 9Letter from the ChairmanIndependent Audit ReportFinancial StatementsCorporate Governance StatementRemuneration ReportDirectors’ ReportDirectors and Senior ManagementChief ExecutiveOfficer’s ReportChief Executive Officer’s Report 10 Principal activities The Company’s principal activities during the year were the design, development, implementation and sale of systems and applications management computer software for business-critical computing and Unified Communication networks. Group overview Integrated Research has a twenty-four 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, distributed system servers, Unified Communications (“UC”), and Payments environments and the business applications that run on these platforms. 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 licence fees, recurring maintenance and consulting services. Review and results of operations The Company achieved a 21% increase in annual after tax profit over the prior year to $9.0 million, which is within the guidance provided to the Australian Stock Exchange on July 6, 2012. Total revenue increased by 9% over the prior year, to $48.6 million. The growth in revenue was brought about by strong licence sales in both Unified Communications and Payments product lines. In constant currency, revenue grew by 13% compared to the prior year. Revenue Revenue for the year was $48.6 million, an increase of 9% over 2011. Licence fees increased by 15% and whilst maintenance fees decreased by 3% over the prior year it increased by 2% using a constant currency. The customer retention rate was 91% for the year ending June 2012. In underlying natural currency revenue grew in the Americas by 25% and Europe by 6%. Asia Pacific revenue was relatively flat compared to the prior year. Revenue derived from the Company’s UC products continued its strong growth. Even with the stronger Australian dollar, new licence sales for UC were up 26% over the prior year with strong growth driven by the Americas. Licence sales derived from HP NonStop remained stable with growth of 2% of the previous corresponding period. Revenue from consulting services increased by 26% over the prior year to $3.3 million and made a contribution of $0.7 million to the group results. Expenses The Company continued to focus on expanding its capabilities and improving productivity. The number of staff at the end of the current year was 186 (2011: 162). Total expenses were $37.4 million, up 10% against the prior year with a higher investment in sales and marketing. Research and development expenditure of $10.1 million was 21% of total revenue and in line with historical averages. The company is committed to maintaining and improving its core strategic strength and we expect a comparable level of investment in research and development in the future. Net research and development expenses are represented as follows: In thousands of AUD Gross research and development spending Capitalisation of development expenses Amortisation of capitalised expenses Net research and development expenses Shareholder returns Returns to shareholders increased through the payment of partly franked dividends: Net profit ($’000) Basic EPS Dividends per share Return on equity 2012 $9,035 5.41¢ 5.0¢ 31% 2012 10,215 (6,730) 6,649 10,134 2011 $7,465 4.47¢ 4.0¢ 27% 2011 8,924 (5,655) 5,680 8,949 2010 $5,401 3.24¢ 3.0¢ 22% Financial position The consolidated entity continues to hold a strong financial position being free of debt and with cash at 30 June 2012 of $12.0 million, compared to $11.6 million at the same time last year. Net cash flow provided by operating activities increased 6% over the equivalent prior year to $14.6 million. Net cash flow provided by operating activities ($’000) Current ratio (current assets to current liabilities) Net tangible asset backing per ordinary share 2012 $14,646 1.93 9.18¢ 2011 $13,854 1.80 8.12¢ 2010 $8,339 1.57 6.32¢ 10 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 11 Review of Operations and Activities | page 10 – 13Independent Audit ReportFinancial StatementsCorporate Governance StatementRemuneration ReportDirectors’ ReportReview of Operations and ActivitiesDirectors and Senior ManagementChief ExecutiveOfficer’s ReportLetter from the Chairman Outlook and Strategy for 2013 The Company provides performance management solutions based on its Prognosis software for mission- critical computing environments. Prognosis derives its competitive advantage from its unique design which enables real time monitoring, is extremely scalable, highly flexible and provides very deep visibility into the systems and applications that it manages. As such, Prognosis is ideally suited to complex, high transaction and high traffic environments. Through deep forensic analysis into the root cause of problems and extensive reporting on service levels, Prognosis enables proactive and rapid resolution of issues, and capacity and operational planning. This provides insight into potential issues before they become business critical. Prognosis helps users improve their operational maturity by proactively minimising expensive outages, improving user satisfaction and optimising IT operations and resources. The Company’s growth strategy is to create, sell and support Prognosis-based products and services that deliver profitable growth from existing markets and customers, as well as creating new products that open new markets. The Company currently focuses on three core markets: Infrastructure, Communications and Payments. The Infrastructure market for Integrated Research includes users of high-end computing systems such as the HP NonStop platform for financial, telecommunication, trading, manufacturing and other high-volume, high-value transaction environments. NonStop is an important part of HP’s server strategy and remains at the operational core of many of the world’s largest companies. The Company continues to invest in Prognosis for Nonstop to be aligned with HP and its customers. Prognosis for Distributed Systems (Windows, Unix and Linux) is mostly sold alongside the Company’s NonStop products as customers seek a common monitoring interface for all platforms, or convert applications from one platform to another. The Communications segment includes users of IP Telephony and Unified Communications (UC) applications such as video, messaging, mobility and presence. The Company anticipates growth in this segment through the ongoing shipment of IP phones and endpoints as well as the increasing value per endpoint through the use of UC applications. UC networks are becoming more pervasive, more critical and more complex and as such they require effective performance management and Prognosis is strongly positioned to benefit from this need. The company will continue to invest in R&D to expand the suite of Prognosis for UC products to cover more platforms, vendors and applications, and by doing so increase the Company’s addressable market and revenue potential. The Company has expanded its suite of Payments products by adding new products for additional platforms, vendors and applications, including fraud management and wholesale money transfer applications. This expands the company’s addressable market in the Payments segment and increases revenue potential. The Company will maintain this strategy in the Payments market. Our strategic alliance with ACI, the world’s largest payments software vendor, has delivered revenue in FY2012 and continues to be an important channel to market for the Company. Consulting Services provide Prognosis customers with implementation, customisation and training services to ensure that they get the most out of their investment in Prognosis. Consulting Services also help IR develop unique and repeatable solutions that extend the use and value of Prognosis. Consulting Services achieved profitability in FY2012 and the Company will continue to invest in people and processes to grow consulting revenue and margin. The Company continues to invest in its R&D capability through the addition of resources and its use of the Agile development methodology which has improved the rate and quality of software production for the Company. 12 | Integrated Research and its controlled entities | Annual Report 2012 14 Directors The directors of the Company at any time during or since the end of the financial year are listed below: Steve Killelea, AM Non-Executive Director and Chairman 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 is also Chairman of the Institute for Peace and Economics and The Charitable Foundation and for activities involved with these he has received a number of international awards. He is also active in the financial community with investments in many high tech companies. Steve’s current term will expire no later than the close of the 2012 Annual General Meeting. Listed companies directorships held in the past three years: None. Age: 63 years. Mark Brayan, MBA Managing Director and Chief Executive Officer 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. Prior to joining Integrated Research 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. Listed companies directorships held in the past three years: None. Age: 48 years. Alan Baxter, BSc, DipEd Independent Non-Executive Director Alan was appointed as a Director in June 2009. Alan has over forty years’ experience in Information Technology covering a broad range of the industry’s activities. These include many years in a variety of roles with IBM Australia, CEO of DMR Consulting in Australia and COO of Fujitsu Consulting’s global operations from London. He was non- executive Chairman of Fujitsu Australia & New Zealand, a director of Mincom Ltd, non-executive Chairman of Konekt Limited and also of Innogence Limited. He is a non-executive director of CPT Global, a publicly listed technology consulting company. Alan’s current term will expire no later than the close of the 2012 Annual General Meeting. Listed company directorships held in the past three years other than listed above: None. Age: 67 years. John Brown, BCom, FCA, MAICD Independent Non-Executive Director John was appointed a Director in July 2007. He was a partner with KPMG for over 26 years and since retiring in 2006 has been appointed to be the chair or member of the audit committee of a number of NSW and Federal public sector entities. John is also a Director and Chair of the Audit Committee of Sydney Water Corporation, a member of the National Health and Research Medical Council and a Director of The Gift Of Life Foundation. John’s current term will expire no later than the close of the 2013 Annual General Meeting. Listed companies directorships held in the past three years: None. Age: 64 years. Kate Costello, LLB, FAICD Independent Non-Executive Director 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, LBT Innovations Ltd, and a number of other private companies. Kate’s current term will expire no later than the close of the 2014 Annual General Meeting. Listed companies directorships held in the past three years other than listed above: None. Age: 59 years. Clyde McConaghy, BBus, MBA, MAICD, MIOD – UK Non-Executive Director Clyde was appointed a Director in December 2007. He has two decades of international strategic market development experience in the technology, media and publishing industries. Clyde was a board director of WMRC Plc, an economic analysis publisher, on the London Stock Exchange and a director of the Economist Intelligence Unit in London. Clyde 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 2014 Annual General Meeting. Listed companies directorships held in the past three years: None. Age: 50 years. Peter Lloyd Independent Non-Executive Director Peter was appointed a Director in July 2010. He has 39 years’ experience in computing technology, having worked for both computer hardware and software solution providers. For the past 26 years Peter has been specifically involved in the provision of payments solutions for the financial services industry. Peter is currently the global sales and marketing Director for Distra Pty Ltd a provider of payments systems. He is also a Director of The Grayrock Group Pty Ltd and Limehouse Creative Pty Ltd. Peter’s current term will expire no later than the close of the 2013 Annual General meeting. Listed companies directorships held in the past three years: None. Age: 58 years. David Leighton, MBA, FCPA, ACIS Company Secretary David is a member of Chartered Secretaries Australia. David has been Company Secretary from October 2000 up to his retirement in July 2012. David Purdue, BEc, MBA, GradDip CSP, FCA, FCIS, FCSA, GAICD Company Secretary David was appointed Company Secretary in July 2012. David is also the Company’s Global Commercial Manager and is responsible for the company’s global commercial business. Prior to this, David spent three years at Integrated Research’s Colorado office to manage the Americas finance operations. David is a qualified Chartered Accountant and Chartered Secretary with over 25 years’ experience in both professional practice and industry. 14 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 15 Directors and Senior Management | page 14 – 17Letter from the ChairmanIndependent Audit ReportFinancial StatementsCorporate Governance StatementRemuneration ReportDirectors’ ReportChief ExecutiveOfficer’s ReportDirectors and Senior Management 16 Senior Management Peter Adams, BCom, 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 25 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, BAppSc General Manager, Research and Development Alex Baburin joined Integrated Research in November 2006 and is responsible for the Company’s software development and global support activities. Alex has over 25 years’ experience in the development, creation and management of high-technology hardware and software products for Honeywell and Siemens. Before joining Integrated Research he was responsible for general management of the Siemens Access Control product line globally and for much of that time was based in Germany. Brian Bigley Vice President Europe Brian joined Integrated Research in September 2009 and was responsible for all business operations in Europe until recently returning to Integrated Research in the United States to take up a senior role. Brian has over 25 years of experience in the computer industry including Compaq Computer, Siemens, CA (previously known as Computer Associates), HP and start-ups as a sales and marketing executive. Brian has held CEO, President and Sr. Vice President roles during his career. Andre Cuenin, BSc, MBA President Americas Andre joined Integrated Research in October 2008 and is responsible for all business operations in the Americas region. Andre has over 20 years’ experience in IT sales, most recently as VP of Field Operations at Stratavia, where he was responsible for sales and professional services marketing worldwide. Prior to this he spent 15 years with CA (previously known as Computer Associates) in several senior management positions including VP of Worldwide Sales Operations. John Dunne, BInfTech, MBT General Manager, Products & Alliances John is responsible for the company’s global product strategy and alliances, ensuring the delivery of high-quality products aligned to customers’ strategic directions. He is an expert in systems monitoring and management with over 15 years’ experience in the ICT industry, including eight years with Integrated Research. His current focus includes development of enterprise-class IP telephony management and reporting solutions to deliver business insight to global organisations and service providers. Andrew Levido, BEng, MBA General Manager, Global Sales Andrew joined Integrated Research in May 2012 and is responsible for the global sales, pre-sales and consulting operations. He has over 25 years’ experience in leadership roles in the technology sector, including senior regional and global roles with Alcatel, Alcatel-Lucent and Technicolor. Andrew has extensive international experience and has lived and worked in various Asian and European countries. Melanie Newman, HRM PGDip General Manager, Human Resources Melanie is responsible for the Human Resources function at Integrated Research which includes responsibility for aligning Strategic HR initiatives with the Business Strategy to support a high performance culture. Melanie has over 14 years’ HR Management experience mostly within global organisations in the Information Technology industry. Pierre Semaan, BEng, MBA Vice President Asia Pacific Pierre joined Integrated Research in May 2008 and is responsible for all business operations in the Asia Pacific region. Prior to taking over responsibilities for Asia Pacific in January 2011, Pierre was responsible for the management and strategic direction of all product lines at Integrated Research. Pierre has over 20 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 organisations. Prior to Sage, Pierre worked at Citrix as the Chief of Operations & Director of the CTO Office and Advanced Products Group. 16 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 17 Directors and Senior Management | page 14 – 17Letter from the ChairmanIndependent Audit ReportFinancial StatementsCorporate Governance StatementRemuneration ReportDirectors’ ReportChief ExecutiveOfficer’s ReportDirectors and Senior Management 18 The directors present their report together with the Financial Statements of Integrated Research Limited (“the consolidated entity”), being the Company and its controlled entities, for the year ended 30 June 2012 and the Auditor’s Report thereon. Results The net profit of the consolidated entity for the 12 months ended 30 June 2012 after income tax expense was $9.0 million. Dividends Dividends paid or declared by the Company since the end of the previous financial year were: Final 2011 – Ordinary shares 75% franked Interim 2012 – Ordinary shares 40% franked Final 2012 – Ordinary shares 70% franked 2.5 2.0 3.0 4,172 3,340 5,033 16 Sep 2011 16 Mar 2012 14 Sep 2012 Cents Per Share Total Amount $’000 Date of Payment Principal activities and review of operations Detail of the principal activities and review of operations of the consolidated entity are set out on pages 10 to 12. Events subsequent to reporting date For dividends declared after 30 June 2012 see Note 19 in the financial statements. The financial effect of dividends declared and paid after 30 June 2012 has not been brought to account in the financial statements for the year ended 30 June 2012 and will be recognised in subsequent financial statements. 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. Directors and company secretary Details of current directors’ qualifications, experience, age and special responsibilities are set out on pages 14 to 15. 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 2012, and the numbers of meetings attended by each director were: Board Meetings Audit and Risk Committee Meetings Nomination and Remuneration Committee Meetings Strategy Committee Meetings Alan Baxter Mark Brayan John Brown Kate Costello Steve Killelea Peter Lloyd Clyde McConaghy A 11 12 12 12 10 12 12 B 12 12 12 12 12 12 12 A - - 3 - - 3 3 B - - 3 - - 3 3 A 5 - - 4 4 - B 5 - - 5 5 - A - 4 - 4 4 4 - B - 4 - 4 4 4 - A: Number of meetings attended. B: Number of meetings held during the time the directors held office or was a member of the board or 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. 18 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 19 Directors’ Report | page 18 – 23Letter from the ChairmanIndependent Audit ReportFinancial StatementsCorporate Governance StatementRemuneration ReportChief ExecutiveOfficer’s ReportDirectors’ ReportDirectors and Senior ManagementDirectors’ Report Directors’ interests The relevant interest of each director in the shares, options or performance rights over ordinary shares issued by the companies in the consolidated entity and other relevant bodies corporate, as notified by the directors to the Australian Securities Exchange in accordance with S205G(1) of the Corporations Act 2001, at the date of this report is as follows: Unissued shares under option and performance rights Unissued ordinary shares of Integrated Research Limited under option or performance rights at the date of this report are as follows: Ordinary shares in Integrated Research Options Performance rights Directly held Beneficially held Total Number of Options Number of Rights Alan Baxter Mark Brayan John Brown Kate Costello Steve Killelea Clyde McConaghy Peter Lloyd - 250,000 101,000 100,000 25,000 - - 200,000 100,000 275,000 101,000 200,000 94,497,339 337,612 94,834,951 - - - - - - Share options and performance rights - 750,000 - 170,000 - - - - - - - - - - Options and performance rights granted to directors and senior executives On 21 November 2011, the consolidated entity established a new performance rights and options plan. Details of the plan are summarised in note 16 to the financial statements. During or since the end of the financial year, the company granted performance rights for no consideration over unissued ordinary shares in Integrated Research Limited to the following named directors and executive officers of the consolidated entity as part of their remuneration: Number of performance rights granted Exercise price Expiry date Directors Mark Brayan Executive Officers Peter Adams Alex Baburin Brian Bigley Andre Cuenin John Dunne Pierre Semaan 170,000 100,000 75,000 65,000 75,000 75,000 65,000 Nil Nil Nil Nil Nil Nil Nil Sep 2014 Sep 2014 Sep 2014 Sep 2014 Sep 2014 Sep 2014 Sep 2014 The performance rights were granted under the Integrated Research Performance Rights and Option Plan (established November 2011). The performance rights vest on 31 August 2014 subject to the consolidated entity achieving certain performance hurdles. The performance rights are automatically exercised upon vesting. The Company will issue shares upon vesting conditions being met for Executive Officers. The Company will make an on-market purchase for Mr Brayan upon his vesting conditions being satisfied. Options Performance Rights Expiry date Exercise price Number of shares Expiry date Exercise price Sep 2012 Mar 2013 July 2013 Oct 2013 May 2014 $0.42 $0.38 $0.35 $0.31 $0.28 750,000 Sep 2014 350,000 Nov 2014 Nil Nil 200,000 340,000 735,000 Number of shares 495,000 869,500 Total options 2,375,000 Total performance rights 1,364,500 Options and performance rights 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 347,500 327,000 250,000 $0.28 $0.48 $0.42 Indemnification and insurance of officers and auditors 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 to insure the directors and executive 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. 20 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 21 Directors’ Report | page 18 – 23Letter from the ChairmanIndependent Audit ReportFinancial StatementsCorporate Governance StatementRemuneration ReportChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ Report Remuneration report The Company’s Remuneration Report, which forms part of this Directors’ Report, is on pages 24 to 31. Corporate governance A statement describing the Company’s main corporate governance practices in place throughout the financial year is on pages 32 to 37. 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 & Risk 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: Æ All non-audit services were subject to the corporate governance procedures adopted by the Company and have been reviewed by the Audit & Risk Committee to ensure they do not impact the integrity and objectivity of the auditor, and Æ The non-audit services provided do not undermine the general principles relating to auditor independence as set out in Professional Statement F1 Professional independence, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards. A copy of the auditors’ independence declaration as required under Section 307C of the Corporations Act is on page 77 and forms part of the Directors’ Report. 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 Statements 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 21st day of August 2012 22 | Integrated Research and its controlled entities | Annual Report 2012 24 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 remuneration surveys provide periodic analysis 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 either options or performance rights over ordinary shares of Integrated Research Limited under the rules of the share plans. 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 Nomination and 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: Æ The capability and experience of the directors and senior executives Æ The directors and senior executives ability to control the relevant segment’s performance Æ The consolidated entity’s performance including: Ì The consolidated entity’s earnings Ì 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. Short-term incentive bonus The Nomination and Remuneration Committee is responsible for setting the key performance indicators (KPIs) for the Chief Executive Officer, and for approving the KPIs for the senior executives who report to him. The KPIs 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 KPIs 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 year’s 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 KPIs 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 Prior to the 2012 financial year, options were issued to executive directors and other senior executives under the Employee Share Option Plan. In November 2011, the Company established a new plan titled Integrated Research Performance Rights and Options Plan (“IRPROP”). Performance rights are issued to executive directors and other senior executives under the IRPROP. The ability of executive directors and other senior executives to exercise either options or performance rights 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: New licences Net profit Dividends paid Closing share price Change in share price 2012 2011 2010 2009 2008 $28,861,000 $25,005,000 $18,413,000 $21,723,000 $19,623,000 $9,035,000 $7,465,000 $5,401,000 $7,863,000 $5,776,000 $7,512,000 $4,171,000 $7,506,000 $5,003,000 $5,826,000 $0.665 $0.39 $0.275 ($0.125) $0.40 $0.125 $0.275 ($0.06) $0.335 ($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 licences. The Nomination and Remuneration Committee considers that the above performance linked structure is generating the desired outcomes. 24 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 25 Remuneration Report | page 24 – 31Letter from the ChairmanIndependent Audit ReportFinancial StatementsCorporate Governance StatementChief ExecutiveOfficer’s ReportRemuneration ReportDirectors and Senior ManagementDirectors’ ReportRemuneration Report 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: Directors (full year) Steve Killelea Chairman Mark Brayan Chief Executive Officer Alan Baxter John Brown Kate Costello Peter Lloyd Clyde McConaghy Other key management personnel (full year) Other key management personnel (part year) Geoff Bryant Vice President Consulting (resigned Nov 2011) Andrew Levido General Manager, Global Sales (appointed May 2012) Peter Adams Chief Financial Officer Alex Baburin General Manager, Research and Development Brian Bigley Vice President Europe Andre Cuenin President Americas John Dunne General Manager, Products and Alliances David Leighton Company Secretary (retired July 2012) Pierre Semaan Vice President Asia Pacific 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 undertakings 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 undertakings 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. Brian Bigley, Vice President Europe, has a contract of employment with Integrated Research Limited dated 1 November 2010, which provides for specific notice and severance undertakings of up to one month’s compensation depending on the particular circumstances. Mr Bigley can terminate his employment by giving one month’s prior notice in writing. Directors’ and executive officers’ remuneration Details of the nature and amount of each major element of the remuneration of each of the key management personnel director of the Company and each of the executives and relevant group key management executives are reported below. The estimated value of options and performance rights 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 and performance rights granted during the year are set out below. “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. Mr Alex Baburin, General Manager Research and Development, has a contract of employment with Integrated Research Limited dated 18 October 2006, which provides for specific notice and severance undertakings of up to one month’s compensation depending on the particular circumstances. Mr Baburin can terminate his employment by giving one month’s prior notice in writing. Mr Andre Cuenin, President Americas, has a contract of employment with Integrated Research Limited dated 22 September 2008, which provides for specific notice and severance undertakings of one month’s compensation depending on the particular circumstances. Mr Cuenin can terminate his employment by giving one month’s prior notice in writing. Mr John Dunne, General Manager Products and Alliances, has a contract of employment with Integrated Research Limited dated 29 August 2008, which provides for specific notice and severance undertakings of one month’s compensation depending on the particular circumstances. Mr Dunne can terminate his employment by giving one month’s prior notice in writing. Mr Andrew Levido, General Manager Global Sales, has a contract of employment with Integrated Research Limited dated 7 May 2012, which provides for specific notice and severance undertakings of three months compensation depending on the particular circumstances. Mr Levido can terminate his employment by giving three months prior notice in writing. Mr Pierre Semaan, Vice President Asia Pacific, has a contract of employment with Integrated Research Limited dated 22 May 2008, which provides for specific notice and severance undertakings of one month’s compensation depending on the particular circumstances. Mr Semaan can terminate his employment by giving one month’s 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. Director’s base fees in FY2012 were $50,000 per annum plus compulsory superannuation. The chairman receives the base fee by a multiple of two. Director’s 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. 26 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 27 Remuneration Report | page 24 – 31Letter from the ChairmanIndependent Audit ReportFinancial StatementsCorporate Governance StatementChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration Report Short Term Post- employment Share- based payments Other compen- sation Proportion of remuneration Short Term Post- employment Share- based payments Other compen- sation Proportion of remuneration Salary & fees $ Bonus $ Non- cash benefits $ Super- annuation contribution $ Value of options and rights $ Termi- nation benefit $ Perfor- mance related Total $ Value of options and rights 2012 in AUD Salary & fees $ Bonus $ Non- cash benefits $ Super- annuation contribution $ Value of options and rights $ Termi- nation benefit $ Perfor- mance related Total $ Value of options and rights 2011 in AUD Directors: Non-executive Alan Baxter John Brown Kate Costello Peter Lloyd Steve Killelea (Chairman) 9,500 50,000 50,000 50,000 100,000 Clyde McConaghy 50,000 Directors: Executive - - - - - - - - - - - - 45,000 4,500 4,500 4,500 9,000 4,500 - - - - - - Mark Brayan 429,693 109,450 4,532 15,775 20,642 Executive officers (excluding directors) Peter Adams 252,693 50,226 4,532 Alex Baburin 231,193 37,762 Brian Bigley 175,603 68,804 - - Geoff Bryant (resigned Nov 2011) 133,290 13,115 7,219 Andre Cuenin 206,250 200,549 John Dunne 189,908 36,314 David Leighton 45,000 Andrew Levido (appointed May 2012) 30,838 - - - - - 378 Pierre Semaan 219,693 89,467 4,532 15,775 20,807 673 10,138 2,813 17,092 4,050 1,992 15,775 8,342 3,519 2,353 - 8,748 4,073 - - 4,725 - - - - - - - - - - - - - - - - Total compensation: key management (consolidated, including directors) 2,223,661 605,687 21,193 176,890 52,402 3,079,833 331,568 293,281 247,433 163,762 418,360 247,387 49,050 33,208 15% 13% 28% 8% 48% 15% - - 3% 1% 1% - 2% 2% - - 334,192 27% 1% 54,500 54,500 54,500 54,500 109,000 54,500 - - - - - - - - - - - - Directors: Non-executive Alan Baxter John Brown Kate Costello Peter Lloyd Steve Killelea (Chairman) 29,750 50,000 50,000 50,000 100,000 Clyde McConaghy 50,000 Directors: Executive - - - - - - - - - - - - 24,750 4,500 4,500 4,500 9,000 4,500 - - - - - - 580,092 19% 4% Mark Brayan 395,468 130,600 4,532 15,199 (12,656) - - - - - - - - - - - - - - - - 54,500 54,500 54,500 54,500 109,000 54,500 - - - - - - - - - - - - 533,143 24% (2%) 300,621 273,317 256,951 15% 14% 19% (2%) (1%) - 181,701 22% (7%) 49,050 334,742 499,020 - 28% 57% 119,860 17% 285,132 59% - - - - - Executive officers (excluding directors) Peter Adams 241,007 45,874 4,532 Alex Baburin 220,183 37,374 - Geoff Bryant 180,676 47,941 11,984 15,199 19,817 16,350 (5,991) (4,057) - Rick Ferguson (resigned Jan 2011) 138,322 40,019 2,644 13,886 (13,170) David Leighton 45,000 - - 4,050 - Pierre Semaan 221,007 95,302 4,813 15,199 (1,579) Andre Cuenin 207,999 286,522 John Dunne (appointed Jan 2011) Brian Bigley (appointed Nov 2010) 91,743 20,000 118,325 166,807 Total compensation: key management (consolidated, including directors) 2,189,480 870,439 - - - 2,985 1,514 8,257 (140) - - 28,505 162,692 (36,079) - 3,215,037 28 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 29 Remuneration Report | page 24 – 31Letter from the ChairmanIndependent Audit ReportFinancial StatementsCorporate Governance StatementChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration Report 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: 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: Included in remuneration $ (A) Short term incentive bonuses % vested in year % forfeited in year (B) 109,450 50,226 37,762 68,804 13,115 200,549 36,314 89,467 50% 91% 83% 50% 52% 100% 86% 63% 50% 9% 17% 50% 48% - 14% 37% Directors Mark Brayan Executives Peter Adams Alex Baburin Brian Bigley Geoff Bryant Andre Cuenin John Dunne Pierre Semaan (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 2012 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 No options have been granted to named executives either during or since the end of the financial year. 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 performance hurdles. Further details, including grant dates and exercise dates regarding options granted to executives under the ESOP are in Note 16 to the financial statements. Exercise of options granted as compensation During the reporting year no shares were issued to executives on the exercise of options previously granted as compensation. Options granted Number Date Percent vested in year Percent Forfeited in year (A) Financial year in which grant expires Value yet to vest ($) Min (B) Max (C) Directors Mark Brayan 1,000,000 Sep 2007 25% Executives Peter Adams Alex Baburin 350,000 Mar 2008 40,000 Oct 2008 Andre Cuenin 300,000 Oct 2008 Pierre Semaan 200,000 Jul 2008 John Dunne 30,000 May 2009 25% 25% 25% 25% 25% - - - - - - 2013 2013 2013 2013 2013 2014 nil nil nil nil nil nil nil nil 1,254 9,405 nil 887 Performance rights granted Number Date 170,000 Dec 2011 100,000 Dec 2011 75,000 Dec 2011 65,000 Dec 2011 75,000 Dec 2011 65,000 Dec 2011 75,000 Dec 2011 Value yet to vest ($) Min (B) Max (C) Percent vested in year Percent Forfeited in year (A) Financial year in which grant expires - - - - - - - - - - - - - - 2015 nil 65,212 2015 2015 2015 2015 2015 2015 nil nil nil nil nil nil 38,360 28,770 24,934 28,770 24,934 28,770 Directors Mark Brayan Executives Peter Adams Alex Baburin Brian Bigley Andre Cuenin Pierre Semaan John Dunne (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 or performance rights for employee benefit expense purposes. 30 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 31 Remuneration Report | page 24 – 31Letter from the ChairmanIndependent Audit ReportFinancial StatementsCorporate Governance StatementChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration Report 32 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 evaluating and approving 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 assessing the integrity of internal control and management information systems. It is also responsible for approving and monitoring financial and other reporting. 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 and Risk 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 board-endorsed policies, 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 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 strategic matters for discussion, the CEO’s report, financial reports, key performance indicator reports and presentations by key executives and external industry experts. Board papers are circulated in advance. Directors have other opportunities, including visits to operations, for contact with a wider group of employees. 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. In addition executives make regular presentations to the board to ensure its familiarity with 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. 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: Æ The appointment, remuneration, performance objectives and evaluation of the chief executive officer. Æ The remuneration packages for senior executives. Æ The company’s recruitment, retention and termination policies and procedures for senior executives. Æ Executive remuneration and incentive policies. Æ Policies on employee incentive plans, including equity incentive plans. Æ Superannuation arrangements. Æ The remuneration framework and policy for non- executive directors. Æ 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 Composition of the board The names of the directors of the company in office at the date of this report are set out on pages 14 to 15 of this report. The company’s constitution provides for the board to consist of between three and twelve members. At 30 June 2012 the board members were comprised as follows: Æ Mr Steve Killelea – Non Executive Director (Chairman). Æ Mr Alan Baxter – Independent Non Executive Director. Æ Mr John Brown – Independent Non Executive Director. Æ Ms Kate Costello – Independent Non Executive Director. Æ Mr Peter Lloyd – Independent Non Executive Director. Æ Mr Clyde McConaghy – Non Executive Director. Æ Mr Mark Brayan – Executive Director (Chief Executive Officer). 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 is satisfied that the company benefits from Mr Killelea’s 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. 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 CEO 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, in conjunction with the board, determines the selection criteria for the position based on the skills deemed necessary for the board to best carry out its responsibilities. The committee then selects a panel of candidates and the board appoints the most suitable candidate who must stand for election at the next general meeting of shareholders. 32 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 33 Corporate Governance Statement | page 32 – 37Letter from the ChairmanIndependent Audit ReportFinancial StatementsChief ExecutiveOfficer’s ReportCorporate Governance StatementDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance Statement Responsibilities regarding nomination The Committee develops and makes recommendations to the board on: Æ The CEO and senior executive succession planning Æ 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. Æ A plan for identifying, reviewing, assessing and enhancing director competencies. Æ Board succession plans to maintain a balance of skills, experience and expertise on the board. Æ Evaluation of the board’s performance. Æ Appointment and removal of directors. Æ 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: Æ Ms Kate Costello (Chairperson) – Independent Non-Executive Æ Mr Alan Baxter – Independent Non-Executive Æ Mr 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 and Risk Committee The Audit and Risk 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 risk management and internal control of the consolidated entity. The members of the Audit and Risk Committee during the year were: Æ Mr John Brown (Chairman) – Independent Non-Executive Æ Mr Peter Lloyd – Independent Non-Executive Æ Mr Clyde McConaghy – Non-Executive During the year, the Audit and Risk Committee provided the Board with updates to the Company’s risk management register (with the Board approving this document). The external auditor, Chief Executive Officer and Chief Financial Officer are invited to Audit and Risk 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 19. 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 2012 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 main responsibilities of the Audit and Risk Committee include: Æ Serve as an independent party to monitor the financial reporting process and internal control systems. Æ Review the performance and independence of the external auditors and make recommendations to the board regarding the appointment or termination of the auditors. Æ Review the scope and cost of the annual audit, negotiating and recommending the fee for the annual audit to the board. Æ Review the external auditor’s management letter and responses by management. Æ Provide an avenue of communication between the auditors, management and the board. Æ Monitor compliance with all financial statutory requirements and regulations. Æ Review financial reports and other financial information distributed to shareholders so that they provide an accurate reflection of the financial health of the company. Æ Monitor corporate risk management and assessment processes, and the identification and management of strategic and operational risks. Æ Enquire of the auditors of any difficulties encountered during the audit, including any restrictions on the scope of their work, access to information or changes to the planned scope of the audit. The Audit and Risk Committee reviews the performance of the external auditors on an annual basis and normally meets with them during the year as follows: Æ 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. The Strategy Committee is responsible for: Æ Review and assist in defining current strategy. Æ Assess new strategic opportunities, including M&A proposals and intellectual property developments or acquisitions. Æ Stay close to the business challenges and monitor operational implementation of strategic plans. Æ Prior to announcement of results: Ì 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. Ì To recommend the Board approval of these documents. Æ To finalise half-year and annual reporting: Ì Review the results and findings of the auditor, the adequacy of accounting and financial controls, and to monitor the implementation of any recommendations made. Ì Review the draft financial report and recommend board approval of the financial report. Æ As required, to organise, review and report on any special reviews or investigations deemed necessary by the board. 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: Æ Mr Steve Killelea (Chairman) – Non-Executive Æ Mr Mark Brayan – Executive Æ Mr Peter Lloyd – Independent Non-Executive Æ Ms Kate Costello – Independent Non-Executive Æ Endorse strategy and business cases for consideration by the full board. The Committee met four times during the year under review. Risk management Under the Audit and Risk Charter, the Audit and Risk Committee reviews the status of business risks to the consolidated entity through integrated risk management programs ensuring risks are identified, assessed and appropriately managed and communicated to the board. 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: Æ Capital expenditure above a certain size requires Board approval. Æ Financial exposures are controlled, including the use of forward exchange contracts. Æ Risks are identified and managed, including internal audit, privacy, insurances, business continuity and compliance. Æ 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. 34 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 35 Corporate Governance Statement | page 32 – 37Letter from the ChairmanIndependent Audit ReportFinancial StatementsChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance Statement 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: Æ Financial reporting – Monthly actual results are reported against budgets approved by the directors and revised forecasts for the year are prepared monthly. Æ 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. Æ Quality and integrity of personnel – Formal appraisals are conducted at least annually for all employees. Æ 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. 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 Each Director 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 consolidated entity are set out in Note 25. 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: Æ Responsibility to the community and fellow employees to act with honesty and integrity, and without prejudice. Æ 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. Æ Dealing honestly with customers, suppliers and consultants. Æ Ensuring reports and other information are accurate and timely. Æ Proper use of company resources, avoidance of conflicts of interest and use of confidential or proprietary information. Equal Employment Opportunity The Company has a policy on Equal Employment Opportunity with the provision that commits to a workplace that is free of discrimination of all types. It is Company policy to hire, develop and promote individuals solely on the basis of merit and their ability to perform without prejudice to race, colour, creed, national origin, religion, gender, age, disability, sexual orientation, marital status, membership or non membership of a trade union, status of employment (whether full or part-time) or any other factors prohibited by law. The board is satisfied that the Equal Employment Opportunity policy is sufficient without the need to further establish a separate policy on gender diversity as required by the ASX Corporate Governance Council recommendation. 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: Æ 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. Æ 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. 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. 36 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 37 Corporate Governance Statement | page 32 – 37Letter from the ChairmanIndependent Audit ReportFinancial StatementsChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance Statement 38 Contents Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the financial statements 01. 02. 03. 04. 05. 06. 07. 08. 09. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. Significant accounting policies Segment reporting Finance income Expenses Auditors’ remuneration Income tax expense Earnings per share Cash and cash equivalents Trade and other receivables Other current assets Other financial assets Property, plant and equipment Deferred tax assets and liabilities Intangible assets Trade and other payables Employee benefits Provisions Other liabilities Capital and reserves Financial instruments Operating leases Consolidated entities Reconciliation of cash flows from operating activities Key management personnel disclosures Related parties Parent entity disclosures Subsequent events Page 39 40 41 42 43 43 50 51 51 51 52 52 53 53 54 55 55 56 57 59 59 62 62 63 64 67 67 68 68 72 73 73 Consolidated statement of comprehensive income For the year ended 30 June 2012 Consolidated Notes 2012 2011 In thousands of AUD Revenue Revenue from licence fees Revenue from maintenance fees Revenue from consulting Total revenue Research and development expenses Sales, consulting and marketing expenses General and administration expenses Total expenses Other gains and losses Currency exchange losses Profit before finance income and tax Finance income Profit before tax Income tax expense Profit for the year 4 3 6 28,861 16,406 3,341 48,608 (10,134) (23,004) (4,278) (37,416) (133) 11,059 509 11,568 (2,533) 9,035 (147) 125 - (22) 25,005 16,941 2,646 44,592 (8,949) (21,023) (4,137) (34,109) (1,170) 9,313 381 9,694 (2,229) 7,465 287 (602) (42) (357) Other comprehensive income (Loss)/gain on cash flow hedge taken to equity Foreign exchange translation differences Income tax relating to gains/(loss) on cash flow hedge 13 Other comprehensive income (net of tax) Total comprehensive income for the year 9,013 7,108 Profit attributable to: Owners of the parent Total comprehensive income attributable to: Owners of the parent Basic earnings per share (AUD cents) Diluted earnings per share (AUD cents) 7 7 9,035 9,013 5.41¢ 5.38¢ 7,465 7,108 4.47¢ 4.47¢ The consolidated statement of comprehensive income is to be read in conjunction with the notes to the financial statements set out on pages 43 to 73. 38 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 39 Financial Statements | page 38 – 73Letter from the ChairmanIndependent Audit ReportChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial StatementsFinancial Statements Consolidated statement of financial position As at 30 June 2012 Consolidated statement of changes in equity For the year ended 30 June 2012 In thousands of AUD Current assets Cash and cash equivalents Trade and other receivables Current tax assets Other current assets Total current assets Non-current assets Trade and other receivables 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 Income tax liabilities 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 Notes 2012 2011 8 9 10 9 11 12 13 14 15 17 18 13 17 18 19 19 12,038 20,725 163 953 33,879 656 1,802 1,820 453 13,849 18,580 52,459 4,285 1,779 1,653 9,832 17,549 3,003 621 2,053 5,677 23,226 29,233 1,175 (1,507) 29,565 29,233 11,635 14,058 715 1,129 27,537 1,018 1,800 1,875 286 13,808 18,787 46,324 3,365 1,528 1,664 8,737 15,294 2,605 528 540 3,673 18,967 27,357 845 (1,495) 28,007 27,357 In thousands of AUD Balance at 1 July 2011 Profit for the year Other comprehensive income for the year (net of tax) Total comprehensive income for the year Lapsed employee options Expensed employee options Expensed employee performance rights Shares issued Dividends to shareholders Balance at 30 June 2012 Share capital 845 - - - - - 330 - 1,175 Balance at 1 July 2010 835 Profit for the year Other comprehensive income for the year (net of tax) Total comprehensive income for the year Lapsed employee options Expensed employee options Shares issued Dividends to shareholders Balance at 30 June 2011 - - - - - 10 - 845 Consolidated Hedging reserve Translation reserve Employee benefit reserve Retained earnings 147 - (147) (147) - - - - - (98) - 245 245 - - - - (1,908) - 125 125 - - - - (1,783) (1,306) - (602) (602) - - - - 147 (1,908) 266 - - - (35) 44 83 (82) - 276 544 - - - (186) (89) (3) - 266 Total 27,357 9,035 28,007 9,035 - (22) 9,035 35 - - - 9,013 - 44 83 248 (7,512) 29,565 (7,512) 29,233 24,527 7,465 24,502 7,465 - (357) 7,465 186 - - 7,108 - (89) 7 (4,171) 28,007 (4,171) 27,357 The consolidated statement of changes in equity is to be read in conjunction with the notes to the financial statements set out on pages 43 to 73. The consolidated statement of financial position is to be read in conjunction with the notes to the financial statements set out on pages 43 to 73. 40 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 41 Financial Statements | page 38 – 73Letter from the ChairmanIndependent Audit ReportChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial Statements Consolidated statement of cash flows For the year ended 30 June 2012 In thousands of AUD Notes 2012 2011 Consolidated Notes to the Financial Statements For the year ended 30 June 2012 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 23 Cash flows from investing activities Payments for capitalised development Payments for property, plant and equipment Payments for intangible assets Interest 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 19 8 45,565 (29,409) 16,156 (1,510) 14,646 (6,730) (518) (221) 509 (6,960) 248 (7,512) (7,264) 422 11,635 (19) 12,038 43,875 (28,536) 15,339 (1,485) 13,854 (5,655) (397) (243) 381 (5,914) 7 (4,171) (4,164) 3,776 8,396 (537) 11,635 The consolidated statement of cash flows is to be read in conjunction with the notes to the financial statements set out on pages 43 to 73. 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 2012 comprises the Company and its subsidiaries (together referred to as the “consolidated entity”). The financial report was authorised for issue by the directors on 21 August 2012. 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 statements of the consolidated entity also comply with International Financial Reporting Standards and interpretations adopted by the International Accounting Standards Board. b) Basis of Preparation The financial statements are presented in Australian dollars and are 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 financial statements 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. 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. 42 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 43 Letter from the ChairmanIndependent Audit ReportChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial StatementsNotes to the Financial Statements | page 43 – 73 Note 1: Significant accounting policies (cont.) 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 is not expected to materially affect any of the amounts recognised in the financial statements, but may change the disclosures presently made in relation to the consolidated entity’s financial statements: Standard/Interpretation Effective for annual reporting periods beginning on or after Expected to be initially applied in the financial year ending AASB 9 ‘Financial Instruments’, AASB 2009-11 and AASB 2010-7 ‘Amendments to Australian Accounting Standards arising from AASB 9’ AASB 2010-8 ‘Amendments to Australian Accounting Standards – Deferred Tax: Recovery of Underlying Assets’ AASB 10 ‘Consolidated Financial Statements’ AASB 12 ‘Disclosure of Interests in Other Entities’ AASB 13 ‘Fair Value Measurement’ and AASB 2011-8 ‘Amendments to Australian Accounting Standards arising from AASB 13’ AASB 119 ‘Employee Benefits’(2011) and AASB 2011-10 ‘Amendments to Australian Accounting Standards arising from AASB 119 (2011)’ AASB 127 ‘Separate Financial Statements’ (2011) AASB 2011-9 ‘Amendments to Australian Accounting Standards – Presentation of Items of Other Comprehensive Income’ AASB 2012-2 ‘Amendments to Australian Accounting Standards – Disclosures – Offsetting Financial Assets and Financial Liabilities’ AASB 2012-3 ‘Amendments to Australian Accounting Standards – Disclosures – Offsetting Financial Assets and Financial Liabilities’ AASB 2012-5 ‘Amendments to Australian Accounting Standards arising from Annual Improvements 2009-2011 Cycle’ 1 January 2013 30 June 2014 1 January 2012 1 January 2013 1 January 2013 30 June 2013 30 June 2014 30 June 2014 1 January 2013 30 June 2014 1 January 2013 1 January 2013 30 June 2014 30 June 2014 1 July 2012 30 June 2013 1 January 2013 30 June 2014 1 January 2014 30 June 2015 1 January 2013 30 June 2014 At the date of authorisation of the financial statements, the following IASBs were also in issue but not effective, although Australian equivalent Standards have not yet been issued: Mandatory Effective Date of IFRS 9 and Transition Disclosures (Amendments to IFRS 9 and IFRS 7) Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (amendments to IFRS 10, IFRS 11 and IFRS 12) 1 January 2015 30 June 2016 1 January 2013 30 June 2014 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 year end date, being the present value of the quoted forward price. 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 includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging 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 in 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 profit or loss 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 profit or loss. Note 1: Significant accounting policies (cont.) The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial statements. 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. 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 In preparing the financial statements of the individual entities 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 year end date are translated to Australian dollars at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in profit or loss. 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. On consolidation, 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 year end 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 other comprehensive income and accumulated in the translation reserve. 44 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 45 Letter from the ChairmanIndependent Audit ReportChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial StatementsNotes to the Financial Statements | page 43 – 73 The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Other development expenditure is recognised in profit or loss 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 profit or loss on a straight- line basis over the estimated useful life, but no more than three years. Intellectual property Intellectual property acquired from third parties is amortised over its estimated useful life, but no more than three years. Computer software Computer software is stated at cost and depreciated on a straight-line basis over a 2½ to 3 year period. 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. Allowance 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. Note 1: Significant accounting policies (cont.) 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 profit or loss 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. Share-based payment transactions The share option and performance rights programmes allows the consolidated entity’s employees to acquire shares of the Company. The fair value of options and performance rights granted are 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 or the performance rights. The fair value of the instrument 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 or performance rights that are expected to vest. 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 the year end date, calculated at undiscounted amounts based on remuneration wage and salary rates that the consolidated entity expects to pay as at the year end date. m) Provisions A provision is recognised in the statement of financial position 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. Note 1: Significant accounting policies (cont.) 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 year end 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 profit or loss 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 profit or loss. 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 profit or loss 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 year end date which have maturity dates approximating to the terms of the consolidated entity’s obligations. 46 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 47 Letter from the ChairmanIndependent Audit ReportChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial StatementsNotes to the Financial Statements | page 43 – 73 Note 1: Significant accounting policies (cont.) 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 generally 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 profit or loss 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. p) Expenses Operating lease payments Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised in profit or loss as an integral part of the total lease expense and spread over the lease term. Financing income Financing income comprises interest receivable on funds invested. q) Income tax Income tax on the profit or loss for the periods presented comprises current and deferred tax. Income tax is recognised in profit or loss 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 substantively enacted at the year end date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised on 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 year end 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 dividend franking deficit tax that arises from the distribution of dividends are recognised at the same time as the liability to pay the related dividend. r) 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 statement of financial position. 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. 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. Receivables The consolidated entity assesses impairment of receivables based upon assessment of objective evidence for significant receivables and 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 reporting date. This assessment includes judgements and estimates of future outcomes the actual results of which may differ from the estimates at the reporting date. Note 1: Significant accounting policies (cont.) s) 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 consolidated 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. 48 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 49 Letter from the ChairmanIndependent Audit ReportChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial StatementsNotes to the Financial Statements | page 43 – 73 Note 2. Segment reporting The information reported to the CODM (being the Chief Executive Officer) for the purposes of resource allocation and assessment of performance is focused on geographical performance. The principal geographical regions are 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 and Corporate Australia – includes revenue and expenses for research and development and corporate head office functions of the company. Inter-segment pricing is determined on an arm’s length basis. Segment profit represents the profit earned by each segment without allocation of investment revenue and income tax expense. This is the measure reported to the chief operating decision maker for the purposes of resource allocation and assessment of segment performance. Information regarding these segments is presented below. The accounting policies of the reportable segments are the same as the Group’s accounting policies. Americas Europe Asia Pacific Corporate Australia* Eliminations Consolidated In thousands of AUD 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 Sales to customers outside the consolidated entity 31,890 26,706 7,183 7,099 8,668 8,858 867 1,929 - - 48,608 44,592 Inter-segment sales - - - - - 26,594 23,890 (26,594) (23,890) - - Total segment revenue Total revenue 31,890 26,706 7,183 7,099 8,668 8,858 27,461 25,819 (26,594) (23,890) 48,608 44,592 48,608 44,592 Segment results 784 777 175 168 244 225 9,856 8,143 - - 11,059 9,313 Results from operating activities Financing income Income tax expense Profit for the year Capital additions** 203 61 32 37 Depreciation and amortisation expenditure 67 Non-current assets 1,048 63 822 20 108 20 93 - - - 11,059 9,313 509 381 (2,533) (2,229) 9,035 7,465 739 640 7,489 6,561 - - 504 542 7,402 6,478 - - - - - 17,478 17,926 (54) (54) 18,580 18,787 Americas (USD) Europe (UK Sterling) In thousands of local currency*** 2012 2011 2012 2011 Sales to customers outside the consolidated entity 33,137 26,489 4,687 4,416 Inter-segment sales Total segment revenue Segment results - - - - 33,137 26,489 4,687 4,416 825 662 114 110 * Corporate Australia includes both the research and development and corporate head office functions of the Company. ** Excludes internal development costs capitalised but includes third party assets acquired. *** Segment results represented in local currencies as reviewed by the Chief Operating Decision Maker Note 3. Finance income In thousands of AUD Interest income Note 4. Expenses Total expenses include: In thousands of AUD Employee benefits expense: Defined contribution plans Equity settled share-based payments Other employee benefits Depreciation and amortisation Bad and doubtful debt expense Operating lease rental expenses Note 5. Auditors’ remuneration 2012 and 2011 – Deloitte Touche Tohmatsu In AUD 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 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: Other auditors Consolidated 2012 509 509 2011 381 381 Consolidated 2012 2011 1,382 127 25,316 26,825 7,489 572 1,207 1,150 (89) 23,350 24,411 6,561 227 1,258 Consolidated 2012 2011 168,000 15,530 163,760 15,308 16,800 1,932 15,750 1,531 3,523 - 50 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 51 Letter from the ChairmanIndependent Audit ReportChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial StatementsNotes to the Financial Statements | page 43 – 73 Note 6. Income tax expense Recognised in profit for the year Note 7. Earnings per share (cont.) Weighted average number of shares used as the denominator Consolidated Note 2012 2011 (Number) In thousands of AUD Current tax expense: Current year Prior year adjustments Deferred tax expense: Origination and reversal of temporary differences 13 Total income tax expense in profit and loss 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 Other Prior year adjustments Income tax expense 2,326 (24) 2,302 231 2,533 Consolidated 2012 11,568 3,470 79 105 (1,097) - (24) 2,533 2,752 (69) 2,683 (454) 2,229 2011 9,694 2,908 11 69 (751) 61 (69) 2,229 Note 7. Earnings per share The calculation of basic and diluted earnings per share at 30 June 2012 was based on the profit attributable to ordinary shareholders of $9,035,000 (2011: $7,465,000); a weighted number of ordinary shares outstanding during the year ended 30 June 2012 of 166,977,446 (2011: 166,837,850); and a weighted number of ordinary shares (diluted) outstanding during the year ended 30 June 2012 of 168,086,211 (2011: 167,055,263), calculated as follows: In thousands of AUD Profit for the year Consolidated 2012 9,035 2011 7,465 Number for basic earnings per share: Ordinary shares Effect of employee share plans on issue Number for diluted earnings per share Basic earnings per share (AUD cents) Diluted earnings per share (AUD cents) Note 8. Cash and cash equivalents In thousands of AUD Cash at bank and on hand Note 9. Trade and other receivables Current In thousands of AUD Trade debtors Less: Allowance for doubtful debts Less: Allowance for returns GST receivable Non-current In thousands of AUD Trade debtors Consolidated 2012 2011 166,977,446 166,837,850 1,108,765 217,413 168,086,211 167,055,263 5.41¢ 5.38¢ 4.47¢ 4.47¢ Consolidated 2012 12,038 2011 11,635 Consolidated 2012 21,878 (516) (721) 20,641 84 20,725 2011 14,620 (244) (418) 13,958 100 14,058 Consolidated 2012 656 2011 1,018 52 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 53 Letter from the ChairmanIndependent Audit ReportChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial StatementsNotes to the Financial Statements | page 43 – 73 Note 9. Trade and other receivables (cont.) The credit period on sales ranges from 30 to 90 days although in limited circumstances extended payment terms have been offered. No interest is charged on trade debtors. Ageing of past due but not impaired: In thousands of AUD Past due 90 days Consolidated 2012 3,772 2011 2,637 Note 11. Other financial assets In thousands of AUD Deposits Consolidated 2012 1,802 2011 1,800 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. The movement in the allowance for doubtful debts in respect of trade receivables is detailed below: Note 12. Property, plant and equipment In thousands of AUD Balance at beginning of year Amounts written off during the year Increase in provision Balance end of year Consolidated 2012 244 (300) 572 516 2011 470 (453) 227 244 The consolidated entity has used the following criteria to assess the allowance loss for trade receivables and as a result is unable to specifically allocate the allowance to the ageing categories shown above: Æ historical bad debt experience; Æ the general economic conditions; Æ an individual account by account specific risk assessment based on past credit history; and Æ any prior knowledge of debtor insolvency or other credit risk. Included in the consolidated entity’s trade receivable balance are debtors with a carrying amount of $2,535,000 (2011: $1,975,000) which are 90 days past due at the reporting date which the consolidated entity has not provided for as there has been no significant change in credit quality and the consolidated entity believes that the amounts are still considered recoverable. The consolidated entity does not hold any collateral over these balances. Note 10. Other current assets In thousands of AUD Other prepayments Fair value of hedge asset – forward foreign exchange contracts Consolidated 2012 676 277 953 2011 463 666 1,129 In thousands of AUD Plant and Equipment At cost Accumulated depreciation Leasehold Improvements At cost Accumulated depreciation Total property, plant and equipment At cost Accumulated depreciation Total written down amount Consolidated 2012 2011 4,321 (3,458) 863 2,068 (1,111) 957 6,389 (4,569) 1,820 3,844 (3,052) 792 1,993 (910) 1,083 5,837 (3,962) 1,875 54 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 55 Letter from the ChairmanIndependent Audit ReportChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial StatementsNotes to the Financial Statements | page 43 – 73 Note 12. Property, plant and equipment (cont.) Note 13. Deferred tax assets and liabilities (cont.) Consolidated 2012 2011 Movement in temporary differences during the year: For year ended 30 June 2012 Consolidated In thousands of AUD Plant and Equipment Carrying amount at start of year Additions Effects of foreign currency exchange Depreciation expense Carrying amount at end of year Leasehold Improvements Carrying amount at start of year Additions Effects of foreign currency exchange Depreciation expense Carrying amount at end of year Note 13. Deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Consolidated Assets Liabilities In thousands of AUD 2012 2011 Property, plant and equipment Intangible assets Trade and other payables Employee benefits Provisions Other current liabilities Unrealised foreign exchange gain Unrealised foreign exchange loss - - 468 772 364 - - - Deferred tax assets/liabilities 1,604 - - 567 596 243 - - 296 1,702 2012 50 4,063 - - - - 41 - 792 445 6 (380) 863 1,083 73 (1) (198) 957 788 397 (36) (357) 792 1,276 - 6 (199) 1,083 Net 2012 (50) 2011 - 2011 - 4,021 (4,063) (4,021) - - - - - - 468 772 364 - (41) - 567 596 243 - - 296 Set off of deferred tax asset (1,151) (1,416) (1,151) (1,416) - - Net deferred tax assets/liabilities 453 286 3,003 2,605 (2,550) (2,319) 4,154 4,021 (2,550) (2,319) In thousands of AUD Property, plant and equipment Intangible assets Trade and other payables Employee benefits Provisions Unrealised foreign exchange gain Unrealised foreign exchange loss Balance 1 July 11 Recognised in income Recognised in equity Balance 30 June 12 - (4,021) 567 596 243 - 296 (2,319) (50) (42) (99) 176 121 (41) (296) (231) - - - - - - - - (50) (4,063) 468 772 364 (41) - (2,550) For year ended 30 June 2011 Consolidated In thousands of AUD Property, plant and equipment Intangible assets Trade and other payables Employee benefits Provisions Unrealised foreign exchange gain Unrealised foreign exchange loss Balance 1 July 10 Recognised in income Recognised in equity Balance 30 June 11 28 (4,185) 339 510 670 (162) 69 (2,731) (28) 164 228 86 (427) 162 269 454 - - - - - - (42) (42) - (4,021) 567 596 243 - 296 (2,319) Note 14. Intangible assets The amortisation is recognised in the following line item in the statement of comprehensive income: In thousands of AUD Research and development expenses Consolidated 2012 6,911 6,911 2011 6,005 6,005 56 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 57 Letter from the ChairmanIndependent Audit ReportChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial StatementsNotes to the Financial Statements | page 43 – 73 Note 14. Intangible assets (cont.) Note 14. Intangible assets (cont.) Cost In thousands of AUD Balance at 1 July 2010 Fully amortised & offset Effects of foreign currency exchange Internally developed Acquired Balance at 30 June 2011 Balance at 1 July 2011 Fully amortised & offset Effects of foreign currency exchange Internally developed Acquired Balance at 30 June 2012 Consolidated Software development Third party software 28,193 (12,490) - 5,655 61 21,419 21,419 (7,242) - 6,730 57 20,964 1,551 (205) (44) - 181 1,483 1,483 - 3 - 164 1,650 Amortisation Consolidated In thousands of AUD Balance at 1 July 2010 Fully amortised & offset Effects of foreign currency exchange Amortisation for year Balance at 30 June 2011 Balance at 1 July 2011 Fully amortised & offset Effects of foreign currency exchange Amortisation for year Balance at 30 June 2012 Software development Third party software 14,684 (12,490) - 5,821 8,015 8,015 (7,242) - 6,649 7,422 1,103 (205) (3) 184 1,079 1,079 - 2 262 1,343 Total 29,744 (12,695) (44) 5,655 242 22,902 22,902 (7,242) 3 6,730 221 22,614 Total 15,787 (12,695) (3) 6,005 9,094 9,094 (7,242) 2 6,911 8,765 Carrying amounts Consolidated In thousands of AUD Balance at 30 June 2011 Balance at 30 June 2012 Software development Patents and trademarks Third party software 13,404 13,542 - - 404 307 Total 13,808 13,849 Note 15. Trade and other payables In thousands of AUD Trade and other creditors The average credit period on trade and other payables is 30 days. Note 16. Employee benefits Current In thousands of AUD Liability for annual leave Liability for long service leave Non-current In thousands of AUD Liability for long service leave Consolidated 2012 4,285 4,285 2011 3,365 3,365 Consolidated 2012 1,314 465 1,779 Consolidated 2012 242 2011 1,084 444 1,528 2011 149 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. 58 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 59 Letter from the ChairmanIndependent Audit ReportChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial StatementsNotes to the Financial Statements | page 43 – 73 Note 16. Employee benefits (cont.) Share based payments Performance Rights On 21 November 2011, the consolidated entity established the Integrated Research Performance Rights and Options Plan (IRPROP). The plan enables the Company to offer performance rights to eligible employees to obtain shares in Integrated Research at no cost contingent upon performance conditions being met. The performance conditions for non-executive employees includes a service period and performance components. The performance conditions for executives includes a service period and profit after tax hurdles. The performance rights are automatically exercised into shares upon the performance conditions being met. The following performance rights were granted during the period: Grant Date December 2011 December 2011 Type Number of Rights Vesting Date Expiry date Non-Executive Executive 887,500 665,000 15 Oct 2014 31 Aug 2014 15 Nov 2014 30 Sep 2014 The fair value of the performance rights including assumptions used are as follows: Grant date Fair value at measurement date Share price Exercise price Expected volatility Contractual life (expressed in days) Expected dividends Risk-free interest rate (based on 3 year treasury bonds) Executive 30 Dec 11 Non-Executive 30 Dec 11 $0.38 $0.47 nil 51% 1,005 7.5% 3.1% $0.38 $0.47 nil 51% 1,051 7.5% 3.1% The fair values of services received in return for performance rights 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 a Binomial option-pricing model. During the year ended 30 June 2012, the consolidated entity recognised an expense through profit of $83,000 related to the fair value of performance rights granted (2011: $nil). The following table provides the movement in performance rights during the year: Note 16. Employee benefits (cont.) Share Options 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 2012 are as follows: Æ All options vest at the rate of 25% per annum, starting on the first anniversary of the grant date Æ The contractual life of each option is five years from the grant date Æ Exercises are settled by physical delivery of shares Æ Grants marked (*) include performance hurdles as conditions for vesting Grant date Exercise Price Number of Instruments Outstanding Grant date Exercise Price Sep 2007 (*) Apr 2008 (*) Jul 2008 (*) $0.42 $0.38 $0.35 1,000,000 Oct 2008 (*) 350,000 May 2009 200,000 $0.31 $0.28 Number of Instruments Outstanding 340,000 755,000 The number and weighted average exercise prices of share options is as follows: In thousands of options 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) Weighted Average exercise price Number of options Weighted Average exercise price Number of options 2012 $0.37 $0.42 $0.38 - $0.36 $0.35 2012 3,872 (572) (655) - 2,645 1,289 2011 $0.38 $0.42 $0.28 - $0.37 $0.38 2011 5,420 (1,523) (25) - 3,872 1,429 The options outstanding at 30 June 2012 have a weighted average exercise price of $0.36 and a weighted average of contractual life of five years from inception. Executive Non-Executive Executive Non-Executive During the year ended 30 June 2012, 654,500 options were exercised (2011: 25,000). In thousands of performance rights 2012 2012 2011 2011 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) - - - 665 665 - - (18) - 888 870 - - - - - - - - - - - - - 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. There were no options granted during the 2012 financial year (2011:nil). During the year ended 30 June 2012, the consolidated entity recognised an expense through profit of $44,000 related to the fair value of options granted (2011: credit of $89,000). 60 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 61 Letter from the ChairmanIndependent Audit ReportChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial StatementsNotes to the Financial Statements | page 43 – 73 Note 17. Provisions Current In thousands of AUD Employee benefits Non-current In thousands of AUD Employee benefits Lease make good Note 18. Other liabilities Current In thousands of AUD Fair value of hedge liabilities - forward foreign exchange contracts Deferred revenue Non-current In thousands of AUD Deferred revenue Note 16 Note 16 Consolidated 2012 1,779 1,779 Consolidated 2012 242 379 621 Consolidated 2012 102 9,730 9,832 Consolidated 2012 2,053 2011 1,528 1,528 2011 149 379 528 2011 18 8,719 8,737 2011 540 Note 19. Capital and reserves Share capital In thousands of shares On issue 1 July Issued against employee options exercised On issue 30 June Ordinary shares 2012 166,852 655 167,507 2011 166,827 25 166,852 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 consolidated entity, as well as from the translation of liabilities that hedge the consolidated entity’s net investment in a foreign subsidiary. Employee benefit reserve The employee benefit reserve arises on the grant of either share options or performance rights to employees under the Integrated Research Performance Rights and Option Plan (established November 2011) or the Employee Share Option Plan (established October 2000). Amounts are transferred out of the reserve and into share capital when the options or performance rights are exercised. Refer to Note 16 for further details. Dividends Dividends recognised in the current year by the company are: In thousands of AUD Cents per share Total amount Franked/ unfranked Date of payment 2012 Final 2011 Interim 2012 Total amount 2011 Final 2010 Interim 2011 Total amount 2.5 2.0 4.5 1.0 1.5 2.5 75% franked 16 Sep 2011 40% franked 16 Mar 2012 45% franked 50% franked 17 Sep 10 11 Mar 11 4,172 3,340 7,512 1,668 2,503 4,171 62 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 63 Letter from the ChairmanIndependent Audit ReportChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial StatementsNotes to the Financial Statements | page 43 – 73 Note 19. Capital and reserves (cont.) After the end of the financial year, the following dividend was proposed by the directors. The financial effect of this dividend has not been brought to account in the financial statements for the year ended 30 June 2012 and will be recognised in subsequent financial statements: In thousands of AUD Final 2012 Cents per share Total amount Franked/ unfranked Date of payment 3.0 5,033 70% franked 14 Sep 12 The final dividend declared of 3.0 cents together with the interim dividend paid in March 2012 of 2.0 cents takes total dividends for the 2012 financial year to 5.0 cents. Franking account disclosure: In thousands of AUD Adjusted franking account balance Impact on franking account balance of dividends not recognised Note 20. Financial instruments Company 2012 1,669 (1,510) 2011 1,446 (1,340) Capital risk management The 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 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 8 and 19 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 consolidated entity’s financial management framework. The Board has an established Audit and Risk 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 and Risk 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 risks arising from the consolidated entity’s financial instruments are currency risk, credit risk, liquidity risk and cash flow interest rate risk. The 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 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 consolidated entity does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. Note 20. Financial instruments (cont.) Market risk The consolidated entity’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and cash flow interest rate risks. The 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 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 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 the functional currency of the respective entities undertaking the transactions is as follows: Consolidated Liabilities Assets In thousands of AUD 2012 2011 US Dollar Euro UK Sterling - - - - - - 2012 3,400 2,507 9 2011 1,700 1,611 9 Foreign currency sensitivity At 30 June 2012, if the US Dollar, Euro 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 Net profit Retained earnings Change in currency (i) – 10% decrease Consolidated US Impact Euro Impact Sterling Impact 2012 378 378 2011 189 189 2012 279 279 2011 179 179 2012 2011 1 1 1 1 (i) This has been based on the change in the exchange rate against the Australian Dollar in the financial years ended 30 June 2012 and 30 June 2011. 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. 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. As stated in the 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 year end 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 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. 64 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 65 Letter from the ChairmanIndependent Audit ReportChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial StatementsNotes to the Financial Statements | page 43 – 73 Note 20. Financial instruments (cont.) Note 20. Financial instruments (cont.) Forward foreign exchange contracts The 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 consolidated entity uses forward exchange contracts to hedge its foreign currency risk. The forward exchange contracts have maturities of less than two years after the year end date. The consolidated entity classifies its forward exchange contracts hedging forecasted transactions as cash flow hedges and measures them at fair value. The following table details the forward foreign currency contracts outstanding as at reporting date: Outstanding contracts Average Exchange Rate Foreign Currency Contract Value Fair Value 2012 2011 2012 FC’000 2011 FC’000 2012 A$’000 2011 A$’000 2012 A$’000 2011 A$’000 Consolidated Sell US Dollar Less than 3 months 3 to 6 months 6 to 9 months 9 to 12 months Sell UK Sterling Less than 3 months Sell Euros Less than 3 months 3 to 6 months 6 to 9 months 9 to 12 months 1.01 1.01 1.01 - - 0.71 0.71 0.76 - 0.89 0.99 1.02 1.01 - 0.71 0.73 0.72 0.72 3,500 2,250 3,250 - - 1,100 300 300 - 2,650 1,600 1,100 1,500 - 300 300 400 200 3,468 2,228 3,205 - - 1,540 424 395 - 2,981 1,619 1,082 1,481 - 420 409 559 277 8 (11) (51) - - 168 47 14 - 487 98 26 25 - 12 (3) 5 (2) Credit risk management Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the consolidated entity. The 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 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. 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 consolidated entity’s short, medium and long-term funding and liquidity management requirements. The 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 15 for both 2012 and 2011 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 consolidated entity is a reasonable approximation of their fair value. Note 21. 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 Consolidated 2012 1,140 3,303 - 4,443 2011 1,004 3,648 542 5,194 Ownership interest 2012 2011 Country of incorporation Australia USA UK 100% 100% 100% 100% 175 648 Note 22. Consolidated entities These hedge assets are classified as a level 2 fair value measurement, being derived from inputs rather than quoted prices that are observable for the asset either directly (ie as prices) or indirectly (ie derived from prices). Interest rate risk management The consolidated entity is exposed to interest rate risk on the cash held in bank deposits. Cash in bank and term deposits of $13,840,000 were held by the consolidated entity at the reporting date, attracting an average interest rate of 4.2% (2011: 4.6%) If interest rates had been 50 basis points higher or lower and all other variables were held constant, the consolidated entity’s net profit would increase/(decrease) by $69,000 (2011: $67,000). In thousands of AUD Parent entity: Integrated Research Limited Subsidiaries: Integrated Research, Inc Integrated Research UK Limited 66 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 67 Letter from the ChairmanIndependent Audit ReportChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial StatementsNotes to the Financial Statements | page 43 – 73 Note 23. Reconciliation of cash flows from operating activities Note 24. Key management personnel disclosures (cont.) Consolidated Key management personnel compensation The key management personnel compensation are as follows: In AUD Short-term benefits Post-employment benefits Equity compensation benefits Consolidated 2012 2011 2,850,541 3,088,424 176,890 52,402 162,692 (36,079) 3,079,833 3,215,037 Individual directors and executives compensation disclosures Information regarding individual directors and executives compensation is provided in the remuneration report on pages 24 to 31. Apart from the details disclosed in this note, no director has entered into a material contract with the consolidated entity since the end of the previous financial year and there were no material contracts involving directors’ interests existing at year-end. Key management personnel transactions with the consolidated entity 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 months notice and that 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. Information regarding individual key management personnel’s service contracts is provided in the remuneration report on pages 26 to 27. 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). All performance rights refer to performance rights over ordinary shares of Integrated Research Limited, which are exercisable on a one-for-one basis under the Integrated Research Performance Rights and Option Plan (IRPROP). In thousands of AUD Profit for the year Depreciation and amortisation Provision for doubtful debts Allowance for returns Interest received Share-based payments expense Net exchange differences Change in operating assets and liabilities: (Increase)/decrease in trade debtors (Increase)/decrease in future income tax benefit (Increase)/decrease in other operating assets Increase/(decrease) in trade and other payables 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 Net cash from operating activities 2012 9,035 7,489 272 303 (509) 127 117 (6,880) (167) 580 920 2,628 (11) 398 344 14,646 2011 7,465 6,561 (226) (655) (381) (89) 181 1,867 456 (538) 275 (1,703) 1,453 (868) 56 13,854 Note 24. 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: Directors (full year) Other key management personnel (full year) Other key management personnel (part year) Geoff Bryant Vice President Consulting (resigned Nov 2011) Andrew Levido General Manager, Global Sales (appointed May 2012) Steve Killelea Chairman Peter Adams Chief Financial Officer Mark Brayan Chief Executive Officer Alex Baburin General Manager, Research and Development Alan Baxter John Brown Kate Costello Peter Lloyd Brian Bigley Vice President Europe Andre Cuenin President Americas John Dunne General Manager, Products and Alliances David Leighton Company Secretary (retired July 2012) Clyde McConaghy Pierre Semaan Vice President Asia Pacific 68 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 69 Letter from the ChairmanIndependent Audit ReportChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial StatementsNotes to the Financial Statements | page 43 – 73 Note 24. Key management personnel disclosures (cont.) Note 24. Key management personnel disclosures (cont.) Options 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: Performance rights over equity instruments granted as compensation The movement during the reporting year in the number of performance rights 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 2011 Granted as compensation Exercised Other changes* Held at 30 June 2012 Vested during the year Vested and exercisable at 30 June 2012 Directors Mark Brayan 1,000,000 Executives Peter Adams Alex Baburin Andre Cuenin Pierre Semaan John Dunne Prior Year Directors 350,000 200,000 300,000 200,000 50,000 Held at 1 July 2010 - - - - - - 1,000,000 250,000 500,000 - - - - - - - 350,000 87,500 (160,000) 40,000 10,000 - - 300,000 75,000 200,000 50,000 (35,000) 15,000 7,500 87,500 10,000 75,000 50,000 7,500 Granted as compensation Exercised Other changes* Held at 30 June 2011 Vested during the year Vested and exercisable at 30 June 2011 Mark Brayan 1,000,000 Executives Peter Adams Alex Baburin Andre Cuenin Rick Ferguson Pierre Semaan John Dunne 350,000 200,000 300,000 300,000 200,000 50,000 - - - - - - - - - - - - - - - - - - 1,000,000 350,000 200,000 300,000 (300,000) - - - 200,000 50,000 - - - - - - - 250,000 - - - - - 35,000 * Other changes represent options that expired or were forfeited during the year There were no options granted as compensation during the current year. 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. Current Year Directors Mark Brayan Executives Peter Adams Alex Baburin Brian Bigley Andre Cuenin Pierre Semaan John Dunne Held at 1 July 2011 Granted as compensation Exercised Other changes* Held at 30 June 2012 Vested during the year Vested and exercisable at 30 June 2012 - - - - - - - 170,000 100,000 75,000 65,000 75,000 65,000 75,000 - - - - - - - - - - - - - - 170,000 100,000 75,000 65,000 75,000 65,000 75,000 - - - - - - - - - - - - - - * Other changes represent performance rights that expired or were forfeited during the year The performance rights offered to executives are subject to the consolidated entity achieving profit after tax performance hurdles. The next available testing date is August 2014. Performance rights expire on the earlier of their expiry date or termination of the individual’s employment. No performance rights have been granted since the end of the financial year. The performance rights were provided at no cost to the recipients. There were no performance rights granted in the 2011 financial year. 70 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 71 Letter from the ChairmanIndependent Audit ReportChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial StatementsNotes to the Financial Statements | page 43 – 73 Note 24. Key management personnel disclosures (cont.) Note 26. Parent entity disclosures 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: Current Year Held at 1 July 2011 Purchases Received on exercise of options Received as compensation Sales Vested and exercisable at 30 June 2012 Directors: Non-executive Alan Baxter John Brown Kate Costello Steve Killelea 100,000 101,000 200,000 94,834,951 Directors: Executive Mark Brayan 25,000 - - - - - - - - - - - - - - - - - - - - 100,000 101,000 200,000 94,834,951 25,000 Prior Year Held at 1 July 2010 Purchases Received on exercise of options Received as compensation Sales Vested and exercisable at 30 June 2011 Directors: Non-executive - 100,000 Alan Baxter John Brown Kate Costello Steve Killelea 101,000 200,000 94,834,951 Directors: Executive Mark Brayan 25,000 - - - - - - - - - - - - - - - - - - - 100,000 101,000 200,000 94,834,951 25,000 Shareholdings at the date of the Directors’ Report for existing Key Management Personnel remain unchanged. Other transactions with the consolidated entity There were no other transactions between the key management personnel, or their personally-related entities, and the consolidated entity. Note 25. Related parties The consolidated entity has a related party relationship with its key management personnel (see note 24). At 30 June 2012 Mr Steve Killelea, the Chairman of the Company, owned either directly or indirectly 56.41% of the Company (2011: 56.84%). Financial Position In thousands of AUD Assets Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Net assets Equity Issued capital Employee benefits reserve Hedging reserve Retained earnings Total equity Financial Performance In thousands of AUD Profit for the year Other comprehensive income Total comprehensive income Parent Entity 2012 2011 19,055 17,479 36,534 6,672 3,861 10,533 26,001 1,175 276 - 24,550 26,001 Parent Entity 2012 8,470 (147) 8,323 20,810 17,926 38,736 10,488 3,434 13,922 24,814 845 266 147 23,556 24,814 2011 6,864 245 7,109 Note 27. Subsequent events For dividends declared after 30 June 2012 see Note 19 in the financial statements. The financial effect of dividends declared and paid after 30 June 2012 have not been brought to account in the financial statements for the year ended 30 June 2012 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. 72 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 73 Letter from the ChairmanIndependent Audit ReportChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial StatementsNotes to the Financial Statements | page 43 – 73 74 The directors declare that: (a) in the directors’ opinion, there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; (b) the financial statements are in compliance with International Financial Reporting Standards, as stated in Note 1 to the financial statements; (c) in the directors’ opinion, the financial statements and notes thereto are in accordance with the Corporations Act 2001, including compliance with accounting standards and giving a true and fair view of the financial position and performance of the consolidated entity; and (d) the directors have been given the declarations required by Section 295A of the Corporations Act 2001. Signed in accordance with a resolution of the directors made pursuant to Section 295(5) of the Corporations Act 2001. Dated at North Sydney this 21st day of August 2012. Steve Killelea Chairman Mark Brayan Chief Executive Officer 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 Independent Auditor’s Report to the members of Integrated Research Limited Report on the Financial Report We have audited the accompanying financial report of Integrated Research Limited, which comprises the statement of financial position as at 30 June 2012, the statement of comprehensive income, the statement of cash flows and the statement of changes in equity for the year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, 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 39 to 74. Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the consolidated financial statements comply with International Financial Reporting Standards. Auditor’s Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those 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 company’s preparation of the financial report that gives a true and fair view, 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 company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 74 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 75 Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited Independent Audit Report | page 75 – 77Directors’ DeclarationLetter from the ChairmanChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial StatementsIndependent Audit Report Auditor’s Independence Declaration In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of Integrated Research Limited, would be in the same terms if given to the directors as at the time of this auditor’s report. 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 consolidated entity’s financial position as at 30 June 2012 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) the consolidated financial statements also comply with International Financial Reporting Standards as disclosed in Note 1. Report on the Remuneration Report We have audited the Remuneration Report included in pages 24 to 31 of the directors’ report for the year ended 30 June 2012. 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. Opinion In our opinion the Remuneration Report of Integrated Research Limited for the year ended 30 June 2012, complies with section 300A of the Corporations Act 2001. DELOITTE TOUCHE TOHMATSU Weng W Ching Partner Chartered Accountants Sydney, 21 August 2012 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 21 August 2012 Dear Board Members Auditor’s Independence Declaration to 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 2012, 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 Weng W Ching Partner Chartered Accountants Sydney, 21 August 2012 Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 76 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 77 Independent Audit Report | page 75 – 77Letter from the ChairmanChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial StatementsIndependent Audit Report 78 Shareholder information Analysis of numbers of equity security holders by size of holding as at 3 September 2012 1 -1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Class of equity security Ordinary shares Shares Options 162 1,082 676 1,039 88 3,047 - 17 17 20 3 57 Performance Rights - 37 51 34 1 123 Equity security holders Twenty largest quoted equity security holders The names of the twenty largest holders of quoted equity securities as at 3 September 2012 are listed below: Ordinary Shares Number held Percentage of issued shares 1 2 3 4 5 6 7 8 9 Mr Stephen John Killelea Mr Andrew Rhys Rutherford B & R James Investments Pty Limited Citicorp Nominees Pty Limited Custodial Services Limited Spectrok Pty LtdJ P Morgan Nominees Australia Limited Aust Executor Trustees SA Ltd 258 Investments Pty Ltd 10 Forsyth Barr Custodians Ltd 11 Mr Kevin John Cairns + Mrs Catherine Valerie Cairns 12 13 14 15 16 ABN Amro Clearing Sydney Nominees Pty Ltd Spectrok Pty Ltd Garrett Smythe Ltd Bell Potter Nominees Ltd Oates Super Pty Ltd 17 Mr Rodney Walter Ross 18 19 Howard Securities Pty Ltd Fergfam Nominees Pty Ltd 20 Mr Mark Ronald Gerard Brayan 94,497,339 4,485,869 3,000,000 1,476,193 1,305,650 1,270,472 1,241,545 875,597 850,000 809,970 766,752 649,414 641,359 563,155 532,000 420,000 417,050 400,000 375,263 375,000 56.19 2.67 1.78 0.88 0.78 0.76 0.74 0.52 0.51 0.48 0.46 0.39 0.38 0.33 0.32 0.25 0.25 0.24 0.22 0.22 78 | Integrated Research and its controlled entities | Annual Report 2012 Annual Report 2012 | Integrated Research and its controlled entities | 79 ASX Additional Information | page 78 – 80Letter from the ChairmanChief ExecutiveOfficer’s ReportDirectors and Senior ManagementDirectors’ ReportRemuneration ReportCorporate Governance StatementFinancial StatementsIndependent Audit ReportASX Additional Information Unquoted equity securities Number on issue Number of holders Options issued under the Integrated Research Limited Employee Option Plan to take up ordinary shares Performance rights issued under the Integrated Research Limited Performance Rights and Options Plan to take up ordinary shares 1,472,500* 1,534,500** 57 123 * Number of unissued ordinary shares under the options. ** Number of unissued ordinary shares under the performance rights. 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* * Includes direct and indirect holdings. Number held 94,834,951 Percentage 56.33 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. 3. Performance rights. No voting rights. Other information Integrated Research Limited, incorporated and domiciled in Australia, is a publicly listed company limited by shares. 80 | Integrated Research and its controlled entities | Annual Report 2012 Corporate Directory Directors Steve Killelea Chairman and Non-Executive Director Mark Brayan Managing Director and CEO Alan Baxter Independent Non-Executive Director John Brown Independent Non-Executive Director Kate Costello Independent Non-Executive Director Peter Lloyd Independent Non-Executive Director Clyde McConaghy Non-Executive Director Secretary David Purdue Registered Office Level 9, 100 Pacific Highway North Sydney, NSW, 2060 Phone: (+61 2) 9966 1066 Share Registry Computershare Auditors Solicitors Deloitte Touche Tohmatsu 225 George Street Sydney, NSW, 2000 Ashurst Level 36, Grosvenor Place 225 George Street Sydney, NSW, 2000 Bankers Westpac Banking Corporation Securities Exchange Listing Australian Securities Exchange Code IRI Country of Incorporation 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 Thursday, 15 November 2012, at the Museum of Sydney, Corner of Phillip and Bridge Streets, Sydney. Corporate HQ Asia Pacific/Middle East/Africa Integrated Research Ltd Level 9/100 Pacific Highway North Sydney NSW 2060 Australia +61 (2) 9966 1066 +61 (2) 9966 1042 info.ap@ir.com Americas – West Coast Integrated Research Inc. 8055 East Tufts Avenue Suite 950 Denver CO 80237 +1 (303) 390 8700 +1 (303) 390 8777 info.usa @ir.com Americas – East Coast Integrated Research Inc. 1818 Library Street Suite 500 Reston VA 20190 +1 (703) 956 3016 +1 (303) 390 8777 info.usa@ir.com Europe Integrated Research UK Ltd Orchard Lea, Drift Road Winkfield, Windsor Berkshire SL4 4RP +44 (0) 1344 894 200 +44 (0) 1344 890 851 info.europe@ir.com For more information visit our website at www.ir.com or our community blog at www.realtime.ir.com