Annual Report 2016Pro Medicus Limited • 450 Swan Street Richmond Victoria 3121 Australiapromedicus.com.au • promedicus.com • visageimaging.com HIGHLIGHTS FINANCIAL SUMMARY X NPAT $6.37 million for continuing operations up from $3.22 million X Underlying after-tax profit up 212% X Revenue of $27.58 million – increase of 57% X Cash reserves of $17.11 million X Strong balance sheet – debt free X Dividends of 3.0c per share unfranked BUSINESS HIGHLIGHTS X Increased transaction revenue from US contracts X Four key US contract wins in last 12 months X First sale to large European hospital X Future contracted revenue increased to $100 million over next 5 years X Rapidly expanding foot print in North American market X Australian business improved 1 PRO MEDICUS ANNUAL REPORT 20161. Highlights 2014/20153. CEO and Chairman’s Letter5. Financial Summary7. Business Background9. Global Leadership Team11. The Year in Review13. Into the Future15. Financial Report16. Director’s Report62. Director’s Declaration63. Independent Audit Report65. ASX Additional Information66. Corporate Governance 73. Corporate Informationcontentsvisit us at: www.promedicus.com.auwww.promedicus.comwww.visageimaging.comDesigned and Produced by Kajetan Design Group (Melbourne) Dr Sam Hupert Peter Kempen Dear Shareholders, This has been another very exciting year for the company. We experienced rapid expansion of our footprint in the North American market and our significant investments in Research and Development continue to be rewarded. We were pleased to report a net profit after tax of $6.37 million from our continuing operations in 2016, a significant improvement on the previous years reported profit of $3.22 million. Underlying profit (excluding currency fluctuations) increased by 212%. Revenue rose to $27.58 million in 2016, an increase of 57 percent, with much of the growth coming from our North American business. The past year has been one of unprecedented sales success for the company with the signing of four key contracts with large prestigious North American Health Institutions culminating in the July 2016 deal with Mayo Clinic. We also saw the expansion of our footprint in Europe with our first enterprise sale to a large German Government Hospital. All of this reinforces our belief that Visage 7 is truly world leading technology. Increasingly our customers are opting to pay for the use of our technology on a per transaction or “pay per view” basis. Our model, based on committed minimum transaction numbers over a contract period which ranges from 5 to 7 years, has helped build a high quality annuity stream that continues to grow as existing customers increase their “views” and new customers are brought on to the system. Forward contracted revenue doubled over the past 12 months and now exceeds $100M AUD over the next five years. Our technology is also being recognised for educational and research purposes. In February, we were delighted to be chosen by the American College of Radiology to provide Visage 7 technology to be used as a key component of its state-of-the- art assessment platform for Emergent/Critical Care Imaging SIMulation. This means trainee radiologists will use and become familiar with Visage 7 technology as part of their training program. The trends we have previously identified as driving the industry are continuing unabated. Exponentially growing image sizes and the requirement to access the electronic medical record, of which the medical images are a significant part, are fueling industry adoption of new systems. Visage 7 with its fast, highly modular and scalable technology is uniquely suited to dealing with these challenges. In Australia, a parallel trend is appearing where larger radiology companies are searching for a Radiology Information System (RIS) that is capable of dealing with both their scale and their sophisticated requirements. This is expected to create opportunities for growth in sales of the company’s Visage RIS product. During the past year we continued to invest in our personnel successfully recruiting key people to supplement our growing US team. The global management structure that we introduced in 2015 is proving to be highly successful in forming the base for future growth. Pro Medicus continued to generate positive cash flow from operations in 2016, and finished the year with cash in hand of $17.11 million. This was up from $12.94 million a year earlier, and is after the payment of dividends during the year of $2.53 million. The company remains debt free and we believe we have sufficient reserves to internally fund the organic growth of the business. Accordingly, your board was pleased to declare dividends for the year of 3.0 cents per share, unfranked. We believe our strong balance sheet positions us well to grow the business in the years ahead as well as support our dividend policy. Finally, we would like to thank our fellow directors and the capable and hard-working teams at Pro Medicus and Visage Imaging, all of whom have made valued contributions to our progress in 2016 positioning us strongly for the future. Yours faithfully Peter Kempen CHAIRMAN Dr Sam Hupert CHIEF EXECUTIVE OFFICE 3 CEO & CHAIRMAN letter 2 PRO MEDICUS ANNUAL REPORT 2016 YEAR ENDED 30 JUNE 2016 ALL FIGURES IN $A THOUSANDS UNLESS OTHERWISE STATED 2016 $’000 27,577 +56.9% 27,557 +56.9% 9,441 +87.9% 6,368 +97.9% 2015 $’000 17,577 +21.7% 17,557 +21.7% 5,025 +121.1% 3,217 +113.2% 39,404 30,094 Revenues from Continuing Operations Total Revenues Operating Profit Before Interest and Income Tax Net Profit After Tax Total Assets 30 June Shareholders’ Funds 30 June 27,385 21,938 Net Tangible Assets per Share at 30 June (cents) Earnings per Share (cents) 17.0 6.3 +97.9% 13.0 3.2 +113.2% FINANCIAL summary 4 5 PRO MEDICUS ANNUAL REPORT 2016 Visage 7 combines 3D/4D and advanced visualisation capabilities with the full gamut of 2D reading functionality creating a truly unique thin client streaming universal viewing platform that enables radiologists to read any type of examination from a 2D chest x-ray to a complicated 3D cardiac study all within the one viewer. BUSINESS background 6 Pro Medicus Limited [ASX: PME] is a leading health imaging IT provider. Founded in 1983, the company provides a comprehensive range of health imaging software and services to hospitals, imaging centres and health care groups worldwide. These solutions are branded “Visage” and provide one of the most comprehensive, enterprise level, end-to-end offerings available in the radiology market today. VISAGE PRODUCTS The Visage product line comprises solutions for RIS (Radiology Information Systems) and Practice Management, Healthcare Imaging and e-health. These systems can be used either individually or in combination by radiologists and other medical imaging professionals to interpret the images created by medical imaging equipment such as X-Ray and Ultrasound machines and CT and MRI Scanners and communicate the results to their referring clinicians. RIS AND PRACTICE MANAGEMENT Pro Medicus offers software applications and services designed to aid the management of medical practices. The software includes medical accounting, clinical reporting, appointments/scheduling and marketing/management information modules and can be integrated with third-party applications. The Visage RIS provides radiology practices with a highly scalable, enterprise level practice management solution that incorporates powerful search capability and configurable workflow and rules engines to meet a broad range of customer’s needs. Services include implementation, hardware sourcing and configuration, staff and management training and ongoing technical and end user support. HEALTHCARE IMAGING In January 2009, the company purchased Visage Imaging, which has been transformed into a global provider of leading edge Enterprise imaging and 3D PACS (Picture Archiving and Communication System) solutions. The company’s product line Visage 7 incorporates leading edge proprietary advanced visualization capability that is able to deliver extremely fast, multi-dimensional images streamed via the Visage 7 intelligent thin-client viewer. Visage 7 components can either be combined and sold as an entire solution or individual components can be sold in a modular fashion as part of a “deconstructed” or best in breed offering. DECONSTRUCTED PACS® Visage Imaging pioneered the concept of Deconstructed PACS® in 2014 when our Global Head of Marketing, Brad Levin, wrote a seminal article describing the approach which breaks the traditional monolithic single vendor PACS system into a collection of individual components that are interfaced together to form a complete “best-of-breed” solution. THE VISAGE 7 ENTERPRISE VIEWER The Visage 7 Enterprise Viewer combines 3D/4D and advanced visualisation capabilities with the full gamut of 2D reading functionality creating a truly unique thin client streaming universal viewing platform that enables radiologists to read any type of examination from a 2D chest x-ray to a complicated 3D cardiac study all within the one viewer. The Enterprise viewer can be interfaced with a broad range of third-party vendor neutral image archiving (VNA) databases and worklist products as part of a Deconstructed PACS® solution. VISAGE 3D PACS As a result of the extensive R&D undertaken post the Visage Imaging acquisition, the Company has its own comprehensive 2D-3D/PACS offering which combines the Visage 7 Enterprise Viewer with the ability to store and archive radiological images, creating one of the world’s first 3D PACS. The scalability and highly modular nature of the Visage 7 product offering means that our technology is ideally suited to the vast majority of radiology environments including large enterprise hospitals, private imaging centres and remote reading/tele-radiology groups enabling us to address segments of the radiology market previously not available or only partially accessible to us. VISAGE EASE PRO Visage Ease Pro provides mobile app technology for diagnostic interpretation of medical images using iOS based mobile devices. It is U.S. Food and Drug Administration (FDA) 510 (k) certified for all imaging modalities apart from mammography which requires higher screen resolution than current iOS devices can support. Incorporating the ability to quickly check the calibration of the screen of an iOS device means that radiologists and allied physicians that require full diagnostic capability on the go can now have it on their mobile device. This enables them to interpret images no matter how large they are anywhere using Visage technology. Visage Ease Pro includes numerous image manipulation features, display of non-DICOM (and non-diagnostic) images such as photos, support for recording voice memos, and the ability to upload photo attachments to studies on Visage 7. E-HEALTH The Company’s Internet-based e-health offering, promedicus. net, enables referring doctors to receive encrypted clinical reports via the Internet to a centralised “in-tray” run on the doctor’s computer. These reports are then electronically incorporated into the patients’ medical records, doing away with the need for double handling or manual filing. Over 26,000 Australian doctors are registered users of promedicus.net. 7 PRO MEDICUS ANNUAL REPORT 2016 KEY PERSONNEL In 2015 the company transitioned from a regional to a global management structure appointing four regional managers to global roles in the areas of Technology/R&D, Sales, Marketing, and Customer Services. The 2016 financial year, the first year under this new structure, has been one of the most successful in the company’s history confirming the board’s belief that this new structure positions the group to cater for anticipated future growth. MALTE WESTERHOFF General Manager – Europe and Global Chief Technology Officer Malte Westerhoff is the General Manager for Visage Imaging GmbH, the European branch of Visage Imaging. He is also the company Chief Technical Officer (CTO) and is responsible for product management and R&D globally. He has more than twelve years of experience in medical imaging and software development, holding positions in both research and industry. Malte holds a master’s degree in physics from Technical University, Berlin, and a PhD in computer science and mathematics from Free University, Berlin. Malte was one of the founders of Indeed – Visual Concepts GmbH, the precursor to Visage Imaging, and is an author/co- author of a number of papers in scientific visualization and high-performance computing. In role as CTO, he is involved in developing and overseeing the company’s growing intellectual property patent portfolio. Prior to joining Pro Medicus, he served in senior technical leadership positions at Mercury Computer Systems and Indeed – Visual Concepts. SEAN LAMBRIGHT Global Head of Sales Sean Lambright is the Global Head of Sales for Visage Imaging as well as VP Sales, North America. He is responsible for the company’s global sales strategy, including all third-party and channel relationships. Sean joined Visage in 2010 and has been instrumental in positioning Visage as a complete enterprise imaging solution capable of dealing with some of the largest and most prestigious health systems in North America. Prior to Visage, his career in imaging IT has spanned 15 years, having served in senior sales roles with AGFA Healthcare, AMICAS and Emageon. Sean holds a Bachelor of Science degree from Arizona State University. BRAD LEVIN General Manager – North America and Global Head of Marketing Brad Levin’s broad experience has spanned a variety of leadership roles, including government, consulting, and marketing. While in government, Brad worked as a PACS subject matter expert for the U.S. Department of Defence’s Digital Imaging Network–Picture Archiving and Communications System (DIN-PACS) initiative, as well as consulting for top healthcare institutions across the U.S. After leaving his consulting role, Brad went on to spearhead marketing for two web-based PACS start-ups, first AMICAS, and then Dynamic Imaging. Both firms experienced rapid commercial growth leading to acquisition, by Vitalworks and GE Healthcare, respectively. In his most recent role, Brad was GE Healthcare’s commercial Marketing Director, where he had radiology and cardiology marketing responsibility for their RIS, PACS and CVIT product portfolios. DANNY TAUBER General Manager – Australia After graduating in 1986 Danny Tauber started his career with chartered accountants Warnocks gaining experience in taxation and general accounting. He then started his own property development company and spent a number of years gaining project management and general finance skills. An interest in IT led Danny into the computer industry where he worked for a company producing hotel management systems. Danny joined Pro Medicus in 1993 and has been with the company for over 23 years. Danny has progressed through the company to his current position of General Manager – Australia which he assumed on the 1st of January 2011. 9 TERESA GSCHWIND Global Head of Customer Service Teresa Gschwind is the Global Head of Customer Service for Visage Imaging, where she is responsible for pre- and post-sales customer service activities worldwide. Prior to this role, Teresa managed the Company’s U.S. Customer Service team based in MA, and then the European Customer Service team based in Berlin, Germany. Teresa has extensive experience working with Visage’s global customer base, having joined the Company in 2002 when Visage was part of Mercury Computer Systems. Prior to Visage, Teresa held numerous management positions at Datacube, Inc, where she specialized in image processing. Teresa holds a Bachelor of Science degree in Electrical Engineering from the University of New Hampshire. MELBOURNE VISAGE IMAGING INC - SAN DIEGO VISAGE GMBH - BERLIN GLOBAL LEADERSHIP team 8 PRO MEDICUS ANNUAL REPORT 2016 AUSTRALIA The company’s Australian operation undertakes research and development of the Visage RIS and e-health products as well as sales and service/support functions of both Visage RIS and Visage 7 products. Australian revenue increased by 3.6% as a result of new sales of both the Visage PACS and Visage RIS products with many sales being for the combined product offering. The company continued to transition its Australian customers to the new Visage RIS platform with the process now nearing completion. Promedicus.net, the company’s e-health offering, continued to hold its strong market position despite increasing competition. NORTH AMERICA The company’s North American team which comprises sales, marketing, implementation and service/support staff was a strong contributor to the group’s overall performance with revenue growing by 90.0% compared to the previous year. This was attributable to a significant growth in transaction based revenue as a number of previously won contracts came on stream. The period also saw a very significant increase of the Visage footprint in North America with the company winning four large and prestigious contracts worth in excess of AUD $60 million. These included sales to Allegheny Health, Mercy Health, Franciscan Mission (FMOL) and Mayo Clinic making the 2016 financial year the most successful in terms of North American sales in the company’s history. EUROPE The Group’s employees in its Berlin office undertake research and development of Visage Imaging products worldwide as well as sales, marketing and service/support functions for the Group’s European operations. Revenue from our European operations increased by 77.1% over last year, as a result of a capital sale to a large German Government hospital, the first Enterprise sale of Visage in Europe. COMPANY OFFICES In addition to its Melbourne based Australian head office, the company has two offshore offices: VISAGE GMBH – BERLIN This is the company’s European headquarters and houses employees who are primarily involved in product R&D and ongoing product support. This office also forms the base of the company’s European operations including order administration and both direct and OEM sales activities. VISAGE IMAGING INC – SAN DIEGO This is the company’s North American headquarters and is the base for staff involved in sales, marketing, training/implementation and applications support for both the Visage Imaging and Pro Medicus products. 11 THE YEAR in review 10 PRO MEDICUS ANNUAL REPORT 2016 EXPANDED PRODUCT PORTFOLIO GROUND BREAKING VISAGE 7 TECHNOLOGY ADDRESSING ENTERPRISE / HOSPITAL MARKETS CONTINUED US EXPANSION NEW RIS TECHNOLOGY PLATFORM PAY PER USE LICENSING MODEL ENTERPRISE IMAGING INTO THE future 12 The Board and Management believe the Company is extremely well positioned for growth after making strong progress in the 2016 financial year, particularly in the North American market. Key factors predicted to drive growth include: EXPANDED GEOGRAPHICAL FOOTPRINT Over the past year the company continued to build on its presence in North America and Europe as well as consolidate its position in Australia. Our North American customer base now comprises some of the largest and most prestigious health systems in the U.S., including 15% of the Top 20 Largest Non-Profit U.S. Health Systems (Becker’s Hospital Review, Dec 2015), seven health systems honoured as Healthcare’s ‘Most Wired’ (Hospitals & Health Networks, Aug 2016), and most impressively, the #1 ranked hospital in the U.S. for 2016/2017 (U.S. News & World Report Honour Roll, Aug 2016). The company believes it can leverage its expanded footprint and increased market presence to drive further sales opportunities across all segments of the market including large Enterprise hospitals, private imaging centres and remote reading tele-radiology. The sale of Visage to a large German Government hospital will provide us with our first Deconstructed PACS reference site in Europe whilst our footprint in Australia continues to grow as we roll out our Visage RIS platform. HIGHLY DIFFERENTIATED TECHNOLOGY The Company continues to maintain its significant ongoing investment in R&D for its flagship Visage 7 suite of products which we believe will continue to differentiate our offerings in the Deconstructed PACS®, Enterprise viewer, 2D/3D PACS advanced visualisation space. The Visage RIS platform is the culmination of many years of intense R&D effort and positions Pro Medicus at the forefront of RIS and practice management technology. It is differentiated by its scalability, powerful search capability and ability to allow clients to configure their own business- specific workflow and rules to meet their needs. INDUSTRY TRENDS The Company believes the North American market has reached a tipping point as a result of a number of significant industry trends that combined, will continue to drive demand for Visage 7 products. Explosion in image data size continues With developments in imaging technology such as positron emission tomography (PET) and high density 640 slice computed tomography (CT) it is not uncommon for a single examination image file to be in the order of 1.5 to 2 Gigabytes or larger in size. The introduction of Digital Breast Tomosynthesis (DBT), a new form of 3D breast imaging, has added to the data explosion problem producing image files as large as 4 to 6 Gigabytes per examination. Traditional PACS/Digital Imaging technology requires these files to be transferred across the network to the radiologist desktop in order to be visualised. This has created very significant network bottlenecks which has limited the widespread adoption and use of these new imaging technologies. Visage 7, with its unique server side thin-client streaming technology, enables the radiologist or referring clinician to instantly visualize these very large datasets without having to move the images to their desktop thereby overcoming the bandwidth/ network bottleneck issue. The move to best in breed or Deconstructed PACS® Solutions Increasingly sales opportunities are requesting a “best in breed” approach whereby multiple components from different vendors are integrated into a single solution. Unlike systems from traditional PACS vendors, Visage 7, with its highly modular and scalable design is ideally suited to this new paradigm resulting in a growing pipeline of opportunities that the company is actively pursuing. TRANSACTION BASED LICENCING Over the past few years, the vast majority of the company’s contracts have been transaction or “pay per view” based. This not only enables customers to more accurately align their investment in Visage to the size of the business, it has the added benefit of creating significant ongoing revenue streams for the company. ENTERPRISE IMAGING The company has made significant investments in ongoing R&D in order to develop additional products the first being Visage 7 Enterprise Imaging module which is scheduled for release in the 2nd half of FY2017. This new product extends the capability of Visage 7 beyond the realm of radiology enabling the viewing of DICOM (radiology) and non-DICOM images such as photos and HD videos (also described as medical multimedia objects) all in the one viewer. Examples of this include wound care photos taken at the bedside, ophthalmology images, dermatology images, as well as video (endoscopic, arthroscopic, operating room HD-video). NEW PRODUCTS AND SERVICES As our customer base continues to grow so does the opportunity for on-selling new, complementary products and services. An increasing proportion of the company’s R&D effort will be focused on developing such complementary services and products which we believe will further increase our value proposition for our large enterprise clients. 13 PRO MEDICUS ANNUAL REPORT 2016 ANNUAL FINANCIAL REPORT 30 JUNE 2016 Directors’ Report Auditor’s Independence Declaration Statement of Comprehensive Income Statement of Financial Position Statement of Changes in Equity Statement of Cash Flows Notes to the Financial Statements Note Note Note Note Note Note Note Note Note Note Note Note Note Note Note Note Note Note Note Note Note Note Note Note Note 1 Corporate Information 2 Summary of Significant Accounting Policies 3 Significant Accounting Judgements, Estimates and Assumptions 4 Financial Risk Management Objectives and Policies 5 Operating Segments 6 Income and Expenses 7 Income Tax 8 Earnings per Share 9 Dividends Paid and Proposed 10 Cash and Cash Equivalents 11 Trade and Other Receivables (Current) 12 Inventory 13 Plant and Equipment 14 Intangible Assets 15 Trade and Other Payables 16 Provisions 17 Contributed Equity and Reserves 18 Share based Payment Plan 19 Commitments 20 Events after the Balance Sheet Date 21 Auditors’ Remuneration 22 Key Management Personnel 23 Related Party Disclosure 24 Contingencies 25 Parent Entity Information Directors’ Declaration Independent Auditor’s Report ASX Additional Information Corporate Governance Statement Corporate Information 16 28 29 30 31 32 33 33 33 44 45 47 49 49 50 51 52 52 53 53 54 55 55 56 57 59 59 59 60 60 61 61 62 63 65 66 73 15 FINANCIAL report 14 PRO MEDICUS ANNUAL REPORT 2016 DIRECTORS’ report Your Directors submit their report for the year ended 30 June 2016. The names and details of the company’s Directors in office during the financial year and until the date of this report are as follows: DR SAM AARON HUPERT M.B.B.S. Managing Director and Chief Executive Officer Co-founder of Pro Medicus Limited in 1983, Sam Hupert is a Monash University Medical School graduate who commenced General Practice in 1980. Realising the significant potential for computers in medicine he left general practice in late 1984 to devote himself full time to managing the Group. Sam served as CEO from the time he co-founded the company until October 2007 at which time he stepped down to become an Executive Director. Sam resumed full time CEO activities in October of 2010. ANTHONY GLENNING B.CS, B.EE, M.EE Non-Executive Director Anthony joined Pro Medicus Limited as a Director on 1 May 2016. He is Investment Director of Starfish Ventures and sits on the board of a number of private Starfish portfolio companies. Anthony is the founder and previously the CEO of Tonic Systems and founding Non- Executive Director of Cameron Systems. Anthony holds bachelor degrees in Computer Science and Electrical Engineering from University of Melbourne and holds a Master’s degree in Electrical Engineering from Stanford University California. Anthony also serves on the Audit Committee. PETER TERENCE KEMPEN F.C.A, F.A.I.C.D Chairman Peter Kempen joined Pro Medicus Limited as a Director on 12 March 2008. He is Chairman of Ivanhoe Grammar School and Chairman of Australasian Leukaemia and Lymphoma Group. He is also a Director of the Yara Pilbara group of companies, a Trustee of the Barr Family Foundation and a member of the Council of St Hilda’s College, University of Melbourne. Peter has previously been Chairman of Patties Food Limited, Chairman of Danks Holdings Limited and Managing Partner of Ernst & Young Corporate Finance Australia. Peter is a Fellow of the Institute of Chartered Accountants in Australia and a Fellow of the Australian Institute of Company Directors. Peter became Chairman in August 2010 before which he served as a Non- Executive Director of the company. Peter is also Chairman of the Audit Committee. RODERICK LYLE LL.B., B.Com, LL.M (Lond), MBA (Melb) Non-Executive Director Roderick joined Pro Medicus Limited as a Director on 23 November 2010. He is the Senior Corporate Advisor in the Melbourne office of Clayton Utz and is a former Managing Partner of that office. Roderick is a member of the Law Institute of Victoria, a member of the Law Society of New South Wales and a member of the Law Society London. Roderick is recognised as one of Australia’s leading commercial lawyers. He has been a key advisor in a large number of significant mergers and acquisitions and equity capital markets transactions throughout Australia, and internationally, for more than three decades. Roderick is also a Guest Lecturer (Mergers & Acquisitions) Melbourne Business School, MBA and EMBA courses. Roderick also serves on the Audit Committee. ANTHONY BARRY HALL B.Sc. (Hons), M.Sc. Executive Director and Technology Director Co-founder of Pro Medicus Limited in 1983, Anthony Hall has been principal architect and developer of the core software systems. His current focus is the transition to and development of the company’s next generation RIS systems. 16 CLAYTON JAMES HATCH CPA Chief Financial Officer and Company Secetary Clayton was appointed Company Secretary on 1 July 2009. Clayton has strong experience in financial and management accounting having worked in a Finance role for several years. Clayton joined Pro Medicus in June 2008 and has progressed through the company to his current position of Chief Financial Officer which he assumed on 1 July 2012. INTERESTS IN THE SHARES AND OPTIONS OF THE COMPANY As at the date of this report, the interests of the Directors in the shares and options of the Company were: Ordinary Shares Options over Ordinary Shares A. B. Hall S. A. Hupert P. T. Kempen R. Lyle A. Glenning EARNINGS PER SHARE Basic earnings per share Diluted earnings per share DIVIDENDS ORDINARY SHARES Final dividends recommended: Normal dividend plan Dividends paid in the year: Interim for the year Final dividend for 2015 shown as recommended in the 2015 report: Normal dividend plan OPERATING AND FINANCIAL REVIEW CORPORATE STRUCTURE Pro Medicus Limited is a company limited by shares that is incorporated and domiciled in Australia. Nature of operations and principal activities The principal activities of the Group during the year were the supply of healthcare imaging products and services to hospitals, diagnostic imaging groups and other health related entities in Australia, North America and Europe. These products and services include: Radiology Information Systems (RIS) ▶ Innovative proprietary medical software for practice management (RIS); ▶ Training, installation and professional services; ▶ After sale support and service products; ▶ Promedicus.net secure email; and ▶ Digital radiology integration products 30,068,500 30,107,660 578,082 140,000 NIL NIL NIL 100,000 200,000 NIL Cents 6.28 6.16 CENTS $’000 1.5 1.5 1.0 1,526 1,526 1,006 Visage 7.0 ▶ Innovative medical imaging software that provides radiologist and clinicians with advanced visualisation capability for rapidly viewing 2-D, 3-D and 4-D medical images; ▶ PACS/Digital imaging software that is sold directly and to original equipment manufacturers (OEM); ▶ Training, installation and professional services; ▶ Service and support products. The Group undertakes research and development (R&D) in Australia for its Practice Management (RIS) and promedicus.net products including R&D for Visage RIS, its new technology platform. The R&D for the Visage Imaging product set is carried out in Europe. The Group has continued development of both the RIS products and the Visage 7.0 product line throughout the period. 17 PRO MEDICUS ANNUAL REPORT 2016 DIRECTORS’ REPORT CONT. REVIEW AND RESULTS OF OPERATIONS Investment Activities Surplus funds which are held in several currencies are invested by the Group in a cash management account and term deposits to maximise the interest return. Performance Indicators Management and the Board monitor overall performance, from the strategic plan through to the performance of the Group against operating plans and financial budgets. The Board, together with management, have identified key performance indicators (KPIs) that are used to monitor performance. Key management monitor these KPIs on a regular basis and Directors receive appropriately structured board reports for review prior to each monthly Board meeting allowing them to actively monitor the Group’s performance. Dynamics of the Business Australia The Group’s Australian employees undertake research and development of Pro Medicus products (RIS) as well as sales and service/support functions. The Group’s Australian revenue was 3.6% above last year as a result of new sales of both the Visage PACS and Visage RIS products with many sales being for the combined product offering. Promedicus.net, the company’s e-health offering, continued to hold its market position despite increasing competition. North America The growing North American team fulfil sales, marketing and professional services roles. Revenue from North America increased by 90.0% compared to the previous year. This was largely attributable to new sales and an increase in transaction based revenue from sales of Visage technology as more contracts came on stream. Europe The Group’s employees in its Berlin office undertake research and development of Visage Imaging products worldwide as well as sales, marketing and service/support functions for the Group’s European operations. Revenue from our European operations increased by 77.1% from last year, due to a large capital sale to a German government hospital. Financials Reported profit after tax for the period was $6.37m an increase of $3.15m (97.9%) from the previous year. Full year revenue of the Group increased from $17.58m to $27.58m, an increase of 56.9%. The key drivers of the profit increase was the significant increase in the performance of the North American operations which was supplemented by a capital sale in Europe and a modest increase in Australian sales. As the Group’s costs are relatively fixed, an increase in sales has a positive impact on profitability. Investments for Future Performance The Company will continue to direct resources into the development of new products and is committed to the continued development of its Visage RIS and Visage 7.0 product sets. It is anticipated that this strategy of ongoing development will continue to position Pro Medicus as a market leader and enable the Group to further leverage its expanded product portfolio and geographical spread. The Group remains committed to providing staff with access to appropriate training and development programs, together with the resources to complete their duties. The Directors express their gratitude for the efforts of the management team and all employees in achieving this year’s result. REVIEW OF FINANCIAL CONDITION Capital Structure The Company has a sound capital structure with a strong financial position, with no debt. Treasury Policy With the increase in overseas operations there is an increased currency risk as a consequence of contracts written in and cash being held in foreign currencies. Whilst this is offset to a degree by having operations in North America and Europe, this change in risk profile has been noted by the Board and action is being taken to manage this risk. The treasury function, co-ordinated within Pro Medicus Limited, is limited to maximising interest return on surplus funds and managing currency risk. The treasury operates within policies set by the Board, which is responsible for ensuring that management’s actions are in line with Board policy. Cash from Operations Net cash flows from operating activities for the current period was a positive $11.25m, with receipts from customers totalling $24.43m compared with payments of $13.49m to suppliers and employees. During the year the Company paid out a total of $2.53m in dividends, the net result being total cash assets of $17.11m; an increase of 32.3% from last year. 18 Liquidity and Funding The Group is cash flow positive, has adequate cash reserves and has no overdraft facility. Sufficient funds are held to finance operations. Risk Management The Company takes a proactive approach to risk management. The Board is responsible for ensuring that risks, and also opportunities, are identified on a timely basis and that the Group’s objectives and activities are aligned with the risks and opportunities identified by the Board. The Company believes that it is crucial for all Board members to participate in this process, as such the Board has not established separate committees for areas such as risk management, environmental issues, occupational health and safety or treasury. The Board has a number of mechanisms in place to ensure that management’s objectives and activities are aligned with the risks identified by the Board. These include the following: • Board approval of strategic plans, which encompass the Company’s vision, mission and strategy statements, designed to meet stakeholder needs and manage business risk; • Implementation of Board approved operating plans and budgets and Board monitoring of progress against these budgets, including the establishment and monitoring of KPIs; • Overseeing of appropriate backup procedures for important company data; and • Routine review by key executives of its established Quality Assurance program and corrective action recommendations stemming from it. Corporate Governance In recognising the need for the highest standards of corporate behaviour and accountability, the Directors of Pro Medicus Limited support and have adhered to the principles of good corporate governance. Please refer to the separate “Corporate Governance” section for more details of specific policies. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS Shareholders’ equity increased by 24.8% from $21.94m to $27.39m. This movement was largely the result of profit during the year, offset by dividends paid out during the year. SIGNIFICANT EVENTS AFTER THE BALANCE DATE A Final Dividend of 1.5 cents per share has been declared post 1 July. Please refer Note 9. LIKELY DEVELOPMENTS AND EXPECTED RESULTS The Directors anticipate that the 2017 financial year will see more opportunity crystallise for the company due to improved prospects in North America and the continued commercialisation and roll out of Visage RIS, the company’s new technology RIS platform. Key components that are likely to affect the performance of the company are: • Increased revenue being generated from recently won transaction based contracts which are scheduled to come on stream in the 2017 financial year. • Continued strong interest in the Visage 7.0 suite of products in the North American market has resulted in a number of sales opportunities that the Company is actively pursuing. • The ability of the expanded Visage 7.0 product set to address key market segments such as large Health Systems and Hospitals in addition to the private radiology and teleradiology markets. • Market dynamics that favour the adoption of Visage 7.0 technology such as trend towards modular, best in breed solutions. • Improved sales prospects for Visage RIS, the company’s new technology RIS platform as the rollout of this new platform continues. As a result, it is anticipated that the 2017 financial year will show a continuing improvement in operational results, however this is dependent upon many market factors over which the Directors have limited or no control. ENVIRONMENTAL REGULATION AND PERFORMANCE The Group has no identified risk with regard to environmental regulations currently in force. There have been no known breaches by the Group of any regulations. SHARE OPTIONS Un-issued Shares As at the date of this report, there were 725,000 un-issued ordinary shares under options refer to Note 18 of the financial statements for further details of the options outstanding. Option holders do not have any right, by virtue of the option, to participate in any share issue of the Company. Shares Issued as a Result of the Exercise of Options During the financial year, 500,000 share options were exercised by current employee and no share options expired. A further 450,000 share options were exercised by Directors or key management personnel in the current year to acquire fully paid ordinary shares in Pro Medicus Limited. 19 PRO MEDICUS ANNUAL REPORT 2016 DIRECTORS’ REPORT CONT. PERFORMANCE RIGHTS Un-issued Shares As at the date of this report, there were 1,471,719 un-issued ordinary shares under performance rights-refer to Note 18 of the financial statements for further details of the performance rights outstanding. Rights holders do not have any right, by virtue of the right, to participate in any share issue of the Company. Shares Issued as a Result of the Exercise of Performance Rights During the financial year, 153,000 performance rights were exercised by current employees and no performance rights expired. A further 384,000 performance rights were exercised by key management personnel in the current year to acquire fully paid ordinary shares in Pro Medicus Limited. INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS During the year, Pro Medicus Limited indemnified Clayton Utz and each one or more of the past, present or future partners of Clayton Utz (other than Mr. Lyle) against any liability (including a liability incurred by Clayton Utz to pay legal costs) arising out of Mr. Lyle’s activities as a Director of Pro Medicus Limited. During or since the financial year, the Company has paid premiums in respect of a contract for Directors’ & Officers’/Company Re-Imbursement Liability insurance for directors, officers and Pro Medicus Limited for costs incurred in defending proceedings against them. Disclosure of the amount of insurance and the terms of this cover is prohibited by the insurance policy. INDEMNIFICATION OF AUDITORS To the extent permitted by law, the Company has agreed to indemnify its auditors, Ernst & Young, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young during or since the financial year. REMUNERATION REPORT (audited) This remuneration report for the year ended 30 June 2016 outlines the remuneration arrangements of the Group in accordance with the requirements of the Corporations Act 2001 and its Regulations. This information has been audited as required by section 308(3C) of the Act. The remuneration report details the remuneration arrangements for key management personnel (KMP) who are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Company and the Group, directly or indirectly, including any director (whether executive or otherwise) of the Group. For the purposes of this report, the term ‘executive’ includes the Chief Executive Officer (CEO), executive directors and other senior executives of the Group. (i) Non – Executive Directors Peter Terence Kempen Chairman Roderick Lyle Director (Non-Executive) Anthony Glenning Director (Non-Executive) (ii) Executive Directors Dr Sam Aaron Hupert Managing Director and CEO Anthony Barry Hall Technology Director (iii) Other Executives Danny Tauber Malte Westerhoff Brad Levin Sean Lambright General Manager – Pro Medicus Limited Managing Director – Visage Imaging GmbH General Manager – Visage Imaging Inc Global Head of Sales – Visage Imaging Inc Remuneration committee Remuneration and nomination issues are handled at the full Board level. Due to the small number of Directors no Committee has been established for this purpose. Board members, as per groupings detailed below, are responsible for determining and reviewing compensation arrangements. In order to maintain good corporate governance the Non-Executive Directors assume responsibility for determining and reviewing compensation arrangements for the Executive Directors of the Group. The Executive Directors in turn are responsible for determining and reviewing the compensation arrangements for the Non-Executive Directors. The CEO, in conjunction with the full Board reviews the terms of employment for all executives. The assessment considers the appropriateness of the nature and amount of remuneration of such executives on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality Board and executive team. Structure Employment Contracts have been entered into with all Executives of the Group. Details of these contracts are provided on page 22. Remuneration consists predominately of fixed remuneration. Variable remuneration is provided occasionally at the Board’s discretion including both short term incentives (STI) and long term incentives (LTI). The Company does not have a policy regarding Executives entering into contracts to hedge their exposure to share options granted as part of their remuneration package. The Board engaged external consultants throughout the year to undertake a review of the remuneration of Executives. Fixed Remuneration Objective The level of fixed remuneration is set so as to provide a base level of remuneration which is both appropriate to the position and is competitive in the market. Fixed remuneration is reviewed annually and the process consists of a review of Group wide, business and individual performance, relevant comparative remuneration in the market and internal and, where appropriate, external advice on policies and practices. As noted above, the company conducting the review has access to external advice independent of management. Executives, including Executive Directors are given the opportunity to receive their fixed (primary) remuneration in a variety of forms including cash and fringe benefits such as motor vehicles and expense payment plans. It is intended that the manner of payment chosen will be optimal for the recipient without creating undue cost for the Group. The fixed remuneration is detailed in Table 1 of this report. Variable Remuneration – Long Term Incentive (LTI) Employee Share Option Scheme Roderick Lyle was granted options on becoming a Director of the company in 2011 under a separate agreement. The share options have a 5 year vesting period, and exercise price of ($0.55 per option) and expire in 2021. Remuneration philosophy The performance of the Group depends upon the quality of its Directors and Executives. To prosper, the Company must attract, motivate and retain highly skilled Directors and Executives. To this end, the Company provides competitive rewards to attract high calibre Executives. Remuneration structure In accordance with best practice corporate governance, the structure of Non-Executive Director and Executive’s remuneration is separate and distinct. Non-Executive Director remuneration Objective The Board seeks to set aggregate remuneration at a level which provides the Company with the ability to attract and retain Directors of the highest calibre, whilst incurring a cost which is acceptable to shareholders. Structure The Constitution and the ASX Listing Rules specify that the aggregate remuneration of Non-Executive Directors shall be determined from time to time by a general meeting. An amount not exceeding the amount determined is then divided between the Directors as agreed. The latest determination was at the Annual General Meeting held on 4 November 2005 when shareholders approved an aggregate remuneration of $500,000 per year. The amount of the aggregate remuneration sought to be approved by shareholders and the manner in which it is apportioned amongst Directors is reviewed annually. The Board considers fees paid to Non-Executive Directors of comparable companies when undertaking the annual review process. Each Director receives a fee for being a Director of the Company. No additional fee is paid for time spent on Audit Committee business. Non-Executive Directors have long been encouraged by the Board to hold shares in the Company (purchased by the Director on market). It is considered good governance for the Directors to have a stake in the Company on whose board they sit. The remuneration of Non-Executive Directors for the period ended 30 June 2016 is detailed in Table 1 of this report. Executives (including Executive Directors remuneration) Objective The Group aims to reward Executives with a level and mix of remuneration commensurate with their position and responsibilities within the Group and so as to: • align the interests of Executives with those of shareholders; • ensure total remuneration is competitive by market standards. 20 21 PRO MEDICUS ANNUAL REPORT 2016 DIRECTORS’ REPORT CONT. REMUNERATION REPORT (audited) (continued) Performance Rights A long term incentive plan was established during 2011-12 whereby Senior Executives of the Group were offered performance rights over the ordinary shares of Pro Medicus Limited. The performance rights, issued for nil consideration, are offered over a 5 year period and vest 4 years after grant date on completion of service. This long term incentive plan includes performance hurdles related to profitability (EBIT – 75%) which is set on an annualised basis by the Board and individual performance (25%). These measures have been selected and set to align to Company performance and to reflect individual contribution to the Company. The fair value of the equity-settled performance rights is estimated using a Black-Scholes model at grant date taking into account the terms and conditions upon which the performance rights were granted. For further details of valuation of options, models and assumptions used please refer to note 18 of the financial statements. The table below outlines the proportion of LTI that were granted since the plan was established. 75% EBIT targets met 2016 85%* 25% Individual targets met 60-100%* * subject to Board approval 2015 25% 92% 2014 90% 87% 2013 0% 96% Variable Pay – Short Term Incentive (STI) Short term incentives in the form of cash bonuses were paid to key staff based on a mix of Company based and personal performance targets. STI bonus for 2016 For the 2016 financial year, the total amount of STI cash bonus either paid or accrued at year end was $935,868. The maximum amount payable under STI was $935,868. Key Performance Indicators Actual STI payments granted to key staff depended on the extent to which specific targets set at the time of employment were met. The targets consist of a number of Key Performance Indicators (KPIs) covering both financial (Sales Targets) and non-financial measures of performance, including client satisfaction, patent filings and employee satisfaction. Shareholder Returns The Directors are confident that the holdings of reserve cash is sufficient to underpin the development and expansion needs of the Company as the business looks to increase its penetration of existing markets. The return on net assets and equity are shown in the table below. Basic earnings per share – reported (cents) Return on assets (%) Return on equity (%) Dividend payout ratio (%) – normal dividend plan Dividend payout ratio (%) – total dividend Available franking credits ($’000) 2016 6.3 24.3 23.3 47.9 47.9 0 2015 3.2 17.6 14.7 62.3 62.3 0 2014 1.5 8.4 7.3 132.8 132.8 782 2013 5.1 25.6 24.2 39.7 39.7 1,641 2012 1.8 11.3 11.2 84.0 84.0 2,638 Employment Contracts Executive Directors Executive Service Contracts, on similar terms and conditions, have been prepared for all Executive Directors of the Company. These agreements provide the following major terms: • Each Executive will receive a remuneration package per annum which is to be reviewed annually; • The agreements protect the Company and Group’s confidential information and provide that any inventions or discoveries of an Executive become the property of the Group; • Non-competition during employment and for a period of 12 months thereafter; and • Termination by the Company on six months’ notice or payment of six months remuneration in lieu of notice or a combination of both (or without notice or payment in lieu in the event of misconduct or other specified circumstances). The agreements may be terminated by the Executives on the giving of six months’ notice. 22 Executives (excluding Executive Directors) All Executives have rolling contracts. The Group may terminate the Executive’s employment agreement by providing six months written notice or providing payment in lieu of the notice period (based on the fixed component of the Executive’s remuneration). The Group may terminate the contract at any time without notice if serious misconduct has occurred. Where termination with cause occurs the Executive is only entitled to that portion of remuneration that is fixed, and only up to the date of termination. On termination with cause any unvested options will immediately be forfeited. Remuneration of key management personnel of the Company and the Group Table 1: Remuneration of key management personnel for the year ended 30 June 2016 Short-Term Post Employment Long Term Share-Based Payment Total Total Performance Related (%) 30 June 2016 ($) Salary & Fees Cash Bonus Non Monetary benefits Super- annuation Long Service Leave Performance Rights Options Directors P T Kempen 63,172 – 1,828 35,000 – S A Hupert 465,000 110,000 A B Hall R. Lyle A. Glenning Executives D Tauber 340,000 47,500 45,662 15,221 321,871 – – – – – – – – 35,000 114,858 35,000 52,026 4,338 723 – – 13,129 10,810 M Westerhoff 424,140 114,311 17,373 2,670 B Levin 279,962 68,670 S Lambright* 233,478 595,387 – – – – – – – – – – – – 51,272 92,959 35,309 55,173 – – – 100,000 724,858 474,526 1,226 51,226 – – – – – 15,944 397,082 651,453 383,941 884,038 – – – – – 13.6% 31.7% 27.2% 73.6% 2,188,506 935,868 19,201 125,860 177,694 234,713 1,226 3,683,068 * S Lambright was appointed to the role of Global Head of Sales on 1 July 2015. At reporting date 21,563 rights with a fair value of $42,694 ($1.98 per performance right) were granted as performance rights to Sean Lambright with a grant date of 22 September 2015. The performance rights have a 4 year vesting period from grant date and are automatically exercised upon completion of the vesting period. An additional 50,000 rights with a fair value of $44,500 ($0.89 per performance right) were granted as performance rights to Sean Lambright in relation to STI commission due for the 2014-15 financial year with a grant date 25 August 2015. The performance rights have a 12 month vesting period from grant date and are automatically exercised upon completion of the vesting period. Compensation options granted, vested and exercised during the year as part of remuneration At reporting date 84,313 rights with a fair value of $166,940 ($1.98 per performance right) were granted as performance rights to Malte Westerhoff with a grant date of 22 September 2015. The performance rights have a 4 year vesting period from grant date and are automatically exercised upon completion of the vesting period. At reporting date 45,750 rights with a fair value of $90,585 ($1.98 per performance right) were granted as performance rights to Danny Tauber with a grant date of 22 September 2015. The performance rights have a 4 year vesting period from grant date and are automatically exercised upon completion of the vesting period. At reporting date 39,781 rights with a fair value of $78,766 ($1.98 per performance right) were granted as performance rights to Brad Levin with a grant date of 22 September 2015. The performance rights have a 4 year vesting period from grant date and are automatically exercised upon completion of the vesting period. 23 PRO MEDICUS ANNUAL REPORT 2016 REMUNERATION REPORT (audited) (continued) Table 2: Remuneration of key management personnel for the year ended 30 June 2015 Short-Term Post Employment Long Term Share-Based Payment Total Total Performance Related % 30 June 2015 ($) Salary & Fees Cash Bonus Non Monetary benefits Super- annuation Long Service Leave Performance Rights Options Directors P T Kempen 56,360 S A Hupert 245,000 A B Hall R. Lyle Executives 245,000 45,662 D Tauber 315,204 – – – – – – – – – 8,640 35,000 35,000 35,000 4,338 – 3,655 3,655 – – – – – – – – 100,000 283,655 283,655 3,084 53,084 M Westerhoff 405,602 179,613 12,981 2,517 B Levin 228,152 60,040 – – – – 61,724 15,617 – – 662,437 303,809 1,540,980 239,653 21,621 124,984 19,219 114,967 4,042 2,065,466 13,129 11,909 37,626 958 378,826 – – – – 10.2% 36.4% 24.9% Table 3: Option holdings of Key Management Personnel Balance at beginning of year 1 July 2015 30 June 2016 Number Directors P T Kempen 200,000 S A Hupert A B Hall R. Lyle A. Glenning Executives D Tauber M Westerhoff B Levin S Lambright – – 200,000 – 350,000 350,000 – – Total 1,100,000 Granted as Remuneration Options Exercised Balance at end of year 30 June 2016 Not vested Vested/ Exercisable Total 100,000 100,000 – – – – – 100,000 100,000 – – – – 200,000 40,000 160,000 200,000 – 350,000 – – – – – – – – – – 350,000 350,000 – – – – – – – – – – – – – – – – – – – – – 350,000 – – 450,000 650,000 40,000 610,000 650,000 Compensation options granted, vested and exercised during the year as part of remuneration At reporting date 72,188 rights with a fair value of $59,848 ($0.83 per performance right) were granted as performance rights to Malte Westerhoff with a grant date of 27 October 2014. The performance rights have a 4 year vesting period from grant date and are automatically exercised upon completion of the vesting period. An additional 185,000 rights with a fair value of $126,964 ($0.69 per performance right) were granted as performance rights to Malte Westerhoff in relation to the 2013-14 financial performance with a grant date of 27 March 2014. The performance rights have a 4 year vesting period from grant date and are automatically exercised upon completion of the vesting period. At reporting date 33,750 rights with a fair value of $27,981 ($0.83 per performance right) were granted as performance rights to Danny Tauber with a grant date of 27 October 2014. The performance rights have a 4 year vesting period from grant date and are automatically exercised upon completion of the vesting period. An additional 107,250 rights with a fair value of $73,605 ($0.69 per performance right) were granted as performance rights to Danny Tauber in relation to the 2013-14 financial performance with a grant date of 27 March 2014. The performance rights have a 4 year vesting period from grant date and are automatically exercised upon completion of the vesting period. At reporting date 20,625 rights with a fair value of $17,099 ($0.83 per performance right) were granted as performance rights to Brad Levin with a grant date of 27 October 2014. The performance rights have a 4 year vesting period from grant date and are automatically exercised upon completion of the vesting period. An additional 61,250 rights with a fair value of $42,035 ($0.69 per performance right) were granted as performance rights to Brad Levin in relation to the 2013-14 financial performance with a grant date of 27 March 2014. The performance rights have a 4 year vesting period from grant date and are automatically exercised upon completion of the vesting period. Table 4: Shareholdings of Key Management Personnel Shares held in Pro Medicus Limited (Number) Balance at beginning of year On Exercise of Performance rights On Exercise of Options Net Change Other Balance 30 June 2016 30 June 2016 1 July 2015 Ordinary Ordinary Ordinary Ordinary Ordinary Directors P T Kempen S A Hupert A B Hall R Lyle A Glenning Executives D Tauber M Westerhoff B Levin S Lambright 478,082 30,107,660 30,068,500 140,000 – – – – – – 150,000 – – – 108,000 126,000 – 150,000 100,000* – – – – – 350,000** – – – – – – – 578,082 30,107,660 30,068,500 140,000 – (129,000) (443,300) – – 129,000 32,700 – 150,000 Total 60,944,242 384,000 450,000 (572,300) 61,205,942 * Peter Kempen exercised 100,000 share options throughout the year at $1.25 per share option. The intrinsic value of the share options at exercise date was $96,000 ($0.96 per share option). ** Malte Westerhoff exercised 350,000 share options throughout the year at $1.00 per share option. The intrinsic value of the share options at exercise date was $402,500 ($1.15 per share option). 24 25 PRO MEDICUS ANNUAL REPORT 2016 ROUNDING The amounts contained in this report and in the financial report have been rounded to the nearest $1,000 (where rounding is applicable) under the option available to the Company under ASIC Corporations (Rounding in Financial/Directors Reports) instrument 2016/191. The Company is an entity to which the Class Order applies. AUDITOR INDEPENDENCE AND NON-AUDIT SERVICES The Directors received a declaration from the auditor of Pro Medicus Limited (refer page 28). NON-AUDIT SERVICES The following non-audit services were provided by the company’s auditor, Ernst & Young. The directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for the auditors imposed by the Corporations Act. The nature and scope of the non-audit service provided means that auditor independence is not compromised. Ernst & Young received the following amount for the provision of non-audit services: Professional services rendered in respect to taxation matters $54,969 Signed in accordance with a resolution of the Directors. P T Kempen Director Melbourne, 19 August 2016 REMUNERATION REPORT (audited) (continued) Table 5: Performance rights of Key Management Personnel Balance at beginning of year Granted as Remuneration Performance rights Exercised Balance at end of year 30 June 2016 (Number) 1 July 2015 30 June 2016 Not vested Vested/ Exercisable Total – – – – – – – – – – – – – – – 231,022 395,751 131,656 71,563 829,992 – – – – – – – – – – – – – – – – – – – – – – – – – Directors P T Kempen S A Hupert A B Hall R Lyle A Glenning Executives D Tauber M Westerhoff 287,750 437,438 51,272 (108,000) 84,313 (126,000) B Levin 91,875 39,781 – S Lambright 150,000 71,563 (150,000) 231,022 395,751 131,656 71,563 231,022 395,751 131,656 71,563 Total 967,063 246,929 (384,000) 829,992 829,992 Loans to Key Management Personnel No loans are made to Key Management Personnel or staff. Other transactions and balances with Key Management Personnel Purchases During the year lease payments of $169,476 (2015: $169,476) in respect of the Group’s operating premises at 450 Swan Street Richmond were paid to Champagne Properties Pty. Ltd., an entity controlled by S. Hupert and A. Hall. Commercial arrangements on an ‘arm’s length basis’ have been determined by an independent assessment of rental and lease terms. DIRECTORS’ MEETINGS The numbers of meetings of Directors (including meetings of committees of Directors) held during the year and the number of meetings attended by each Director were as follows: Directors’ Meetings Eligible to attend Audit Committee Eligible to attend Number of meetings held: Number of meetings attended: P. T. Kempen R. Lyle A. Glenning A. B. Hall S. A. Hupert 9 9 9 2 9 9 2 2 2 0 2 2 9 9 2 9 9 2 2 0 2 2 Committee membership As at 30 June 2016, the company had an Audit Committee comprising the 3 Non-Executive Directors and 2 Executive Directors. 26 27 PRO MEDICUS ANNUAL REPORT 2016 AUDITOR’S INDEPENDENCE DECLARATION To the Directors of Pro Medicus Limited CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2016 Revenue Finance Revenue Revenue Cost of Sales Gross Profit Other Income/(Expenses) Accounting and Secretarial Fees Advertising and Public Relations Depreciation and Amortisation Insurance Legal Costs Operating Lease Expense Other Expense Notes 5 6(a) 6(b) Salaries and Employee Benefits Expense 6(b) Travel and Accommodation Profit before tax Income tax expense Profit for the year Other Comprehensive Income Items that may be reclassified subsequently to profit and loss Foreign Currency translation Other comprehensive income for the year TOTAL COMPREHENSIVE INCOME FOR THE YEAR, NET OF TAX Earnings per share (cents per share) - Basic for net profit for the year - Diluted for net profit for the year 7 17 8 Consolidated 2016 $’000 27,521 56 27,577 (619) 26,958 (89) (527) (944) (3,828) (595) (842) (474) (707) (8,599) (856) 9,497 (3,129) 6,368 198 198 6,566 6.3¢ 6.2¢ 2015 $’000 17,490 87 17,577 (223) 17,354 1,654 (534) (757) (3,116) (528) (580) (375) (486) (6,863) (657) 5,112 (1,895) 3,217 (363) (363) 2,854 3.2¢ 3.1¢ 29 28 PRO MEDICUS ANNUAL REPORT 2016 CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 24,753 17,326 Total comprehensive income for the period FOR THE YEAR ENDED 30 JUNE 2016 Consolidated Issued Capital $’000 Share Reserve $’000 Foreign Currency Translation Reserve $’000 Retained Earnings $’000 Total Equity $’000 At 1 July 2014 327 284 282 19,814 20,707 Profit for the year Other comprehensive income Transaction with owners in their capacity as owners Share Based Payment Dividends At 30 June 2015 – – – – – 327 – – – – 3,217 (363) (363) – 3,217 3,217 (363) 2,854 382 – 666 – – – 382 (2,005) (2,005) (81) 21,026 21,938 At 1 July 2015 327 666 (81) 21,026 21,938 Profit for the year Other comprehensive income Total comprehensive income for the period Transaction with owners in their capacity as owners Share Based Payment Exercise of share options Dividends At 30 June 2016 – – – – 975 – – – – 438 – – – 198 198 – – – 6,368 – 6,368 6,368 198 6,566 – – 438 975 (2,532) (2,532) 1,302 1,104 117 24,862 27,385 AS AT 30 JUNE 2016 ASSETS Current Assets Cash and cash equivalents Trade and other receivables Accrued revenue Inventories Prepayments Total Current Assets Non-current Assets Deferred tax assets Plant and equipment Intangible assets Prepayments Total Non-current Assets TOTAL ASSETS LIABILITIES Current Liabilities Trade and other payables Income tax payable Provisions Total Current Liabilities Non-current Liabilities Trade and other payables Deferred tax liabilities Provisions Total Non-current Liabilities TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Share Reserve Foreign Currency Translation Reserve Retained earnings TOTAL EQUITY Notes Consolidated 2016 $’000 2015 $’000 10 11 12 7 13 14 15 16 15 7 16 17 17 17 17 17,107 4,771 2,258 86 531 12,935 3,731 210 129 321 757 382 13,512 – 14,651 39,404 2,994 2,747 1,826 7,567 – 4,386 66 4,452 12,019 27,385 1,302 1,104 117 24,862 27,385 854 341 11,552 21 12,768 30,094 2,762 495 1,504 4,761 10 3,298 87 3,395 8,156 21,938 327 666 (81) 21,026 21,938 30 31 PRO MEDICUS ANNUAL REPORT 2016 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2016 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Income tax (paid)/refunded Net cash flows from operating activities Cash flows from investing activities Capitalised development costs Interest received Purchase of plant and equipment Proceeds from disposal of plant and equipment Net cash flows used in investing activities Cash flows from financing activities Payment of dividends on ordinary shares Proceeds from issuing shares Net cash flows used in financing activities Net increase/(decrease) in cash and cash equivalents Net foreign exchange differences Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 10 Consolidated 2016 $’000 2015 $’000 Notes 24,432 (13,486) 308 16,987 (8,607) (4,197) 11,254 4,183 (5,607) (5,365) 56 (222) – 87 (201) 5 (5,773) (5,474) 10 14 13 13 9 (2,532) (2,005) 975 (1,557) 3,924 248 12,935 17,107 – (2,005) (3,296) 972 15,259 12,935 NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2016 1. CORPORATE INFORMATION The financial report of Pro Medicus Limited (the Company) for the year ended 30 June 2016 was authorised for issue in accordance with a resolution of directors on 19 August 2016. (b) Statement of compliance with IFRS The financial report complies with Australian Accounting Standards and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. (c) New accounting standards and interpretations (i) Changes in Accounting policy and disclosures The accounting policies adopted are consistent with those of the previous financial year except as follows: The Group has adopted the following new and amended Australian Accounting Standards and AASB Interpretations as of 1 July 2015. Adoption of these standards did not have any effect on the financial position or performance of the Group. The necessary disclosures have been updated to reflect amended accounting standards. Pro Medicus Limited is a for profit company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Securities Exchange. The nature of the operations and principal activities of the Group are described in the Directors’ Report. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Preparation The financial report is a general-purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards board. The financial report has also been prepared on a historical cost basis. The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($000) unless otherwise stated. Reference Title AASB 2013-9 Amendments to Australian Accounting Standards – Conceptual Framework, Materiality and Financial Instruments Application date of standard* Application date for Group* 1 January 2015 1 July 2015 The Standard contains three main parts and makes amendments to a number of Standards and Interpretations. Part A of AASB 2013-9 makes consequential amendments arising from the issuance of AASB CF 2013-1. Part B makes amendments to particular Australian Accounting Standards to delete references to AASB 1031 and also makes minor editorial amendments to various other standards. Part C makes amendments to a number of Australian Accounting Standards, including incorporating Chapter 6 Hedge Accounting into AASB 9 Financial Instruments. AASB 2015-3 Amendments to Australian Accounting Standards arising from the Withdrawal of AASB 1031 Materiality 1 July 2015 1 July 2015 The Standard completes the AASB’s project to remove Australian guidance on materiality from Australian Accounting Standards. (ii) Accounting Standards and Interpretation issued but not yet effective Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective have not been adopted by the Group for the annual reporting period ending 30 June 2016. These are outlined in the table below. 32 33 PRO MEDICUS ANNUAL REPORT 2016 NOTES TO FINANCIAL STATEMENTS cont. Application date of standard* 1 January 2018 Impact on Group financial report Application date for Group* No impact 1 July 2018 Reference Title Summary AASB 9 Financial Instruments AASB 9 (December 2014) is a new standard which replaces AASB 139. This new version supersedes AASB 9 issued in December 2009 (as amended) and AASB 9 (issued in December 2010) and includes a model for classification and measurement, a single, forward-looking ‘expected loss’ impairment model and a substantially-reformed approach to hedge accounting. AASB 9 is effective for annual periods beginning on or after 1 January 2018. However, the Standard is available for early adoption. The own credit changes can be early adopted in isolation without otherwise changing the accounting for financial instruments. Classification and measurement AASB 9 includes requirements for a simpler approach for classification and measurement of financial assets compared with the requirements of AASB 139. There are also some changes made in relation to financial liabilities. AASB 2014-3 Amendments to Australian Accounting Standards – Accounting for Acquisitions of Interests in Joint Operations [AASB 1 & AASB 11] AASB 2014-3 amends AASB 11 Joint Arrangements to provide guidance on the accounting for acquisitions of interests in joint operations in which the activity constitutes a business. The amendments require: a. the acquirer of an interest in a joint operation in which the activity constitutes a business, as defined in AASB 3 Business Combinations, to apply all of the principles on business combinations accounting in AASB 3 and other Australian Accounting Standards except for those principles that conflict with the guidance in AASB 11; and 1 January 2016 No impact 1 July 2016 AASB 2014-4 Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to AASB 116 and AASB 138) b. the acquirer to disclose the information required by AASB 3 and other Australian Accounting Standards for business combinations. This Standard also makes an editorial correction to AASB 11 AASB 116 Property Plant and Equipment and AASB 138 Intangible Assets both establish the principle for the basis of depreciation and amortisation as being the expected pattern of consumption of the future economic benefits of an asset. The IASB has clarified that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset. The amendment also clarified that revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic benefits embodied in an intangible asset. This presumption, however, can be rebutted in certain limited circumstances. 1 January 2016 No impact 1 July 2016 Application date for Group* 1 July 2018 Application date of standard* 1 January 2018 Impact on Group financial report The Group will continue to assess the impact on the change in standard, if any 1 January 2016 No impact 1 July 2016 1 January 2016 No impact 1 July 2016 Reference Title Summary AASB 15 Revenue from Contracts with Customers AASB 1057 Application of Australian Accounting Standards AASB 15 Revenue from Contracts with Customers replaces the existing revenue recognition standards AASB 111 Construction Contracts, AASB 118 Revenue and related Interpretations (Interpretation 13 Customer Loyalty Programmes, Interpretation 15 Agreements for the Construction of Real Estate, Interpretation 18 Transfers of Assets from Customers, Interpretation 131 Revenue—Barter Transactions Involving Advertising Services and Interpretation 1042 Subscriber Acquisition Costs in the Telecommunications Industry). AASB 15 incorporates the requirements of IFRS 15 Revenue from Contracts with Customers issued by the International Accounting Standards Board (IASB) and developed jointly with the US Financial Accounting Standards Board (FASB). AASB 15 specifies the accounting treatment for revenue arising from contracts with customers (except for contracts within the scope of other accounting standards such as leases or financial instruments).The core principle of AASB 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity recognises revenue in accordance with that core principle by applying the following steps: a. Step 1: Identify the contract(s) with a customer b. Step 2: Identify the performance obligations in the contract c. Step 3: Determine the transaction price d. Step 4: Allocate the transaction price to the performance obligations in the contract e. Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation AASB 2015-8 amended the AASB 15 effective date so it is now effective for annual reporting periods commencing on or after 1 January 2018. Early application is permitted. AASB 2014-5 incorporates the consequential amendments to a number Australian Accounting Standards (including Interpretations) arising from the issuance of AASB 15. AASB 2016-3 Amendments to Australian Accounting Standards – Clarifications to AASB 15 amends AASB 15 to clarify the requirements on identifying performance obligations, principal versus agent considerations and the timing of recognising revenue from granting a licence and provides further practical expedients on transition to AASB 15. This Standard lists the application paragraphs for each other Standard (and Interpretation), grouped where they are the same. Accordingly, paragraphs 5 and 22 respectively specify the application paragraphs for Standards and Interpretations in general. Differing application paragraphs are set out for individual Standards and Interpretations or grouped where possible. The application paragraphs do not affect requirements in other Standards that specify that certain paragraphs apply only to certain types of entities. AASB 2014-9 Amendments to Australian Accounting Standards – Equity Method in Separate Financial Statements AASB 2014-9 amends AASB 127 Separate Financial Statements, and consequentially amends AASB 1 First-time Adoption of Australian Accounting Standards and AASB 128 Investments in Associates and Joint Ventures, to allow entities to use the equity method of accounting for investments in subsidiaries, joint ventures and associates in their separate financial statements. AASB 2014-9 also makes editorial corrections to AASB 127. AASB 2014-9 applies to annual reporting periods beginning on or after 1 January 2016. Early adoption permitted. 34 35 PRO MEDICUS ANNUAL REPORT 2016 NOTES TO FINANCIAL STATEMENTS cont. Reference Title Summary AASB 2014-10 Amendments to Australian Accounting Standards – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture AASB 2014-10 amends AASB 10 Consolidated Financial Statements and AASB 128 to address an inconsistency between the requirements in AASB 10 and those in AASB 128 (August 2011), in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The amendments require: a. A full gain or loss to be recognised when a transaction involves a business (whether it is housed in a subsidiary or not) Application date of standard* 1 January 2018 Impact on Group financial report Application date for Group* No impact 1 July 2018 b. A partial gain or loss to be recognised when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. AASB 2014-10 also makes an editorial correction to AASB 10. AASB 2015-10 defers the mandatory effective date (application date) of AASB 2014-10 so that the amendments are required to be applied for annual reporting periods beginning on or after 1 January 2018 instead of 1 January 2016. The subjects of the principal amendments to the Standards are set out below: 1 January 2016 1 July 2016 The Group will amend the future financial reports to comply with AASB 2015-1 AASB 2015-1 Amendments to Australian Accounting Standards – Annual Improvements to Australian Accounting Standards 2012–2014 Cycle AASB 2015-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101 36 AASB 5 Non-current Assets Held for Sale and Discontinued Operations: • Changes in methods of disposal – where an entity reclassifies an asset (or disposal group) directly from being held for distribution to being held for sale (or visa versa), an entity shall not follow the guidance in paragraphs 27–29 to account for this change. AASB 7 Financial Instruments: Disclosures: • Servicing contracts - clarifies how an entity should apply the guidance in paragraph 42C of AASB 7 to a servicing contract to decide whether a servicing contract is ‘continuing involvement’ for the purposes of applying the disclosure requirements in paragraphs 42E–42H of AASB 7. • Applicability of the amendments to AASB 7 to condensed interim financial statements - clarify that the additional disclosure required by the amendments to AASB 7 Disclosure–Offsetting Financial Assets and Financial Liabilities is not specifically required for all interim periods. However, the additional disclosure is required to be given in condensed interim financial statements that are prepared in accordance with AASB 134 Interim Financial Reporting when its inclusion would be required by the requirements of AASB 134. AASB 119 Employee Benefits: • Discount rate: regional market issue - clarifies that the high quality corporate bonds used to estimate the discount rate for post-employment benefit obligations should be denominated in the same currency as the liability. Further it clarifies that the depth of the market for high quality corporate bonds should be assessed at the currency level. The Standard makes amendments to AASB 101 Presentation of Financial Statements arising from the IASB’s Disclosure Initiative project. The amendments are designed to further encourage companies to apply professional judgment in determining what information to disclose in the financial statements. For example, the amendments make clear that materiality applies to the whole of financial statements and that the inclusion of immaterial information can inhibit the usefulness of financial disclosures. The amendments also clarify that companies should use professional judgment in determining where and in what order information is presented in the financial disclosures. Reference Title Summary AASB 2015-9 Amendments to Australian Accounting Standards – Scope and Application Paragraphs [AASB 8, AASB 133 & AASB 1057] This Standard inserts scope paragraphs into AASB 8 and AASB 133 in place of application paragraph text in AASB 1057. This is to correct inadvertent removal of these paragraphs during editorial changes made in August 2015. There is no change to the requirements or the applicability of AASB 8 and AASB 133. AASB 16 Leases The key features of AASB 16 are as follows: Application date of standard* 1 January 2016 Impact on Group financial report Application date for Group* No impact 1 July 2016 1 July 2019 1 January 2019 The Group will amend the future financial reports to comply with AASB 16 1 July 2017 1 January 2017 The Group will amend the future financial reports to comply with AASB 2016-1 Lessee accounting • Lessees are required to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. • A lessee measures right-of-use assets similarly to other non-financial assets and lease liabilities similarly to other financial liabilities. • Assets and liabilities arising from a lease are initially measured on a present value basis. The measurement includes non-cancellable lease payments (including inflation-linked payments), and also includes payments to be made in optional periods if the lessee is reasonably certain to exercise an option to extend the lease, or not to exercise an option to terminate the lease. AASB 16 contains disclosure requirements for lessees. Lessor accounting • AASB 16 substantially carries forward the lessor accounting requirements in AASB 117. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. • AASB 16 also requires enhanced disclosures to be provided by lessors that will improve information disclosed about a lessor’s risk exposure, particularly to residual value risk. AASB 16 supersedes: a. AASB 117 Leases b. Interpretation 4 Determining whether an Arrangement contains a Lease c. SIC-15 Operating Leases—Incentives d. SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The new standard will be effective for annual periods beginning on or after 1 January 2019. Early application is permitted, provided the new revenue standard, AASB 15 Revenue from Contracts with Customers, has been applied, or is applied at the same date as AASB 16. This Standard amends AASB 112 Income Taxes (July 2004) and AASB 112 Income Taxes (August 2015) to clarify the requirements on recognition of deferred tax assets for unrealised losses on debt instruments measured at fair value. This standard amends to IFRS 2 Share-based Payment, clarifying how to account for certain types of share- based payment transactions. The amendments provide requirements on the accounting for: 1 January 2018 • The effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments • Share-based payment transactions with a net settlement feature for withholding tax obligations. A modification to the terms and conditions of a share- based payment that changes the classification of the transaction from cash-settled to equity-settled 1 July 2018 The Group will amend the future financial reports to comply with IFRS 2 37 1 July 2016 1 January 2016 The Group will amend the future financial reports to comply with AASB 2015-2 2016-1 IFRS 2 (Amendments) Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses [AASB 112] Classification and Measurement of Share-based Payment Transactions [Amendments to IFRS 2] PRO MEDICUS ANNUAL REPORT 2016 NOTES TO FINANCIAL STATEMENTS cont. (d) Basis of consolidation The consolidated financial statements comprise the financial statements of Pro Medicus Limited and its subsidiaries as at 30 June each year (the Group). Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has: • Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee) • Exposure, or rights, to variable returns from its involvement with the investee, and • The ability to use its power over the investee to affect its returns. When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: • The contractual arrangement with the other vote holders of the investee • Rights arising from other contractual arrangements • The Group’s voting rights and potential voting rights. The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains a control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of comprehensive income from the date the Group gains control until the date the Group ceases to control the subsidiary. Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it: − Derecognises the assets (including goodwill) and liabilities of the subsidiary. − Derecognises the carrying amount of any non- controlling interest. 38 − Derecognises the cumulative translation differences, recorded in equity. − Recognises the fair value of the consideration received. − Recognises the fair value of any investment retained. − Recognises any surplus or deficit in profit or loss. − Reclassifies the parent’s share of components previously recognised in OCI to profit or loss or retained earnings, as appropriate, as would be required if the Group had directly disposed of the related assets or liabilities. (e) Operating segments An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity), whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available. This includes start-up operations which are yet to earn revenues. Management will also consider other factors in determining operating segments such as the existence of a line manager and the level of segment information presented to the board of directors. Operating segments have been identified based on the information provided to the chief operating decision makers – being the executive management team. The group aggregates two or more operating segments when they have similar economic characteristics and the segments are similar in each of the following respects: • Nature of the products and services • Type or class of customer for the products and services • Nature of the regulatory environment. Operating segments that meet the quantitative criteria as prescribed by AASB 8 are reported separately. However, an operating segment that does not meet the quantitative criteria is still reported separately where information about the segment would be useful to users of the financial statements Information about other business activities and operating segments that are below the quantitative criteria are combined and disclosed in a separate category for “all other segments”. (h) Cash and cash equivalents Cash and cash equivalents in the statement of financial position comprise cash at bank and in hand and short term deposits with an original maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes of value. For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above. (i) Trade and other receivables Trade and intercompany receivables are recognised initially at fair value and subsequently measured at amortised cost less an allowance for any uncollectible amounts. A provision for impairment is made when there is objective evidence that Pro Medicus will not be able to collect the debts. Financial difficulty of the debtors is considered objective evidence by the Group. Bad debts are written off when identified. (f) Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Rendering of services Revenue generated from pay-per-view contracts is recognised based on the number of image views undertaken by the customer, multiplied by the contracted view rate. Revenue from the installation and ongoing support of software applications and services is recognised by reference to the stage of completion of a contract or contracts in progress. Stage of completion is measured by completion of identifiable service segments as a percentage of the total services to be provided for each contract, which is determined by a quotation with the customer. Service Revenue is recognised over the term of the contract. Where revenue is received in advance, revenue is recognised in the period during which the service is provided. Where the contract outcome cannot be reliably measured, revenue is recognised only to the extent that costs have been incurred. Licences License revenue is recognised when control of the right to be compensated for the license can be reliably measured. License revenue is recognised when ownership of the goods have passed to the buyer, which is usually after the software application has been installed and is ready for use by the buyer. Interest Revenue is recognised as the interest accrues (using the effective interest method, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument) to the net carrying amount of the financial asset. (g) Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Group as a lessee Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognised as an expense in the statement of comprehensive income on a straight-line basis over the lease term. 39 PRO MEDICUS ANNUAL REPORT 2016 NOTES TO FINANCIAL STATEMENTS cont. (j) Inventories Inventories are valued at the lower of cost and net realisable value. The cost of finished goods represents the purchase cost. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. (k) Derivative financial instruments and hedging The Group has not transacted any derivative financial instruments to hedge its risk associated foreign currency and interest rate fluctuations. (l) Investments and other financial assets Investments and financial assets in the scope of AASB 139 Financial Instruments: Recognition and Measurement are categorised as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired or originated. Designation is re- evaluated at each reporting date, but there are restrictions on reclassifying to other categories. When financial assets are recognised initially, they are measured at fair value, plus, in the case of assets not at fair value through profit or loss, directly attributable transaction costs. Recognition and derecognition All regular way purchases and sales of financial assets are recognised on the trade date i.e., the date that the Group commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets under contracts that require delivery of the assets within the period established generally by regulation or convention in the market place. Financial assets are derecognised when the right to receive cash flows from the financial assets has expired or when the entity transfers substantially all the risks and rewards of the financial assets. If the entity neither retains nor transfers substantially all of the risks and rewards, it derecognises the asset if it has transferred control of the assets. Subsequent measurement (i) Financial assets at fair value through profit or loss Financial assets classified as held for trading are included in the category “financial assets at fair value through profit or loss”. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term with the intention of making a profit. Derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on financial assets held for trading are recognised in profit or loss and the related assets are classified as current assets in the statement of financial position. (ii) Loans and receivables Loans and receivables including loan notes and loans to key management personnel are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest rate method. Gains and losses are recognised in profit or loss when the loans and receivables are derecognised or impaired. These are included in current assets, except for those with maturities greater than 12 months after reporting date, which are classified as non-current. (m) Foreign currency translation (i) Functional and presentation currency Both the functional and presentation currency of Pro Medicus Limited and its Australian subsidiaries are Australian dollars ($). The United States subsidiaries’ functional currency is United States Dollars. The subsidiary in Germany has a functional currency of Euro. Foreign subsidiaries are translated to presentation currency (see Note 2 (n) (iii) for consolidated reporting). (ii) Transactions and balances Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the reporting date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. (iii) Translation of Group Companies’ functional currency to presentation currency The results of the United States and German subsidiaries are translated into Australian dollars (presentation currency) using an average exchange rate for the trading period. Assets and liabilities are translated at exchange rates prevailing at reporting date. Exchange variations resulting from the translation are recognised in the foreign currency translation reserve in equity. On consolidation, exchange differences arising from the translation of the net investments in foreign subsidiaries are taken to the foreign currency translation reserve. If a foreign subsidiary were sold, the proportionate share of exchange differences would be transferred out of equity and recognised in profit or loss. (n) Income tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. Deferred income tax is provided on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences, except: Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. • where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. • when the taxable temporary difference is associated with investments in subsidiaries, associates or interests in joint ventures, and the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised, except: • where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. • when the deductible temporary difference is associated with investments in subsidiaries, associates or interests in joint ventures, in which case a deferred tax asset is only recognised to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised. The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on the tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Income taxes relating to items recognised directly in equity are recognised in equity and not in the statement of comprehensive income. Tax consolidation legislation Pro Medicus Limited and its wholly-owned Australian controlled entities implemented the tax consolidation legislation as of 1 July 2009. The head entity, Pro Medicus Limited and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The Group has applied the Group allocation approach to determining the appropriate amount of current taxes and deferred taxes to allocate to members of the tax consolidated group. In addition to its own current and deferred tax amounts, Pro Medicus Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Pro Medicus Limited and its 100% owned Australian resident subsidiaries formed a tax consolidated group with effect from 1 January 2009. Pro Medicus Limited is the head entity of the tax consolidated group. An allocation of income tax liabilities between the entities of the tax consolidated group will be made should the head entity default on its tax payment obligations. No such amounts have been recognised in the financial statements on the basis that the possibility of default is remote. (o) Other taxes Revenues, expenses and assets are recognised net of the amount of GST except: • when the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or of the expense item as applicable; and • receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. Cash flows are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows. 40 41 PRO MEDICUS ANNUAL REPORT 2016 NOTES TO FINANCIAL STATEMENTS cont. Intangible assets, excluding development costs, created within the business are not capitalised and expenditure is charged against profits in the period in which the expenditure is incurred. Intangible assets are tested for impairment where an indicator of impairment exists, either individually or at the cash generating unit level. The recoverable amount is estimated and an impairment loss is recognised to the extent that the recoverable amount is lower than the carrying value. The amortisation period and method is renewed at each financial year end and adjustments, where applicable, are made on a prospective basis. Research and development costs Research costs are expensed as incurred. An intangible asset arising from development expenditure on an internal project is recognised only when the group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for sale or use, 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 initial recognition of the development expenditure, the cost model is applied requiring the asset be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure so capitalised is amortised on a straight line basis over the period of expected benefit from the related project (5 years). Development expenditure includes costs of materials and services and salaries and wages and other employee related costs arising from the generation of the intangible asset. 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. Intellectual Property – Software Three separately identifiable intangible assets, in the form of software intellectual property, have previously been identified in the business acquisition of Visage Imaging; • Visage PACS • Visage MagicWeb and • Amira. Following initial recognition, Intellectual property is measured at cost less any accumulated amortisation. A useful life of 5 years has been determined. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. (p) Plant and equipment Plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows: 2016 2015 Property Improvements 2 to 7 years 2 to 7 years Motor Vehicles 4 to 5 years 4 to 5 years Office Equipment 2 to 7 years 2 to 7 years Furniture and Fittings 5 years 5 years Research and Development Equipment 3 to 4 years 3 to 4 years An item of plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the statement of comprehensive income in the period the item is derecognised. Impairment The carrying values of plant and equipment are reviewed for impairment at each reporting date, with recoverable amount being estimated when events or changes in circumstances indicate that the carrying value may be impaired. 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. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount. The recoverable amount of plant and equipment is the greater of 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. (q) Intangible assets Intangible assets acquired separately are initially measured at cost. The cost of an intangible asset acquired in a business combination is its fair value as at date of acquisition. Following initial recognition, intangible assets with a finite life are carried at cost less any accumulated amortisation and any accumulated impairment losses. Amortisation is calculated on a straight-line basis over the estimated useful life of the asset. 42 Software Licenses The Group identified a separate intangible asset in the form of software licenses, in the business acquisition of Visage Imaging. Following initial recognition, software licenses are measured at cost less any accumulated amortisation. A useful life of 4 years has been determined. Customer List The Group identified a separate intangible asset in the form of a customer list, in the business acquisition of Visage Imaging. Following initial recognition, the customer list is measured at cost less any accumulated amortisation. A useful life of 4 years has been determined. (r) Trade and other payables Trade payables and other payables are carried at amortised cost and represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. (s) Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of comprehensive income net of any reimbursement. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the reporting date. Dividends payable are recognised when a legal or constructive obligation to pay the dividend arises, typically following approval of the dividend at a meeting of directors. (t) Employee leave benefits Provision is made for employee entitlement benefits accumulated as a result of employees rendering services up to the reporting date. (i) Annual leave and sick leave The liability for annual leave is recognised and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date, using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures, and periods of service. Expected future payments are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity and currencies that match, as closely as possible the estimated future cash outflows. Expenses for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid. (ii) Long service leave The liability for long service leave is recognised and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date, using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures, and periods of service. Expected future payments are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity and currencies that match, as closely as possible the estimated future cash outflows. (u) based payment transactions (i) Equity settled transactions: The Group provides benefits to its employees (including KMP) in the form of share-based payments, whereby employees render services in exchange for shares or rights over shares (equity- settled transactions). There are currently two plans in place to provide these benefits: • The Employee Share Option Plan (ESOP), which provides benefits to directors and senior executives. • The Long Term Incentive Plan (LTIP), which provides benefits to senior executives. The cost of these equity-settled transactions with employees (for awards granted after 7 November 2002 that were unvested at 1 January 2005) is measured by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined using a Black Scholes model, further details of which are given in note 18. In valuing equity-settled transactions, no account is taken of any vesting conditions, other than conditions linked to the price of the shares of Pro Medicus Limited (market conditions) if applicable. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled (the vesting period), ending on the date on which the relevant employees become fully entitled to the award (the vesting date). 43 PRO MEDICUS ANNUAL REPORT 2016 NOTES TO FINANCIAL STATEMENTS cont. At each subsequent reporting date until vesting, the cumulative charge to the statement of comprehensive income is the product of: − Dilutive potential ordinary shares adjusted for any bonus element − and then divided by the weighted average i) The grant date fair value of the award; number of ordinary shares. ii) For options with non-market vesting conditions, the current best estimate of the number of awards that will vest, taking into account such factors as the likelihood of employee turnover during the vesting period and the likelihood of non-market performance conditions being met; and iii) The expired portion of the vesting period. The charge to the statement of comprehensive income for the period is the cumulative amount as calculated above less the amounts already charged in previous periods. There is a corresponding entry to equity. Until an award has vested, any amounts recorded are contingent and will be adjusted if more or fewer awards vest than were originally anticipated to do so. Any award subject to a market condition is considered to vest irrespective of whether or not that market condition is fulfilled, provided that all other conditions are satisfied. If the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. An additional expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee, as measured at the date of modification. The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share (see note 8). (v) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. (w) Earnings per share Basic earnings per share is calculated as net profit attributable to members of the Group, adjusted to exclude any costs of servicing equity (other than dividends) divided by the weighted average number of ordinary shares, adjusted for any bonus element. Diluted earnings per share is calculated as net profit attributable to members of the Group adjusted for − Costs of servicing equity (other than dividends) − The after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and − Other non-discretionary changes in revenue or expenses during the period that would result from the dilution of potential ordinary shares and 44 (x) Comparatives Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosures. (y) Government grants Research and Development tax credits are recognised in accordance with AASB 120: Accounting for Government Grants and Government Assistance. The Research and development tax credit is recognised when there is reasonable assurance that the grant will be received and all conditions have been complied with. The Grant is recognised as a reduction to the cost base of the intangible and released to income as a reduction in amortisation expense over the expected useful life of the related asset. The amount recognised for the period to 30 June 2016 is nil (2015: $436,918). 3. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements and estimates on historical experience and on other various factors it believes to be reasonable under the circumstances, the result of which form the basis of the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. Management has identified the following critical accounting policies for which significant judgements, estimates and assumptions are made. Actual results may differ from these estimates under different assumptions and conditions and may materially affect financial results or the financial position reported in future periods. Further details of the nature of these assumptions and conditions may be found in the relevant notes to the financial statements. (i) Significant accounting judgements Recovery of deferred tax assets: Deferred tax assets are recognised for un-recouped tax losses and deductible temporary differences as management considers that it is probable that future taxable profits will be available to utilise those temporary differences. Capitalisation of development costs: Development costs are only capitalised by the Group when it can be demonstrated that the technical feasibility of completing the intangible asset is valid so that the asset will be available for use or sale. Impairment of non-financial assets The Group assesses impairment of all assets at each reporting date by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. If an impairment trigger exists the recoverable amount of the asset is determined. Given the current uncertain economic environment management considered that the indicators of impairment were significant enough and as such these assets have been tested for impairment in this financial period. Taxation The Group’s accounting policy for taxation requires management’s judgement as to the types of arrangements considered to be a tax on income in contrast to an operating cost. Judgement is also required in assessing whether deferred tax assets and certain deferred tax liabilities are recognised on the statement of financial position. Deferred tax assets, including those arising from un-recouped tax losses, capital losses and temporary differences, are recognised only where it is considered more likely than not that they will be recovered, which is dependent on the generation of sufficient future taxable profits. Deferred tax liabilities arising from temporary differences in investments, caused principally by retained earnings held in foreign tax jurisdictions, are recognised unless repatriation of retained earnings can be controlled and are not expected to occur in the foreseeable future. Assumptions about the generation of future taxable profits and repatriation of retained earnings depend on management’s estimates of future cash flows. These depend on estimates of future sales volumes, operating costs, capital expenditure, dividends and other capital management transactions. Judgements are also required about the application of income tax legislation. These judgements and assumptions are subject to risk and uncertainty, hence there is a possibility that changes in circumstances will alter expectations, which may impact the amount of deferred tax assets and deferred tax liabilities recognised on the statement of financial position and the amount of other tax losses and temporary differences not yet recognised. In such circumstances, some or all of the carrying amounts of recognised deferred tax assets and liabilities may require adjustment, resulting in a corresponding credit or charge to the statement of comprehensive income. Net investment in foreign operations The Group maintains inter-company loans it assesses to represent a part of its net investment in its foreign operations. The judgements made in assessing these loans to represent net investments are on the basis the loans are neither planned nor likely to be settled within the foreseeable future, the loans do not include trade receivables or trade payable and the loans represent a return of funds from their investment in the respective subsidiaries. (ii) Significant accounting estimates and assumptions Capitalisation of development costs The capitalisation of development costs includes an overhead rate which has been estimated from total costs. The estimated development overheads rate has been calculated by dividing the development labour costs over total labour costs to give a percentage of development labour rate. The development labour rate is then applied against the total overheads of the company, to give an estimate of the amount of overheads that relates to development. Share-based payments The Group measures the cost of equity-settled transactions with employees by reference to the fair value of equity instruments at the date at which they are granted. Estimating fair value for share- based payment transactions requires determination of the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share option/performance rights, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value of share-based payment transactions are disclosed in Note 18. 4. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group’s principal financial instruments are cash and short-term deposits. The main purpose of these financial instruments is to provide finance for the Group’s operations. The Group has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. The main risks arising from the Group’s financial instruments are foreign currency risk, interest risk and credit risk. The Board manages each of these risks as detailed below. Foreign currency risk The Group has transactional currency exposure, which arise from sales made in currencies other than the Group’s presentational currency. Approximately 76% (2015: 64%) of the Group’s sales are denominated in currencies other than the presentational currency, and these sales would be predominately offset by currency exposure on costs. Foreign bank accounts have also been established, to create a natural hedge and reduce the need for regular transfers from the presentational currency (AUD) cash holdings. 45 PRO MEDICUS ANNUAL REPORT 2016 NOTES TO FINANCIAL STATEMENTS cont. At 30 June the Group had the following exposure to US$ foreign currency that is not designated in cash flow hedges or recorded in the functional currency of the subsidiary. At 30 June the Group had the following exposure to GBP£ foreign currency that is not designated in cash flow hedges or recorded in the functional currency of the subsidiary. Consolidated 2016 $000 2015 $000 Financial assets Cash and cash equivalents Financial liabilities Trade and other payables Net exposure 2,114 2,114 – 2,114 Financial assets 640 Cash and cash equivalents 640 Financial liabilities – Trade and other payables 640 Net exposure Consolidated 2016 $000 2015 $000 126 126 – 126 390 390 – 390 At 30 June the Group had the following exposure to CAD$ foreign currency that is not designated in cash flow hedges or recorded in the functional currency of the subsidiary. At 30 June the Group had the following exposure to EUR€ foreign currency that is not designated in cash flow hedges or recorded in the functional currency of the subsidiary. Consolidated 2016 $000 2015 $000 Financial assets Cash and cash equivalents Financial liabilities Trade and other payables Net exposure 842 842 – 842 Financial assets 847 Cash and cash equivalents 847 Financial liabilities – Trade and other payables 847 Net exposure Consolidated 2016 $000 600 600 – 600 2015 $000 3,226 3,226 – 3,226 At 30 June, had the Australian Dollar moved, as illustrated in the table below, with all other variables held constant, post-tax profit and equity (excluding retained profits) would have been affected as follows: Judgements of reasonably possible movements: Post Tax Profit Higher/(Lower) Other Comprehensive Income Higher/(Lower) AUD/USD +10% AUD/USD – 5% AUD/CAD +10% AUD/CAD – 5% AUD/GBP +10% AUD/GBP – 5% AUD/EUR +10% AUD/EUR – 5% Management believe the reporting date risk exposures are representative of the risk exposure inherent in the financial instruments. Credit risk Credit risk arises from the financial instruments of the Group, which comprise cash and cash equivalents and trade and other receivables. The Group’s exposure to credit risk arises from potential defaults of the counter-party, with a maximum exposure equal to the carrying amount of the financial assets. 46 2016 $’000 (211) 106 (84) 42 (13) 6 (60) 30 2015 $’000 (64) 32 (85) 42 (39) 20 (323) 161 2016 $’000 (78) 39 – – – – 2015 $’000 (70) 35 – – – – (156) 78 (126) 63 The Group trades only with recognised, credit worthy third parties. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit assessment. In addition, receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant. The remaining contractual maturities of the Group’s financial liabilities are: <30 days 31-60 days 61-90 days Over 90 days TOTAL Consolidated 2016 $’000 1,015 204 189 1,586 2,994 2015 $’000 688 135 145 1,804 2,772 5. OPERATING SEGMENTS The Group has identified its operating segments based on the internal reports that are reviewed and used by the executive management team (the chief operating decision makers) in assessing performance and in determining the allocation of resources. The operating segments are identified by management based on country of origin. Discrete financial information is reported to the executive management team on at least a monthly basis. Impairment is not monitored at segment level. Types of products and services The Group produces integrated software applications for the health care industry. In addition, the Group provides services in the form of installation and support. Accounting policies and inter-segment transactions The accounting policies used by the Group in reporting segments internally is the same as those contained in note 2 to the financial statements and in the prior periods. Inter-entity sales Inter-entity sales are recognised based on an internally set transfer price. The price aims to reflect what the business operation could achieve if they sold their output and services to external parties at arm’s length. As the Group trades predominantly within the Diagnostic Imaging market there is a concentration of credit risk. Given the underlying Government funding support for Radiology in Hospital settings and the Imaging Centre and Diagnostic Imaging market, and the commercial successes achieved by the Group to date, credit risk is considered to be minimal. Cash and cash equivalents are held with several financial institutions, with the majority held with the Westpac Banking Corporation and Wells Fargo Bank N.A., both AA rated banks. Interest risk The Group exposure to market interest rates relates primarily to the company’s cash and cash equivalents. At reporting date, the Group had the following financial assets exposed to Australian Variable interest rate risk that are not designated in cash flow hedges: Cash and Cash equivalents in the Group ($’000’s) $17,107 (2015: $12,935). The Group’s policy is to place cash balances in either 30 day term deposits or commercial bills that earn higher interest rates. At 30 June 2016, if interest rates had moved, as illustrated in the table below, with all other variables held constant, post-tax profit and equity (excluding retained profits) would have been affected as follows: Consolidated Post Tax Profit Higher/(Lower) Other Comprehensive Income Higher/(Lower) 2016 $’000 2015 $’000 2016 $’000 2015 $’000 171 (86) 129 (65) – – – – Judgements of reasonably possible movements: +1% (100 basis points) – 0.5% (50 basis points) Liquidity risk The Group has minimal liquidity risk as it has cash reserves of $17.1m, with no borrowings. These cash reserves are deemed to be adequate and the Board believes they will underpin the ongoing growth of the business. The table below reflects all contractually fixed pay-offs for settlement and repayments resulting from recognised financial liabilities. Cash flows for financial liabilities without fixed amount of timing are based on the conditions existing at 30 June 2016. 47 PRO MEDICUS ANNUAL REPORT 2016 NOTES TO FINANCIAL STATEMENTS cont. Operating Segments Australia Europe North America Total Operations 2016 $’000 2015 $’000 2016 $’000 2015 $’000 2016 $’000 2015 $’000 2016 $’000 2015 $’000 Revenue Sales to external customers Inter-segment sales Total segment revenue Inter-segment elimination Total consolidation revenue Results Segment result Interest revenue Non segment expenses Income tax expense Net profit Assets Non-current assets Deferred tax asset Current assets Segment assets Inter-segment elimination Total assets Liabilities Segment liabilities Inter-segment elimination Total liabilities Other segment information Capital expenditure Depreciation and amortisation Cash flow information Net cash flow from operating activities Net cash flow from investing activities Net cash flow from financing activities Product information 6,486 10,399 6,261 4,158 16,885 10,419 4,166 2,352 16,869 8,877 27,521 17,490 4,830 8,996 4,718 – – 15,229 8,876 7,070 16,869 8,877 42,750 26,366 (15,229) (8,876) 27,521 17,490 7,281 3,718 1,735 1,227 425 80 9,441 5,025 56 87 (3,129) (1,895) 6,368 3,217 17,574 15,562 431 395 149 – 158 – 93 – 74 114 17,816 15,794 431 509 28,366 26,663 23,370 20,485 16,747 10,470 68,483 57,618 46,371 42,620 23,519 20,643 16,840 10,658 86,730 73,921 (47,652) (44,172) 39,078 29,749 37,339 36,975 2,275 1,190 16,095 10,201 55,709 48,366 (44,016) (40,555) 11,693 7,811 5,677 3,686 5,122 2,693 79 88 353 374 73 54 86 49 5,829 3,828 5,561 3,116 5,367 7,815 (1,419) (6,349) 7,306 2,717 11,254 4,183 (5,621) (5,035) (79) (353) (74) (86) (5,774) (5,474) Revenue from external customers Consolidated Radiology Information Systems (RIS) Picture Archiving Communications Systems (Visage 7/PACS) Other income Total revenue per statement of comprehensive income 2016 $’000 6,032 21,468 21 27,521 2015 $’000 6,245 11,223 22 17,490 Revenue from major customers Included in North American revenue are revenues of 13.4% (2015: nil) from one party. No other customer contributed 10% or more to the Group’s revenue for 2016 48 6. INCOME AND EXPENSES (a) Other Income Net currency gains Net currency (loss) Other Total other income/(expense) (b) Expenses Depreciation and amortisation Motor vehicles Office equipment Furniture and fittings and property improvements Amortisation on capitalised development costs Amortisation on computer software Total depreciation and amortisation expense Salaries and employee benefits expense Wages and salaries Long service leave provision Share-based payment Defined contribution plan expense Total salaries and employee benefits expense 7. INCOME TAX The major components of income tax expense are: Statement of Comprehensive Income Current income tax Current income tax charge Prior year adjustment Deferred income tax Relating to origination and reversal of temporary differences Income tax expense/(benefit) reported in the statement of comprehensive income Notes 13 13 13 14 14 Consolidated 2016 $’000 1,760 (1,849) – (89) 7 155 19 3,646 1 3,828 7,013 244 438 904 2015 $’000 2,029 (380) 5 1,654 3 144 11 2,955 3 3,116 5,581 50 382 850 8,599 6,863 2,015 (71) 1,185 3,129 949 (5) 951 1,895 A reconciliation between tax expense and the product of accounting profit before income tax multiplied by the Group’s applicable income tax rate is as follows: Accounting profit before tax 9,497 5,112 – Australia – United States of America – Germany Prior year adjustment Expenditure not allowable for income tax purposes Other Income tax expense reported in the statement of comprehensive income 2,201 145 523 (71) 326 5 1,142 27 370 (5) 315 46 3,129 1,895 49 (1,557) (2,005) – – – – (1,557) (2,005) At the applicable statutory income tax rate in each country PRO MEDICUS ANNUAL REPORT 2016 NOTES TO FINANCIAL STATEMENTS cont. Deferred income tax Deferred income tax at 30 June relates to the following: Deferred Tax liabilities Foreign currency exchange gain Capitalised development expenses Other Deferred income tax liabilities Deferred tax assets Employee entitlements Intellectual property expenses Tax losses in subsidiaries Audit fee accrual Other Deferred income tax assets Consolidated Statement of Financial Position Consolidated Statement of Comprehensive Income 2016 $’000 2015 $’000 2016 $’000 2015 $’000 886 3,500 – 4,386 411 326 – 16 4 757 914 2,384 – 28 (1,116) – 3,298 (1,088) 326 345 114 24 45 854 85 (19) (114) (8) (41) (97) (369) (449) 2 (814) 31 (19) (185) (3) 41 (135) Unrecognised temporary differences At 30 June 2016, there are no temporary differences associated with the Group’s investments in subsidiaries being recognised as the parent is able to control the timing of the reversal of any temporary differences and it is not probable any temporary difference will reverse in the foreseeable future. Tax consolidation Pro Medicus Limited and its 100% owned Australian resident subsidiaries formed a tax consolidated group with effect from 1 January 2009. Pro Medicus Limited is the head entity of the tax consolidated group. 9. DIVIDENDS PAID AND PROPOSED Declared and paid during the year: Dividends on ordinary shares Final unfranked dividend for 2015: 1.0 cent (2014: 1.0 cent) Interim unfranked dividend for 2016: 1.5 cent (2015: 1.0 cent unfranked) Proposed for approval by directors (not recognised as a liability as at 30 June): Dividends on ordinary shares: Final unfranked dividend for 2016: 1.5 cents (2015: 1.0 cents unfranked) Total dividends proposed Franking credit balance − franking account balance as at the end of the financial year at 30% (2015: 30%) − franking credits that will arise from the payment of income tax payable as at the end of the financial year − franking debits that will arise from the payment of dividends as at the end of the financial year − franking credits that the entity may be prevented from distributing in the subsequent financial year − prior period adjustment The amount of franking credits available for future reporting periods: − impact on the franking account of dividends proposed or declared before the financial report was authorised for issue but not recognised as a distribution to equity holders during the period 8. EARNINGS PER SHARE Consolidated The tax rate at which paid dividends have been franked is 0% (2015: 0%). Dividends proposed will be unfranked. The following reflects the income and share data used in the basic and diluted earnings per share computations: 2016 $’000 2015 $’000 Net profit attributable to ordinary equity holders Weighted average number of ordinary shares for basic earnings per share for the effect of dilution: Share options Performance rights 6,368,722 3,217,197 Number Number 101,378,835 100,263,406 686,563 1,379,441 463,889 1,752,036 Weighted average number of ordinary shares adjusted for the effect of dilution 103,444,839 102,479,331 There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of these financial statements. 50 Consolidated 2016 $’000 2015 $’000 1,006 1,526 2,532 1,003 1,002 2,005 1,526 1,526 1,002 1,002 – – – – – – – – – – – – – – – – 51 PRO MEDICUS ANNUAL REPORT 2016 6,368 3,217 12. INVENTORIES (CURRENT) NOTES TO FINANCIAL STATEMENTS cont. 10. CASH AND CASH EQUIVALENTS Cash at bank and in hand Short-term deposits Consolidated 2016 $’000 15,577 1,530 17,107 2015 $’000 12,935 – 12,935 Cash at bank earns interest at floating rates based on daily bank deposit rates. Short term deposits are made for varying periods of between 30 days and 120 days, depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. The fair value of cash and cash equivalents is their carrying value. Reconciliation of net profit after tax to net cash flows from operations Net profit Adjustments for: Depreciation of property plant and equipment Amortisation of intangible assets Interest received classified in investing activities Foreign currency (gain)/loss Share option expense Changes in assets and liabilities (Increase)/decrease in trade and other receivables (Increase)/decrease in inventory (Increase)/decrease in deferred tax asset (Increase)/decrease in prepayments (Increase)/decrease in accrued revenue (Decrease)/increase in deferred income (Decrease)/increase in trade and other payables (Decrease)/increase in tax provision (Decrease)/increase in deferred tax liability (Decrease)/increase in employee entitlements Net cash flow from operations 11. TRADE AND OTHER RECEIVABLES (CURRENT) Trade receivables Provision for impairment Research & development tax receivable Other receivables Fair value approximates carrying value due to the short term nature of receivables. a) Allowance for impairment loss Movements in the provision for impairment loss were as follows: At 1 July Charge to/(write back of) provision for the year Utilised during the year Foreign exchange translation At 30 June 52 181 3,647 (56) 89 438 (1,040) 43 78 (189) (2,048) 178 (95) 158 2,958 (87) (1,649) 382 (432) (29) 116 16 (75) 440 1,394 2,252 (3,253) 1,107 301 11,254 3,533 – 3,533 989 249 4,771 140 – (140) – – 835 192 4,183 3,155 (140) 3,015 437 279 3,731 97 43 – – 140 At June 30, the ageing analysis of trade receivables is as follows: Total 0-30 days 31-60 days 61-90 days +91 days +91 days 2016 Consolidated 2015 Consolidated 3,533 3,155 1,471 2,167 * Past due not impaired (‘PDNI’) ** Considered Impaired (‘CI’) PDNI* PDNI* 391 410 393 277 PDNI* 1,278 161 CI** – 140 Payment terms on $526,379 (2015: $138,519) of trade receivables have been renegotiated. The Company has been in direct contact with these debtors and is satisfied that payment will be received in full. Consolidated 2016 $’000 86 2015 $’000 129 Finished goods (at lower of cost and net realisable value) Inventory write downs recognised as an expense total nil (2015: nil) 13. PLANT & EQUIPMENT Consolidated Year ended 30 June 2016 At 1 July 2015 net of accumulated depreciation Additions Disposals Exchange differences Depreciation charge for the year At 30 June 2016 net of accumulated depreciation At 30 June 2016 Cost Accumulated depreciation and impairment Net carrying amount Year ended 30 June 2015 At 1 July 2014 net of accumulated depreciation Additions Disposals Exchange differences Depreciation charge for the year At 30 June 2015 net of accumulated depreciation At 30 June 2015 Cost Property Improvements Motor Vehicles Office Equipment Furniture & Fittings Research & Development Equipment Total $’000 $’000 $’000 $’000 $’000 $’000 22 48 – – – (3) 19 – – – (7) 41 248 163 – – (155) 262 23 53 – – (16) 60 – – – – – – 341 216 – – (181) 382 329 488 2,183 401 209 3,610 (310) (477) (1,921) (341) (209) (3,228) 19 41 262 60 – 382 25 – – 1 (4) 22 8 43 – – (3) 48 240 141 – 11 (144) 248 29 2 (1) – (7) 23 – – – – – – 302 186 (1) 12 (158) 341 328 488 2,036 346 209 3,407 Accumulated depreciation and impairment (306) (440) (1,788) (323) (209) (3,066) Net carrying amount 22 48 248 23 – 341 53 PRO MEDICUS ANNUAL REPORT 2016 NOTES TO FINANCIAL STATEMENTS cont. 14. INTANGIBLE ASSETS Consolidated Notes Intellectual Property i) Development Costs ii) Software Licenses iii) $’000 $’000 $’000 – – – – – – 11,549 5,607 – – (3,646) 13,510 3 – – – (1) 2 Total $’000 11,552 5,607 – – (3,647) 13,512 Year ended 30 June 2016 At 1 July 2015 net of accumulated amortisation and impairment Additions - internal development Disposals Exchange differences Amortisation charge for the year At 30 June 2016 net of accumulated amortisation and impairment At 30 June 2016 Cost 1,848 32,655 296 34,799 Accumulated amortisation and impairment (1,848) (19,145) (294) (21,287) – – – – – – – 13,510 9,139 5,365 – – (2,955) 11,549 2 6 – – – (3) 3 13,512 9,145 5,365 – – (2,958) 11,552 1,848 27,048 (1,848) (15,499) 288 (285) 29,184 (17,632) – 11,549 3 11,552 The Group undertook an impairment assessment of the capitalised development costs as at 30 June 2016. The recoverable amount of development costs have been determined based on a value in use calculation using cash flow projections from financial budgets approved by the Board of Directors covering a five-year period. The projected cash flows were updated to reflect the change in forecast revenues and a post-tax discount rate of 17% (30 June 2015:17%) was applied. Cash flows beyond a 5 year period have been extrapolated using a 2.5% growth rate (30 June 2015: 2.5%). All other assumptions remained consistent with those disclosed in Note 2(s). The Groups recoverable value was in excess of the carrying value using the value in use calculation and as such no impairment charges were recorded at 30 June 2016. Net carrying amount Year ended 30 June 2015 At 1 July 2014 net of accumulated amortisation and impairment Additions - internal development Disposals Exchange differences Amortisation charge for the year At 30 June 2015 net of accumulated amortisation and impairment At 30 June 2015 Cost Accumulated amortisation and impairment Net carrying amount i) Intellectual property was acquired in 2009 through the Visage Imaging business combination and is carried at cost less accumulated amortisation. Three separately identifiable intangible assets, in the form of software intellectual property, have been identified in the business acquisition of Visage Imaging; Visage CS, Visage PACS and Amira. These intangible assets have been assessed having a finite life and have been fully amortised using the straight line method over a period of 5 years, commencing February 2009. Amira was sold in July 2012. ii) Development costs have been capitalised at cost. This intangible asset has been assessed as having a finite life and is amortised using the straight line method over a period of 5 years. As at 30 June 2016 the carrying values of capitalised development costs are Visage PACS ($8,905,697) RIS ($4,047,582) and Visage MagicWeb ($556,512), all sit within the Australian operating segment. 54 Key assumptions used in value in use calculations The calculation of value in use for development costs is most sensitive to the following assumptions: − Revenue forecasts − Discount rates − Growth rates used to extrapolate cash flows beyond the forecast period. Revenue forecasts – Revenue forecasts are based on current year consolidated budgets for each geographical segment. Estimated growth rates are then used to forecast the following 4 years revenue for each product used in each geographical segment. Total forecast segment growth rates range from (1%) to 22% across the 4 year period. Discount rates – The discount rate applied to the cash flow projections have been assessed to reflect the time value of money and the perceived risk profile of the industry in which each cash generating unit (CGU) operates. The post-tax discount rate applied was 17% (2015:17%). Growth rate estimates – rates are based on industry based customer price index (CPI) forecasts. The long term rate of 2.5% was used in the current assessment. Sensitivity to changes in assumptions With regard to the assessment of value in use of development costs, the estimated recoverable amount is in excess of its carrying value for each product, however adverse changes in assumptions could result in an impairment loss. Management has considered the possible change in each of the key assumptions applied to the respective capitalised development costs recoverable amount assessments. A reasonably possible adverse change in the revenue forecasts for the RIS product could have the potential to give rise to circumstances where the recoverable amount may be lower than the carrying amount. To illustrate the sensitivity of this assumption, if forecast revenues of the RIS product were to decrease materially, that is in the range of 6 – 10%, across the five year forecast period without the implementation of mitigation plans, cost reductions or restructure which management would look to do if such decreases were to arise, this could lead to a future impairment write-down of approximately $0.2 - $1.5 million. iii) Software Licences have been assessed as having a finite life and are amortised using the straight line method over a period of 4 years. 15. TRADE AND OTHER PAYABLES Consolidated Current Trade payables Other payables and accruals Deferred Income Non Current Deferred Income Notes 2016 $’000 676 1,383 2,059 935 2,994 – – 2015 $’000 404 1,611 2,015 747 2,762 10 10 (i) Trade payables are non-interest bearing and are normally settled on 30-day terms. (ii) Other payables, other than inter-company payables are non-interest bearing and have an average term of 30 days. Fair value approximates carrying value due to the short term nature of trade and other payables. 16. PROVISIONS Current Long service leave Annual leave Non Current Long service leave (i) Long Service Leave Notes Consolidated 2016 $’000 799 1,027 1,826 66 66 2015 $’000 535 969 1,504 87 87 Refer to note 2 (v)(ii) for the relevant accounting policy and a discussion of the significant estimations and assumptions applied in the measurement of this provision. 55 PRO MEDICUS ANNUAL REPORT 2016 101,750,406 1,302 18. SHARE BASED PAYMENT PLAN NOTES TO FINANCIAL STATEMENTS cont. 17. CONTRIBUTED EQUITY AND RESERVES Consolidated (i) Ordinary shares Issued and fully paid Fully paid ordinary shares carry one vote per share and carry the right to dividends (ii) Movements in shares on issue At 1 July 2015 Cancellation for share buy-back Issued for cash on exercise of options Vesting of performance rights At 30 June 2015 At 1 July 2014 Cancellation for share buy-back Issued for cash on exercise of options At 30 June 2015 Share Reserve (i) Balance at 1 July Share options expensed Performance rights expensed Balance at 30 June Foreign Currency Translation Reserve (ii) Balance at 1 July Foreign Currency Movement Balance at 30 June Retained Earnings Balance at 1 July Net profit for the year Dividends Balance at 30 June 2016 $’000 1,302 1,302 Number of Shares 100,263,406 – 950,000 537,000 2015 $’000 327 327 2016 $’000 327 – 975 - Number of Shares 100,263,406 – – 100,263,406 2015 $’000 327 – – 327 Consolidated 2016 $’000 2015 $’000 666 1 437 1,104 (81) 198 117 284 5 377 666 282 (363) (81) 21,026 6,368 (2,532) 24,862 19,814 3,217 (2,005) 21,026 (i) Share Reserve The share reserve is used to record the value of share based payments provided to employees, including KMP, as part of their remuneration. Refer to note 18 for further details of these plans. (ii) Foreign Currency translation reserve The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries and for exchange differences arising from long term loan accounts resulting from net investment in subsidiaries. 56 Capital Management When managing capital, management’s objective is to ensure the entity continues as a going concern as well as to maintain optimal returns to shareholders and benefits for other stakeholders. Management also aims to maintain a capital structure that ensures the lowest cost of capital available to the entity. Management review the capital structure to take advantage of favourable costs of capital or high returns on assets. As the market is constantly changing, management may change the amount of dividends to be paid to shareholders, return capital to shareholders, or issue new shares. During the year, the company paid dividends of $2,532,142 (2015: $2,005,268). Employee Share Option Scheme An employee share incentive scheme was established on 25 August 2000 whereby Directors and staff of the Company were issued with options over the ordinary shares of Pro Medicus Limited. The options, issued for nil consideration, had an exercise price of $1.15 and 2,100,000 share options expired under the scheme on 25 August 2010. Options vested at 20% per annum commencing on the first anniversary of issue. The options cannot be transferred and will not be quoted on the ASX. 200,000 shares were granted as options to Peter Kempen on becoming a Director of the company in 2008 under a separate agreement. The options had a grant date of 12 March 2008 and an exercise price of $1.25. The fair value of the options at grant date was $40,852 ($0.13 - $0.29 per option). The options have a first exercise date of 12 March 2009 and can be exercised at anytime through to expiry date of 12 March 2018. The options vest over a 5 year period on completion of service. At reporting date all options had vested and 100,000 (50%) options were exercised during the year. 900,000 shares were granted as options to key Visage Imaging GmbH employees under a separate agreement. The options had a grant date of 1 April 2010 and an exercise price of $1.00. The fair value of the options at grant date was $67,278 ($0.07 per option). The options have a first exercise date of 1 April 2011 and can be exercised at anytime through to expiry date of 1 April 2020. The options vest over a 5 year period on completion of service. At reporting date all options had vested and 175,000 (19%) options had expired. 700,000 (78%) options were exercised during the year. 550,000 shares were granted as options to Key Executives under a separate agreement. The options had a grant date of 25 August 2010 and an exercise price of $1.00. The fair value of the options at grant date was $54,109 ($0.10 per option). The options have a first exercise date of 25 August 2011 and can be exercised at anytime through to expiry date of 25 August 2020. The options vest over a 5 year period on completion of service. At reporting date all options had vested and 150,000 (27%) options were exercised during the year. 200,000 shares were granted as options to Roderick Lyle on becoming a Director of the company in 2011 under a separate agreement. The options had a grant date of 18 November 2011 and an exercise price of $0.55. The fair value of the options at grant date was $45,116 ($0.23 per option). The options have a first exercise date of 18 November 2012 and can be exercised at anytime through to expiry date of 18 November 2021. The options vest over a 5 year period on completion of service. At reporting date 160,000 (80%) options had vested. No options were exercised during the year. Information with respect to the numbers granted under the employee Share Option Scheme is as follows: Outstanding at the beginning of the year 1,675,000 $0.98 1,675,000 $0.98 2016 2015 Number of Options Weighted average exercise price Number of Options Weighted average exercise price - granted - forfeited - exercised - expired Outstanding at the end of the year Exercisable at end of year – – (950,000) – 725,000 685,000 – – $1.03 – – – – – $0.91 1,675,000 $0.93 1,485,000 – – – – $0.98 $0.98 57 PRO MEDICUS ANNUAL REPORT 2016 NOTES TO FINANCIAL STATEMENTS cont. All options above have been recognised in accordance with AASB 2 as the options were granted after 7 November 2002. The outstanding balance as at 30 June 2016 is represented by: • 100,000 options over ordinary shares with an exercise price of $1.25 each, exercisable until 12 March 2018 • 25,000 options over ordinary share with an exercise price of $1.00 each, exercisable until 1 April 2020 • 400,000 options over ordinary share with an exercise price of $1.00 each, exercisable until 25 August 2020 • 200,000 options over ordinary shares with an exercise price of $0.55 each, exercisable until 18 November 2021. Weighted average remaining contractual life The weighted average remaining contractual life for share options outstanding at 30 June 2016 is 4.14 years (2015: 4.94 Years) Range of exercise price The range of exercise prices for options outstanding at the end of the year was $0.55 - $1.25 (2015: $0.55 - $1.25). Weighted average fair value The weighted average fair value of options granted during the year was nil (2015: nil). Option pricing model The fair value of the equity-settled share options granted is estimated as at the date of the grant using a Black Scholes Model taking into account the terms and conditions upon which the options were granted. Performance Rights A long term incentive plan was established on 18 November 2011 whereby Senior Executives of Group were offered performance rights over the ordinary shares of Pro Medicus Limited. The performance rights, issued for nil consideration, are offered for a 5 year period and vest 4 years after granting date on completion of service. The performance rights cannot be transferred and will not be quoted on the ASX. This long term incentive plan includes performance hurdles related to the company and vesting conditions relating to the employee’s period of service. At reporting date 414,375 performance rights had been granted during the year with a grant date of 22 September 2015. 364,375 performance rights vest over 4 years from grant date on completion of service. The fair value of the 364,375 performance rights at grant date was $721,463 ($1.98 per performance right). The remaining 50,000 performance rights vest in September 2016 and the fair value of these rights was $44,500 ($0.89 per performance right). 397,469 performance rights were granted in prior periods in relation to the 2014-15 financial performance. 247,469 performance rights vest over 4 years from grant date on completion of service. The fair value of the 247,469 performance rights at grant date was $205,166 ($0.83 per performance right). The remaining 150,000 performance rights vest in September 2015 and the fair value of these rights was $133,737 ($0.89 per performance right). 633,500 performance rights were granted in prior periods in relation to the 2013-14 financial performance. The performance rights had a grant date of 27 March 2014 and vest over 4 years from grant date on completion of service. The fair value of the performance rights at grant date was $434,766 ($0.69 per performance right). 176,375 performance rights were granted in prior periods in relation to the 2012-13 financial year. The performance rights had a grant date of 15 September 2013 and vest over 3 years on completion of service. The fair value of the performance rights at grant date was $44,094 ($0.25 per performance right). 387,000 performance rights were granted in prior periods in relation to the 2011-12 financial year. The performance rights had a grant date of 1 July 2012 and vest over 3 years on completion of service. The fair value of the performance rights at grant date was $96,750 ($0.25 per performance right). Information with respect to the number of performance rights granted under the long term incentive scheme is as follows: Weighted average remaining contractual life The weighted average remaining contractual life for performance rights at 30 June 2016 is 2.2 years (2015: 2.4 Years). Performance rights pricing model The fair value of the equity-settled performance rights granted is estimated as at the date of the grant using a Black Scholes Model taking into account the terms and conditions upon which the performance rights were granted. The following table lists the inputs to the models used for the year ended 30 June 2016. Dividend yield Expected volatility Risk-free interest rate Expected life of performance rights Performance rights exercise price 2016 1.2% 0% 0% 1-4 years $0.00 2015 2.42%-3.22% 0% 0% 1-4 years $0.00 Weighted average share price at measurement date $0.89-$1.98 $0.69-$0.89 19. COMMITMENTS a) Operating lease commitments – Group as lessee The US operations have entered into a commercial property lease for office premises from 1 December 2015 for a 5 year period. The German operations have entered into a commercial property lease for office premises and can give notice to vacate 6 months prior to 31 March each year, whereby they sign into another 12 months. The German operations also have several motor vehicle leases which expire at various stages between December 2017 and September 2018. Future minimum rentals payable under non-cancellable operating lease as at 30 June are as follows: − Within one year − After one year and not more than five years − After more than five years 356 679 – 1,035 Consolidated 2016 $’000 2015 $’000 186 89 – 275 20. EVENTS AFTER THE BALANCE SHEET DATE On 19 August 2016, the directors of Pro Medicus Limited declared a final dividend on ordinary shares in respect of the 2016 financial year. This dividend comprises a normal dividend of 1.5 cents per share. The total amount of the dividend is $1,526,256 which represents an unfranked dividend of a total of 1.5 cents per share. The dividend has not been provided for in the 30 June 2016 financial statements. Outstanding at the beginning of the year − granted − forfeited − exercised − expired Outstanding at the end of the year Exercisable at end of year 58 2016 2015 Number of Performance Rights Number of Performance Rights 1,594,344 414,375 – (537,000) – 563,375 1,030,969 – – – 1,471,719 1,594,344 – – 21. AUDITOR’S REMUNERATION Amounts received or due and receivable by Ernst & Young (Australia) for: − an audit or review of the financial report of the Company and any other entity in the Consolidated Group − other services in relation to the Company or Group Amounts received or due and receivable by related practices of Ernst & Young (Australia): − audit of the financial report of Visage Imaging GmbH − other services in relation to Visage Imaging GmbH Consolidated 2016 $’000 2015 $’000 168,313 46,480 214,793 53,221 8,489 276,503 161,445 121,228 282,673 63,192 5,681 351,546 59 PRO MEDICUS ANNUAL REPORT 2016 NOTES TO FINANCIAL STATEMENTS cont. 22. KEY MANAGEMENT PERSONNEL (a) Compensation for key management personnel Short-term employee benefits Post-employment benefits Other long-term benefits Share-based payment Total compensation Consolidated 2016 $’000 2015 $’000 3,143,575 1,802,254 125,860 177,694 235,939 124,984 19,219 119,009 3,683,068 2,065,466 (b) Loans to Key Management Personnel No loans are made to Key Management Personnel or staff. (c) Other transactions and balances with Key Management Personnel Purchases During the year lease payments of $169,476 (2015: $169,476) in respect of the Group’s operating premises at 450 Swan Street, Richmond were paid to Champagne Properties Pty. Ltd., an entity controlled by S. Hupert and A. Hall. Commercial arrangements on an ‘arm’s length basis’ have been determined by an independent assessment of rental and lease terms. 23. RELATED PARTY DISCLOSURE (a) Subsidiaries The consolidated financial statements include the financial statements of Pro Medicus Limited and the subsidiaries listed in the following table. Name Country of incorporation 2016 2015 2016 2015 % Equity interest Investment $000 Promed (USA) Pty Ltd PME IP Australia Pty Ltd Australia Australia Visage Imaging (Aust) Pty Ltd Australia Pro Medicus (USA) LLC United States Visage Imaging Inc United States Visage Imaging GmbH Germany 100 100 100 100 100 100 100 100 100 100 100 100 – – – – 2,389 3,638 6,027 – – – – 2,389 3,638 6,027 (b) Ultimate parent Pro Medicus Limited is the ultimate Australian parent entity and the ultimate parent of the Group. (c) Key management personnel Details relating to KMPs, including remuneration paid, are included in note 22. (d) Transactions with related parties The following table provides the total amount of transactions that were entered into with related parties for the relevant financial year. Terms and conditions of transactions with related parties Sales to and purchases from related parties are made in arm’s length transactions both at normal market prices and on normal commercial terms. Outstanding balances at year end are unsecured, interest free and payable on demand. Entities within the Group that own the intellectual property earn a royalty between 30% - 97% from the sales made by other entities within the Group. Development costs undertaken by the German operations are reimbursed by the parent on commercial terms. 24. CONTINGENCIES Tax related contingencies Amended assessments from the Australian Taxation Office (ATO) As a result of the ATO’s program of routine and regular tax audit, the Group anticipates that ATO audits may occur in the future. The Group is similarly subject to routine tax audits in certain overseas jurisdictions. The ultimate outcome of any future tax audits cannot be determined with an acceptable degree of reliability at this time. Nevertheless, the Group believes that it is making adequate provision for its taxation liabilities (including amounts shown as deferred and current tax liabilities) and is taking reasonable steps to address potentially contentious issues with the ATO. However, there may be an impact to the Group of any of the revenue authority investigations results in an adjustment that increases the Group’s taxation liabilities. Ongoing transactions – transfer pricing The Group has offshore operations in the United States and Germany (note 23). As disclosed in note 23, there are extra Group transactions, which include the Company and its US and German based subsidiaries Visage Imaging Inc and Visage Imaging GmbH and Pro Medicus Limited. These transactions are on an arm’s length basis and are conducted at normal market prices and on normal commercial terms. Whilst there are no investigations currently in progress, such transactions are not subject to any statutory limit in Australia. 25. PARENT ENTITY INFORMATION Current assets Total assets Current liabilities Total liabilities Issued capital Retained earnings Foreign currency translation reserve Share reserve Total shareholders’ equity Profit/(loss) of the parent entity Total comprehensive income of parent entity 2016 $000 28,366 37,465 27,826 29,312 1,302 8,088 (2,341) 1,104 8,153 (607) (607) 2015 $000 26,663 35,181 23,973 24,919 327 11,228 (1,959) 666 10,262 689 689 Sales to related parties $000 Purchases from related parties $000 Other transactions with related parties $000 The parent entity has not entered into any guarantees in relation to the debts of its subsidiaries. There are no contingent liabilities held against the parent entity. The parent entity does not have any contractual commitments for the acquisition of property, plant and equipment. Related party Consolidated Champagne Properties Pty Ltd – Rental lease 2016 Champagne Properties Pty Ltd – Rental lease 2015 – – 169 169 – – 60 61 PRO MEDICUS ANNUAL REPORT 2016 DIRECTORS DECLARATION INDEPENDENT AUDIT REPORT FOR THE YEAR ENDED 30 JUNE 2016 In accordance with a resolution of the directors of Pro Medicus Limited, I state that: (1) In the opinion of the directors: (a) the financial statements, notes and the additional disclosures included in the directors’ report designated as audited, of the consolidated entity are 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 2016 and of the performance for the year ended on that date; and (ii) complying with Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) there are reasonable grounds to believe that the consolidated entity will be able to pay its debts as and when they become due and payable. (c) the financial statements and notes comply with International Financial Reporting Standards (IFRS) as disclosed in Note 2(b). (2) This declaration has been made after receiving the declarations required to be made to the directors in accordance with section 295A of the Corporations Act 2001 for the financial year ended 30 June 2016. On behalf of the Board P T Kempen Chairman Melbourne, 19 August 2016 62 63 PRO MEDICUS ANNUAL REPORT 2016 INDEPENDENT AUDIT REPORT FOR THE YEAR ENDED 30 JUNE 2016 64 ASX ADDITIONAL INFORMATION Additional information required by the Australian Stock Exchange Ltd and not shown elsewhere in this report is as follows. (a) Distribution of equity securities The number of shareholders, by size of holding, in each class of share are: Ordinary shares Number of holders Number of shares 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and Over The number of shareholders holding less than a marketable parcel are: 755 995 303 314 44 2,411 43 434,319 2,639,858 2,370,362 8,737,452 87,568,415 101,750,406 688 (b) Twenty largest shareholders Listed ordinary shares The names of the twenty largest holders of quoted shares are: Number of shares 1 Dr S Hupert (multiple shareholdings) 2 Mr A Hall (multiple shareholdings) 3 J P Morgan Nominees Australia Limited 4 UBS Nominees Pty Ltd 5 RBC Investor Services Australia Pty Ltd 6 Citicorp Nominees Pty Ltd 7 National Nominees Limited 8 BNP Paribas Noms Pty Ltd 9 Mr Bram Vander Jagt & Mrs Maaike Vander Jagt 10 Grain Exporters (Australia) Pty Ltd 11 Mr Peter Terence Kempen & Mrs Elaine Margaret Kempen 12 Mr Kenneth John Vander Jagt & Mrs Tanya Vander Jagt 13 Mr Evan Philip Clucas & Ms Leanne Jane Weston 14 Mr John Charles Plummer 15 HSBC Custody Nominees (Australia) Limited 16 Mr Stephen Geoffrey Wilson & Ms Denise Adele Prandi 17 Mr Alan Graham Rochford 18 Mr Michael Wu 19 Mr Colin Gregory Organ 20 Indicorp Consulting Group Pty Limited 30,107,660 30,068,500 4,504,561 4,028,466 3,345,610 3,121,667 2,008,535 1,841,195 1,000,000 779,091 578,082 400,000 368,217 365,000 340,463 337,537 300,000 275,912 271,000 270,000 Percentage of ordinary shares 29.59% 29.55% 4.43% 3.96% 3.29% 3.07% 1.97% 1.81% 0.98% 0.77% 0.57% 0.39% 0.36% 0.36% 0.33% 0.33% 0.29% 0.27% 0.27% 0.27% (c) Substantial shareholders The names of substantial shareholders who have notified the Company in accordance with section 671B of the Corporations Law are: 84,311,496 80.95% S. Hupert A Hall Commonwealth Bank of Australia (d) Voting rights All ordinary shares carry one vote per share without restriction. Number of shares 30,107,660 30,068,500 5,935,942 65 PRO MEDICUS ANNUAL REPORT 2016 CORPORATE GOVERNANCE STATEMENT FOR THE YEAR ENDED 30 JUNE 2016 The Board of Directors of Pro Medicus Limited is responsible for the corporate governance of the entity having regard to the ASX Corporate Governance Council (CGC) published guidelines as well as its corporate governance principles and recommendations. The Board guides and monitors the business and affairs of Pro Medicus Limited on behalf of the shareholders by whom they are elected and to whom they are accountable. The table below summaries the Group’s compliance with the CGC’s recommendations. Recommendation Principle 1 - Lay solid foundations for management and oversight 1.1 A listed entity should disclose: a) roles and responsibilities of its board and management; and b) those matters expressively reserved to the board and those delegated to management. 1.2 A listed entity should: a) undertake appropriate checks before appointing a person, or putting forward to security holders a candidate for election, as a director; and b) provide security holders with all material information in its possession relevant to a decision on whether or not to elect or re-elect a director. Comply Yes/No Reference/ explanation Yes Page 69 Yes Page 69 1.3 A listed entity should have written agreement with each director and senior executive setting out the terms of their agreement. 1.4 The company secretary of a listed entity should be accountable directly to the board, through the chair, on all matters to do with the proper functioning of the board. No Yes Page 69 Page 69 1.5 A listed entity should: Yes Page 70 a) have a diversity policy which includes requirements for the board or a relevant committee of the board to set measurable objectives for achieving gender diversity and to assess annually both the objectives and the entity’s progress in achieving them; b) disclose that policy or a summary c) disclose as at the end of each reporting period the measurable objectives for achieving gender diversity set by the board or a relevant committee of the board in accordance with the entity’s diversity policy and its progress towards achieving them, and either: 1) the respective proportions of men and women on the board, in senior executive positions and across the whole organisation (including how the entity has defined “senior executive” for these purposes); or 2) if the entity is a “relevant employer” under the Workplace Gender Equality Act, the entity’s most recent “Gender Equality Indicators”, as defined in and published under that Act. 1.6 A listed entity should: Yes Page 70 a) have and disclose a process for periodically evaluation the performance of the board, its committees and individual directors; and b) disclose, in relation to each reporting period, whether a performance evaluation was undertaken in the reporting period in accordance with that process. 1.7 A listed entity should: Yes Page 70 a) have and disclose a process for periodically evaluating the performance of its senior executives; and b) disclose, in relation to each reporting period, whether a performance evaluation was undertaken in the reporting period in accordance with that process. Principle 2 – Structure the board to add value 2.1 The board of a listed entity should: a) have a nomination committee which: 1) has at least three members, a majority of whom are independent directors; and 2) is chaired by an independent directors, and disclose 3) the charter of the committee; 4) the members of the committee; and 5) as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at this meetings; or b) if it does not have a nomination committee, disclose the fact and the process it employs to address board succession issues and to ensure that the board has the appropriate skills, knowledge, experience, independence and diversity to enable it to discharge its duties and responsibilities effectively. 66 Recommendation Comply Yes/No Reference/ explanation 2.2 A listed entity should have and disclose a board skills matrix setting out the Yes Directors Report mix of skills and diversity that the board currently has or is looking to achieve in its membership. 2.3 A listed entity should disclose: Yes Page 69 a) the names of the directors considered by the board to be independent directors; b) if a director has an interest, position, association or relationship of the type described in Box 2.3 but the board is of the opinion that it does not compromise the independence of the director, the nature of the interest, position, association or relationship in question and an explanation of why the board is of that opinion; and c) the length of service of each director. 2.4 A majority of the board of a listed entity should be independent directors. 2.5 The chair of the board of a listed entity should be an independent directors and, in particular, should not be the same person as the CEO of the entity. 2.6 A listed entity should have a program for inducting new directors and provide appropriate professional development opportunities for directors to develop and maintain the skills and knowledge needed to perform their role as a directors effectively. Principle 3 - Act ethically and responsibly 3.1 A listed entity should: a) have a code of conduct for its directors, senior executives and employees; and b) disclose that code or a summary of it. Principle 4 - Safeguard integrity in corporate reporting 4.1 The board of a listed entity should: a) have an audit committee which: 1) |has at least three members, all of whom are non-executive directors and a majority of whom are independent directors; and 2) is chaired by an independent director, who is not the chair of the board; and disclose 3) the charter of the committee 4) the relevant qualifications and experience of the members of the committee; and 5) in relation to each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or b) if it does not have an audit committee, disclose that fact and the processes it employs that independently verify and safeguard the integrity of its corporate reporting, including the processes for the appointment and removal of external auditor and the rotation of the audit engagement partner. 4.2 The board of a listed entity should, before it approves the entity’s financial statements for a financial period, receive from its CEO and CFO a declaration that, in their opinion, the financial records of the entity have been properly maintained and that the financial statements comply with the appropriate accounting standards and give a true and fair view of the financial position and performance of the entity and that the opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively. Yes Yes Yes Page 69 Page 69 Page 69 Yes Page 72 No Page 71 Yes Page 71 4.3 A listed entity that has an AGM should ensure that its external auditor Yes Page 71 attends its AGM and is available to answer questions from security holders relevant to the audit. Principle 5 - Make timely and balanced disclosure 5.1 A listed entity should: Yes Page 71 a) have a written policy for complying with its continuous disclosure No Page 71 obligations under the Listing Rules; and b) disclose that policy or a summary of it. Principle 6 - Respect the rights of security holders 6.1 A listed entity should provide information about itself and its governance to investors via its website. 6.2 A listed entity should design and implement an investor relations program to facilitate effective two-way communication with investors. 6.3 A listed entity should disclose policies and progress it has in place to facilitate and encourage participation at meetings of security holders. 6.4 A listed entity should give security holders the option to receive communications from, and send communications to, the entity and its security registry electronically. Yes No Yes Yes Page 72 Page 72 Page 72 Page 72 67 PRO MEDICUS ANNUAL REPORT 2016 Comply Yes/No Reference/ explanation No Page 72 Recommendation Principle 7 - Recognise and manage risk 7.1 The board of a listed entity should: a) have a committee or committees to oversee risk, each of which: 1) has at least three members, a majority of whom are independent directors; and 2) is chaired by an independent director; and disclose 3) the charter of the committee 4) the members of the committee; and 5) as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or b) if it does not have a risk committee or committees that satisfy (a) above, disclose that fact and the processes it employs for overseeing the entity’s risk management framework. 7.2 The board or a committee of the board should: a) review the entity’s risk management framework at least annually to satisfy Yes Page 72 itself that it continues to be sound; and b) disclose, in relation to each reporting period, whether such a review has taken place. 7.3 A listed entity should disclose: No Page 72 a) if it has an internal audit function, how the function is structured and what role it performs; or b) if it does not have an internal audit function, that fact and the processes it employs for evaluation and continually improving effectiveness of its risk management and internal control processes. 7.4 A listed entity should disclose whether it has any material exposure to Yes Page 72 economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks. Principle 8 – Remunerate fairly and responsibly 8.1 The board of a listed entity should: a) have a remuneration committee which: 1) has at least three members, a majority of whom are independent directors; and 2) is chaired by an independent director; and disclose 3) the charter of the committee 4) the members of the committee; and 5) as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or if it does not have a remuneration committee, disclose that fact and the processes it employs for setting the level and composition of remuneration for directors and senior executives and ensuring that such remuneration is appropriate and not excessive. 8.2 A listed entity should separately disclose its policies and practices regarding the remuneration of non-executive directors and the remuneration of executive directors and other senior executives. 8.3 A listed entity which has an equity-based remuneration scheme should: a) have a policy on whether participants are permitted to enter into transactions (whether through the use of derivatives or otherwise) which limit the economic risk of participating in the scheme; and b) disclose that policy or a summary of it. No Page 71 Yes No Page 71 Page 71 68 Pro Medicus Limited’s corporate governance practices were in place throughout the year ended 30 June 2016. Structure of the Board The skills, experience and expertise relevant to the position of director held by each director in office at the date of the annual report is included in the Directors’ Report. The composition of the Board was determined in accordance with the following principles and guidelines: • The Board should comprise at least four directors and should maintain a majority of non- executive directors, or at least a 50/50 ratio of non-executives and executive directors; • The Chairperson must be a non-executive director and not occupy the role of CEO; • The Board should comprise directors with an appropriate range of qualifications and expertise; and • The Board shall meet monthly and follow meeting guidelines set down to ensure all directors are made aware of, and have available all necessary information, to participate in an informed discussion of all agenda items. Directors of Pro Medicus Limited are considered to be independent when they are independent of management and free from any business or other relationship that could materially interfere with – or could reasonably be perceived to materially interfere with the exercise of their unfettered and independent judgement. In the context of director independence, “materiality” is considered from both the company and individual director perspective. The determination of materiality requires consideration of both quantitative and qualitative elements. An item is presumed to be quantitatively immaterial if it is equal or less than 5% of the appropriate base amount. It is presumed to be material (unless there is qualitative evidence to the contrary) if it is equal to or greater than 10% of the appropriate base amount. Qualitative factors considered include whether a relationship is strategically important, the competitive landscape, the nature of the relationship and the contractual or other arrangements governing it and other factors which point to the actual ability of the director in question to shape the direction of the company’s loyalty. In accordance with the definition of independence above, and the materiality thresholds set, the following directors of Pro Medicus Limited are considered to be independent: Name P T Kempen Chairman, Position Non-Executive Director, Chairman Audit Committee R Lyle Non-Executive Director A Glenning Non-Executive Director The Board wishes to advise that it continues to maintain responsibility for the actions of the Chief Executive Officer and any tasks delegated to the management by the Board. The appointment of appropriately skilled Non- Executive Directors, together with a broadly unchanged business base has meant one new director nomination has occurred this year. Executive Directors’ Appointment Letters have not been revised in the prescribed format as the board considered this unnecessary given the small number of fairly recently appointed current directors who understand their roles and responsibilities. The board has undertaken that the recommended format should be used for any future director appointments. Non-Executive Directors and senior executives have a written employment agreement with the Company setting out the terms of their appointment. Mr. Sam Hupert and Mr. Anthony Hall were directors in Pro Medicus Pty Ltd since incorporation in 1983. Mr. Peter Kempen was appointed in March 2008, Mr Roderick Lyle was appointed in November 2010 and Mr Anthony Glenning was appointed in May 2016. Company Secretary The Company Secretary is accountable to the Board on all matters to do with the proper functioning of the Board. The Company Secretary, who is also the Chief Financial Officer, attends all Board meetings and ensures that the business at Board meetings is accurately captured in the minutes of these meetings. Board Functions As the Board acts on behalf of and is accountable to the shareholders, it seeks to identify the expectations of the shareholders, as well as other regulatory and ethical expectations and obligations. In addition, the Board is responsible for identifying areas of significant business risk and ensuring arrangements are in place to adequately manage those risks. The Board seeks to discharge these responsibilities in a number of ways. The Board has delegated responsibility for the operation and administration of the group to the Chief Executive Officer and the executive team (as detailed in Note 22). The Board ensures that this team is appropriately qualified and experienced to discharge their responsibilities and has in place procedures to assess the performance of the Chief Executive and the executive team. 69 PRO MEDICUS ANNUAL REPORT 2016 The Board is responsible for ensuring that management’s objectives and activities are aligned with the expectations and risks identified by the Board. The Board has a number of mechanisms in place to ensure this is achieved. These mechanisms include the following: • approval of strategic plans, which encompass the entity’s vision, mission and strategy statements, designed to meet stakeholders’ needs and manage business risk; • involvement in developing the strategic plan (a dynamic document) and approving initiatives and strategies designed to ensure the continued growth and success of the entity; • overseeing implementation of operating plans and budgets by management and monitoring of progress against budget - this includes the establishment and monitoring of key performance indicators (both financial and non- financial) for all significant business processes; and • utilising appropriately skilled professionals to provide advice on relevant discussion topics and procedures to allow Directors, in the furtherance of their duties, to seek independent professional advice at the Company’s expense. Performance The performance of the board and key executives is reviewed regularly against both measurable and qualitative indicators. During the reporting period the board conducted performance evaluations that involved an assessment of each board member’s and key executive’s performance against specific and measurable qualitative and quantitative performance criteria. The performance criteria against which directors and executives are assessed are aligned with the financial and non-financial objectives of Pro Medicus Limited. In order to ensure that the Board continues to discharge its responsibilities in an appropriate manner, the Chairman annually reviews the performance of all Directors who will be asked to retire from the board if not performing in a satisfactory manner. Diversity The Group recognises the value contributed to the organisation by employing people with varying skills, cultural backgrounds, ethnicity and experience. Pro Medicus believes its diverse workforce is the key to its continued growth, improved productivity and performance. We actively value and embrace the diversity of our employees and are committed to creating an inclusive workplace where everyone is treated equally and fairly, and where discrimination, harassment and inequity are not tolerated. While Pro Medicus is committed to fostering diversity at all levels, gender diversity has been and continues to be a priority for the Group. The Group has established a diversity policy outlining the board’s measureable objectives for achieving diversity. This is assessed annually to measure the progress towards achieving those objectives. The table below outlines the diversity objectives established by the board, the steps taken during the year to achieve these objectives and the outcomes. Objectives Steps taken/Outcome Increase the number of women in the workforce, including senior management positions and at board level. • There were no key senior female appointments made during the year as there were no key senior appointments made during the year. • Pro Medicus did not appoint any females in managerial roles as there were no managerial appointments made during the year • As at 30 June 2016, women represented 22% in the Group’s workforce (2015:20%), 20% in key executive positions (2015:20%) and 0% at board level (2015:0%) • Women represented 33% of new hires during the year (2015:20%) For the upcoming financial year, the Group targets to increase female representation in the Group’s workforce to 25-30% Promote an inclusive culture that treats the workforce with fairness and respect. • Pro Medicus has set a zero tolerance policy against discrimination of employees at all levels. The company also provides avenues for employees to voice their concerns or report any discrimination. • No cases of discrimination were reported during the year (2015: nil). Provide career development opportunities for every employee, irrespective of any cultural, gender or other differences. • Whilst Pro Medicus place focus on gender diversity, career development opportunities are equal for all employees. • During the year, representation at training and development programs was based on performance of the employees. The achievement of the measurable objectives in the current financial year was taken into consideration in assessing bonuses for employees. The Group will continue to review and update the measureable objectives to promote diversity for the upcoming year. Committees Due to the small number of Directors, the Board decided it was more appropriate to handle nomination and remuneration issues at full Board level. No Committees for these functions have been established at this time. In addition the full Board handles any matters as and when they arise concerning environmental issues, occupational health and safety, finance and treasury. In order to maintain good corporate governance the Non-Executive Directors assume responsibility for determining and reviewing compensation arrangements for the Executive Directors of the Group. The Executive Directors in turn are responsible for determining and reviewing the compensation arrangements for the Non-Executive Directors. The CEO, in conjunction with the full Board reviews the terms of employment for all executives. The Board has delegated the responsibility of executive remuneration to the management who will assess the appropriateness of the nature and amount of remuneration of such executives on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality board and executive team. The Company does not have a policy in regards to whether participants are permitted to enter into transactions (whether through derivatives or otherwise) which limit the economic risk of participating in the scheme, however the Board are in the process of evaluating a policy for such issues. Strategic planning has been an important objective of the Board. Meetings are scheduled so that all Board members can attend and are conducted in an informal fashion to allow non-executive directors to gain enhanced industry, customer, product and research knowledge. The members of the audit committee are: P T Kempen Chairman S A Hupert A B Hall R Lyle A Glenning The audit committee is also responsible for nomination of the external auditor and reviewing the adequacy of the scope and quality of the annual statutory audit and half yearly audit review. Due to the small number of Directors, the Committee does not meet the requirements of Recommendation 4.1 as all members of the Board serve on the Audit Committee, whilst the Board Chairman is also the Audit Committee Chairman as his area of expertise is in Accounting and Finance. The number of meetings held and individual attendance of Committee members at those meetings are disclosed in the Directors Report. Prior to approval of the Company’s annual financial statements, the Board obtains a declaration from the Chief Executive Officer and Chief Financial Officer that, in their opinion, the financial records of the entity have been properly maintained and that the financial statements comply with the appropriate accounting standards and give a true and fair view of the financial position and performance of the entity and that the opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively. A representative of the external auditors Ernst & Young will continue to attend the Annual General Meeting and is available to answer questions from security holders relevant to the audit. Continuous Disclosure Policy The board has developed a written policy to ensure compliance with the ASX Listing Rules on continuous disclosure and has adopted measures to ensure the market and shareholders are fully informed. The measures in place require all potential market sensitive matters are discussed with the Chief Executive Officer who in conjunction with the Chairman and other relevant directors decide whether to make an appropriate announcement to the market. Audit Committee The Board has established an audit committee, which operates under a charter approved by the Board. Only nominated authorised persons have the authority to release these communications to the ASX. This policy is displayed on the company website. It is the Board’s responsibility to ensure that an effective internal control framework exists within the entity. This includes internal controls to deal with both the effectiveness and efficiency of significant business processes. This also includes the safeguarding of assets, the maintenance of proper accounting records, and reliability of financial information as well as non-financial considerations such as the benchmarking of operational key performance indicators. 70 71 PRO MEDICUS ANNUAL REPORT 2016 CORPORATE INFORMATION ABN 25 006 194 752 Directors The names of the Directors of the Company in office during the year and until the date of this report are: Peter Terence Kempen Chairman/Non-Executive Director/Chairman Audit Committee Dr Sam Aaron Hupert Chief Executive Officer/ Managing Director Anthony Barry Hall Technology Director Roderick Lyle Non-Executive Director Anthony Glenning Non-Executive Director Company Secretary Clayton James Hatch Registered Office 450 Swan Street Richmond, VIC, 3121 (03) 9429 8800 Internet Address www.promedicus.com.au www.promedicus.com www.visageimaging.com Solicitors Sci-Law Strategies Morrison Foerster Bankers Westpac Banking Corporation Auditors Ernst & Young Share Registry Link Market Services Limited Tower 4 727 Collins Street Docklands VIC 3008 Australia Mailing address: Link Market Services Limited Locked Bag A14 Sydney South NSW 1235 Australia T: +612 8280 7111 Toll free: 1300 554 474 F: +612 9287 0303 F: (proxy forms only) +612 9287 0309 E: registrars@linkmarketservices. com.au www.linkmarketservices.com.au You can do so much more online Shareholder Communication The Board of Directors aims to ensure that the shareholders, on behalf of whom they act, are informed of all information necessary to assess the performance of the Directors. Information is communicated to the shareholders through: • the annual report which is distributed to all shareholders registered to receive copies; • through the release of information to the market via the ASX • the annual general meeting and other meetings so called to obtain approval for Board action as appropriate; • an up to date website - www.promedicus.com.au; • email contact with registered users; and • special written communications to shareholders distributed with the dividend notifications. The company ensures that any material given to a particular group is available to all interested parties via the company website. This includes any material presented at the Annual General Meeting. Shareholders are encouraged to receive communications electronically as requested and can elect to do so through the company’s share registry. A copy of the Corporate Governance Statement is also available of the Company’s website – www.promedicus.com.au. The Company has not yet designed a specific investor relations program to facilitate effective two-way communication with shareholders. Trading policy Under the group’s security trading policy, an executive, director, or any employee of the group, must not trade in any securities of the parent company at any time when they are in possession of unpublished, price-sensitive information in relation to those securities. Executives, directors and employees of the group may only trade in the securities of the parent company during an open period. Only in exceptional circumstances will approval be forthcoming outside of an open period which is 30 days after: • One day following the announcement of the half- yearly and full year results as the case may be. • One day following the holding of the annual general meeting. • One day after any other form of earnings forecast update is given to the market. As required by the ASX listing rules, the Group notifies the ASX of any transaction conducted by directors in the securities of the parent company. Code of Conduct The board has developed a “Code of Conduct” consistent with the recommendations and details are disclosed on the company website. Risk Management Policies The Company takes a proactive approach to risk management. The Board is responsible for ensuring that risks are identified on a timely basis and that the Group’s objectives and activities are aligned with the risks identified by the Board. The Company believes that it is crucial for all Board members to participate in this process; as such the Board has not established separate committees for areas such as risk management, environmental issues, occupational health and safety or treasury. Whilst the Company has not established an internal audit function, it is committed to the identification; monitoring and management of risks associated with its business activities and has included in its management and reporting systems a number of risk management controls, such as: • Annual budgeting and monthly reporting systems for all operations which enable the monitoring of progress against performance targets and to evaluate trends • Guidelines and limits on capital expenditure and purchasing authority matrix • Executive approvals for staffing requirements • Detailed monthly management reports including cash flow reports, and to identify any foreign currency risks associated with contracts written in and cash being held in foreign currencies The Company up until late in the financial period was not exposed to any interest rate or significant currency sensitive loans or debts. Given the increase in overseas operations there is now an increased currency risk as a consequence of contracts written in and cash being held in foreign currencies. This change in risk profile has been noted by the board and action is being taken to manage this risk. The Board oversees appropriate backup procedures for important company data. Detailed annual review of insurance policies in force to ensure cover is at appropriate levels to safeguard key executives, Company assets and operations. The Board regularly considers succession planning to ensure staff of appropriate skill and experience are available to the Company. A review of the Company risk management policy was not undertaken during the year. The Board does not believe the Company has any material exposure to economic, environmental and social sustainability risks at the present time. 72 73 PRO MEDICUS ANNUAL REPORT 2016 NOTES DID YOU KNOW THAT YOU CAN ACCESS – AND EVEN UPDATE – INFORMATION ABOUT YOUR HOLDINGS IN PRO MEDICUS LIMITED VIA THE INTERNET? Visit Link Market Services’ website www.linkmarketservices. com.au and access a wide variety of holding information, make some changes online or download forms. YOU CAN: • Check your current and previous holding balances. • Choose your preferred annual report delivery option. • Update your address details. • Update your bank details. • Lodge, or confirm lodgement of, your Tax File Number (TFN), Australian Business Number (ABN) or exemption. • Check transaction and dividend history. • Enter your email address. • Check the share prices and graphs. • Download a variety of instruction forms. • Subscribe to email announcements. You can access this information via a security login using your Security holder Reference Number (SRN) or Holder Identification Number (HIN) as well as your surname (or company name) and postcode (must be the postcode recorded on your holding record). DON’T MISS OUT ON YOUR DIVIDENDS Dividend cheques that are not banked are required to be handed over to the State Trustee under the Unclaimed Monies Act. You are reminded to bank cheques immediately. BETTER STILL, WHY NOT HAVE US DO YOUR BANKING FOR YOU. Wouldn’t you prefer to have immediate access to your dividend payment? Your dividend payments can be credited directly into any nominated bank, building society or credit union account in Australia as cleared funds on dividend payment date – and we will still mail [(or email if you prefer)] you a dividend advice confirming your payment details. Not only can we do your banking for you, but payment by direct credit eliminates the risk of cheque fraud. TOP 5 TIPS FOR PRO MEDICUS LIMITED INVESTORS VISITING LINK’S (OUR REGISTRY) WEBSITE 1) Bookmark www.linkmar ketservices.com.au – to bookmark, click on ‘Favourites’ on the menu bar at the top of your browser then select ‘Add to Favourites’. 2) Create a portfolio for your holding or holdings and you don’t have to remember your SRN or HIN every time you visit. 3) Lodge your email via the ‘Communications Options’ and benefit from the online communications options Pro Medicus Limited offers its investors. 4) Check out the ‘FAQs’ page (accessible via the orange menu bar) for answers to frequently asked questions. 5) Use the ‘Client List’ page (accessible via the orange menu bar) to link to Pro Medicus Limited website and the website of the other Link clients in which you invest. CONTACT INFORMATION You can also contact the Pro Medicus Limited share registry by calling +61 2 8280 7111 or Toll Free 1300 554 474. 74 75 PRO MEDICUS ANNUAL REPORT 2016 NOTES 76 1. Highlights 2014/20153. CEO and Chairman’s Letter5. Financial Summary7. Business Background9. Global Leadership Team11. The Year in Review13. Into the Future15. Financial Report16. Director’s Report62. Director’s Declaration63. Independent Audit Report65. ASX Additional Information66. Corporate Governance 73. Corporate Informationcontentsvisit us at: www.promedicus.com.auwww.promedicus.comwww.visageimaging.comDesigned and Produced by Kajetan Design Group (Melbourne) Annual Report 2016Pro Medicus Limited • 450 Swan Street Richmond Victoria 3121 Australiapromedicus.com.au • promedicus.com • visageimaging.com