Pro Medicus Annual Report 2017

Plain-text annual report

Annual Report 2017 P P R R O O M M E E D D I I C C U U S S A A N N N N U U A A L L R R E E P P O O R R T T 2 2 0 0 1 1 7 7 450 Swan Street Richmond Victoria 3121 Australia promedicus.com.au • promedicus.com • visageimaging.com HIGHLIGHTS FINANCIAL SUMMARY  NPAT $9.32 million for continuing operations up from $6.37 million  Underlying after-tax proﬁ t up 53%  Revenue of $31.62 million – increase of 15%  Margins increase to 45% – up 29%  Cash reserves of $22.78 million  Strong balance sheet – debt free  Dividends of 4.0c per share with ﬁ nal fully franked BUSINESS HIGHLIGHTS  Increased transaction revenue from US contracts  Implementations on or ahead of schedule  Future contracted revenue of $110 million over next 5 years  Rapidly expanding foot print in North American market  Visage 7 Open Archive released visit us at: www.promedicus.com.au  Australian business expands with Primary Healthcare contract win www.promedicus.com www.visageimaging.com PRO MEDICUS ANNUAL REPORT 2017 1 ) e n r u o b e M l j ( p u o r G n g i s e D n a t e a K y b d e c u d o r P d n a d e n g i s e D contents 1. Highlights 2016/2017 11. The Year in Review 65. Independent Audit Report 3. CEO and Chairman’s Letter 13. Into the Future 72. ASX Additional Information 5. Financial Summary 15. Financial Report 73. Corporate Governance 7. Business Background 16. Director’s Report 81. Corporate Information 9. Global Leadership Team 64. Director’s Declaration Dr Sam Hupert Peter Kempen Dear Shareholders, This has been a record year for the company. We continued to expand our footprint in the North American market and made signiﬁ cant inroads in Australia with the announcement of the Healthcare Imaging Services (Primary Healthcare) contract in March. Our ongoing investments in Research and Development for both our Visage 7 and Visage RIS products continue to be rewarded. We were pleased to report a net proﬁ t after tax of $9.32 million from our continuing operations in 2017, a signiﬁ cant improvement on the previous years reported proﬁ t of $6.37 million. Underlying proﬁ t (excluding currency ﬂ uctuations) increased by 53%. Revenue rose to $31.62 million in 2017, an increase of 15 percent, with the growth coming from both our North American and Australian businesses. EBIT margins continued to increase, a trend the company sees continuing in FY18. The past year has also seen the company successfully complete a record number of large- scale implementations in North America. Pleasingly, we were able to complete these implementations on, or ahead of, schedule and in a number of cases in a fraction of the planned project time. This has resulted in our clients realising signiﬁ cant beneﬁ ts in key areas such as IT infrastructure consolidation, radiologist productivity, increased clinical accuracy and scalability allowing them to expand their operations. This not only reinforces our belief that Visage 7 is truly world leading technology but also that is able to deliver unparalleled value to our clients. The trend towards purchasing our technology on a transaction or “pay per view” basis continues, with the vast majority of North American revenue now coming from this model. The 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 bought on to the system. Forward contracted revenue now exceeds $110M AUD over the next ﬁ ve years. The trends we have previously identiﬁ ed as driving the industry are continuing unabated. Exponentially growing image sizes and the requirement to access the electronic medical record (EMR), of which the medical images are a signiﬁ cant part, are fueling industry adoption of new systems. Visage 7 with its fast, highly modular and scalable technology and the recently released Visage 7 Open Archive are 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. In March of this year the company signed a landmark deal that will see Visage RIS (Practice Management) implemented throughout Healthcare Imaging Services (Primary Healthcare) 141 clinics. This deal has repositioned the company as the undisputed leader in RIS in Australia and will help form the base for future sales of this product locally. 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 providing the base for future growth. Pro Medicus continued to generate positive cash ﬂ ow from operations in 2017, and ﬁ nished the year with cash in hand of $22.78 million. This was up from $17.11 million a year earlier, and is after the payment of dividends during the year of $3.08 million. The company remains debt free and we believe we have suffi cient reserves to internally fund the organic growth of the business. Accordingly, your board was pleased to declare dividends for the year of 4.0 cents per share, an increase of 33%, with the ﬁ nal dividend of 2.5 cents being fully franked. 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 2017 positioning us strongly for the future. Yours faithfully Peter Kempen CHAIRMAN Sam Hupert CHIEF EXECUTIVE OFFICER PRO MEDICUS ANNUAL REPORT 2017 3 CEO & CHAIRMAN letter 2 YEAR ENDED 30 JUNE 2017 ALL FIGURES IN $A THOUSANDS UNLESS OTHERWISE STATED 2017 $’000 31,597 +14.8% 31,619 +14.7% 13,390 +41.8% 9,321 +46.4% 2016 $’000 27,521 +56.9% 27,557 +56.9% 9,441 +87.9% 6,368 +97.9% 47,206 39,404 Revenues from Continuing Operations Total Revenues Operating Proﬁ t Before Interest and Income Tax Net Proﬁ t After Tax Total Assets 30 June Shareholders’ Funds 30 June 34,834 27,385 Net Tangible Assets per Share at 30 June (cents) Earnings per Share (cents) 23.0 9.1 +44.4% 17.0 6.3 +97.9% FINANCIAL summary PRO MEDICUS ANNUAL REPORT 2017 5 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 off erings available in the radiology market today. VISAGE PRODUCTS The Visage product line comprises solutions for RIS (Radiology Information Systems) /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 PRACTISE MANAGEMENT Pro Medicus off ers 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 conﬁ gurable workﬂ ow and rules engines to meet a broad range of customer’s needs. Services include project management, implementation, 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 Visage 7 product line 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 off ering. 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 off ering which combines the Visage 7 Enterprise Viewer with the ability to store and archive radiological images using the Visage 7 Open Archive, creating one of the world’s ﬁ rst 3D PACS. The scalability and highly modular nature of the Visage 7 product off ering 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) certiﬁ ed for all imaging modalities apart from mammography which requires higher screen resolution than current iOS devices can support. This enables clinicians to interpret images no matter how large 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 off ering, 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 ﬁ ling. Over 26,000 Australian doctors are registered users of promedicus.net. VISAGE 7 OPEN ARCHIVE The Company introduced Visage 7 Open Archive to the North American market during the year with the off ering built on the same ultrafast, highly scalable enterprise imaging platform used in Visage 7. Coupled with a modular design based on open standards, Visage 7 Open Archive ensures maximum interoperability even in the most complex environments. The introduction of Visage 7 Open Archive enables the Company to off er the choice of deconstructed or single vendor solutions. PRO MEDICUS ANNUAL REPORT 2017 7 BUSINESS background VISAGE IMAGING INC - SAN DIEGO VISAGE GMBH - BERLIN 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 2017 ﬁ nancial year has been the most successful in the company’s history conﬁ rming 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 Offi cer Malte Westerhoff is the General Manager for Visage Imaging GmbH, the European branch of Visage Imaging. He is also the company Chief Technical Offi cer (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 scientiﬁ c 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. MELBOURNE 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, ﬁ rst AMICAS, and then Dynamic Imaging. Both ﬁ rms 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 ﬁ nance 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. 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. PRO MEDICUS ANNUAL REPORT 2017 9 GLOBAL LEADERSHIP team 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 28.6% as a result of new sales of both the Visage PACS and Visage RIS products with many sales being for the combined product off ering. The company continued to transition its Australian customers to the new Visage RIS platform. The sale of Visage RIS to Healthcare Imaging Services (Primary Healthcare) during the year helped solidify the company’s leading position in the Australian RIS market. Promedicus.net, the company’s e-health off ering, 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 27.6% compared to the previous year. This was attributable to a signiﬁ cant growth in transaction based revenue as a number of previously won contracts came on stream. The year also saw the company’s biggest implementation undertaking, with previously announced deals in North America being installed during the period. The fast track implementation methodology used by the company provides customers with substantial savings in both IT and infrastructure whilst also delivering a strategic advantage to the company due to the speed of the implementations compared to industry norms. EUROPE The Group’s employees in its Berlin offi ce 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 decreased by 58.2% from last year, in line with expectations, due to a large capital sale to a German government hospital in the prior year not being repeated in the current year. 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 offi ce 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. THE YEAR in review PRO MEDICUS ANNUAL REPORT 2017 11 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 The Board and Management believe the Company is extremely well positioned for growth after making strong progress in the 2017 ﬁ nancial year. 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 Australia as well as consolidate its position in Europe. Our growing North American customer base comprises some of the largest and most prestigious health systems in the U.S., including the #1 ranked hospital in the U.S. for 2017/2018 (U.S. News & World Report Honour Roll). 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. HIGHLY DIFFERENTIATED TECHNOLOGY The Company continues to maintain its signiﬁ cant ongoing investment in R&D for its ﬂ agship Visage 7 suite of products, which includes the Visage 7 Viewer and Visage 7 Open Archive, which we believe will continue to diff erentiate our off erings in the Deconstructed PACS®, Enterprise viewer, 3D PACS and advanced visualisation space. The Visage RIS platform is the culmination of many years of intense R&D eff ort and positions Pro Medicus at the forefront of RIS/Practice Management technology. It is diff erentiated by its scalability, powerful search capability and ability to allow clients to conﬁ gure their own business- speciﬁ c workﬂ ow 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 signiﬁ cant industry trends that combined, will continue to drive demand for Visage 7 products. Adoption of Electronic Medical Records (EMR) The US Government as part of its Meaningful Use program has mandated US health institutions to implement an enterprise wide Electronic Medical Record (EMR). Under this new model, all patient clinical data including images is entered into, and is accessed via, the EMR. This has resulted in a heightened focus on enterprise imaging as medical images both DICOM (radiology and cardiology) as well as non DICOM (photos and videos) now comprise a large and rapidly growing part of the medical record. Visage 7, with its ability to display all of these image types within the one product is well positioned to beneﬁ t from this rapidly evolving trend. Explosion in image data size continues With developments in imaging technology it is now not uncommon for a single examination image ﬁ le 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 ﬁ les as large as 6 Gigabytes per examination. Traditional PACS/Digital Imaging technology requires these ﬁ les to be transferred across the network to the radiologist desktop in order to be visualised. This has created very signiﬁ cant 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 modular or “best in breed” approach whereby multiple components from diff erent 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 The vast majority of the company’s contracts are now 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 beneﬁ t of creating signiﬁ cant ongoing revenue streams for the company. ENTERPRISE IMAGING The company has made signiﬁ cant investments in ongoing R&D in order to develop products including Visage 7 Enterprise. 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 additional, complementary products and services. An increasing proportion of the company’s R&D eff ort is focused on developing such as complementary services and products which we believe will further increase our value proposition for our large enterprise clients. PRO MEDICUS ANNUAL REPORT 2017 13 ANNUAL FINANCIAL REPORT 30 JUNE 2017 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 Note 1 Corporate Information 2 Summary of Signiﬁ cant Accounting Policies 3 Signiﬁ cant Accounting Judgements, Estimates and Assumptions 4 Operating Segments 5 Income and Expenses 6 Income Tax 7 Earnings per Share 8 Dividends Paid and Proposed 9 Cash and Cash Equivalents 10 Trade and Other Receivables (Current) 11 Inventory 12 Plant and Equipment 13 Intangible Assets 14 Trade and Other Payables 15 Provisions 16 Contributed Equity and Reserves 17 Share based Payments 18 Commitments 19 Events after the Balance Sheet Date 20 Auditors’ Remuneration 21 Key Management Personnel 22 Related Party Disclosure 23 Financial Risk Management Objectives and Policies 24 Contingencies 25 Parent Entity Information 26 Other Accounting Policies Directors’ Declaration Independent Auditor’s Report ASX Additional Information Corporate Governance Statement Corporate Information 16 28 29 30 31 32 33 33 33 34 35 37 38 40 40 41 42 42 42 44 47 47 48 49 53 53 53 54 54 55 58 58 59 64 65 72 73 81 PRO MEDICUS ANNUAL REPORT 2017 15 FINANCIAL report DIRECTORS’ report Your Directors submit their report for the year ended 30 June 2017 in relation to Pro Medicus Limited (the “Company”) and its subsidiaries (the “Group”). The names and details of the Company’s Directors in offi ce during the ﬁ nancial year and until the date of this report are as follows: 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 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 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, Chairman of Ivanhoe Grammar School 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. DR SAM AARON HUPERT M.B.B.S. Managing Director and Chief Executive Offi cer 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 signiﬁ cant 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 JAMES 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 Starﬁ sh Ventures and sits on the board of a number of private Starﬁ sh portfolio companies. Anthony is the founder and previously the CEO of Tonic Systems and a 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. RODERICK LEWIS JOHN 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 offi ce of Clayton Utz and is a former Managing Partner of that offi ce. 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 signiﬁ cant 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. Anthony hold a Bachelor and Master’s degree in Science from La Trobe University. 16 CLAYTON JAMES HATCH CPA Company Secetary Clayton was appointed Company Secretary on 1 July 2009. Clayton has strong experience in ﬁ nancial 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 Offi cer which he assumed on 1 July 2012. 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 2016 shown as recommended in the 2016 report: Normal dividend plan OPERATING AND FINANCIAL REVIEW 30,068,500 30,107,660 678,082 340,000 4,000 NIL NIL NIL NIL NIL Cents 9.10 8.95 CENTS $’000 2.5 1.5 1.5 2,567 1,540 1,535 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 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. PRO MEDICUS ANNUAL REPORT 2017 17 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 28.6% above last year as a result of new sales of both the Visage PACS and Visage RIS products with a number of 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 27.6% compared to the previous year. This was 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 decreased by 58.2% from last year, due to a large capital sale to a German government hospital in the prior year. Financials Reported proﬁt after tax for the period was $9.32m an increase of $2.95m (46.4%) from the previous year. Full year revenue of the Group increased from $27.58m to $31.62m, an increase of 14.7%. The key drivers of the proﬁt increase was the signiﬁcant increase in the performance of the North American and Australian operations. As the Group’s costs are relatively ﬁxed, an increase in sales has a signiﬁcant 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 function 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 $14.83m, with receipts from customers totalling $31.87m compared with payments of $12.57m to suppliers and employees. During the year the Company paid out a total of $3.08m in dividends, the net result being total cash assets of $22.78m; an increase of 33.1% from last year. 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 27.2% from $27.39m to $34.83m. 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 2.5 cents per share has been declared post 1 July 2017. Please refer to Note 8 of the ﬁnancial statements. LIKELY DEVELOPMENTS AND EXPECTED RESULTS The Directors anticipate that the 2018 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 previously won transaction based contracts which are scheduled to come on stream in the 2018 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. • Increased revenue from 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 2018 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 25,000 un- issued ordinary shares under options. Refer to Note 17 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, 400,000 share options were exercised by current employees and no share options expired. A further 300,000 share options were exercised by Directors or key management personnel in the current year to acquire fully paid ordinary shares in Pro Medicus Limited. 18 PRO MEDICUS ANNUAL REPORT 2017 19 DIRECTORS’ REPORT CONT. PERFORMANCE RIGHTS Un-issued Shares As at the date of this report, there were 1,475,590 un-issued ordinary shares under performance rights. Refer to Note 17 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, 73,375 performance rights were exercised by current employee and no performance rights expired. A further 153,000 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 2017 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. Remuneration Philosophy The performance of the Group depends upon the quality of its Directors and Executives. To prosper, the Group must attract, motivate and retain highly skilled Directors and Executives. To this end, the Group provides competitive rewards to attract high calibre Executives. 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: 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 2017 is detailed in Table 1 of this report. • align the interests of Executives with those of shareholders; • ensure total remuneration is competitive by market standards. Structure Employment contracts have been entered into with all Executives of the Group. Details of these contracts are provided on page 23. 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. 20 PRO MEDICUS ANNUAL REPORT 2017 21 DIRECTORS’ REPORT CONT. REMUNERATION REPORT (audited) (continued) Variable Remuneration – Long Term Incentive (LTI) 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 17 of the ﬁnancial statements. The table below outlines the proportion of LTI that were granted since the plan was established. 75% EBIT targets met 2017 125% 25% Individual targets met 60–100%* * subject to Board approval 2016 85% 88% 2015 25% 92% 2014 90% 87% 2013 0% 96% A new long term incentive plan was established during 2016–17 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 – Earnings per share (EPS) growth (60%) which is set on an annualised basis by the Board and Total shareholder returns (TSR) growth (40%). The Company’s TSR growth performance hurdle is measured relative to the ASX300 Index and assessed by the Board at the end of the performance period in accordance with the terms of the plan. These measures have been selected and set to align to Company performance and shareholder value. The fair value of the equity-settled performance rights is estimated using Black Sholes and Monte Carlo Simulation Models 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 17 of the ﬁnancial statements. Variable Remuneration – 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 2017 For the 2017 ﬁnancial year, the total amount of STI cash bonus either paid or accrued at year end was $884,690. The maximum STI cash bonus amount payable was $1,043,623. Key Performance Indicators Actual STI payments granted to key staff depended on the extent to which speciﬁc targets set at the time of employment were met. The targets consist of a number of Key Performance Indicators (KPIs) covering both ﬁnancial (Sales Targets) and non-ﬁnancial measures of performance, including client satisfaction, patent ﬁlings and employee satisfaction. Shareholder Returns The Directors are conﬁdent that the holdings of reserve cash is sufficient to underpin the development and expansion needs of the Company as the business looks to increase its penetration of existing markets. The return on net assets and equity are shown in the table below. Basic earnings per share – reported (cents) Return on assets (%) Return on equity (%) Dividend payout ratio (%) – normal dividend plan Dividend payout ratio (%) – total dividend Available franking credits ($’000) 2017 9.1 28.6 26.8 44.0 44.0 531 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 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. 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 2017 Short-Term Post Employment Long Term Share-Based Payment Total Performance Related (%) Total 30 June 2017 ($) Salary & Fees Cash Bonus Non Monetary beneﬁts Super- annuation Long Service Leave Performance Rights Directors P T Kempen S A Hupert A B Hall R Lyle A Glenning Executives D Tauber 63,806 465,000 340,000 45,662 91,324 321,871 — — — — — — M Westerhoff 417,432 108,390 16,474 B Levin 303,004 66,314 S Lambright 234,139 709,986 — — 1,194 35,000 — — — — — 35,000 35,000 4,338 8,676 13,129 2,532 — — — 7,610 5,708 — — — — — — — 100,000 507,610 380,708 50,000 100,000 — — — — — 5,365 60,136 400,501 — — — 123,427 668,255 83,275 452,593 55,483 999,608 15.0% 34.7% 33.1% 76.6% 2,282,238 884,690 17,668 133,675 18,683 322,321 3,659,275 22 PRO MEDICUS ANNUAL REPORT 2017 23 REMUNERATION REPORT (audited) (continued) Compensation options granted, vested and exercised during the year as part of remuneration During the reporting period, 77,538 rights with a fair value of $139,956 were granted as performance rights to Malte Westerhoff with a grant date of 19 October 2016. The performance rights have a 4 year vesting period from grant date and are automatically exercised upon achievement of the vesting conditions. During the reporting period, 26,800 rights with a fair value of $48,374 were granted as performance rights to Danny Tauber with a grant date of 19 October 2016. The performance rights have a 4 year vesting period from grant date and are automatically exercised upon achievement of the vesting conditions. During the reporting period, 40,000 rights with a fair value of $195,200 ($4.88 per performance right) were granted as performance rights to Brad Levin with a grant date of 19 October 2016. The performance rights have a 4 year vesting period from grant date and are automatically exercised upon achievement of the vesting conditions. During the reporting period, an additional 50,000 rights with a fair value of $44,500 ($0.89 per performance right) were granted as performance rights to Sean Lambright in relation to STI commission due for the 2014–15 ﬁnancial year with a grant date 25 August 2015. The performance rights have a 12 month vesting period from grant date and are automatically exercised upon achievement of the vesting conditions. Table 2: Remuneration of key management personnel for the year ended 30 June 2016 Short-Term Post Employment Long Term Share-Based Payment Total Total Performance Related % 30 June 2016 ($) 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 During the reporting period, 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 achievement of the vesting conditions. During the reporting period, 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 achievement of the vesting conditions. During the reporting period, 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 achievement of the vesting conditions. During the reporting period, 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 achievement of the vesting conditions. 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 achievement of the vesting conditions. Table 3: Option holdings of Key Management Personnel Balance at beginning of year 1 July 2016 30 June 2017 Number Directors P T Kempen 100,000 S A Hupert A B Hall R. Lyle A. Glenning Executives D Tauber M Westerhoff B Levin S Lambright — — 200,000 — 350,000 — — — Total 650,000 Granted as Remuneration Options Exercised Balance at end of year 30 June 2017 Not vested Vested/ Exercisable Total — — — — — — — — — — 100,000 — — 200,000 — 350,000 — — — 650,000 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 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 2017 30 June 2017 1 July 2016 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 578,082 30,107,660 30,068,500 140,000 — 129,000 32,700 — 150,000 — — — — — 100,000* — — 200,000** — — — — — 4,000*** 38,750 54,250 10,000 50,000 350,000**** — — — (111,338)~ (27,125)~~ — — 678,082 30,107,660 30,068,500 340,000 4,000 406,412 59,825 10,000 200,000 Total 61,205,942 153,000 650,000 (134,463) 61,874,479 * ** 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 $388,000 ($3.88 per share option). Roderick Lyle exercised 200,000 share options throughout the year at $0.55 per share option. The intrinsic value of the share options at exercise date was $1,135,200 ($5.68 per share option). *** Anthony Glenning purchased 4,000 shares throughout the year at the prevailing market share price. **** Danny Tauber 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 $1,925,000 ($5.50 per share option). Danny Tauber sold 111,338 shares throughout the year at the prevailing market share price. ~ ~~ Malte Westerhoff sold 27,125 shares throughout the year at the prevailing market share price. 24 PRO MEDICUS ANNUAL REPORT 2017 25 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 $103,736. Signed in accordance with a resolution of the Directors. P T Kempen Director Melbourne, 18 August 2017 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 2017 (Number) 1 July 2016 30 June 2017 Not vested Vested/ Exercisable Total Directors P T Kempen S A Hupert A B Hall R Lyle A Glenning Executives D Tauber — — — — — — — — — — — — — — — — — — — — — — — — — 225,500 26,800 (38,750) M Westerhoff B Levin 395,751 131,656 77,538 (54,250) 40,000 (10,000) S Lambright 72,188 50,000 (50,000) 213,550 419,039 161,656 72,188 213,550 419,039 161,656 72,188 Total 825,095 194,338 (153,000) 866,433 866,433 Loans to Key Management Personnel No loans are made to Key Management Personnel or staff. — — — — — — — — — — — — — — — 213,550 419,039 161,656 72,188 866,433 Other transactions and balances with Key Management Personnel Purchases During the year lease payments of $169,476 (2016: $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 9 8 9 2 2 2 2 2 2 9 9 9 9 9 2 2 2 2 2 Committee membership As at 30 June 2017, the company had an Audit Committee comprising the 3 Non-Executive Directors and 2 Executive Directors. 26 PRO MEDICUS ANNUAL REPORT 2017 27 AUDITOR’S INDEPENDENCE DECLARATION To the Directors of Pro Medicus Limited CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Ernst & Young 8 Exhibition Street Melbourne VIC 3000 Australia GPO Box 67 Melbourne VIC 3001 Tel: +61 3 9288 8000 Fax: +61 3 8650 7777 ey.com/au Auditor’s Independence Declaration to the Directors of Pro Medicus Limited As lead auditor for the audit of Pro Medicus Limited for the financial year ended 30 June 2017, I declare to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Pro Medicus Limited and the entities it controlled during the financial year. Ernst & Young Paul Gower Partner 18 August 2017 FOR THE YEAR ENDED 30 JUNE 2017 Revenue Finance Revenue Revenue Cost of Sales Gross Proﬁt Net foreign currency losses Accounting and secretarial fees Advertising and public relations Depreciation and amortisation Insurance Legal costs Operating lease expense Other expense Salaries and employee beneﬁts expense 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 Notes 4 5(a) Consolidated 2017 $’000 31,597 22 31,619 (521) 31,098 (777) (638) (962) 2016 $’000 27,521 56 27,577 (619) 26,958 (89) (527) (944) 5(b) (4,283) (3,828) (756) (268) (514) (603) (8,178) (707) 13,412 (4,091) 9,321 28 28 9,349 9.1¢ 9.0¢ (595) (842) (474) (707) (8,599 (856) 9,497 (3,129) 6,368 198 198 6,566 6.3¢ 6.2¢ 5(b) 6 16 7 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 28 PRO MEDICUS ANNUAL REPORT 2017 29 CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AS AT 30 JUNE 2017 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 Deferred tax liabilities Provisions Total Non-current Liabilities TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Share buyback reserve Share reserve Foreign currency translation reserve Retained earnings TOTAL EQUITY Notes Consolidated 2017 $’000 2016 $’000 9 10 11 6 12 13 14 15 6 15 16 16 16 16 22,775 3,489 3,264 54 598 17,107 4,771 2,258 86 531 FOR THE YEAR ENDED 30 JUNE 2017 At 1 July 2015 Proﬁt for the year Other comprehensive income 30,180 24,753 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 At 1 July 2016 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 Share buy-back Dividends At 30 June 2017 1,023 283 15,478 242 17,026 47,206 3,458 1,972 1,822 7,252 5,045 75 5,120 12,372 34,834 1,937 (73) 1,717 145 31,108 34,834 757 382 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 Consolidated Issued Capital $’000 Share Buyback Reserve $’000 Share Reserve $’000 Foreign Currency Translation Reserve $’000 Retained Earnings $’000 Total Equity $’000 327 — — — — 975 — 1,302 1,302 — — — — 635 — — — — — — — — — — — — — — — — (73) — 666 (81) 21,026 21,938 — — — 438 — — 1,104 — 198 198 — — — 6,368 6,368 — 198 6,368 6,566 — — 438 975 (2,532) (2,532) 117 24,862 27,385 1,104 117 24,862 27,385 — — — 613 — — — — 28 28 — — — — 9,321 9,321 — 28 9,321 9,349 — — — 613 635 (73) (3,075) (3,075) 1,937 (73) 1,717 145 31,108 34,834 30 PRO MEDICUS ANNUAL REPORT 2017 31 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2017 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 Net cash ﬂows used in investing activities Cash ﬂows from ﬁnancing activities Payment of dividends on ordinary shares Payment of share buyback 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 9 Consolidated 2017 $’000 2016 $’000 Notes 31,874 24,432 (12,572) (13,486) (4,473) 14,829 308 11,254 (6,070) (5,607) 22 (80) 56 (222) (6,128) (5,773) 9 13 12 8 (3,075) (2,532) (73) 635 — 975 (2,513) (1,557) 6,188 (520) 17,107 22,775 3,924 248 12,935 17,107 NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017 1. CORPORATE INFORMATION The ﬁnancial report of Pro Medicus Limited (the Company) for the year ended 30 June 2017 was authorised for issue in accordance with a resolution of Directors on 18 August 2017. 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. (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) 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. 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. 32 PRO MEDICUS ANNUAL REPORT 2017 33 NOTES TO FINANCIAL STATEMENTS cont. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognised in accordance with AASB 139 Financial Instruments: Recognition and Measurement either in proﬁt or loss or in other comprehensive income. If the contingent consideration is classiﬁed as equity, it shall not be remeasured. 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, estimates and assumptions 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. 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. 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. Management has tested certain assets for impairment in this ﬁnancial period. Refer to Note 13 of the ﬁnancial statements for signiﬁcant assumptions applied in assessing for impairment on non-ﬁnancial assets. 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. Deferred tax assets are recognised for deductible temporary differences as management considers that it is probable that future taxable proﬁts will be available to utilise those temporary differences. 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. 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”. 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. 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 17. 4. 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 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. 34 PRO MEDICUS ANNUAL REPORT 2017 35 NOTES TO FINANCIAL STATEMENTS cont. Operating Segments Australia Europe North America Total Operations 2017 $’000 2016 $’000 2017 $’000 2016 $’000 2017 $’000 2016 $’000 2017 $’000 2016 $’000 Revenue Sales to external customers Inter-segment sales 8,340 6,486 14,512 10,399 1,740 5,253 4,166 21,517 16,869 31,597 27,521 4,830 — — 19,765 15,229 Total segment revenue 22,852 16,885 6,993 8,996 21,517 16,869 51,362 42,750 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 (19,765) (15,229) 31,597 27,521 11,609 7,281 1,222 1,735 559 425 13,390 9,441 22 56 (4,091) (3,129) 9,321 6,368 19,549 17,574 729 431 121 — 149 — 55 294 93 — 19,725 17,816 1,023 431 26,834 28,366 24,057 23,370 24,441 16,747 75,332 68,483 47,112 46,371 24,178 23,519 24,790 16,840 96,080 86,730 (48,874) (47,652) 47,206 39,078 31,696 37,339 2,147 2,275 23,638 16,095 57,481 55,709 (45,109) (44,016) 12,372 11,693 6,075 4,141 5,677 3,686 53 81 79 88 23 61 73 54 6,151 4,283 5,829 3,828 4,479 5,367 (4,733) (1,419) 15,083 7,306 14,829 11,254 (2,513) (1,557) — — — — (2,513) (1,557) 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 2017 $’000 6,964 24,595 38 31,597 2016 $’000 6,032 21,468 21 27,521 Revenue from major customers Included in the North American segment are customers that contributed to the total consolidated Group revenue by 14.9% (2016: 13.4%) from one party and 13.0% (2016: nil) from another party. No other customer contributed 10% or more to the Group’s revenue for the year ended 30 June 2017. 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. Minimum exam counts are recognised in the year the customer is implemented and any subsequent year that image views do not exceed minimum agreed examinations. 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 Licence revenue is recognised when control of the right to be compensated for the license can be reliably measured. Licence 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. 5. INCOME AND EXPENSES (a) Net foreign currency gains/(losses) Currency gains Currency (loss) Total net foreign currency losses (b) Expenses Depreciation and amortisation Motor vehicles Office equipment Capitalised development costs Computer software Total depreciation and amortisation expense Salaries and employee beneﬁts expense Wages and salaries Long service leave provision Share-based payment expense Deﬁned contribution plan expense Notes 12 12 12 13 13 Consolidated 2017 $’000 3,377 2016 $’000 1,760 (4,154) (1,849) (777) (89) 7 147 25 7 155 19 4,103 3,646 1 1 4,283 3,828 6,594 68 613 903 7,013 244 438 904 Total salaries and employee beneﬁts expense 8,178 8,599 (6,053) (5,621) (53) (79) (22) (74) (6,128) (5,774) Furniture and ﬁttings and property improvements 36 PRO MEDICUS ANNUAL REPORT 2017 37 NOTES TO FINANCIAL STATEMENTS cont. 6. 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: • 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. 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. Income taxes relating to items recognised directly in equity are recognised in equity and not in the statement of comprehensive income. Unrecognised temporary differences At 30 June 2017, 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 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. 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. 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. Notes Consolidated 2017 $’000 2016 $’000 6. INCOME TAX (cont’d) 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 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 At the applicable statutory income tax rate in each country 3,865 (167) 393 4,091 2,015 (71) 1,185 3,129 13,412 9,497 3,489 2,201 190 368 (167) 330 (119) 145 523 (71) 326 5 4,091 3,129 – 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 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 Audit fee accrual Other Deferred income tax assets Consolidated Statement of Financial Position Consolidated Statement of Comprehensive Income 2017 $’000 2016 $’000 2017 $’000 2016 $’000 732 4,264 49 5,045 690 308 22 3 1,023 886 3,500 — 4,386 411 326 16 4 757 154 (764) (49) (659) 279 (18) 6 (1) 266 28 (1,116) — (1,088) 85 (19) (8) (41) (97) 38 PRO MEDICUS ANNUAL REPORT 2017 39 9. CASH AND CASH EQUIVALENTS Cash at bank and in hand Short-term deposits Consolidated 2017 $’000 22,775 — 22,775 2016 $’000 15,577 1,530 17,107 Cash and cash equivalents in the Statement of Financial Position and Statement of Cash Flow 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. 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 loss Share-based payment 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 9,321 6,368 179 4,104 (22) 777 613 181 3,647 (56) 89 438 1,282 (1,040) 32 (266) (309) 43 78 (189) (1,006) (2,048) (7) 242 (775) 659 5 14,829 178 (95) 2,252 1,107 301 11,254 NOTES TO FINANCIAL STATEMENTS cont. 7. 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 – Other non-discretionary changes in revenue or expenses during the period that would result from the dilution of potential ordinary shares – Dilutive potential ordinary shares adjusted for any bonus element and then divided by the weighted average number of ordinary shares. The following reﬂects the income and share data used in the basic and diluted earnings per share computations: Net proﬁt attributable to ordinary equity holders Consolidated 2017 $’000 2017 $’000 9,321,331 6,368,722 Number Number Weighted average number of ordinary shares for basic earnings per share 102,484,842 101,378,835 Effect of dilution: Share options Performance rights 132,573 1,505,931 686,563 1,379,441 Weighted average number of ordinary shares adjusted for the effect of dilution 104,123,346 103,444,839 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 8. DIVIDENDS PAID AND PROPOSED Declared and paid during the year: Dividends on ordinary shares Final unfranked dividend for 2016: 1.5 cent (2015: 1.0 cent) Interim unfranked dividend for 2017: 1.5 cent (2016: 1.5 cent unfranked) Proposed for approval by directors (not recognised as a liability as at 30 June): Dividends on ordinary shares: Final franked dividend for 2017: 2.5 cents (2016: 1.5 cents unfranked) Total dividends proposed Franking credit balance − franking account balance as at the end of the ﬁnancial year at 30% (2016: 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 Consolidated 2017 $’000 2016 $’000 1,535 1,540 3,075 1,006 1,526 2,532 2,567 2,567 1,526 1,526 531 501 — — — 1,032 (1,102) (70)* — — — — — — — — * The deﬁcit at 30 June 2017 is expected to be supported by income tax instalments paid in the subsequent ﬁnancial year. The tax rate at which paid dividends have been franked is 30% (2016: 0%). Dividends proposed will be fully franked. 40 PRO MEDICUS ANNUAL REPORT 2017 41 NOTES TO FINANCIAL STATEMENTS cont. 10. TRADE AND OTHER RECEIVABLES (CURRENT) 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 the Group 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. 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 3,284 — 3,284 — 205 3,489 — — — — — 3,533 — 3,533 989 249 4,771 140 — (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 2017 Consolidated 2016 Consolidated 3,284 3,533 1,978 1,471 * Past due not impaired (‘PDNI’) ** Considered Impaired (‘CI’) PDNI* 290 391 PDNI* 712 393 PDNI* 304 1,278 CI** — — Payment terms on $301,356 (2016: $526,379) 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. 11. INVENTORY Finished goods (at lower of cost and net realisable value) Consolidated 2017 $’000 54 2016 $’000 86 Inventory write downs recognised as an expense during the year ended 30 June 2017 total nil (2016: nil) 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. 12. PLANT & 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: Property Improvements Motor Vehicles Office Equipment Furniture and Fittings 2017 2016 2 to 7 years 4 to 5 years 2 to 7 years 5 years 2 to 7 years 4 to 5 years 2 to 7 years 5 years Research and Development Equipment 3 to 4 years 3 to 4 years 12. PLANT & EQUIPMENT (cont’d) 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. Year ended 30 June 2017 At 1 July 2016 net of accumulated depreciation Additions Disposals Exchange differences Depreciation charge for the year At 30 June 2017 net of accumulated depreciation At 30 June 2017 Cost Accumulated depreciation and impairment Net carrying amount 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 Consolidated Property Improvements Motor Vehicles Office Equipment Furniture & Fittings Research & Development Equipment Total $’000 $’000 $’000 $’000 $’000 $’000 19 — — — (2) 17 41 — — — (7) 34 262 83 — (2) (147) 196 60 — — (1) (23) 36 — — — — — — 382 83 — (3) (179) 283 329 488 2,204 399 209 3,629 (312) (454) (2,008) (363) (209) (3,346) 17 34 196 36 — 283 22 — — — (3) 19 48 — — — (7) 41 248 163 — 6 (155) 262 329 488 2,183 23 53 — — (16) 60 401 (341) 60 — — — — — — 341 216 6 (181) 382 209 3,610 (209) (3,228) — 382 Accumulated depreciation and impairment (310) (447) (1,921) Net carrying amount 19 41 262 42 PRO MEDICUS ANNUAL REPORT 2017 43 NOTES TO FINANCIAL STATEMENTS cont. 13. 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. 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. 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. 13. INTANGIBLE ASSETS Year ended 30 June 2017 At 1 July 2016 net of accumulated amortisation and impairment Additions – internal development Disposals Exchange differences Amortisation charge for the year At 30 June 2017 net of accumulated amortisation and impairment At 30 June 2017 Cost Consolidated Intellectual Property i) Development Costs ii) Software Licenses iii) $’000 $’000 $’000 — — — — — — 13,510 6,070 — — (4,103) 15,477 2 — — — (1) 1 Total $’000 13,512 6,070 — — (4,104) 15,478 1,848 38,725 294 40,867 Accumulated amortisation and impairment (1,848) (23,248) (293) (25,389) Net carrying amount 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 — — — — — — — 15,477 1 15,478 11,549 5,607 — — (3,646) 13,510 3 — — — (1) 2 11,552 5,607 — — (3,647) 13,512 1,848 32,655 296 34,799 Accumulated amortisation and impairment (1,848) (19,145) (294) (21,287) Net carrying amount — 13,510 2 13,512 44 PRO MEDICUS ANNUAL REPORT 2017 45 NOTES TO FINANCIAL STATEMENTS cont. 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 0% to 57% (2016: -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% (2016:17%). Growth rate estimates – rates are based on industry based customer price index (CPI) forecasts. The long term rate of 2.5% (2016: 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 7 – 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 – $1.3 million. 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 as 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 2017 the carrying values of capitalised development costs are Visage PACS ($10,593,365) RIS ($4,367,516) and Visage MagicWeb ($515,579), all sit within the Australian operating segment. The Group undertook an impairment assessment of the capitalised development costs as at 30 June 2017. 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 2016:17%) was applied. Cash ﬂows beyond a 5 year period have been extrapolated using a 2.5% growth rate (30 June 2016: 2.5%). 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 2017. 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 14. 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. Current Trade payables Other payables and accruals Deferred Income Consolidated Notes 2017 $’000 2016 $’000 446 2,086 2,532 926 3,458 676 1,383 2,059 935 2,994 (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. 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. 15. 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. 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. 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. 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. 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. 46 PRO MEDICUS ANNUAL REPORT 2017 47 NOTES TO FINANCIAL STATEMENTS cont. 15. PROVISIONS (cont’d) Consolidated 16. CONTRIBUTED EQUITY AND RESERVES (cont’d) Current Long service leave Annual leave Non Current Long service leave Notes 2017 $’000 821 1,001 1,822 75 75 2016 $’000 799 1,027 1,826 66 66 16. CONTRIBUTED EQUITY AND RESERVES 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. Contributed Equity (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 2016 Cancellation for share buy-back Issued for cash on exercise of options Vesting of performance rights At 30 June 2017 At 1 July 2015 Cancellation for share buy-back Issued for cash on exercise of options Vesting of performance rights At 30 June 2016 Share Reserve (i) Balance at 1 July Share options expensed Performance rights expensed Balance at 30 June Consolidated 2017 $’000 1,937 1,937 Number of Shares 101,750,406 (16,232) 700,000 226,375 2017 $’000 1,302 1,302 2017 $’000 1,302 — 635 — 102,660,549 1,937 Number of Shares 100,263,406 — 950,000 537,000 2016 $’000 327 — 975 — 101,750,406 1,302 Consolidated 2017 $’000 1,104 — 613 1,717 2016 $’000 666 1 437 1,104 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 (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 17 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. 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 $3,074,568 (2016: $2,532,142). 17. SHARE BASED PAYMENTS (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). Consolidated 2017 $’000 2016 $’000 117 28 145 24,862 9,321 (3,075) 31,108 (81) 198 117 21,026 6,368 (2,532) 24,862 There are currently two plans in place to provide these beneﬁts: • The Employee Share Option Plan (ESOP), which provides beneﬁts to directors, senior executives and other employees. • The Long Term Incentive Plan (LTIP), which provides beneﬁts to senior executives and other employees. 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 either a Black Scholes model or Monte Carlo simulation model. 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). At each subsequent reporting date until vesting, the cumulative charge to the statement of comprehensive income is the product of: (i) The grant date fair value of the award; (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. 48 PRO MEDICUS ANNUAL REPORT 2017 49 NOTES TO FINANCIAL STATEMENTS cont. 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 7). 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. During the reporting period, 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. During the reporting period, all options had vested and 175,000 (19%) options had expired. No 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. During the reporting period, all options had vested and 400,000 (73%) 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. During the reporting period, all options had vested and 200,000 (100%) options were exercised during the year. Information with respect to the number of options granted under the employee share option scheme is as follows: 2017 2016 Number of Options Weighted average exercise price Number of Options Weighted average exercise price Outstanding at the beginning of the year 725,000 $0.91 1,675,000 $0.98 – granted – forfeited – exercised – expired Outstanding at the end of the year Exercisable at end of year — — — — — — (700,000) $0.91 (950,000) — 25,000 25,000 — $1.00 $1.00 — 725,000 685,000 — — $1.03 — $0.91 $0.93 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 2017 is represented by: • 25,000 options over ordinary share with an exercise price of $1.00 each, exercisable until 1 April 2020. Weighted average remaining contractual life The weighted average remaining contractual life for share options outstanding at 30 June 2017 is 2.76 years (2016: 4.14 Years) Range of exercise price The range of exercise prices for options outstanding at the end of the year was $1.00 – $1.00 (2016: $0.55 – $1.25). Weighted average fair value The weighted average fair value of options granted during the year was nil (2016: 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 Tranche 1 A long term incentive plan was established on 18 November 2011 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 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. Tranche 2 A new long term incentive plan was established during 2016–17 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 for a 12 month 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. During the reporting period, 230,246 performance rights had been granted during the year with a grant date of 19 October 2016. 90,000 performance rights from Tranche 1 vest over 4 years from grant date on completion of service. The fair value of these 90,000 performance rights at grant date was $439,326 ($4.88 per performance right). A further 180,492 performance rights from Tranche 2 vest over 4 years from grant date on completion of service. The fair value of these 180,492 performance rights at grant date was $326,003. The remaining 50,000 performance rights vest in September 2017 and the fair value of these rights was $44,500 ($0.89 per performance right). 414,375 performance rights were granted in prior periods in relation to the 2015–16 ﬁnancial performance. 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). 50 PRO MEDICUS ANNUAL REPORT 2017 51 NOTES TO FINANCIAL STATEMENTS cont. Information with respect to the number of performance rights granted under the long term incentive scheme is as follows: Outstanding at the beginning of the year − granted − forfeited − exercised − expired Outstanding at the end of the year Exercisable at end of year 2017 2016 Number of Performance Rights Number of Performance Rights 1,471,719 320,492 — 1,594,344 414,375 — (226,375) (537,000) — — 1,565,836 1,471,719 — — Weighted average remaining contractual life The weighted average remaining contractual life for performance rights at 30 June 2017 is 1.8 years (2016: 2.2 Years) Performance rights pricing model (Tranche 1) The fair value of the equity-settled performance rights granted for Tranche 1 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: Dividend yield Expected volatility Risk-free interest rate Expected life of performance rights Performance rights exercise price 2017 0.6% 40% 3.30% 2016 1.2% 0% 0% 1 – 4 years 1 – 4 years $0.00 $0.00 Weighted average share price at measurement date $0.89 – $4.88 $0.89 – $1.98 Performance rights pricing model (Tranche 2) The fair value of the equity-settled performance rights granted for Tranche 2 is estimated as at the date of the grant using Black Sholes and Monte Carlo Simulation Models taking into account the terms and conditions upon which the performance rights were granted. The following table lists the inputs to the models used: Dividend yield Expected volatility Risk-free interest rate Expected life of performance rights Performance rights exercise price Weighted average share price at measurement date 2017 0.6% 40% 3.30% 1 – 4 years $0.00 $0.85 – $2.45 18. COMMITMENTS 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. Operating lease commitments – Group as 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. 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 Consolidated 2017 $’000 350 456 — 806 2016 $’000 356 679 — 1,035 19. EVENTS AFTER THE BALANCE SHEET DATE On 18 August 2017, the directors of Pro Medicus Limited declared a ﬁnal dividend on ordinary shares in respect of the 2017 ﬁnancial year. This dividend comprises a normal dividend of 2.5 cents per share. The total amount of the dividend is $2,566,514 which represents a franked dividend of a total of 2.5 cents per share. The dividend has not been provided for in the 30 June 2017 ﬁnancial statements. 20. 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 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 2017 2016 169,895 55,590 225,485 59,143 48,146 332,774 168,313 46,480 214,793 53,221 8,489 276,503 52 PRO MEDICUS ANNUAL REPORT 2017 53 NOTES TO FINANCIAL STATEMENTS cont. 21. 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 2017 $’000 2016 $’000 3,184,596 3,143,575 133,675 18,683 322,321 125,860 177,694 235,939 3,659,275 3,683,068 (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 (2016: $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. The current arrangement is on a month to month basis. 22. 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 2017 2016 2017 2016 % 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 21. (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. Sales to related parties $000 Purchases from related parties $000 Other transactions with related parties $000 Related party Consolidated Champagne Properties Pty Ltd – Rental lease Champagne Properties Pty Ltd – Rental lease 2017 2016 — — 169 169 — — Terms and conditions of transactions with related parties Sales to and purchases from related parties are made in arm’s length transactions both at normal market prices and on normal commercial terms. Outstanding balances at year end are unsecured, interest free and payable on demand. Entities within the Group that own the intellectual property earn a royalty between 30% – 97% from the sales made by other entities within the Group. Development costs undertaken by the German operations are reimbursed by the parent on commercial terms. 23. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group’s principal ﬁnancial instruments are cash and short-term deposits. The main purpose of these ﬁnancial instruments is to provide ﬁnance for the Group’s operations. The Group has various other ﬁnancial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. The main risks arising from the Group’s ﬁnancial instruments are foreign currency risk, interest risk and credit risk. The Board manages each of these risks as detailed below. Foreign currency risk (i) Functional and presentation currency Both the functional and presentation currency of Pro Medicus Limited and its Australian subsidiaries are Australian dollars ($). 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 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. The Group has transactional currency exposure, which arise from sales made in currencies other than the Group’s presentational currency. Approximately 92% (2016: 76%) 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. 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. Financial assets Cash and cash equivalents Financial liabilities Trade and other payables Net exposure Consolidated 2017 $’000 2,804 2,804 — 2,804 2016 $’000 2,114 2,114 — 2,114 55 54 PRO MEDICUS ANNUAL REPORT 2017 NOTES TO FINANCIAL STATEMENTS cont. 23. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (cont’d) At 30 June the Group had the following exposure to CAD$ foreign currency that is not designated in cash ﬂow hedges or recorded in the functional currency of the subsidiary Financial assets Cash and cash equivalents Financial liabilities Trade and other payables Net exposure Consolidated 2017 $’000 1,518 1,518 — 1,518 2016 $’000 842 842 — 842 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. Financial assets Cash and cash equivalents Financial liabilities Trade and other payables Net exposure Consolidated 2017 $’000 2016 $’000 118 118 — 118 126 126 — 126 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. Financial assets Cash and cash equivalents Financial liabilities Trade and other payables Net exposure Consolidated 2017 $’000 3 3 — 3 2016 $’000 600 600 — 600 At 30 June, had the Australian Dollar moved, as illustrated in the table below, with all other variables held constant, post-tax proﬁt and equity (excluding retained proﬁts) would have been affected as follows: Management believe the reporting date risk exposures are representative of the risk exposure inherent in the ﬁnancial instruments. Credit risk Credit risk arises from the ﬁnancial instruments of the Group, which comprise cash and cash equivalents and trade and other receivables. The Group’s exposure to credit risk arises from potential defaults of the counter-party, with a maximum exposure equal to the carrying amount of the ﬁnancial assets. The Group trades only with recognised, credit worthy third parties. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit assessment. In addition, receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not signiﬁcant. As the Group trades predominantly within the Diagnostic Imaging market there is a concentration of credit risk. Given the underlying Government funding support for Radiology in Hospital settings and the Imaging Centre and Diagnostic Imaging market, and the commercial successes achieved by the Group to date, credit risk is considered to be minimal. Cash and cash equivalents are held with several ﬁnancial institutions, with the majority held with the Westpac Banking Corporation and Wells Fargo Bank N.A., both AA rated banks. Interest risk The Group exposure to market interest rates relates primarily to the company’s cash and cash equivalents. At reporting date, the Group had the following ﬁnancial assets exposed to Australian Variable interest rate risk that are not designated in cash ﬂow hedges: Cash and Cash equivalents in the Group ($’000) $22,775 (2016: $17,107). 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 2017, 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 Judgements of reasonably possible movements: +1% (100 basis points) –0.5% (50 basis points) Liquidity risk Post tax proﬁt higher/(lower) Other comprehensive income higher/(lower) 2017 $’000 228 (114) 2016 $’000 171 (86) 2017 $’000 — — 2016 $’000 — — The Group has minimal liquidity risk as it has cash reserves of $22.8m, 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 2017. The remaining contractual maturities of the Group’s ﬁnancial liabilities are: Judgements of reasonably possible movements: AUD/USD +10% AUD/USD –5% AUD/CAD +10% AUD/CAD –5% AUD/GBP +10% AUD/GBP –5% AUD/EUR +10% AUD/EUR –5% 56 Post tax proﬁt higher/(lower) Other comprehensive income higher/(lower) 2017 $’000 (280) 140 (152) 76 (12) 6 — — 2016 $’000 (211) 106 (84) 42 (13) 6 (60) 30 2017 $’000 (69) 34 — — — — (152) 76 2016 $’000 (78) 39 — — — — (156) 78 <30 days 31 – 60 days 61 – 90 days Over 90 days TOTAL PRO MEDICUS ANNUAL REPORT 2017 Consolidated 2017 $’000 752 816 161 1,729 3,458 2016 $’000 1,015 204 189 1,586 2,994 57 NOTES TO FINANCIAL STATEMENTS cont. 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 22). As disclosed in Note 22, 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 Information relating to Pro Medicus Limited Current assets Total assets Current liabilities Total liabilities Issued capital Retained earnings Foreign currency translation reserve Share reserve Share Buyback Reserve Total shareholders’ equity Proﬁt/(loss) of the parent entity Total comprehensive income of parent entity 2017 $000 26,834 36,211 28,274 29,837 1,937 5,001 (2,208) 1,717 (73) 6,374 (13) (13) 2016 $000 28,366 37,465 27,826 29,312 1,302 8,088 (2,341) 1,104 — 8,153 (607) (607) 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. 26. OTHER ACCOUNTING POLICIES (a) New accounting standards and interpretations 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 2016. 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. Pronouncement Title AASB 2014-4 Clariﬁcation of Acceptable Methods of Depreciation and Amortisation (Amendments to AASB 116 and AASB 138) Application date of standard* Application date for Group* 1 January 2016 1 July 2016 The amendments clarify the principle in AASB 116 Property Plant and Equipment and AASB 138 Intangible Assets that revenue reﬂects a pattern of economic beneﬁts that are generated from operating a business (of which the asset is part) rather than the economic beneﬁts that are consumed through use of the asset. As a result, the ration of revenue generated to total revenue expected to be generated cannot be used to depreciate property, plant and equipment and may only be used in very limited circumstances to amortise intangible assets. AASB 2015-1 Amendments to Australian Accounting Standards – Annual Improvements to Australian Accounting Standards 2012–2014 Cycle 1 January 2016 1 July 2016 The amendments clarify certain requirements in: • AASB 5 Non-current Assets Held for Sale and Discontinued Operations - Changes in methods of disposal • AASB 7 Financial Instruments: Disclosures – sservicing contracts; applicability on the amendments to AASB 7 to condensed interim ﬁnancial statements • AASB 119 Employee Beneﬁts – regional market issue regarding discount rate • AASB 134 Interim Financial Reporting – disclosure of information ‘elsewhere in the interim ﬁnancial report’ AASB 2015-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101 1 January 2016 1 July 2016 The Standard amends AASB 101 Presentation of Financial Statements to clarify existing presentation and disclosure requirements and to ensure entities are able to use judgement when applying the Standard in determining what information to disclose, where and in what order information is presented in their ﬁnancial; statements. For example, the amendments make clear that materiality applies to the whole of ﬁnancial statements and that inclusion of immaterial information can inhibit the usefulness of ﬁnancial disclosures. 58 PRO MEDICUS ANNUAL REPORT 2017 59 NOTES TO FINANCIAL STATEMENTS cont. (b) 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 2017. These are outlined in the table below. Pronouncement Title Summary Application date of standard* Impact on Group ﬁnancial report Application date for Group* 1 July 2018 The Group is currently assessing the impact on the change in standard. AASB 9 Financial Instruments AASB 9 replaces AASB 139 Financial Instruments: Recognition and Measurement. 1 January 2018 Except for certain trade receivables, an entity initially measures a ﬁnancial asset at its fair value plus, in the case of a ﬁnancial asset not at fair value through proﬁt or loss, transaction costs. Debt instruments are subsequently measured at fair value through proﬁt or loss (FVTPL), amortised cost, or fair value through other comprehensive income (FVOCI), on the basis of their contractual cash ﬂows and the business model under which the debt instruments are held. There is a fair value option (FVO) that allows ﬁnancial assets on initial recognition to be designated as FVTPL if that eliminates or signiﬁcantly reduces an accounting mismatch. Equity instruments are generally measured at FVTPL. However, entities have an irrevocable option on an instrument-by-instrument basis to present changes in the fair value of non-trading instruments in other comprehensive income (OCI) without subsequent reclassiﬁcation to proﬁt or loss. For ﬁnancial liabilities designated as FVTPL using the FVO, the amount of change in the fair value of such ﬁnancial liabilities that is attributable to changes in credit risk must be presented in OCI. The remainder of the change in fair value is presented in proﬁt or loss, unless presentation in OCI of the fair value change in respect of the liability’s credit risk would create or enlarge an accounting mismatch in proﬁt or loss. All other AASB 139 classiﬁcation and measurement requirements for ﬁnancial liabilities have been carried forward into AASB 9, including the embedded derivative separation rules and the criteria for using the FVO. The incurred credit loss model in AASB 139 has been replaced with an expected credit loss model in AASB 9. The requirements for hedge accounting have been amended to more closely align hedge accounting with risk management, establish a more principle- based approach to hedge accounting and address inconsistencies in the hedge accounting model in AASB 139. Pronouncement Title Summary Application date of standard* Impact on Group ﬁnancial report Application date for Group* AASB 15 Revenue from Contracts with Customers AASB 2016-5 Amendments to Australian Accounting Standards – Classiﬁcation and Measurement of Share-based Payment Transactions AASB Interpretation 22 Foreign Currency Transactions and Advance Consideration 1 July 2017 1 January 2018 The Group is currently undertaking an impact assessment in relation to the requirements of AASB 15. The assessment is currently on-going and the Group has not reached a determination or conclusion with respect to the impact of the new accounting standard. 1 July 2017 1 January 2018 The Group will continue to assess the impact on the change in standard, if any 1 January 2018 No impact 1 July 2017 AASB 15 replaces all existing revenue requirements in Australian Accounting Standards (AASB 111 Construction Contracts, AASB 118 Revenue, AASB Interpretation 13 Customer Loyalty Programmes, AASB Interpretation 15 Agreements for the Construction of Real Estate, AASB Interpretation 18 Transfers of Assets from Customers and AASB Interpretation 131 Revenue – Barter Transactions Involving Advertising Services) and applies to all revenue arising from contracts with customers, unless the contracts are in the scope of other standards, such as AASB 117 (or AASB 16 Leases, once applied). 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 an entity expects to be entitled in exchange for those goods or services. An entity recognises revenue in accordance with the core principle by applying the following steps: • Step 1: Identify the contract(s) with a customer • Step 2 : Identify the performance obligations in the contract • Step 3: Determine the transaction price • Step 4: Allocate the transaction price to the performance obligation in the contract • Step 5: Recognise revenue when (or as) the entity satisﬁes a performance obligation. This Standard amends AASB 2 Share-based Payment, clarifying how to account for certain types of share-based payment transactions. The amendments provide requirements on the accounting for: • 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. The Interpretation clariﬁes that in determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non- monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine a date of the transactions for each payment or receipt of advance consideration. 60 PRO MEDICUS ANNUAL REPORT 2017 61 (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. (e) 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. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. (f) Comparatives Where necessary, comparatives have been reclassiﬁed and repositioned for consistency with current year disclosures. NOTES TO FINANCIAL STATEMENTS cont. Pronouncement Title Summary Application date of standard* Impact on Group ﬁnancial report Application date for Group* AASB 16 Leases 1 July 2018 AASB 16 requires lessees to account for all leases under a single on- balance sheet model in a similar way to ﬁnance leases under AASB 117 Leases. The standard includes two recognition exemptions for lessees – leases of ’low-value’ assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessees will be required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. Lessor accounting is substantially unchanged from todays’ accounting under AASB 117. Lessors will continue to classify all lease using the same classiﬁcation principle as in AASB 117 and distinguish between two types of leases: operating and ﬁnance leases. 1 January 2019 The Group is currently assessing the impact on the change in standard. However an asset and liability will be required to be recorded on the statement of ﬁnancial position for operating leases. There will be a further shift in the classiﬁcation of expenses between operating lease expense, depreciation expense and a ﬁnancing charge. 26. OTHER ACCOUNTING POLICIES (cont’d) (c) 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. (d) 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. 62 PRO MEDICUS ANNUAL REPORT 2017 63 DIRECTORS DECLARATION INDEPENDENT AUDIT REPORT FOR THE YEAR ENDED 30 JUNE 2017 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 2017 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. Ernst & Young 8 Exhibition Street Melbourne VIC 3000 Australia GPO Box 67 Melbourne VIC 3001 Tel: +61 3 9288 8000 Fax: +61 3 8650 7777 ey.com/au Independent Auditor’s Report to the Members of Pro Medicus Limited Report on the Audit of the Financial Report (c) the ﬁnancial statements and notes comply with International Financial Reporting Standards Opinion (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 2017. On behalf of the Board P T Kempen Chairman Melbourne, 18 August 2017 We have audited the financial report of Pro Medicus Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 30 June 2017, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a) b) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2017 and of its consolidated financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 64 PRO MEDICUS ANNUAL REPORT 2017 65 INDEPENDENT AUDIT REPORT FOR THE YEAR ENDED 30 JUNE 2017 INDEPENDENT AUDIT REPORT FOR THE YEAR ENDED 30 JUNE 2017 1. Capitalisation of development costs 2. Impairment of intangible assets Why significant How our audit addressed the key audit matter Why significant How our audit addressed the key audit matter The Group develops medical software related to radiology systems. Development costs are capitalised and presented as intangible assets on the consolidated statement of financial position. The carrying value of intangible assets as at 30 June 2017 was $15.5 million (33% of total assets). Capitalised development costs represents a key audit matter as product development is core to the Group’s operations and it is the key asset on the Group’s consolidated statement of financial position. This involves judgement to determine whether the costs meet the capitalisation criteria in accordance with Australian Accounting Standard - AASB 138 Intangible Assets. The measurement of capitalised development costs is based on the time and overhead costs associated with individuals employed by the Group for the specific purpose of developing software. Capitalised development costs are amortised once the product is available for use. Capitalised development costs are amortised over a useful life of five years. Refer to Note 13 to the financial report for disclosure relating to capitalised program development costs. Our audit procedures assessed the existence and measurement of capitalised development costs and the related disclosures. In performing our assessment, we: ► Assessed key measurement inputs, including salaries and overhead costs, used in the Group’s capitalisation model which determines the amount of capitalised development costs. ► Tested a sample of overhead costs capitalised within the capitalisation model to assess whether these costs were appropriately capitalised in accordance with Australian Accounting Standard – AASB 138 Intangible Assets. ► Tested a sample of employee costs recorded within the capitalisation model to employee timesheets and enquired with the Group regarding the development activities that were undertaken. This included an assessment of whether a sample of employees were directly involved in developing software and not maintenance (as maintenance costs are not eligible for capitalisation). ► Assessed the useful life and amortisation rate allocated to capitalised development costs. ► Assessed the consistency of the capitalisation methodology applied by the Group in comparison to prior reporting periods. ► Assessed the adequacy of the disclosures included in Note 13. As at 30 June 2017 the Group held $15.5 million (or 33% of total assets) in intangible assets, predominately comprising capitalised development costs recognised in accordance with Australian Accounting Standard - AASB 138 Intangible Assets. As explained in Note 13 to the financial report, intangible assets are tested by the Group for impairment annually. The directors’ assessment of the recoverable amounts has been determined based on a value in use model referencing discounted cash flows of the RIS, Visage PACS, and Visage Magic Web cash generating units (CGU). This impairment model contains estimates and significant judgements regarding future cash flow projections and, therefore, the recoverable amount of intangible assets has been identified as a key audit matter. Our audit procedures assessed the recoverable amount of intangible assets and the related disclosures. In performing our assessment, we involved our valuation specialists and: ► Assessed the appropriateness of the valuation methodologies. ► Assessed the incorporation of the Board approved 2018 cash flows into the Group’s impairment analysis. ► Evaluated the key inputs and assumptions including cash flows, discount rates and growth rates adopted in the valuation of the recoverable amounts. In doing so, we assessed the Group’s ability to achieve historical forecasts and assessed the assumptions with respect to forecasted future revenues and the probability of achieving such revenues. ► Assessed key assumptions including cash flow projections and discount rate to external market data. ► Assessed the adequacy of the disclosures made in the financial report per those required by Australian Accounting Standard - AASB 136 Impairment of Assets. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 66 67 PRO MEDICUS ANNUAL REPORT 2017 INDEPENDENT AUDIT REPORT FOR THE YEAR ENDED 30 JUNE 2017 INDEPENDENT AUDIT REPORT FOR THE YEAR ENDED 30 JUNE 2017 3. Revenue recognition Why significant How our audit addressed the key audit matter The Group generated $31.6 million in revenue across three jurisdictions for the year ended 30 June 2017. Our audit procedures assessed the recognition of revenue and the related disclosures. In performing our assessment, we: Revenue recognition is deemed a key audit matter as it represents a key measurement of the Group’s performance and demonstrates the growth of the Group. Revenue is predominately generated from pay-per-view contracts which are driven by the number of image views undertaken by the customer. Revenue from the installation and ongoing support of software applications and services is recognised by reference to the stage of contract completion. Service revenue is recognised over the term of the contract. Refer to Note 4 to the financial report for disclosure relating to revenue recognition. ► Reviewed new significant customer contracts. ► Tested whether the recognition of revenue was in accordance with the customer contracts by testing a sample of revenue transactions to contracts and customer invoices. ► Analytically reviewed revenue recognised to compare and contrast the revenue recognition profile between reporting periods, including on a customer, product and geographical basis. ► Tested a sample of revenue transactions recognised prior to and after year end, to assess whether revenue was recognised in the appropriate period. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 68 Information Other than the Financial Report and Auditor’s Report Thereon The directors are responsible for the other information. The other information comprises the information included in the Group’s 2017 Annual Report other than the financial report and our auditor’s report thereon. We obtained the Directors’ Report and the Corporate Governance Statement that are to be included in the Annual Report, prior to the date of this auditor’s report, and we expect to obtain the remaining sections of the Annual Report after the date of this auditor’s report. Our opinion on the financial report does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed on the other information obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor's Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 69 PRO MEDICUS ANNUAL REPORT 2017 INDEPENDENT AUDIT REPORT FOR THE YEAR ENDED 30 JUNE 2017 INDEPENDENT AUDIT REPORT FOR THE YEAR ENDED 30 JUNE 2017      Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 7 to 13 of the directors' report for the year ended 30 June 2017. In our opinion, the Remuneration Report of Pro Medicus Limited for the year ended 30 June 2017, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young Paul Gower Partner Melbourne 18 August 2017 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 70 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 71 PRO MEDICUS ANNUAL REPORT 2017 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 1,193 1,334 326 302 45 685,509 3,450,797 2,572,929 8,385,510 87,565,804 CORPORATE GOVERNANCE STATEMENT FOR THE YEAR ENDED 30 JUNE 2017 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 Comply Yes/No Reference/ explanation The number of shareholders holding less than a marketable parcel are: 69 1,445 1.1 A listed entity should disclose: Yes Page 77 3,200 102,660,549 Principle 1 – Lay solid foundations for management and oversight (b) Twenty largest shareholders Listed ordinary shares The names of the twenty largest holders of quoted shares are: Number of shares Percentage of ordinary 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 Citicorp Nominees Pty Ltd 6 National Nominees Limited 7 BNP Paribas Noms Pty Ltd 8 Mr Bram Vander Jagt & Mrs Maaike Vander Jagt 9 One Managed Investment Funds Limited 10 HSBC Custody Nominees (Australia) Limited – A/C No 2 11 Grain Exporters (Australia) Pty Ltd 12 Mr Peter Terence Kempen & Mrs Elaine Margaret Kempen (multiple shareholdings) 13 HSBC Custody Nominees (Australia) Limited 14 Mr Danny Tauber 15 Mr Kenneth John Vander Jagt & Mrs Tanya Vander Jagt 16 Mr John Charles Plummer 17 Mr Roderick Lyle (multiple shareholdings) 18 Mr Stephen Geoffrey Wilson & Ms Denise Adele Prandi 19 Mr Evan Philip Clucas and Ms Leanne Jane Weston 20 Mr Michael Wu 30,107,660 30,068,500 6,196,601 3,731,531 3,183,055 2,275,880 1,468,282 900,000 878,776 878,756 720,297 678,082 532,900 406,412 403,600 365,000 340,000 337,537 328,980 275,912 29.33% 29.29% 6.04% 3.63% 3.10% 2.22% 1.43% 0.88% 0.86% 0.86% 0.70% 0.66% 0.52% 0.40% 0.39% 0.36% 0.33% 0.33% 0.32% 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: 84,077,761 81.90% S. Hupert A Hall (d) Voting rights All ordinary shares carry one vote per share without restriction. Number of shares 30,107,660 30,068,500 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. Yes Page 77 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 77 Page 77 1.5 A listed entity should: Yes Page 77 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 77 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 77 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. 72 PRO MEDICUS ANNUAL REPORT 2017 73 Comply Yes/No Reference/ explanation No Page 78 Recommendation 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. 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 76 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. Yes Yes Yes Page 76 Page 76 Page 76 Yes Page 79 No Page 78 Recommendation 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. Comply Yes/No Yes Reference/ explanation Page 79 4.3 A listed entity that has an AGM should ensure that its external auditor Yes Page 79 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 79 a) have a written policy for complying with its continuous disclosure 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. Principle 7 – Recognise and manage risk 7.1 The board of a listed entity should: Yes Yes Yes Yes Page 79 Page 79 Page 79 Page 79 No Page 80 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: Yes Page 80 a) review the entity’s risk management framework at least annually to satisfy 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 80 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 Yes Page 80 to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks. 74 PRO MEDICUS ANNUAL REPORT 2017 75 Recommendation 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. Comply Yes/No Reference/ explanation No Page 78 Yes No Page 78 Page 78 Pro Medicus Limited’s corporate governance practices were in place throughout the year ended 30 June 2017. 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 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 21). 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. 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. 76 PRO MEDICUS ANNUAL REPORT 2017 77 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 2017, women represented 21% in the Group’s workforce (2016:22%), 20% in key executive positions (2016:20%) and 0% at board level (2016:0%) • Women represented 0% of new hires during the year (2016:33%) • 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 (2016: 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. 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. 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. 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. In addition the full Board handles any matters as and when they arise concerning environmental issues, occupational health and safety, ﬁnance and treasury. Audit Committee The Board has established an audit committee, which operates under a charter approved by the Board. 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. 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. 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 members of the audit committee are: P T Kempen Chairman S A Hupert A B Hall R Lyle A Glenning • 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 effectively facilitates two-way communication with shareholders, through six monthly investor relations roadshows and through constant investor meetings and conference calls with shareholders on request. 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. 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. Only nominated authorised persons have the authority to release these communications to the ASX. This policy is displayed on the company website. 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; 78 PRO MEDICUS ANNUAL REPORT 2017 79 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. 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 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 Level 12, 680 George Street Sydney NSW 2000 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 80 PRO MEDICUS ANNUAL REPORT 2017 81 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.linkmarketservices. 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. 82 PRO MEDICUS ANNUAL REPORT 2017 83 NOTES ) e n r u o b e M l j ( p u o r G n g i s e D n a t e a K y b d e c u d o r P d n a d e n g i s e D contents 1. Highlights 2016/2017 11. The Year in Review 65. Independent Audit Report 3. CEO and Chairman’s Letter 13. Into the Future 72. ASX Additional Information 5. Financial Summary 15. Financial Report 73. Corporate Governance 7. Business Background 16. Director’s Report 81. Corporate Information 9. Global Leadership Team 64. Director’s Declaration 84 visit us at: www.promedicus.com.au www.promedicus.com www.visageimaging.com Annual Report 2017 P P R R O O M M E E D D I I C C U U S S A A N N N N U U A A L L R R E E P P O O R R T T 2 2 0 0 1 1 7 7 450 Swan Street Richmond Victoria 3121 Australia promedicus.com.au • promedicus.com • visageimaging.com

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