TZ Limited
Annual Report 2005

Plain-text annual report

transformation 2005 Annual Report contents financial highlights  2 3 4 6 7 9 financial highlights chairman’s letter leadership group ceo’s report the TZ group structure expanded group capability the year ahead 3 operational review 27 intellectual property update 29 technology update 33 product development technologies 37 product development capability TZ Limited’s proprietary intelligent fastening technology is creating an entirely new standard for the way manufactured products are designed, assembled and serviced. The company posesses an extensive and growing patent portfolio, a fully integrated product development capability and proven expertise in licensing technology to leading global companies. TZ Limited has developed a range of intelligent fastening solutions using its patented devices and techniques combined with a specially designed proprietary operating system. Textron Fastening Systems has licensed the exclusive rights to commercialize the technology in all industry sectors globally. 42.08 27.9 5.72 8.22 .9 4.08 2.44 2004 2004 2005 2005 .69 .8 2004 0.32 2005 2004 2005 2004 2005 diluted EPS (in cents) net profit (in millions) EBITDA (in millions) revenues (in millions) shareholder equity (in millions) ’05 Annual Report  chairman’s letter I am pleased to report that it has been a year of transformation, rapid growth and exceeding expectations, in this our first full year of trading with our subsidiary Teleyzygology, Inc (TZ Inc). The overall performance of our subsidiary companies exceeded expectations and allowed us to record better than expected earnings of $5.79M EBITDA compared to a loss of $39,992 last year. The year ended 30th June 2005 was the first full year of operations in which TZ Inc operated as a wholly owned subsidiary of TZ Limited. Revenue for TZ Inc was $9,828,86. In March 2005, the Illinois-based Product Development Technology Holdings, Inc. and associated companies comprising the PDT Group (PDT) was acquired and revenue included in the consolidated entity from the date of acquisition to 30 June 05 was $8,390,277. Total revenue for the year for TZ Limited was $8,28,463. The board considers excellent progress is being made against our stated objectives and the decision to relocate the primary operations of TZ Limited to the United States and expand our capability through acquisition to have been the right one. Significant steps forward have been taken towards the commercialization of our Intelligent Fastening Technology and the Directors are particularly pleased with the spirit of co-operation and shared commitment evident in the new relationship with Textron Fastening Systems. All in all we view these as positive developments to support sustained shareholder value creation. The board is delighted with its strategic acquisition of PDT, it is a tremendous company highly respected within the USA design community and I would like to take this opportunity to welcome the PDT team on board. TZ Limited has undergone a dramatic transformation during the year, from a small visionary team to a full scale profitable product development and intellectual property (IP) licensing company with 45 people around the world. Transformations like this do not occur without the committed focus of Directors, management and team contributors at every level. Good companies become great companies by attracting and developing the best people and talent – this is a philosophy consistent in our planning and evident in our execution. We recently announced a restructure of TZ Limited management and instituted a group CEO position, to over see the growing number of entities in the group; Chris Kelliher will move into this expanded role and has already recruited some excellent new management into the company. I would like to thank Chris and his diligent team of John Wilson, Dickory Rudduck and now Mark Schwartz for leading the company through this exciting year of transition to be the company we share today. I invite you to read on about the exciting progress made during the year, if you are a shareholder thank you for your support, if you are thinking of becoming a shareholder please read on about a great example of an Australian company taking on the world. Tony Leibowitz Chairman leadership group expanding our executive capacity to meet expected growth Pictured left to right; Mark Schwartz, Noel Gewarges, Bernard Perrine, Chris Kelliher, John Wilson and Dickory Rudduck. Bernard Perrine TZ Inc CEO Noel Gewarges TZ Group CFO Mark Schwartz PDT Inc CEO Chris Kelliher TZ Group CEO and TZ Limited Executive Director John Wilson TZ Inc COO Dickory Rudduck TZ Inc CTO 2 ’05 Annual Report ’05 Annual Report 3 ceo’s report a year of change and rapid growth In this year of transition, we have moved our technology from concept to commercial reality. We started the year as a company of eleven people in Sydney, new to life in a public company and with an expanding horizon of opportunity. (IFT) and converting The first fiscal quarter we focused our commercial priorities on securing applications for our Intelligent Fastening Technology the subsequent market validation into an expanded agreement with our partner, Textron Fastening Systems (TFS) aimed at increasing their commitment to commercialize IFT globally across multiple industry segments. We executed the new agreement late in 2004 and in so doing set the course for the realization of our vision to create a new fastening standard based on our protected Intellectual property. In April 2005, through a global promotional and media campaign, TFS formally launched InteviaTM , based exclusively on our IFT technology and received broad industry recognition. Our technical priority centered on implementing a systematic approach to testing and validating fastener and smart material actuator designs and commencing a multi year Technology Development plan that will deliver industrial grade verified fastener designs supported within a common electronics and software architecture. Early in 2005 we commissioned a state of the art test and verification facility in Chicago that is proving invaluable, not just in testing, but also in optimizing fastener design and developing proprietary software control algorithms. Our deepened knowledge of smart materials and how to harness them represent significant know-how. As anticipated providing commercial, technical and relationship support from Australia to the growing momentum in the United States and Europe became increasingly difficult, in late 2004 the decision was made to accelerate the move to the USA and relocate the whole TZ team, several with young families, to Chicago to be closer to our partners, their customers and the market. To the TZ team who accepted the challenge, moved from a Sydney summer to a mid-west winter, I applaud your commitment and belief in yourselves and our shared vision. In March 2005 we completed the acquisition of PDT a move that dramatically increased our ability to develop commercial Applications and the underlying intelligent fasteners, software and electronics. The PDT and TZ teams have integrated well and our collective capability now covers all aspects of product development from innovation of concept through to manufactured product – a broad capability fundamental to our future success. PDT under Marks direction has proven to be an impressive organization, the anticipated synergies are materializing and PDT is on track to achieve its full year objectives. To the outstanding PDT team thank you for easing our transition and making us welcome. Throughout the year IFT continued to receive recognition as a commercially significant technology and in April 2005 Textron Fastening Systems introduced the first commercial aerospace applications, receiving strong interest and commercial orders from leading companies in the sector. We anticipate a similar response to the next two commercial applications due to be released by the end of the year, with another two to follow in the new calendar year. In the past year we worked hard to win validation and market acceptance. This required us to develop unique solutions for diverse customer problems, each one requiring a special fastener design, this is appropriate to “bootstrap” and validate the technology but it does not provide the leverage to engage hundreds or even thousands of customers. A critical factor as we go forward is to weight our efforts on the core technology of IFT; smart materials actuation, fastener concepts, software and proprietary electronics, it is on this platform that future applications will be built. Our top priority is to complete the series of fully tested fastener families with commercial grade software and a documented Application Programming Intereface and evaluation kit. This will transition the proliferation of the technology, volume manufacturing and customer engagement to our partner, Textron Fastening Systems. This is the fundamental intention of the new agreement and the past years work augers well this planned shift in focus. Our stated objective is to create and industry standard based on our intelligent fastening technology and TZ operating system. Industry standards are powerful forces that can endure for decades. A well recognized example is Microsofts’ Windows™ operating system where today tens of thousands of companies create software for literally millions of application needs. This success was a combination of Microsoft’s unwavering long term focus, sustained improvement of the technology over many years (from MS-DOS to Windows XP) and encouraging more and more companies to use the technology as a platform on which to build software products and systems. For Microsoft the initiating force in their success was IBM’s Industry leadership; a company with an imperative to gain competitive advantage in an emerging market (the Personal Computer) that was threatening its core business, (the MainFrame Computer). Our relationship with Textron Fastening Systems draws on these obvious lessons and references the many parallels. Leveraging an Industry Leaders credibility, access to markets and their need for competitive differentiation, we believe will lead to broad acceptance of our underlying game changing platform and by progressively improving it over time hundreds of companies can integrate it into their product strategies leading ultimately to its commoditization and adoption as an Industry Standard. Consistent to delivering this goal we are bringing management into the company with the relevant background and experience. I am pleased to welcome to the company Bernard Perrine who, until accepting our offer, was the General Manager of marketing for the Windows Mobile and Embedded Devices Division at Microsoft. Bernard will join us in late October as the CEO of TZ Inc and will be a valuable addition to an already strong leadership team. To John, Dickory and Mark and your outstanding teams I thank you for a job brilliantly done in this year of transformation. And to our shareholders, I thank you for your ongoing support and for your foresight investing in a small Australian company with high aspirations, in so doing you have allowed us to make the transformation evident in the past year. Rest assured you have a committed and talented team of results oriented people building a company we can all be proud of. Chirs Kelliher TZ Group CEO 4 ’05 Annual Report ’05 Annual Report 5 the TZ group structure augmenting our operations expanded group capability deepening strategic execution competence World leader in assembly enabling technology Fully integrated product development services company Technology licensor: intellectual property creation technology development application development system integration technology licensing Multi-disciplinary capability: research industrial design mechanical & electrical engineering software development tooling and pilot production TZ Limited Board Tony Liebowitz, Chairman Chris Kelliher, Executive Director John Falconer, Company Secretary Group CEO Chris Kelliher TZ Inc CEO Bernard Perrine Group CFO Noel Gewarges PDT CEO Mark Schwartz TZ Inc COO John Wilson TZ Inc CTO Dickory Rudduck Acquisitions Smart Materials Software Other New Business Actuators Intelligent Closures Intelligent Packaging Intelligent Containers New IP 6 ’05 Annual Report ’05 Annual Report 7 the year ahead accelerating our plans for growth The company anticipates undertaking a number of strategic objectives in the year ahead. Textron Fastening Systems Textron Inc announced in early September of this year they were reviewing strategies to improve the performance of its US$2B subsidiary, Textron Fastening Systems (TFS) and as such may consider selling certain or all TFS assets based on the determination of that review. This announcement is consistent with TZ Inc management’s understanding of Textron’s strategy to focus on value based businesses, investment in new products and technologies and to move away from under performing commodity based assets. featured Intelligent Fastening in Textron’s Technology Intevia™ has constantly investor communications as an example of their future value based growth strategies. In the light of the recent Textron announcement, Textron and TFS have restated their full commitment to Intevia™ and the future of the TZ Limited relationship and other opportunities. Since the announcement, open and ongoing communication between the senior management of TZ Inc, TFS and Textron Inc are taking place. TZ Inc management is fully informed and satisfied with the direction that the strategic review process is taking and is firm in its view that this development will present opportunities to accelerate business growth and support our stated objective of pursuing a NASDAQ listing in the course of the next calendar year. Commercialization of other Intellectual Property The company owns and is continuing to develop significant Intellectual Property (IP) in technology outside IFT and the license agreement with TFS. To date, commercialization efforts have focused predominantly on IFT and building the Textron relationship and commercialization foundations. With the basic IFT building blocks now in place, the company will explore licensing opportunities for its other valuable IP and in the course of next year, will implement a structured program to target technology partners prospective PDT PDT continued to perform strongly this year and will build on that momentum by continuing to scale the business through the ongoing development and further acquisition of branch offices. PDT has shown that this model effectively leverages existing overhead and access to the lower cost Ukrainian resource pool to drive strong profitability. These offices also further expand the PDT footprint to support existing strategic customers who desire a local presence and will underpin future business development efforts to win new and large strategic clients who see value in full service capability and access to low cost, high quality engineering (Ukraine) and Asian manufacturing resources. In line with this initiative, PDT has invested in the development of a tightly controlled product innovation and development process which was recently audited for ISO 3485 Certification (medical device design). This highly coveted certification is central to PDT’s strategy of expanding into the highly lucrative medical device market. Certification is expected in this calendar year and when secured, PDT will be the first product development firm to achieve this recognition for its proprietary process. PDT will continue to support the company’s drive to bring intelligent fastening to market by supporting development of core fastening technology, developing applications and assisting in the commoditization of the fasteners themselves. Technology Development Technology development will continue to focus on delivering commercial grade fasteners supported by software and electronics. By December, three fastener families will be fully verified, tooled and in pre-production manufacturing. These three new fastener families, which will be branded by TFS as the S, IL and R series will provide a base technology offer enabling many application opportunities to be pursued and underpin TFS application solutions for security, rapid assembly, rapid reconfiguration and maintainability. These industrial strength fasteners will initially be launched as part of an Evaluation Kit with remote communications software that will allow prospective customers and interested third parties to fully evaluate applications of the technology and to better explore and understand the full multi-functional capability that these intelligent fastening devices can offer as part of an assembled system. TZ’s proprietary intelligent fastening operating system allows for secure and rapid maintenance procedures ’05 Annual Report 9 the year ahead Availability of these kits is planned for launch in early 2006 and will be targeted at the design and engineering community. These Evaluation Kits will be upgradeable, by a software release which will be made available later in the year, that will provide for a full Engineering Development Kit. It is anticipated that these Kits will support demand creation for Intevia™ solutions as designers and engineers embrace the capability of independently engineering applications to meet specific needs. This software will be the first commercial release of the TZ Operating System (TZ-OS). Futurewall Futurewall was launched in Australia and gained momentum in its first year with significant sales volume being achieved well above initial expectations, In recent months, the licensee has not been able to sustain these levels of sales due to recent events unrelated to the marketability of the product. The company to restructure the current licensing arrangement to ensure that the potential of the product is maximized in the Australian market. investigating options is currently In addition, a product extension is currently planned to add additional functionality to the core system that will capitalize on identified market opportunities and increase the attractiveness of the offer. Encouraging progress is also being made in China for manufacturing and distribution and the launch of the product in the USA although slow to date, will receive increased management focus with an injection of dedicated and appropriate resources to build on the identified opportunities. Management believes that an opportunity exists to build a highly profitable global Futurewall business by revisiting the current licensing and distribution model and exploring avenues for TZ to directly influence market outcomes and derive an increased share of the proven profit potential. Organisational Development The company is deepening its talent base and execution capability to fully capitalize on opportunities. To manage the integration of a growing number of entities in the TZ Group and ensure the planned synergies, strategic integration and growth, the role of Group CEO has been introduced and will be filled by Chris Kelliher. Joining the leadership group as CEO of TZ Inc is Bernard Perrine, will leave his current role at Microsoft to take up this position in late October. Until this appointment, Bernard was the General Manager of Marketing for the Mobile and Embedded Devices division responsible for global sales and marketing teams for WindowsTM mobile software for pocket PC’s, Smartphones and embedded devices. Prior to joining Microsoft, Bernard was vice president at Eastman Kodak responsible for their global retail photofinishing business and prior to that, a founding partner at Kinko’s Inc. Bernard’s proven success and considerable experience make him well qualified for this position. His experience at Microsoft will bring an insightful dimension to the companies increasing focus on software which is critical to establishing IFT as an industry standard for remotely activated assembly systems. It is anticipated that another Group Role will be established during the course of the year to bring the appropriate focus to other IP platforms, licensing opportunities and emerging new business. for intelligent Acquisitions Smart materials actuation is a fundamental enabling technology fastening devices. Management believes the acquisition of a smart materials supplier is strategically important to enable TZ to produce proprietary actuator designs for high temperature and high duty cycle actuators which will provide competitive advantage, broaden the application opportunities, produce incremental revenue and guarantee the supply of these materials. The company has identified a number of potential acquisition targets and in September the company entered into a Memorandum of Understanding to acquire a leading smart materials supplier and Technologist. Discussions are progressing and a decision will be made in the near future. There is a cross company requirement for additional software development and electronic engineering capability. These are currently being met by organic growth within PDT and ramping up the deployment of Ukraine based software engineers. It is possible this growth will need to be supplemented through the acquisition of appropriately skilled and established Illinois based businesses, several of which have already been identified. TZ’s testing facilities in Chicago are used to ensure fasteners and actuators meet the specified standard for a variety of commerical applications. ’05 Annual Report  introducing The Premier Global Multi-industry Company 2004 Revenue: USD$ 0.2 billion (NYSE: TXT) operational review securing our channel to market 22% • bell helicopter • textron systems 19% 24% cessna textron financial 5%5% 30% industrial • E-Z-GO • Fluid & Power • Greenlee • Jacobsen • Kautex “We have secured a globally committed commercialisation partner in TFS with the industry presence and global scale of sales, manufacturing, engineering and distribution resources needed to build an extensive application sales base.” John Wilson, COO and Co-founder of TZ Inc Dickory Rudduck, TZ Inc CTO; John Wilson, TZ Inc COO; Rick Clayton, TFS President; Seshu Seshasai TFS EVP of Technology; Maritn Schnurr, TFS EVP of Sales and Marketing; and Chris Kelliher, TZ Group CEO reviewing the various strategic After licensing options available to the Company, TZ management determined the most appropriate path forward and commenced the structured negotiation process with TFS executives. The last quarter of 2004 saw heavy commercial negotiation, substantive due diligence on TZ’s intellectual property and robust modelling of the IFT revenue opportunity. With new obligations for each party agreed to, licensing terms defined and a formal agreement signed, TFS secured the global rights to commercialise IFT across all industry sectors. A significant focus for management at the start of the operational year in July 2004 was the development and nurturing of the technology partnership relationship with Textron Fastening Systems (TFS). The original one-year agreement on which the parties based their 2003/04 collaboration expired in August 2004 providing the impetus for both parties to move forward to define an on-going and substantial relationship. Underpinned by the ground swell of market interest, the initial launch of the technology to the aerospace sector early in 2004, and significant awareness building for Intelligent Fastening Technology (IFT) through TFS’ public relations initiatives, it was clear that an exclusive relationship would create a solid platform for the broad commercialisation of IFT, accelerate the Company’s growth plans and support TZ’s stated objective to establish IFT as a new industry standard. 2 ’05 Annual Report ’05 Annual Report 3 operational review deploying dedicated resources “Our global presence, technology resources and sales and marketing network give the wherewithall to establish this technology as an industry standard within a few years.” Sesh Seshasai, EVP of Technology for TFS On signing the agreement, TFS put into action immediate steps to build a flexible and responsive IFT organisation and allocate dedicated resources to commercialisation. Using the highly profitable and fast growing global aerospace division as the structure to incubate the IFT business, TFS appointed senior VP level executives across the marketing and technical functions to lead the IFT business, supported by high level senior management appointments in product management, application engineering and business development roles. The appointment of predominantly Six Sigma Black Belt certified resources to the IFT business, clearly demonstrated TFS’ commitment to the technology and the push for successful execution of commercialisation plans. Six Sigma is a disciplined, data-driven approach and methodology for change management and the achievement of quality and near perfection in any process -- from manufacturing to transactional and from product to service. Black Belts are typically high performing senior managers who are fully trained, certified and experienced in the principles and practical application of Six Sigma methodology. As of June 2005, there were six dedicated full-time IFT resources and a substantial compliment of shared TFS resources across Europe, US and Asia sales and marketing, application engineering, product engineering and operations focused on supporting IFT based activity. In support of this new structure, TZ reallocated and employed additional resources to compliment TFS’ organisation and provide a sound foundation for competency and skill sharing. We have a close working relationship with TFS working through all the aspects of prod devt through to commercial projects. ’05 Annual Report 5 At Textron Fastening Systems, some of our most exciting products are hidden. Miniature fasteners for electronic applications, “blind” fasteners for aircraft – even fasteners with microchips driven by remote devices. These new Intevia “intelligent” fasteners are even replacing traditional lock and key, enhancing both access and security. Isn’t that “smart”? We’re making fasteners smart. operational review acheiving commercial validation Several application development opportunities in the Automotive, Aerospace, Defence and Security industries are currently progressing through TFS’ new product and services introduction process. Secure Latching System for the Aerospace Industry Initiated in August 2004 and launched in April 2005, the Secure Latching System represents the world’s first commercial implementation of intelligent fastening technology. This product is an innovative secure electronic latching solution for aircraft interiors, which meets the needs of the aerospace industry for cost-effective security, systems integration and management, and weight reduction. The initial customer for the secure latching system is UK-based aircraft interiors company, MacCarthy Interiors, who intend to apply the product to their first and business class stowage systems. MacCarthy Interiors takes pride in offering innovative, design led production solutions to their customers who include Virgin Atlantic Airways, British Airways, KLM and Airbus. The new intelligent latch has a slim-line profile to allow flush mounting into aircraft monuments and offers increased functionality and reduced weight compared to the heavy electro-mechanical latching systems in use currently. The new mechanism comprises a dynamically adjustable mechanical locking system, smart materials actuation, integrated sensors and embedded microprocessors, which are software controlled, allowing a hierarchy of secure control devices from contact switches to touch screens. The potential to network into the aircraft system extends local control to centralised stations for single point lock down of multiple units. The latching system is controlled by an integrated contact key mat door handle which, when touched, instructs the latches to release and visually indicates a locked or unlocked status via dual colour LED’s. Concepts for the Security Market Building on the enormous demand for security products, TFS has developed concepts to showcase the potential of IFT as a breakthrough platform in electronic system locking. The emerging convergence between the physical security market and the IT industry is seeing items such as locks and entry systems being upgraded to work with the same computing systems that control computer and network sign-on and identity management. Spending in 2005 on convergence projects in North America and Europe is expected to be over USD$ . billion. The remotely activated drawer and cabinet locking system provides improved operator efficiency, ergonomics and ease of use and removes the issues associated with the management of physical keys. The integrated intelligent locking mechanism offers improved aesthetics and security with no visible locking points. Drawers and safe doors self eject when unlocked providing easy access to users. The concept has the potential for integration into a range of other security systems including enterprise wide access control systems. Textron’s 2004 Annual Report (p3 shown above) showcased a secure cabinet locking concept for the financial banking sector 3 ’05 Annual Report 7 operational review establishing early adopter relationships operational review targeting industry sectors A concerted program is underway working across all segments of the aerospace industry including commercial aviation, business jet, helicopters and aerospace defense, to secure relationships with early technology adopters. Stage 4: Proliferate Across Other Segments Utilise these application platforms and proven track record of performance to spring board into new segments with a range of product variants to new customers. Stage 5: Expand the Engagement Model Evaluate existing partner relationships to ensure they do not hinder broader market penetration within segments and expansion into new areas through focused cost reduction, operational effectiveness and industry demand. Stage 6: Exploit Maturing Market Opportunities Increase market acceptance will stimulate broader market interest and accelerate adoption, leading to the point where IFT becomes a base technology required by the majority market as a means to compete with early adopters of the technology. While the early opportunities provide an encouraging endorsement of the potential of the technology, since the signing of the new agreement, TFS has embarked on a more structured approach to commercialisation. A six-stage business strategy the broad commercialisation of IFT has been developed. Since the start of this year, focus has been on the successful execution of Stages  to 3: for Stage : Establish Internal Conditions Establish the necessary internal conditions and infrastructure to support early commercialisation of IFT. Stage 2: Form Early Adopter Relationships Establish segment specific deal driven relationships with ‘Early Adopters’ who see the potential for the technology and provide initial application opportunities for TFS in a controlled and structured rollout. These partnership relationships are critical to successful commercialisation as they provide the means for technology introduction and to proving technical, commercial and market viability. these specific Stage 3: Exploit Specific Segment Niches Leverage to drive commercial opportunities within the segment to establish a commercial platform of application solutions and product offerings. relationships Concepts on display at the 2005 Hamburg Expo included a biometrically controlled latching system, remotely releasable access panels and an aircraft seat attachment system for rapid reconfiguration. Targeting Automotive Building on the aerospace sector launch, preliminary market scanning commenced in earnest in May 2005 in the automotive sector to identify the key value drivers on which IFT can support a strong proposition to the industry. Targeting mainly the major European automotive players, several initial application opportunities have been identified and projects are currently being progressed. A systematic launch to the major automotive OEMs is scheduled for rollout in late 2005. ’05 Annual Report 9 Targeting Aerospace Building on the strong interest in IFT received at the Hamburg Aircraft Interiors Expo 2004, TFS chose the 2005 event for a major demonstration of Intevia™ capability. The presentation was underpinned by a strong message promoting the benefits of the technology in improved security, improved maintainability and rapid reconfiguration. With over 0,000 visitors from over 00 countries and 50 airlines, the three day aircraft interiors event provided TFS with an opportunity to unveil a series of IFT concepts that it believes will bring fundamental changes to the way aircraft interiors are designed, serviced and adapted to market requirements. The event exceeded expectations with significant interest from major aerospace industry leaders who see the technology as a key enabler for strategic initiatives and product differentiation. A concerted program is underway across all segments of the aerospace industry including commercial aviation, business jet, helicopters and aerospace defence, to secure relationships with early technology adopters. Given the nature of the aerospace industry, non- disclosure undertakings prohibit TZ from outlining these commercial engagements and application opportunities, although significant traction with the targeted major segment players is generating a sound base of solid commercial opportunities. operational review launching the TFS Intevia™ brand The industry standard for the design, assembly, service and recycling of products that will completely change the dynamics of manufacturing across all industries. To establish the foundations for marketing efforts, TFS engaged an external marketing consultant to support the creation of the Intevia™ brand and the development of a branding strategy to correctly position the technology in the market. All market communications are aligned to establishing Intevia™ as the recognized industry standard. In addition, sub-brand messaging along four broad based end-user benefits have also been articulated, i.e rapid assembly, rapid reconfiguration, improved security and improved maintainability, and promotional material such as brochures, multi-media and video format have been developed to support targeted communication strategies for each market segment. 20 ’05 Annual Report A TFS promotion for the Intevia™ latch ’05 Annual Report 2 operational review earning prestigious acclaim Supporting public relations and awareness building activity continued to be strong over the year. The technology was featured in several cover stories and articles in leading industry publications including Designfax, Surface Mount Technology, Sensors and Design News. Additionally, Intevia™ was selected as Product of the Month in the June 2005 edition of NASA Tech Briefs magazine, the largest U.S. circulated engineering magazine. Subsequently, Intevia was nominated as a finalist and contender for its Product of the Year 2005 award, representing significant industry recognition and a substantial opportunity for promotion and business development with U.S. government agencies. When the U.S. Congress formed NASA in 958, it mandated that NASA and its contractors must report any newly developed commercially significant technologies to industry so that engineers, managers, and scientists could improve their competitiveness and productivity. For more than three decades, this has been accomplished through the publication of NASA Tech Briefs. The Tech Briefs also provide their readers with a technology support package, which explains the technology in detail and provides contact points for questions or licensing discussions. 23 ’05 Annual Report 22 ’05 Annual Report operational review building systems and assembly enabling technology Given the significant focus on TFS activity over the year, the Company has not been able to dedicate significant attention to other technology initiatives. In addition, certain events have also limited the extent of planned activity: FutureWall Technology The market acceptance of FutureWall as an integrated office furniture and partitioning system and sales to the professional office fit-out market in Sydney, Melbourne and Perth showed strong growth in 2004 and early 2005 with the system clearly emerging as the product of choice for the professional services market. Successful fit-out implementations at Cutler Hughes Harris, Corrs Chambers Westgarth and Kemp Strang Lawyers clearly validated the product’s strong value proposition and market potential. In the first full year of sales, volumes exceeded initial expectations and with over $5Million in potential sales under tender, the Company was anticipating sustained growth through 2006. In recent months, however, the licensee has not been able to realize these opportunities due to events unrelated to the marketability of the product. The company is currently investigating options to restructure the current licensing arrangement to ensure that the potential of the product is maximized in the Australian market, which will in turn provide a solid platform for regional growth into Asia, the US and Europe. Preliminary steps have been taken to explore identified opportunities in China for manufacturing and distribution, and the Company has continued to validate the potential for the system in the US with structured presentations to various leading architectural firms and market influencers. Steps towards finalizing distribution relationships in the US have been put on hold pending resolution of the Australian business. Our ability to validate the high growth potential and profitable nature of the FutureWall business, which has until now been successfully demonstrated in the Australian market, will be fundamental to marketing the FutureWall technology in other to prospective customers territories. Assembly Enabling Technology Over the year, the Company has continued to pursue a more substantial and expanded innovation partnership with Alcoa Engineered Products to underpin the commercialisation of the Company’s other assembly enabling technology. Until recently this was progressing positively with a number of opportunities identified and a major development project underway with a dedicated launch customer for a major DIY residential building product offering. Unfortunately, the recent restructure of the Engineered Products Division and the accompanying leadership changes have now stalled these programs. We are awaiting advice as to the future direction of the Division under the new leadership and will re-engage once the new executive team settles into the role. We have continued to maintain our relationship with the launch customer for the DIY product and are currently exploring independently of Alcoa, other quick-to-market product development opportunities that can be driven through their established channels to national retailers. 24 ’05 Annual Report A FutureWall installation in the Sydney offices of the law firm, Kemp Strang ’05 Annual Report 25 intellectual property update protecting shareholder value Ongoing intellectual property creation and prosecution is ensuring the creation of sustainable value for our shareholders and customers. The significant portion of the IP portfolio has been built to protect the landscape for Intelligent Fastening Technology and the practical commercial application of the technology across multiple market sectors. Application Patents This year, ten new application patents were generated in several application areas in support of the significant push into the aerospace industry, particularly in aircraft reconfiguration, maintenance and security. Patents targeting the automotive sector have primarily been in the area of seat attachment and safety. The total number of Application Patents at the end of the financial year was 9. Core Technology Patents The various research and development projects undertaken by the Company over the year has generated several new actuator systems, fastening mechanisms and electronic control algorithms for SMA. Many of these new innovations have been patented and collectively reinforce TZ’s core IP position. The total number of Core Technology Patents at the end of the financial year was 5. A New Well of Ideas TZ’s recent acquisition of PDT has allowed the Company to capitalise on a wealth of creative capability that will support new initiatives in commercial product development and future IP and technology licensing. A new initiative designed to consolidate the combined potential under a structured program, Informed Innovation, will harness the company’s unique ability to generate new product ideas and product creation opportunities. The program is intended to deliver patented innovations of exceptional value and relevance to targeted customers. The program builds on the Company’s understanding of the technological and business worlds, empathy with market needs, and a capability that spans both creative and practical implementation phases. Currently seven new patents have been filed to support defined opportunities in the medical, retail, closures, and software industries. combined with IP Maintenance: A Core Business Process The commercialisation of IFT through the TFS the Company’s relationship expansion through the acquisition of PDT has greatly increased activity around IP and trademark creation, confidentiality, and the protection of know-how and trade secrets. Given the significant importance of IP management to the Company’s future, TZ has employed a U.S. Patent Attorney as in-house legal counsel to develop administrative systems and robust processes to support group activity and to improve the ongoing management of the IP portfolio. A significant advantage of this in-house capability is the potential reduction in IP prosecution costs as TZ now interfaces directly with the United States Patent and Trademark Office for the lodgement, examination and review of Provisional Patents and National Phase Applications. For continuity of IP strategy, all IP activity continues to be strategically overseen by the Company’s original Australian patent lawyers, Chrysiliou Law. The Intevia™ Latch undergoing rigorous life-cycle and strength testing in the TZ Lab ’05 Annual Report 27 technology update creating the next industry standard “We’re taking the Company from a research and custom solutions phase to the commercial production of fully engineered, certified technology platforms with broad application potential.” Geoff Sizer, GM Technology Development The TZ development team has grown from its initial nucleus of a few clever engineers to a well structured technology development team comprising senior mechanical engineers, industrial designers, electronics engineers, software developers and production engineering specialists. In-house competencies are further supplemented where needed by renowned consultants and industry experts in specific fields of interest to reinforce the Company’s technological position and know-how. At the implementation level, manufacturing is undertaken by a network of trusted sub-contractors located in the U.S., Australia and Asia. Technology development has been undertaken as part of a structured and planned process. Team structure, facilities and development tools have been established to support future plans for rapid growth as the product commercialisation initiatives increase. Specifically, development work has focused on the investigation of smart material properties, the design and development of mechanisms, electronics and software development, production engineering and the manufacture of production fasteners, software tools and sensing systems. Collectively, this effort has culminated in the realisation of: • Several fastener product families • A standard electronics platform design • An Intelligent Fastening operating system destined to become the industry standard. Additionally, research and testing of Nickel Titanium (NiTi) SMA and other smart materials is establishing the foundations for an evolution of increasingly advanced intelligent fastening solutions. Work is also underway on the design and development of an Application-Specific Integrated Circuit (ASIC or custom microchip) to further reduce fastener size and cost. Some fasteners exceeded expectations for durability in the lab ’05 Annual Report 29 technology update technology update developing robust technology for broad application adding to a family of intelligent fasteners After extensive life-cycle and strength testing, some fasteners have exhibited durability that far exceeds specified requirements for a range of specified applications. Development fundamental elements of Technology which are: initiatives stretch across the five Intelligent Fastening • A fastening mechanism • Smart materials actuation • Embedded electronics • Integrated sensors • Software control These elements create complete intelligent fastening systems which can be designed to satisfy a wide range of application requirements. Over the past year, development efforts across all five elements have led to a significant achievement with the delivery of a sound platform for the commercialisation of first generation IFT enabled products. Additional fastener families are currently progressing through their development phases, including linear strip fastening and perimeter seals, linear and quarter turn actuators, stressing fasteners, magnetically actuated fasteners, temporary fasteners for aircraft manufacture and a number of novel mechanisms which may be incorporated into future fastening designs. family fastener Each incorporates standard TZ electronics and operating system designs, including a communications network interface for monitoring and control, internal sensing functionality, auxiliary control outputs and auxiliary sensing inputs. Designs are modular to allow configuration into a wide range of situations. A key aspect of fastener development is endurance and verification testing of fastener designs. Purpose designed test rigs and proprietary “SmartTest” PC- based software has been developed to enable a comprehensive design characterisation and endurance testing program. Testing to date has shown fastener families to exhibit durability that far exceeds specified requirements for the range of commercial applications currently under consideration. Development to date has delivered four discreet families of intelligent fastening mechanisms with each configuration possessing inherent properties making it suitable for certain practical applications. The Radial Mechanism The Radial Mechanism family consists of fasteners for high load bearing, high life cycle applications, including more robust versions for demanding aerospace and automotive applications. The Inline Mechanism The Inline Mechanism family of fasteners can satisfy a wide range of locking and latching applications, with versions certified for use in the cabins of commercial airliners. The Overhang Clip The Overhang Clip family consists of relatively simple, inexpensive fasteners for panel attachment, connector retention, PC security and other commercial applications. The Ring Grip The Ring Grip family consists of medium load bearing fasteners for panel attachment, part attachment and low security locking applications. 30 ’05 Annual Report ’05 Annual Report 3 product development technologies providing new opportunities for growth “The success and strong growth we have acheived is expected to continue as we add new capabilities and move into new areas of significant potential such as medical devices.” Mark Schwartz, CEO and President of PDT The acquisition of the Chicago based PDT, was completed on 8th of March 2005. This was an important step in corporate development adding substantial value to the Company as a core building block for future strategic initiatives. Headquartered in Chicago, Illinois, PDT employs 42 people in five international locations and offers a total capability in product development including competencies in research, product ideation, design and engineering, electronic and software engineering, model-making, rapid prototyping and tooling. PDT’s reputation has always been stamped with a theme of sustained and profitable growth. This year has been no exception with the establishment of two new offices to strategically expand the company’s global footprint. The United Kingdom office based in Oxford, will provide access to the opportunities identified with the growing base of European clients and will strengthen the company’s position in the design industry through a culturally diverse design team. Similarly, the newest office, located in Plymouth, Minnesota, is a conduit to Minneapolis’ rich medical device manufacturing community and will offer a strong base to deliver the company’s objective of expanding the client base in the medical industry. Scott Semenik and Mark Schwartz, founders of PDT To further support the goal of increasing PDT’s medical client base, the Company has applied for ISO 3485 certification. This certification is a quality management system created specifically for medical devices. Upon completion of the audit process, PDT will be the only design firm in the United States with this qualification, making it uniquely qualified to serve clients in this industry and giving the Company more traction toward its growth plans. This year, PDT has also added electrical engineering and software capabilities to its already impressive list of competencies. These departments are led by a highly qualified manager based in Lincolnshire, Illinois who directs a strong and competent team located in the Ukraine. With the addition of these new electrical engineers and software specialists, the Ukrainian office has grown to house 38 high-level employees. PDT applied its multi-disciplinary capabilities to research, design and engineer an innovative concept phone for Qualcomm ’05 Annual Report 33 product development technologies prototyping and engineering successful products “We have a wealth of knowledge and experience in capturing complex design concepts to create high quality tools in the quickest and most cost-effective manner using the latest technologies.” Ray Wiltgen, GM PDT Tooling Production The design end of PDT’s business has been growing rapidly fuelled by large-scale turnkey development agreements with new and existing customers. Cobra Electronics continues to be a loyal client, entrusting PDT’s design, engineering and user interface groups to work with Cobra’s teams to develop several products. Both companies have received accolades from the Consumer Electronics Association for their work in the form of a “Best of Innovation Award” for the SkyNav 3000 Advanced Mobile Navigation System and “Design and Engineering Showcase Awards” for the SkyNav 2000 and 3000 Mobile Navigation as well as the XRS 9700 Radar Detector. from In addition to the honours from the Consumer Electronics Association, PDT has also received accolades the Chicago Athenaeum of Architecture and Design for its work on Swingline’s complete re-vamp of its stapler line. The products recognised were: The Companion Desktop Stapler, Invision Stapler, Speed Grip Electric Stapler, Optima Desk Stapler and the Optima Grip Stapler. The Swingline Optima Grip Stapler also received an “ADEX” Silver Award. The ADEX Award (Design Journal’s Award for Design Excellence) is the largest and most prestigious awards program for product design of furniture, fixtures and finishes marketed to the design trade. In addition to the awards given to the Swingline staplers, PDT has received another “Good Design Award” from the Chicago Athenaeum of Architecture and Design for its work on Fiskars’ 2004 Back to School line of products. Ray Wiltgen and Dave May, GM PDT Tooling Engineering The access to PDT resources has provided a dramatic increase in TZ’s capability to accommodate the many application development and commercialisation opportunities that are emerging as TFS continues to launch its IFT business strategy across the various participation sectors. The integration of TZ and PDT resources and multi- disciplinary capability has allowed TZ to work with TFS and its customers at every level of the development process, from concept ideation, product design and high volume production engineering to commercially integrate the technology into commercial, high value solution based offerings. PDT’s rapid prototyping and tooling facility in Lincolnshire, Illinois ’05 Annual Report 35 product development capability vertically integrated services and proven experience research user interface development electrical engineering & software tooling industrial design mechanical engineering laser scanning asian sourcing PDT’s design for the Cobra XRS 9700 Radar Detector received the “Design and Engineering Showcase” award from the Consumer Electronics Association ’05 Annual Report 37 (cid:48)(cid:36)(cid:52)(cid:0)(cid:80)(cid:79)(cid:82)(cid:84)(cid:70)(cid:79)(cid:76)(cid:73)(cid:79) (cid:48)(cid:36)(cid:52)(cid:0)(cid:83)(cid:69)(cid:82)(cid:86)(cid:69)(cid:83)(cid:0)(cid:67)(cid:76)(cid:73)(cid:69)(cid:78)(cid:84)(cid:83)(cid:0)(cid:73)(cid:78)(cid:0)(cid:86)(cid:65)(cid:82)(cid:73)(cid:79)(cid:85)(cid:83)(cid:0)(cid:73)(cid:78)(cid:68)(cid:85)(cid:83)(cid:84)(cid:82)(cid:73)(cid:69)(cid:83)(cid:0) (cid:83)(cid:85)(cid:67)(cid:72)(cid:0)(cid:65)(cid:83)(cid:26) (cid:35)(cid:79)(cid:78)(cid:83)(cid:85)(cid:77)(cid:69)(cid:82)(cid:0)(cid:37)(cid:76)(cid:69)(cid:67)(cid:84)(cid:82)(cid:79)(cid:78)(cid:73)(cid:67)(cid:83) (cid:52)(cid:69)(cid:76)(cid:69)(cid:67)(cid:79)(cid:77)(cid:77)(cid:85)(cid:78)(cid:73)(cid:67)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:83) (cid:47)(cid:70)(cid:70)(cid:73)(cid:67)(cid:69)(cid:0)(cid:51)(cid:85)(cid:80)(cid:80)(cid:76)(cid:73)(cid:69)(cid:83) (cid:45)(cid:69)(cid:68)(cid:73)(cid:67)(cid:65)(cid:76) (cid:50)(cid:69)(cid:67)(cid:82)(cid:69)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78) (cid:51)(cid:67)(cid:72)(cid:79)(cid:79)(cid:76)(cid:0)(cid:51)(cid:85)(cid:80)(cid:80)(cid:76)(cid:73)(cid:69)(cid:83) (cid:35)(cid:79)(cid:77)(cid:80)(cid:85)(cid:84)(cid:69)(cid:82)(cid:0)(cid:40)(cid:65)(cid:82)(cid:68)(cid:87)(cid:65)(cid:82)(cid:69) (cid:49)(cid:85)(cid:65)(cid:76)(cid:67)(cid:79)(cid:77)(cid:77)(cid:0) (cid:35)(cid:79)(cid:78)(cid:67)(cid:69)(cid:80)(cid:84)(cid:0)(cid:48)(cid:72)(cid:79)(cid:78)(cid:69)(cid:0) (cid:36)(cid:69)(cid:76)(cid:76)(cid:0)(cid:45)(cid:85)(cid:76)(cid:84)(cid:73)(cid:77)(cid:69)(cid:68)(cid:73)(cid:65)(cid:0)(cid:43)(cid:69)(cid:89)(cid:66)(cid:79)(cid:65)(cid:82)(cid:68) (cid:51)(cid:65)(cid:78)(cid:70)(cid:79)(cid:82)(cid:68)(cid:0)(cid:38)(cid:79)(cid:79)(cid:72)(cid:89)(cid:0) (cid:34)(cid:82)(cid:65)(cid:78)(cid:68)(cid:0)(cid:48)(cid:65)(cid:73)(cid:78)(cid:84)(cid:0)(cid:48)(cid:69)(cid:78)(cid:83) (cid:45)(cid:69)(cid:68)(cid:69)(cid:76)(cid:65)(cid:0)(cid:40)(cid:65)(cid:82)(cid:77)(cid:79)(cid:78)(cid:89)(cid:0) (cid:45)(cid:65)(cid:78)(cid:85)(cid:65)(cid:76)(cid:0)(cid:34)(cid:82)(cid:69)(cid:65)(cid:83)(cid:84)(cid:80)(cid:85)(cid:77)(cid:80) (cid:48)(cid:65)(cid:80)(cid:69)(cid:82)(cid:77)(cid:65)(cid:84)(cid:69)(cid:0)(cid:64)(cid:33)(cid:68)(cid:86)(cid:65)(cid:78)(cid:67)(cid:69)(cid:82)(cid:7)(cid:0) (cid:51)(cid:69)(cid:76)(cid:70)(cid:13)(cid:33)(cid:68)(cid:86)(cid:65)(cid:78)(cid:67)(cid:73)(cid:78)(cid:71)(cid:0) (cid:45)(cid:69)(cid:67)(cid:72)(cid:65)(cid:78)(cid:73)(cid:67)(cid:65)(cid:76)(cid:0)(cid:48)(cid:69)(cid:78)(cid:67)(cid:73)(cid:76)(cid:0) (cid:38)(cid:73)(cid:83)(cid:75)(cid:65)(cid:82)(cid:83)(cid:0)(cid:34)(cid:65)(cid:67)(cid:75)(cid:0)(cid:84)(cid:79)(cid:0) (cid:51)(cid:67)(cid:72)(cid:79)(cid:79)(cid:76)(cid:0)(cid:48)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:83) (cid:46)(cid:73)(cid:84)(cid:82)(cid:79)(cid:85)(cid:83)(cid:0)(cid:39)(cid:79)(cid:13)(cid:43)(cid:65)(cid:82)(cid:84) 38 (cid:48)(cid:36)(cid:52)(cid:0)(cid:41)(cid:78)(cid:84)(cid:69)(cid:76)(cid:76)(cid:69)(cid:67)(cid:84)(cid:85)(cid:65)(cid:76)(cid:0)(cid:48)(cid:82)(cid:79)(cid:80)(cid:69)(cid:82)(cid:84)(cid:89)(cid:26)(cid:0) (cid:45)(cid:65)(cid:71)(cid:78)(cid:69)(cid:84)(cid:73)(cid:67)(cid:0)(cid:44)(cid:65)(cid:78)(cid:67)(cid:73)(cid:78)(cid:71)(cid:0)(cid:36)(cid:69)(cid:86)(cid:73)(cid:67)(cid:69) ’05 Annual Report (cid:35)(cid:79)(cid:66)(cid:82)(cid:65)(cid:0)(cid:46)(cid:65)(cid:86)(cid:47)(cid:78)(cid:69)(cid:0) (cid:20)(cid:21)(cid:16)(cid:16)(cid:0)(cid:45)(cid:79)(cid:66)(cid:73)(cid:76)(cid:69)(cid:0) (cid:46)(cid:65)(cid:86)(cid:73)(cid:71)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:0)(cid:53)(cid:78)(cid:73)(cid:84) ’05 Annual Report 39 directors’ report directors’ report The directors of TZ Limited present their report together with the financial reports of the parent entity and its controlled entities for the financial year ended 30 June 2005 Directors The details of directors of the company during the year and to the date of this report are: A Leibowitz Chairman A Sigalla Resigned 5 July 2004 C Kelliher J Falconer Executive Director Company Secretary - Appointed 5 July 2004 J Wilson D Rudduck M Hadaway Resigned 5 July 2004 Resigned 5 July 2004 Resigned 5 July 2004 Operating Results The operating profit after income tax for the year ended 30 June 2005 for the consolidated entity was $4,082,90 (2004: Loss $,809,880). This operating profit is $403,000 more than the operating profit of $3,680,000 disclosed in the unaudited Preliminary Final Report announced to the market on 3 September 2005 due principally to a recalculation of exchange rate differences and a reassessment of accrued expenses. Earnings Before Interest Taxation Depreciation and Amortisation (“EBITDA”) was $5,79,590 (2004: Loss $39,992) Review of Operations The year ended 30 June 2005 was the first full year of operations in which Telezygology Inc. operated as a wholly owned subsidiary of TZ Limited. Revenue for Telezygology Inc was $9,828,86. In March 2005 the PDT group in Illinois, USA, was acquired. Revenue included in the consolidated entity from the date of acquisition to 30 June 2005 was $8,390,277. Principal Activities The principal activities of the consolidated entity during the financial year were the development and licensing of intellectual property relating to fastening systems through the wholly owned subsidiary, Telezygology, Inc. After the acquisition of the PDT group in March 2005, the activities of the consolidated entity included a full service capability in product design, mechanical and software engineering, injection molding tooling and rapid and pre-production prototyping. All of the operations of the consolidated entity are now based in Illinois, USA. Significant Changes in State of Affairs At a general meeting of shareholders held on 5 July 2004, and as foreshadowed in the Company's prospectus in March 2004, the issue of 6,000,000 shares was approved to a company associated with a former director of the Company for services rendered to the Company. The full amount of this accrued liability of $2,244,000 was included in the financial accounts for the year ended 30 June 2004. The Company completed a fully underwritten share issue in December 2004 and January 2005 to raise $8,078,000, before costs. The Company acquired 00% of the PDT group in March 2005 for a cash and share consideration of $USD2 million ($5,584,000) with earn-out conditions for the 2005 calendar which may reduce the final consideration. Likely Developments The particular information required by s299() of the Corporations Act (2002) has not been included in this report, as the inclusion of such information is likely to result in unreasonable prejudice to the Company. Dividends No dividend has been paid or declared since the commencement of the financial year. The directors do not recommend the payment of a dividend. Information on Directors Mr Tony Leibowitz Non Executive Chairman Mr Tony Leibowitz is an investment banker, Chairman of Chandler McLeod Limited and NCML (Holdings) Limited and a director of Babcock and Brown Environmental Investments Limited, all ASX-listed companies. Mr Leibowitz is a former senior partner of PricewaterhouseCoopers, specialising in financial advisory services and is a Fellow of the Institute of Chartered Accountants in Australia and an Affiliate of the Securities Institute of Australia. As at the date of this report Mr Leibowitz had the following interest in securities in the Company: Interest in shares ,493,748 Interest in options ,000,000 Mr Chris Kelliher Executive Director of TZ Limited and the Chief Executive Officer of its wholly owned subsidiary, Telezygology Inc. Mr Kelliher's role is to expand and strengthen execution capability, lead the USA business expansion and have overall responsibility for the Company's operating entities. Mr Kelliher has ov--er 9 years experience managing technology based companies ranging from startup ventures to subsidiaries of large multinational companies. He was appointed Managing Director of Microsoft South Pacific Region in 996 after 3 years as Managing Director of Microsoft's Australian subsidiary. Prior to this, he spent 3 years as the founding Managing Director of Microsoft in New Zealand. Before this he held senior management positions with Digital Equipment Corporation and Philips. As at the date of this report Mr Kelliher had the following interest in securities in the Company: Interest in shares ,46,569 Interest in options 4,727,82 Mr John Falconer Non Executive Director and Company Secretary Mr Falconer is a Fellow of the Institute of Chartered Accountants in Australia and an Associate of the Securities Institute of Australia. He is the principal of Carbone Falconer & Co, a small firm of Chartered Accountants in Sydney providing specialist services to private and public company clients. He is a director and company secretary of Kingsgate Consolidated Limited and Taragon Property Fund, and the company secretary of Tri Origin Minerals Ltd, all ASX-listed entities. As at the date of this report Mr Falconer had the following interest in securities in the Company: Interest in shares ,388,82 Interest in options ,388,82 Directors Meetings The number of directors' meetings and number of meetings attended by each of the directors of the company during the financial year were: Directors Meetings No. of Meetings Held No. of Meetings Attended A Leibowitz C Kelliher J Falconer A Sigalla* J Wilson* D Rudduck* M Hadaway* 3 3 3 - - - - 3 3 3 - - - - 40 ‘05 Annual Report ‘05 Annual Report 41 directors’ report directors’ report * Each of these directors resigned as a director of the Parent Entity on 5 July 2004. Other matters were dealt with during the year by way of circular resolutions signed by all Directors. Directors and Executive Officers Remuneration Report The company's policy for determining the nature and amount of emoluments of board members and senior executives of the company is as follows: Directors' Fees are paid to Non Executive Directors as approved from time to time by shareholders. The last increase was approved by shareholders at the General Meeting held 5 July 2004 and allowed for a fixed sum not exceeding $250,000. Emoluments paid to senior executives of the company are determined by the Executive Director and the Board of Directors. The broad remuneration policy is to ensure the remuneration package properly reflects the person's duties and responsibilities and that remuneration is competitive in attracting, retaining and motivating people of the highest quality. Details of the nature and amount of each major element of the emoluments of each director of the company and the consolidated entity are: Role Salary, Fees & Superannuation Non-Cash Commissions contribution Options Total Parent Entity A Leibowitz J Falconer Parent Entity A Sigalla* Non Executive Chairman Non executive director 20,000 60,000 Executive Director - Executive Directors and Executive Officers Economic Entity C Kelliher** J Wilson* D Rudduck* M Schwartz R Wiltgen S Semenik D May Total Executive Director and TZI Chief Executive Officer TZI Chief Operations Officer TZI Chief Technical Officer PDT President and Chief Executive Officer PDT Vice President PDT Vice President PDT Vice President 473,89 385,3 307,992 03,855 03,855 03,855 03,855 - - - - - - - - 39,000 59,000 - - 60,000 - 39,000 52,89 9,000 9,000 7,84 7,84 - - - - - - - - - - - - - - 40,35 324,76 03,855 03,855 03,855 03,855 1,762,434 18,000 14,368 78,000 1,872,802 * Each of these directors resigned as a director of the Parent Entity on 5 July 2004. ** Mr Kelliher's services are provided to the Company under an agreement with Mainland Air Services Ltd and all payments are made to that company. Directors' Benefits Particulars of Directors' Benefits are disclosed in Note 5 of the Financial Statements. Indemnification and Insurance of Directors and Officers The parent entity has not taken out an insurance policy indemnifying directors and officers for the financial year nor has the company provided any indemnification during the year. Share Options (i) Options that were granted over unissued shares or interests during or since the end of the financial year by the Company to directors as part of their remuneration are as follows: Director A H Leibowitz A H Leibowitz C Kelliher C Kelliher Expiry Date Issue price of shares Number under option 3 December 2006 3 December 2007 3 December 2006 3 December 2007 $0.75 $.00 $0.75 $.00 500,000 500,000 500,000 500,000 All of the above options were issued on 5 July 2004 after approval by shareholders at a general meeting and were also reported in the Directors Report for the year ended 30 June 2004. (ii) At the date of this report, options over unissued shares or interests of the Company are as follows: Expiry Date 29 August 2006 29 August 2006 29 August 2006 26 March 2007 30 March 2006 3 December 2006 3 December 2007 Issue price of shares Number under option $0.27 $0.34 $0.40 $0.45 $0.34 $0.75 $.00 ,49,25 2,236,687 6,590,062 2,000,000 7,455,625 ,000,000 ,000,000 Complete details of the above options are in Note 5 to the Financial Statements Environmental Issues The consolidated entity's operations are not regulated by any significant environmental regulation under a law of the Commonwealth or of a State or Territory. Corporate governance The directors are responsible for the corporate governance practices of the Company. The main corporate governance practices that were in operation during the financial year will be set out in the Corporate Governance section of the 2005 Annual Report. Proceedings on Behalf of Company No person has applied for leave of Court to bring proceedings on behalf of the company or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for all or any part of those proceedings. The company was not a party to any such proceedings during the year. Auditor's Independence Declaration The Company's independent auditor has provided an independence declaration for the year ended 30 June 2005, a copy of the declaration is attached to and forms part of the directors' report. Signed at Sydney this 30th day of September 2005 in accordance with a resolution of the Board of Directors. Significant After Balance Date Events No matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the economic entity, the results of those operations, or the state of affairs of the economic entity in future financial years. J Falconer Director 42 ‘05 Annual Report ‘05 Annual Report 43 auditor’s independence declaration to the directors of TZ Limited statements of financial performance for the year ended 30 june 2005 I declare that, to the best of my knowledge and belief, in relation to our audit of TZ Limited and the consolidated entity for the year ended 30 June 2005 there have been: i). no contraventions of the auditor independence requirements as set out in the Corporations Act 200; and ii). no contraventions of any applicable code of professional conduct. Sales Revenue Cost of Sales Gross Profit Note Consolidated Parent Entity 2005 $ 2004 $ 8,28,464 ,88,293 (6,47,9) 2,07,345 (63,506) 556,787 2 2 2005 $ - - - 2004 $ 633,084 (398,857) 234,227 Other Revenue from Ordinary Activities 2 225,442 2,36,48 33,799 2,09,258 Taylor & Co. Stephen Taylor Sydney, 30 September 2005 Employee related expenses Occupancy expenses Communications expenses Depreciation Amortisation of intangibles Professional and corporate services Travel and accommodation Carrying value of subsidiary sold Interest paid Revenue from sale of investment Cost of investment sold Loss on close down of operating business Foreign exchange losses Write off non recoverable loan (2,683,690) (,96,596) (307,89) (298,048) (8,304) (420,957) (,40,926) (,94,445) (,204,34) - (79,25) - - - - - (28,06) (275,96) (202,798) (387,945) (240,297) (345,833) (36,367) (80,957) 324,926 (303,256) (455,534) (97,447) (50,000) - (20,928) - - (36,368) (270,35) (2,029) - - - - - - (48,809) (68,437) (77,22) (08,806) (66,322) - (76,37) (83,395) (4,654) 98,494 (3,022) - - (50,000) (63,992) Other Expenses from Ordinary Activities (800,550) (207,022) (29,827) Profit/(Loss) from ordinary activities before income tax expense Income tax expense relating to ordinary activities Profit/(Loss) from ordinary activities after related income tax expense Profit/(Loss) from extraordinary items after related income tax expense Net Profit/(Loss) 3 4 4,293,58 (,809,880) (857,893) 580,03 20,608 - - - 4,082,90 (,809,880) (857,893) 580,03 - - - - 4,082,90 (,809,880) (857,893) 580,03 Net (Profit)/Loss attributable to outside equity interests - - - - Net Profit/(Loss) attributable to members of the parent entity 4,082,90 (,809,880) (857,893) 580,03 Total changes in equity other than those resulting from transactions with owners as owners 3 4,082,90 (,809,880) (857,893) 580,03 Basic Earnings Per Share (Cents) Diluted Earning Per Share (Cents) 2 2 2.8 2.44 (.69) (.69) The above Statements of Financial Performance are to be read in conjunction with the attached notes. 44 ‘05 Annual Report ‘05 Annual Report 45 statements of financial position for the year ended 30 june 2005 statements of cash flows for the year ended 30 june 2005 Note Consolidated Parent Entity Note Consolidated Parent Entity CURRENT ASSETS Cash Assets Receivables Work in Process TOTAL CURRENT ASSETS NON-CURRENT ASSETS Receivables Investments Property, Plant and Equipment Intangibles Deferred tax Assets 2005 $ 2004 $ 2005 $ 2004 $ 7 5,63,544 5 6 9,6,456 423,82 7,40,963 3,295,6 - ,6,63 4,99,74 - ,206,36 3,233,322 - 5,98,82 0,706,24 6,52,805 4,439,638 5 7 8 9 - - - 0 2,385,760 7,998,532 33,203,229 20,52,257 4,7,40 90,997 30,796,382 9,934,669 36,025 - - - - - - - TOTAL NON-CURRENT ASSETS 35,03,87 20,025,676 35,588,989 28,50,789 TOTAL ASSETS CURRENT LIABILITIES Payables Provisions Interest-bearing liabilities TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Payables Interest-bearing liabilities Deferred tax liabilities TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Issued Capital Reserves Accumulated Losses Shareholders' equity attributable to members of the parent entity 50,302,629 30,73,800 4,74,794 32,950,427 0  2 0 2 5,632,499 2,75,3 2,355,949 2,523,597 29,9 424,475 73,35 - - - 5,685 - 6,86,65 2,824,248 2,355,949 2,539,282 - 2,028,00 9,858 2,037,868 8,224,033 - - - - 695,948 695,948 - - - - 695,948 695,948 2,824,248 3,05,897 3,235,230 42,078,596 27,907,552 38,689,897 29,75,97 3 4 4 64,398,396 54,565,803 64,398,396 54,565,803 255,540 - - - (22,575,340) (26,658,25) (25,708,499) (24,850,606) 42,078,596 27,907,552 38,689,897 29,75,97 Outside equity interests in controlled entity - - - - TOTAL EQUITY 4 42,078,596 27,907,552 38,689,897 29,75,97 The above Statements of Financial Position are to be read in conjunction with the attached notes. Cash Flows from Operating Activities: Receipts from customers 8,3,805 ,098,463 2005 $ 2004 $ 2005 $ - 2004 $ 675,594 Payments to suppliers and employees (2,52,89) (3,903,70) (,068,425) (,432,978) Interest received Interest paid Income tax paid Other income 3,36 (79,26) 69,962 (263,252) 227,583 (2,029) (63,370) 3,975 (622) - - - 49,44 (4,654) (622) - Net Cash (Used in) Provided by Operating Activities 7(b) 6,232,4 (2,999,50) (842,87) (73,29) Cash Flows from Investing Activities: Proceeds from sale of investment securities Payment made for investments securities Payment for plant and equipment Acquisition cost for controlled entity Acquisition for controlled entity Escrowed deposit 0 - (29,524) (479,774) 7(c) (6,563,400) 7(c) (5,287,85) 324,926 (303,256) (2,287) (20,050) - - Payments for research and development (2,955,32) (389,89) Repayment of loan from controlled entity Loan to controlled entity Loans to other person Loans repaid other person Aggregated cash flow from acquired entity - - (34,609) 62,000 49,83 98,493 (3,022) 0 - - (479,774) (20,050) (6,563,400) (5,287,85) - 5,62,772 - - - - - (8,086,7) - - (,23,76) (6,460) (,22,66) 333,489 207,670 62,000 333,489 - - Net Cash Provided by (Used in) Investing Activities (5,399,783) (,37,503) (6,572,037) (9,7,373) Cash Flows from Financing Activities: Share Issues Share Issue costs Proceeds from issue of debt securities Repayment of borrowing 8,077,629 3,522,52 8,077,629 3,522,52 (707,406) (2,59,972) (707,406) (2,59,972) - - ,000,000 (600,000) - - - - Net Cash Provided by Financing Activities 7,370,223 ,402,80 7,370,223 ,002,80 Net Increase (Decrease) in Cash Held (,797,49) 7,03,527 (44,685) ,7,588 Cash at beginning of year 7(a) 7,40,963 478,585 ,206,36 34,728 Effects of exchange rate fluctuations on the balances of cash held in foreign currencies - (99,49) - - Cash at end of year 7(a) 5,63,544 7,40,963 ,6,63 ,206,36 The above Statements of cash flows are to be read in conjunction with the attached notes. 46 ‘05 Annual Report ‘05 Annual Report 47 notes to the financial statements for the year ended 30 june 2005  Summary of Accounting Policies The financial report is a general purpose financial report which has been drawn up in accordance with applicable Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Consensus Views, and the Corporations Act 200. The financial report has been prepared on the historical cost basis and does not take into account changing money values or, except where stated, current valuations of non-current assets. Cost is based on the fair values of the consideration given in exchange for assets. Fair value means the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arms length transaction. The recoverable amount of non current assets is assessed on the basis of the expected net cash flows which will be received from the asset's employment and subsequent disposal. The expected net cash flows have not been discounted to their present values in determining recoverable amounts, unless otherwise stated. The accounting policies have been consistently applied and, except where stated, are consistent with those of the previous year. Where necessary, comparative information has been reclassified to achieve consistency in disclosure with current financial year amounts and disclosures. notes to the financial statements for the year ended 30 june 2005 losses may be more readily recognised as deferred tax assets as the 'probable' recognition criteria is less stringent than the 'virtually certain' test of Australian GAAP. (ii) Impairment of financial assets Under AASB 36: Impairment of Assets, both current and non current assets are tested for impairment. The A-IFRS objective is to ensure that an entity's assets are carried at no more than their recoverable amount. The recoverable amount of an asset is determined as the higher of fair value less costs to sell, and value in use. Under AGAAP, non-current assets are written down when the carrying value of non-current assets exceed its recoverable amount. In determining value in use, projected future cash flows are discounted using a risk adjusted pre-tax discount rate and impairment is assessed for the individual asset or at the 'cash generating unit' level. A 'cash generating unit' is determined as the smallest group of assets that generates cash flows that are largely independent of the cash inflows from other assets or groups of assets. The economic entity assets held at  July 2004 did not reveal any indicator to require impairment of the assets and, as a result, no adjustment to non-current assets balance at  July 2004 are expected to be made upon transition to A-IFRS. The significant accounting policies which have been adopted in the preparation of this financial report are: (iii) Research and development expenditure (a) Principles of Consolidation The consolidated financial statements comprise the financial statements of TZ Limited and all its controlled entities (refer note 7) other then CAP Asia Pacific Pte Ltd for which the Company currently holds a 25% interest in the company. The consolidated entity currently has no direct involvements in its Asian operations, has no board representation and has no commitments to provide future funding. This investment currently is carried forward at a nil value. The directors believe, as they are in no position to exert any significant influence over the operations of the company and it indirect investments in CED Hong Kong Limited and CED Philippines Inc, they have been excluded from the principles of consolidation. Entities have been consolidated in the financial statements from the date that control exists. All intercompany balances and transactions between entities in the consolidated entity, including any unrealised profits or losses, have been eliminated on consolidation. Outside equity interest comprises the aggregate of the equity of controlled entities, other than that held either directly or indirectly by the parent entity, after making adjustments for unrealised profits and losses of controlled entities and other adjustments necessary to comply with Accounting Standards. The directors consider that the net revenues and expenses omitted from the annual report are not significant. (b) Impacts of adopting the Australian equivalents to International Financial Reporting Standards TZ Limited will be required to prepare financial statements that comply with Australian equivalents to International Financial Reporting Standards (“A-IFRS”) for reporting periods beginning on or after  January 2005. Accordingly, the Company's first half- year report prepared under A-IFRS will be for the half-year reporting period ended 3 December 2005, and its first annual financial report prepared under A-IFRS will be for the year ended 30 June 2006. At the date of this report, the directors of the Company have completed an assessment of accounting policy alternative on transition to A-IFRS, the finalisation of the A-IFRS accounting policies that will be adopted from  July 2005, and the determination of the likely impact on the results and financial position of the Company. The following proforma statement of financial performance and statement of financial position outline the likely impacts on the current year result and financial position of the Company had the financial statements been prepared using A-IFRS, based on the directors' accounting policy decisions current at the date of this financial report. Users of the financial report should note that further developments in A-IFRS (for example, the release of further pronouncements by the Australian Accounting Standards Board and the Urgent Issues Group), if any, may result in changes to the accounting policy decisions made by the directors to date, and, consequently, the likely impacts outlined in the following proforma financial statements. The Directors may, at any time until the completion of the Company's first A-IFRS compliant financial report, elect to revisit, and where considered necessary, revise the accounting policies applied in preparing the proforma financial statements. i) Income tax The Company currently recognises deferred taxes by accounting for the differences between accounting profits and taxable income, which gives rise to 'permanent' and 'timing' differences. Pursuant to AASB 2 Income Taxes, deferred taxes are measured by reference to the temporary differences determined as the difference between the carrying amount and the tax base of assets and liabilities recognised in the statement of financial position. The Company has carried forward tax losses which have not been recognised as deferred tax assets as they do not satisfy the 'virtually certain' criteria of current Australian Generally Accepted Accounting Principles (GAAP). Pursuant to AASB 2, tax Under AASB 38: Intangible Assets, costs associated with the research phase of the development of an asset must be expensed in the year its incurred. This will result in a change in the current accounting policy, which capitalises research costs to the statement of financial position where it is expected beyond any reasonable doubt that sufficient future benefits will be derived so as to recover these deferred costs. On transition, the financial effect of this impact is assessed as nil (parent: nil), as no research cost were capitalised at  July 2004 or 30 June 2005. The consolidated entity will undertake an annual impairment test for its current capitalised research and development cost to ensure that the entity's assets are carried at no more than their estimated recoverable amount. (iv) Goodwill on consolidation Under AASB 3: Business Combinations, goodwill is capitalised to the statement of financial position and subjected to an annual impairment test. Amortisation of goodwill is prohibited. Current accounting policy of the entity is to amortise goodwill on a straight-line basis over a period of 20 years. Impairment testing at  July 2005 confirmed no impairment of the $8,608,927 goodwill less accumulated amortisation of $,20,44 as disclosed in the economic entity's financial statements at 30 June 2005. The previously amortised goodwill of $387,945 will, therefore, be reversed resulting in a corresponding increase of $387,945 in retained earnings at  July 2004 and an increase in profit amounting to $822,469 for the year ended 30 June 2005. (v) Share-based Payments Under AASB 2 Share based Payments, the Company must determine the fair value of equity instruments and options issued to employees as remuneration and recognise a corresponding expense through statement of financial performance. This will involve using a valuation technique as the shares and options issued are not quoted on a listed stock exchange. The Company has decided to employ the Black-Scholes option pricing model. The Company currently does not recognise any costs associated with Share Based Payments. A transitional adjustment will be made against accumulated loss at  July 2004 to recognise on a pro rate basis the fair value of all share-based payments granted after 7 November 2002, which have not vested as at  July 2004 and the comparative figures in the Company's statement of financial performance relating to the year ended 30 June 2005 will be restated to recognise on a pro rata basis the fair value of all share-based payments made during that year so as to comply with A-IFRS. As a consequence, contributed equity will increase by $67,663 and an additional employee benefit expense of $67,663 will be recognised in Statement of financial performance for the financial year ended 30 June 2005. 48 ‘05 Annual Report ‘05 Annual Report 49 notes to the financial statements for the year ended 30 june 2005 notes to the financial statements for the year ended 30 june 2005 Economic Entity Parent Entity (ii) Goodwill 2005 $ 2005 $ Goodwill, representing the excess of the purchase consideration over the fair value of the identifiable net assets acquired on the acquisition of a controlled entity, is amortised on a straight line basis over 20 years being the minimum period of time during which benefits are expected to arise. Reconciliation of Net Profit Net profit/(loss) reported under Australian Accounting Standards 4,082,90 (857,893) Key transitional adjustments: - Reversal of amortisation of goodwill (iv) - Share-based Payments(v) Total transitional adjustments Net profit under A-IFRS Reconciliation of Equity 822,469 (67,663) 754,806 4,837,76 - (67,663) (67,663) (925,556) (g) Receivables and Payables Trade accounts receivable, amounts due from related parties and other receivables represent the principal amounts due at balance date plus accrued interest less, where applicable, any provisions for doubtful accounts. Accounts payable represent the principal amounts outstanding at balance date plus, where applicable, any accrued interest. (h) Employee Entitlements The provisions for employee entitlements to wages, salaries and annual leave represent the amount which the consolidated entity has a present obligation to pay resulting from employees' services provided up to balance date. The provision has been calculated at nominal amounts and includes related on-costs. The liability for employee entitlements to long service leave represents the present value of the estimated future cash outflows to be made by the employer resulting from employees' services provided up to the balance date. Total equity reported under Australian Accounting Standards 42,078,596 38,689,897 (i) Income Tax Retrospective adjustments to equity at 1 July 2004: Increase/(Decrease) in current year profit/(loss) resulting from transition to A IFRS - Reversal of amortisation of goodwill (iv) - Share-based Payments(v) Increase in contributed equity Total equity under A-IFRS (c) Inventories - 822,469 (67,663) - - (67,663) 67,663 67,663 42,90,065 38,689,897 Inventories are measured at the lower of cost and net realisable value. Costs are assigned on a first in first out basis. (d) Investments Investments are recognised in the financial statements at cost. (e) Property, Plant and Equipment Property, plant and equipment is included at cost, less where applicable, any accumulated depreciation or amortisation. The carrying amount of property, plant and equipment is reviewed annually by directors to ensure it does not exceed the recoverable amount. The depreciation rates used for each class of asset are as follows: ◗ Office Furniture and Equipment 3% - 50% ◗ Leasehold Improvement 30% ◗ Motor Vehicle 37% - 50% ◗ Plant & Equipment 20% - 25% The depreciable amount of all fixed assets is depreciated on a straight line basis over their estimated useful lives commencing from the time the asset is held ready for use. (f) Intangibles The carrying value of all intangible assets are assessed at least each reporting date to ensure they do not exceed their recoverable amount. Where the carrying value exceeds this recoverable amount the excess of the carrying value over the recoverable amount of the intangible asset is immediately recognised as an expense, except to the extent to which the decrement reverses an increment previously recognised in an Asset Revaluation Reserve. (i) Trade Marks & Patents Trademarks owned by the consolidated entity are valued in the accounts at cost and are not currently amortised and will be until commercialisation of the IP and then will be amortised over their estimated useful life, subject always to the recoverable amount test referred to above. The consolidated entity adopts the liability method of tax-effect accounting whereby the income tax expense for the period is based on the operating result after adjusting for items which, as a result of their treatment under income tax legislation, create permanent differences between that result and the taxable income or loss. Timing differences, which arise due to the different accounting periods in which items of revenue and expense are included in the determination of operating result, income tax and taxable income are brought to account as either provision for deferred income tax, or an asset described as future income tax benefit at the rate of income tax applicable to the period in which the benefit will be received, or the liability will become payable. Future income tax benefits are not brought to account unless realisation of the asset is assured beyond reasonable doubt. Future income tax benefits in relation to tax losses are not brought to account unless there is virtual certainty of realisation of the benefit. The amount of benefits brought to account or which may be realised in the future is based on the assumption that no adverse change will occur in income taxation legislation and the anticipation that the consolidated entity will derive sufficient future assessable income and comply with the conditions of deductibility imposed by the law to permit a future income tax benefit to be realised. (j) Leases Lease payments under operating leases, where substantially all the risks and benefits remain with the lessor, are charged as expenses in the period in which they are incurred. Where assets are acquired by means of finance leases, the present value of minimum lease payments is established as an asset at the beginning of the lease term and amortised on a straight line basis over the expected economic life. A corresponding liability is also established and each lease payment is allocated between such liability and interest expense. (k) Foreign Currency Transactions and Balances Transactions in foreign currencies are initially measured and brought to account at the rate of exchange in effect at the date of each transaction. Exchange differences relating to monetary items are brought to account in the Statements of Financial Performance in the financial year in which the exchange rates change as exchange gains or losses. (l) Revenue Recognition (i) Sales Revenue Sales Revenue comprises revenue earned from the provision of products or services to entities outside the consolidated entity. Sales revenue is recognised when the goods or services are provided or, in relation to Membership Income. (ii) Other Revenue - Direct Cost Recovery Direct Cost Recovery revenue comprises revenue earned from the provision of services, the costs of which are directly recoverable from the client as they are incurred. (iii) Interest Revenue Interest Revenue is recognised as it accrues. 50 ‘05 Annual Report ‘05 Annual Report 51 notes to the financial statements for the year ended 30 june 2005 notes to the financial statements for the year ended 30 june 2005 (ii) Goodwill Goodwill, representing the excess of the purchase consideration over the fair value of the identifiable net assets acquired on the acquisition of a controlled entity, is amortised on a straight line basis over 20 years being the minimum period of time during which benefits are expected to arise. (g) Receivables and Payables Trade accounts receivable, amounts due from related parties and other receivables represent the principal amounts due at balance date plus accrued interest less, where applicable, any provisions for doubtful accounts. Accounts payable represent the principal amounts outstanding at balance date plus, where applicable, any accrued interest. (h) Employee Entitlements The provisions for employee entitlements to wages, salaries and annual leave represent the amount which the consolidated entity has a present obligation to pay resulting from employees' services provided up to balance date. The provision has been calculated at nominal amounts and includes related on-costs. The liability for employee entitlements to long service leave represents the present value of the estimated future cash outflows to be made by the employer resulting from employees' services provided up to the balance date. (i) Income Tax The consolidated entity adopts the liability method of tax-effect accounting whereby the income tax expense for the period is based on the operating result after adjusting for items which, as a result of their treatment under income tax legislation, create permanent differences between that result and the taxable income or loss. Timing differences, which arise due to the different accounting periods in which items of revenue and expense are included in the determination of operating result, income tax and taxable income are brought to account as either provision for deferred income tax, or an asset described as future income tax benefit at the rate of income tax applicable to the period in which the benefit will be received, or the liability will become payable. Future income tax benefits are not brought to account unless realisation of the asset is assured beyond reasonable doubt. Future income tax benefits in relation to tax losses are not brought to account unless there is virtual certainty of realisation of the benefit. The amount of benefits brought to account or which may be realised in the future is based on the assumption that no adverse change will occur in income taxation legislation and the anticipation that the consolidated entity will derive sufficient future assessable income and comply with the conditions of deductibility imposed by the law to permit a future income tax benefit to be realised. (j) Leases Lease payments under operating leases, where substantially all the risks and benefits remain with the lessor, are charged as expenses in the period in which they are incurred. Where assets are acquired by means of finance leases, the present value of minimum lease payments is established as an asset at the beginning of the lease term and amortised on a straight line basis over the expected economic life. A corresponding liability is also established and each lease payment is allocated between such liability and interest expense. (k) Foreign Currency Transactions and Balances Transactions in foreign currencies are initially measured and brought to account at the rate of exchange in effect at the date of each transaction. Exchange differences relating to monetary items are brought to account in the Statements of Financial Performance in the financial year in which the exchange rates change as exchange gains or losses. (l) Revenue Recognition (i) Sales Revenue Sales Revenue comprises revenue earned from the provision of products or services to entities outside the consolidated entity. Sales revenue is recognised when the goods or services are provided or, in relation to Membership Income. (ii) Other Revenue - Direct Cost Recovery Direct Cost Recovery revenue comprises revenue earned from the provision of services, the costs of which are directly recoverable from the client as they are incurred. (iii) Interest Revenue Interest Revenue is recognised as it accrues. 2 Revenues from Ordinary Activities Sales Revenue Total Sales Revenue 8,28,464 ,88,293 8,28,464 ,88,293 Consolidated Parent Entity 2005 $ 2004 $ 2005 $ 2004 $ - - - - - - 633,084 633,084 32,752 77,05 398,857 2,000,000 06,760 2,498 6,47,9 - 6,47,9 32,752 309,754 63,506 - 2,000,000 25,026 0,46 225,442 27,282 9,99 33,799 - 2,36,48 33,799 2,09,258 Cost of Sales Cost of Goods Sold Services Expenses (Benefits) Total Cost of Sales Non-operating revenue Sale of Controlled entity Interest Sundry revenue items Total non-operating revenue 3 Loss From Ordinary Activities Profit/Loss from ordinary activities includes: Net losses on disposals of property, plant & equipment 2,609 66,555 Amortisation of non-current assets Intellectual Property Goodwill Bad and Doubtful Debts expense 49,80 822,469 93,8 - 387,945 - - - - - 66,322 - - - 4 Income tax The amount provided in respect of income tax differs from the amount prima facie payable on the operating result. The difference is reconciled as follows: Prima Facie Income Tax on the Operating Result Before Income Tax at 30% (2004: 30%) Tax Effect of Permanent Differences: Amortisation of Intangibles Other Non-Allowable Expenses ,224,873 (542,964) (257,368) 74,004 342,278 - 6,383 (45,05) 47,596 - - - - 36,63 257,368 (20,67) - - Future Income Tax Benefit not brought to account (,356,543) Income Tax Expense/(Credit) Attributable to Operating Result 20,608 The potential future income tax benefit arising from tax losses has not been recognised as an asset because recovery of tax losses is not virtually certain. 4,68,999 5,975,542 ,987,62 2,5,028 The taxation benefits of tax losses and timing differences not brought to account will only be obtained if:- a) assessable income is derived of a nature and of amount sufficient to enable the benefit from the deductions to be realised; b) conditions for deductibility imposed by the law are complied with; and c) no changes in tax legislation adversely affect the realisation of the benefit from the deductions. 52 ‘05 Annual Report ‘05 Annual Report 53 notes to the financial statements for the year ended 30 june 2005 notes to the financial statements for the year ended 30 june 2005 Consolidated Parent Entity Consolidated Parent Entity 5 Receivables Current: Trade Debtors Sundry Debtors Sub-total Other Debtors and Prepayments Non-Current: Amounts Receivable from: Controlled Entities 6 Work in Process Uncompleted/Unbilled jobs - at Cost 7 Investments Shares in Controlled Entities - at Cost Note 7(a) Shares - Other - unquoted at cost (a) Controlled Entities Parent Entity: TZ Limited Subsidiaries of TZ Limited Telezygology Inc. PDT Holdings, Inc. Product Development Technologies, Inc. PDT Tooling, Inc. PDT Southeast Limited Liability Company (LLC)* CJSC PDT Ukraine CED Membership Services Pty Ltd The Presidential Card Pty Ltd CUC Australasia Pty Ltd CED Online Pty Ltd Golf Partners Australia Pty Ltd Golf Partners International Pty Ltd CED Asia Pacific Pte Ltd CED Hong Kong Limited (i) CED Philippines Inc (i) 2005 $ 2004 $ 2005 $ 3,92,079 5,44,694 9,056,773 04,683 99,029 3,8,262 3,280,29 4,870 - 4,976,74 4,976,74 5,000 2004 $ - 3,233,322 3,233,322 - 9,6,456 3,295,6 4,99,74 3,233,322 - 423,82 - - - - - - 0 0 2,385,760 7,998,532 - - 33,203,229 20,52,247 - 0 33,203,229 20,52,257 Country of Incorporation Percentage Owned % 2005 2004 Australia USA USA USA USA USA Ukraine Australia Australia Australia Australia Australia Australia Singapore Hong Kong Philippines 00 00 00 00 00 00 00 00 00 00 00 00 25 6.25 6.25 00 0 0 0 0 0 00 00 00 00 00 00 25 6.25 6.25 *(An LLC is treated as a partnership for US purposes) (i) Owned by CED Asia Pacific Pte Ltd (the 6.25% represents TZ Limited indirect interest). 8 Property, Plant and Equipment Property, Plant and Equipment Cost Accumulated Depreciation Total Property, Plant and Equipment Movements during the year: Office Furniture and Equipment Beginning of year Additions Disposals Depreciation expense End of year Leasehold Improvements Beginning of year Additions Depreciation expense End of year Motor Vehicles Beginning of year Additions Depreciation expense End of year Plant and Equipment Beginning of year Additions Depreciation expense End of year 9 Intangibles Goodwill on Consolidation Intellectual Property Trademarks Total Intangibles Movements during the year: Intellectual Property Beginning of year Additions Amortisation expense End of year 2005 $ 2004 $ 2005 $ 4,564,885 (393,475) 4,7,40 290,208 (99,2) 90,997 90,997 ,420,694 (2,609) (5,285) ,338,797 - 540,28 (3,765) 508,453 - 48,002 (0,860) 37,42 - 2,282,06 (95,088) 2,87,08 25,476 74,309 (27,503) (7,285) 90,997 - - - - - - - - - - - - 7,398,53 5,29,862 ,795,855 4,775,230 ,602,04 29,577 30,796,382 9,934,669 4,775,230 7,439,805 (49,80) 4,775,230 - - ,795,855 4,775,230 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2004 $ - - - 66,320 - (27,295) (39,025) - - - - - - - - - - - - - - - - - - - - - 54 ‘05 Annual Report ‘05 Annual Report 55 notes to the financial statements for the year ended 30 june 2005 notes to the financial statements for the year ended 30 june 2005 9 Intangibles (cont.) Trademarks Beginning of year Additions End of year Goodwill on Consolidation Beginning of year Additions Amortisation expense End of year 0 Payables Current: Trade Creditors Other Accruals - refer to Note 22 Contingent Liability - refer to Note 7 Sundry Creditors Total Current Payables Non-Current: Amounts Payable to: - Controlled Entities Included in the above are aggregate amounts payable to Controlled Entities and are non-interest bearing (2004: non-interest bearing)  Provisions Current: Employee Entitlements Aggregate Employee Entitlements 2 Interest Bearing Liabilities Current: Bank loans - secured Non-Current Bank loans - secured The bank loans are secured by a mortgage over the assets of PTD Inc group Consolidated Parent Entity 2005 $ 2004 $ 2005 $ 2004 $ 29,577 ,572,437 ,602,04 - 29,577 29,577 5,57,807 - 3,09,20 5,29,862 (822,469) (387,945) 7,398,53 5,29,862 - - - - - - - 2,333,00 394,794 73,8 - 2,244,000 - - - - - - - - - - 225,352 2,244,000 - 2,23,556 ,067,933 5,632,499 2,39 2,282,768 54,245 2,75,3 2,355,949 2,523,597 - - - - 695,948 695,948 695,948 695,948 29,9 29,9 73,35 73,35 424,475 2,028,00 - - - - - - 5,685 5,685 - - Consolidated Parent Entity 2005 $ 2004 $ 2005 $ 2004 $ 3 Issued Capital Issued and Paid Up Capital: 47,52,00 (2004: 28,435,77) Fully Paid Ordinary Shares 64,398,396 54,565,803 64,398,396 54,565,803 Movements during the year: Opening balance Shares issued during the year: 6,000,000 on the 6 July 2004 3,076,923 on the 2 December 2004 50,000,000 on the 29 August 2003 42,26 on the 30 September 2003 70,734,446 on the 8 January 2004 26,667,000 on the 26 March 2004 7,455,625 on the 30 March 2004 Share issue costs Closing balance Opening balance 54,565,803 25,420,00 54,565,803 25,420,00 2,040,000 8,500,000 - - 2,040,000 8,500,000 - - - - - - - ,500,000 22,000 7,683,62 2,000,50 2,500,000 - - - - - ,500,000 22,000 7,683,62 2,000,50 2,500,000 (707,407) (4,559,969) (707,407) (4,559,969) 64,398,396 54,565,803 64,398,396 54,565,803 No. No. No. No. 28,435,77 67,478,527 28,435,77 67,478,527 Share movement during the year before consolidation 30 May 2003 29 August 2003 30 September 2003 - - - - 50,000,000 42,26 - - - - 50,000,000 42,26 Total ordinary share before consolidation 28,435,77 7,890,743 28,435,77 7,890,743 23 December 2003 consolidation on a“5 for ” basis - (94,32,637) - (94,32,637) Ordinary shares issued after consolidation 28,435,77 23,578,06 28,435,77 23,578,06 6 July 2004 2 December 2004 8 January 2004 26 March 2004 30 March 2004 Closing balance (ii) Share Unquoted Options: Opening balance Options issued: 5 January 2004 (a) 5 January 2004 (b) 5 January 2004 (c) 26 March 2004 (d) 30 March 2004 (e) 6 July 2004 (f) Closing balance 6,000,000 3,076,923 - - 6,000,000 3,076,923 - - - - - 70,734,446 26,667,000 7,455,625 - - - 70,734,446 26,667,000 7,455,625 47,52,00 28,435,77 47,52,00 28,435,77 9,893,499 - 9,893,499 - - - - - - ,49,25 2,236,687 6,70,062 2,000,000 7,455,625 - - - - - 2,000,000 - 2,000,000 ,49,25 2,236,687 6,70,062 2,000,000 7,455,625 - 2,893,499 9,893,499 2,893,499 9,893,499 56 ‘05 Annual Report ‘05 Annual Report 57 notes to the financial statements for the year ended 30 june 2005 notes to the financial statements for the year ended 30 june 2005 3 Issued Capital (cont) (a) The Company issued ,49,25 options to acquire ordinary shares in consideration of the cancellation of TZ Inc. option holder's options over shares in TZ Inc., as agreed to in the general meeting of shareholders on the 23 December 2003 in part of the consideration for the purchase of TZ Inc. The options expire on the 29 August 2006 and are exercisable at 27 cents. (b) The Company issued 2,236,687 options to acquire ordinary shares in consideration of the cancellation of TZ Inc. option holder's options over shares in TZ Inc., as agreed to in the general meeting of shareholders on the 23 December 2003 in part of the consideration for the purchase of TZ Inc. The options expire on the 29 August 2006 and are exercisable at 34 cents. (c) The Company issued 6,70,062 options to acquire ordinary shares in consideration of the cancellation of TZ Inc. option holder's options over shares in TZ Inc., as agreed to in the general meeting of shareholders on the 23 December 2003 in part of the consideration for the purchase of TZ Inc. The options expire on the 29 August 2006 and are exercisable at 40 cents. (d) The Company issued 2,000,000 options to acquire ordinary shares as part consideration for underwriting fees for the Company's share capital raising as detailed in the prospectus lodged on the 4 March 2004. The options expire on the 26 March 2007 and are exercisable at 45 cents. (e) The Company issued 7,455,625 options to acquire share in the Company as per the Convertible Notes Agreement entered into, on the conversion of the convertible notes to ordinary share. The options expire on the 30 March 2006 and are exercisable at 34 cents. (f) The Company issued 2,000,000 options to acquire share in the Company as resolved at a general meeting of shareholders held on 4 July 2005 to the Company Directors, Mr Chris Kelliher and Mr Anthony Leibowitz by way of two tranches. The first tranche was vested on 3 December 2004 with a exercisable price of 75 cents, and the second tranche will vest on 3 December 2005 with a exercisable price of $.00 dollar. The options will expire on 3 December 2006 and 3 December 2007 respectively. (iii) Employee Share Option Plan No options have been issued during the year or to the date of this report under the Employee Share Option Plan. (iv) Options Exercised Other than 20,000 shares at $0.40 being issued on 3 August 2005 as a result of the exercise of 20,000 options, no shares have been issued by virtue of an exercise of an option during the year or to the date of this report. Consolidated Parent Entity 2004 $ 2005 $ 2005 $ 2004 $ 4 Reserves, Retained Profits and Total Equity Foreign Currency Translation Reserve Movements during the year: Opening Balance Adjustment arising from the translation of foreign controlled entities' financial statements Closing Balance Retained Profits/(Losses) Balance at beginning of year Net Profit/(Loss) attributable to members of the parent entity 580,03 Balance at end of year Total Equity - 255,540 255,540 - - - - - - - - - (26,658,250) (24,848,37) (24,850,606) (25,430,69) 4,082,90 (,809,880) (857,893) (22,575,340) (26,658,25) (25,708,499) (24,850,606) Total Equity at beginning of year 27,907,552 57,639 29,75,97 (0,609) Total Changes in Equity recognised in the Statement of Financial Performance Transactions with owners as owners 4,082,90 (,809,880) (857,893) 580,03 Movements in Foreign Currency Translation Reserves 255,540 - - - Contribution of Equity Total Equity at end of year 9,832,594 29,45,793 9,832,593 29,45,793 42,078,596 27,907,552 38,689,897 29,75,97 5 Directors’ and Executives’ Remuneration a) Names and position held by directors and specified executives in office at any time during the financial year are: Directors Anthony Leibowitz Chairman - Non Executive Director Chris Kelliher John Falconer Andrew Sigalla John Wilson CEO TZ Inc - Executive Director Non executive Director (appointed 5 July 2004) Executive Director (resigned 5 July 2004) Executive Director (resigned 5 July 2004) Dickory Rudduck Executive Director (resigned 5 July 2004) Martin Hadaway Non Executive Director (resigned 5 July 2004) Specified executives John Wilson TZ Inc. Chief Operating Officer Dickory Rudduck TZ Inc. Chief Technical Officer Mark Schwartz PDT Inc. President and CEO Ray Wiltgen Scott Semenik David May PDT Inc. Vice President PDT Inc. Vice President PDT Inc. Vice President b) Directors' Remuneration Primary 2005 A Leibowitz C Kelliher J Falconer A Sigalla* J Wilson* D Rudduck* Total 2004 A Leibowitz C Kelliher A Sigalla J Wilson D Rudduck J Nissen J Whiting K Whiteman Total Salary, Fees & Commissions Superannuation Options Total contribution 20,000 473,89 60,000 - - - 653,89 - - - - - - - 39,000 39,000 - - - - 59,000 52,89 60,000 - - - 78,000 73,89 47,66 - 33,332 - 6,663 - 56,000 23,000 30,000 6,667 56,667 679,945 9,000 9,000 - ,500 ,500 2,000 - - - - - - - - - 47,66 33,332 6,663 65,000 32,000 30,000 8,67 58,67 700,945 * Each of these directors resigned as a director of the Parent Entity on 15 July 2004. 58 ‘05 Annual Report ‘05 Annual Report 59 notes to the financial statements for the year ended 30 june 2005 notes to the financial statements for the year ended 30 june 2005 5 Directors’ and Executives’ Remuneration (cont) c) Specified executives' remuneration Primary 5 Directors’ and Executives’ Remuneration (cont) e) Shareholdings Number of shares held by directors and specified executives 2005 J Wilson** D Rudduck** M Schwartz R Wiltgen S Semenik D May Total Salary, Fees & Superannuation Non-Cash Options Commissions contribution Total 385,3 307,992 03,855 03,855 03,855 03,855 9,000 9,000 7,84 7,84 - - - - - - - - - - - - - - 40,35 324,76 03,855 03,855 03,855 03,855 ,08,543 8,000 4,368 - ,40,9 Directors A Leibowitz C Kelliher J Falconer A Sigalla* Total Balance 01/07/04 Granted as Remuneration Net change other Balance 30/06/05 372,78 ,46,569 - ,092,249 2,88,599 - - - - - ,20,967 ,493,748 - ,46,569 ,388,82 ,388,82 - ,092,249 2,509,49 5,390,748 * Resigned as a director of the Parent Entity on the 15 July 2004. ** Each of these executives resigned as directors of the Parent Entity on the 15 July 2004. Specified executives d) Options and Rights Holdings Number of options held by directors and specified executives Directors A Leibowitz C Kelliher J Falconer A Sigalla* Total Balance Granted as 01/07/04 Remuneration (i) Net change other Balance 30/06/05 - 3,727,82 - ,49,25 ,000,000 ,000,000 - - ,000,000 4,727,82 - - ,388,82 ,388,82 - ,49,25 5,28,937 2,000,000 ,388,82 8,607,9 * Resigned as a director of the Parent Entity on the 15 July 2004. Specified executives J Wilson D Rudduck M Schwartz R Wiltgen S Semenik D May Total Balance Granted as 01/07/04 Remuneration (i) Net change other Balance 30/06/05 ,49,25 ,49,25 - - - - 2,982,250 - - - - - - - - - - - - - - ,49,25 ,49,25 - - - - 2,982,250 (i) The Company issued the options in the above tables as resolved at the general meeting of shareholder held on 15 July 2004 further detailed in Note 12 (ii) (f). J Wilson D Rudduck M Swartz R Wiltgen S Semenik D May Total f) Remuneration Practices Balance 01/07/04 4,832,004 7,976,89 - - - - 2,808,93 Granted as Remuneration Net change other - - - - - - - - - - - - - - Balance 30/06/05 4,832,004 7,976,89 - - - - 2,808,93 The company's policy for determining the nature and amounts of emoluments of directors and senior executives of the company is as follows; The remuneration structure for executive officers, including executive directors, is based on a number of factors, including the length of service, particular experience of the individual concerned, and overall performance of the Company. The contracts for service between the Company and specified directors and executives are on a continuing basis the terms of which are not expected to change in the immediate future. Upon retirement specified directors and executives are paid employee benefit entitlements accrued to date of retirement. Executive directors and senior executives may receive bonuses based on the achievement of specific performance hurdles. There is no separate profit-share plan. The constitution provides that the remuneration of Non-executive Directors will not be more than the aggregate fixed sum determined by a general meeting of shareholders. The aggregate remuneration has been set at the last general meeting of shareholder held on the 5 July 2004 in the amount of $250,000 per annum. Consolidated Parent Entity 6 Related Party Transactions (a) Controlled Entities Loan to Controlled Entities - Non-Current Loan repaid from Controlled Entities - Non-Current These loans are interest free. There are no fixed terms of repayment. 2005 $ - - 2004 $ 2005 $ 2004 $ - - 7,754,927 ,670,030 3,340,549 3,69,56 60 ‘05 Annual Report ‘05 Annual Report 61 1251 TZ AR Financials V2 21/10/05 12:09 PM Page 22 1251 TZ AR Financials V2 21/10/05 12:09 PM Page 23 notes to the financial statements for the year ended 30 june 2005 notes to the financial statements for the year ended 30 june 2005 16 Related Party Transactions (cont) (b) Transaction with Directors During the financial year ended 30 June 2004, the consolidated entity purchased investment securities in a company that Mr J Nissen was a director of for a total consideration of $300,000. These securities were sold on the market for a total consideration of $Nil (2004: $324,925). In September 2003 a further $300,000 was loaned to the same entity secured against shares in a third party. The loan could not be recovered and the security was exercised and realising $Nil (2004: $250,000.) Mr A Leibowitz is a director of Tandem Corporate Pty Limited which provided services to the Company's reconstruction and capital raising for the year ended 30 June 2004. Charges for services provided during the current year amounted to $Nil (2004: $1,200,000). Mr J Falconer is a director of Dunbar Associates Pty Ltd which provided corporate services to the Company during the year at normal commercial rates which amounted to $67,245 (2004: $44,539) Mr Sigalla resigned as a director of the Parent Entity on 15 July 2004 but continued as a director of Telezygology Inc. He is a director of ZMS Investments Pty Limited which provided consultancy services to the Company during the year at normal commercial rates and which totalled $220,000 (2004: $2,150,000) Consolidated Parent Entity 2005 $ 2004 $ 2005 $ 2004 $ 17 Notes to the Statements of Cash Flows a). Reconciliation of Cash For the purpose of the statements of cash flows, cash includes: Cash at Bank and on Hand Deposit on call b). Reconciliation of Cash Flow from Operations with Operating Result After Income Tax 5,349,625 263,919 5,613,544 6,146,577 1,264,386 7,410,963 1,161,631 - 1,161,631 7,011 1,199,305 1,206,316 Operating Profit/(Loss) after Income Tax 4,082,910 (1,809,880) (857,893) 580,013 Non-Cash Flows in Operating Profit/(Loss): Depreciation Amortisation of Intangibles Unrealised Exchange Loss(Gain) Employee Entitlements Doubtful Debts Changes in Assets and Liabilities (Increase)/Decrease in Trade Debtors (Increase)/Decrease in Prepayments and Other Debtors (Increase)/Decrease in Inventories (Increase)/Decrease in Work in Process (Decrease)/Increase in Creditors and Accruals 310,607 1,241,649 (4,114) 56,056 340,891 202,466 13,044 - 581,682 (593,050) 202,798 387,945 97,447 (578) - (59,018) (2,098,314) 12,315 - 268,135 Cash Flows Provided by/(Used in) Operations 6,232,141 (2,999,150) - - - (15,685) - - 166,322 - - 30,080 - 40,011 198,355 (2,075,941) - - (167,648) (842,871) 4,264 - 542,032 (713,219) $ 17 Notes to the Statements of Cash Flows (cont) c). Acquisition of Entities 2005 2004 $ 2005 $ 2004 $ Consolidated Parent Entity During the year 100% of the controlled entity PDT Holdings, Inc. was acquired. Details of this transaction are: Purchase Consideration Cash consideration Amount due under contact of sale - cash Amount due under contact of sale - shares Cash outflow/inflow Assets and liabilities held at acquisition date: Cash Receivable Property, Plant and equipment Work in Process Intangibles Payables Interest bearing liabilities Goodwill on consolidation During the year 100% of the controlled entity Telezygology, Inc. was acquired. Details of this transaction are: Purchase Consideration Cash consideration Share issue consideration Cash outflow/inflow Assets and liabilities held at acquisition date: Cash Receivable Property, Plant and equipment Intangibles Payables Interest bearing liabilities Goodwill on consolidation 12,211,207 6,563,400 3,416,251 2,231,556 12,211,207 47,835 4,262,434 3,930,372 976,619 6,027,540 (4,767,954) (2,453,280) 8,023,566 4,187,641 12,211,207 - - - - - - - - - - - - - - - - - - - - - - - - - - - 20,183,612 - 20,183,612 - 207,670 1,231,756 53,897 4,414,987 (460,210) (782,295) 4,665,805 15,517,807 20,183,612 12,211,207 6,563,400 3,416,251 2,231,556 12,211,207 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 20,183,612 - 20,183,612 - - - - - - - - - - 62 ‘05 Annual Report ‘05 Annual Report 22 23 ‘05 Annual Report ‘05 Annual Report 63 1251 TZ AR Financials V2 21/10/05 12:09 PM Page 24 notes to the financial statements for the year ended 30 june 2005 notes to the financial statements for the year ended 30 june 2005 17 Notes to the Statements of Cash Flows (cont) On the 11 March 2004 the year the Company finalised an agreement to purchase all the shares in PDT Holding Inc, for a cash and share consideration of US$12 million on a going concern basis. The full purchase price is only payable on PDT achieving its 2005 forecasted EBITDA figure of US$3.0 Million. Under the sale agreement, the Company is required to pay the following consideration (a) US$5,000,000 cash on the signing of the contract. (b) A further US$1,000,000 to be placed in an escrow account until after the preparation of audited consolidated financial statements as at 31 December 2004. (c) The remaining US$6,000,000 will be paid by from USD$3,000,000 current held in escrow and US$3,000,000 shares in TZ Limited with an ascribed value of USD$1.00 per TZ Limited share, on achieving its 2005 forecasted EBITDA figure. The Company has estimated that under current trading activities, PDT might not achieve its estimated EBITDA forecasts under the agreement. This will have the effect of reducing the final purchase consideration for PDT to approximately USD$9.6M. Therefore the Company has only provided for an additional USD$1.7M (AU$2,231,556) as the amount outstanding for shares to be issued as part of the final acquisition cost. Consolidated Parent Entity 2005 $ 2004 $ 2005 $ 2004 $ d). Disposal of Entities During the year the controlled entity Golf Link Partners Pty Limited was sold. Aggregate details of this transaction are: Consideration received Amount due under contact of sale Cash inflow/(outflow) Assets and liabilities held at disposal date: Investment in controlled entity Cash Debtors Inventory Investments Plant and Equipment Trade Creditors Net Gain/(loss) on disposal - - - - - - - - - - - - - - 2,000,000 (2,000,000) - - - - - - - 267,968 (788,145) (520,177) 2,520,177 2,000,000 - - - - - - - - - - - - - - 2,000,000 (2,000,000) - - 481,809 - - - - - - 481,809 1,518,191 2,000,000 e). Non Cash Financing and Investing Activities Share Issued. - On the 8 January 2004, the Company issued 70,734,446 ordinary shares issued at 25 cents as part consideration for the purchase of Telezygology Inc. - On the 30 March 2004, the Company issued 7,455,625 ordinary shares on the conversion of the Convertible Notes that have been issued as part consideration for the purchase of Telezygology Inc. - On the 16 July 2004, the Company issued 6,000,000 ordinary shares as approved in the general meeting of shareholders held on the 15 July 2005 to the Company former director for service provided in the Company recent restructure and capital rising under the prospectus conducted in March 2004. 8 Segment Information Segment Revenues Engineering and Design Membership Business Investments Total of all segments Unallocated Consolidated (i)All sales were to customers outside the consolidated entity Segment Results Engineering and Design Membership Business Investments Total of all segments Eliminations Unallocated Profit from ordinary activities before income tax expense Income tax expense relating to ordinary activities Profit from ordinary activities after related income tax expense Extraordinary items Net profit 2005 $ 2004 $ 8,222,578 - 25,026 8,437,604 6,302 40,026 ,048,267 2,454,556 3,642,849 6,85 8,443,906 3,649,700 5,52,62 (,665,224) - (,027,473) (857,893) 925,845 4,294,79 (,766,852) - - (,20) (43,028) 4,293,58 (,809,880) (20,608) - 4,082,90 (,809,880) - - 4,082,90 (,809,880) Segment Assets and Liabilities Engineering and Design Membership Business Investments Total of all segments Unallocated Consolidated Geographical Segments Assets Liabilities 2005 $ 2004 $ 2005 $ 2004 $ 43,566,770 20,025,666 5,992,477 284,53 - - 6,674,83 9,40,973 50,24,60 29,436,639 6,028 ,295,6 - 2,23,556 8,224,033 - 50,302,629 30,73,800 8,224,033 - - 284,53 2,539,77 2,824,248 The Investment segment is carried on in Australia. All other segments are operated and controlled from the USA. 9 Financial Instruments (a) Interest rate risk exposure The Company is exposed to interest rate risk through primary financial assets and financial liabilities. The following table summarises the interest rate risk for the Company, together with the effective weighted average interest rate for each class of financial assets and liabilities. 64 ‘05 Annual Report ‘05 Annual Report 24 ‘05 Annual Report 65 notes to the financial statements for the year ended 30 june 2005 notes to the financial statements for the year ended 30 june 2005 9 Financial Instruments (cont) Floating Fixed Interest maturing in 2005 Weighted Average Interest Rates interest rate $ 1year or less over 1 to 5 years $ $ Non interest bearing $ Total $ 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 Financial assets Cash 3.50 2.84 5,60,488 6,43,435 - ,264,386 Receivables 2.54 - ,834,468 - - - Total financial assets 7,444,956 6,43,435 - ,264,386 Financial liabilities Bank Loan 6.25 - ,476,760 Bills/Instalment Notes Lease Liabilities Trade and sundry creditors Total financial liabilities 7.50 7.5 - - - - - - - - - ,476,760 - - - - - - - 62,4 - - - - - - - 975,725 - - - - - 3,056 3,42 5,63,544 7,40,963 - 7,326,988 3,295,6 9,6,456 3,295,6 - 7,330,044 3,298,303 4,775,000 0,706,24 - - - - - - - ,476,760 - - 975,725 62,4 - - - - 5,469,088 2,75,3 5,469,088 2,75,3 62,4 - 975,725 - 5,469,088 2,75,3 8,083,984 2,75,3 Net financial assets 5,968,96 6,43,435 (62,4) ,264,386 (975,725) - ,860,956 547,90 6,69,06 7,955,0 Reconciliation of net financial assets to net assets: Net financial assets above Non-financial assets and liabilities: Inventories Investments Property, plant and equipment Intangibles Deferred tax Assets Provision for employee entitlements Deferred tax liabilities Net assets per statement of financial position 2005 $ 2004 $ 6,690,06 7,955,0 423,82 - - 0 4,7,40 90,997 30,796,382 9,934,669 36,025 (29,9) (9,858) - (73,35) - 42,078,596 27,907,552 (b) Net fair values of financial assets and liabilities (i) The net fair values of cash and cash equivalents and non-interest bearing monetary financial assets and liabilities approximate their carrying values as disclosed in the statement of financial position and the notes to the financial statements. (ii) The carrying amounts and estimated net fair values of equity investments approximate their carrying values as disclosed in the statement of financial position and the notes to the financial statements. (c) Credit risk exposure The maximum exposure to credit risk, excluding the value of any collateral or other security, at balance date to recognised financial assets is the carrying amount, net of any provision for doubtful debts, as disclosed in the statement of financial position and notes to the financial statements. The Company does not have any material credit risk exposure to any single debtor or group of debtors under financial instruments entered into by the Company. Receivables due from major debtors are not normally secured by collateral, however the credit worthiness of debtors is monitored. Consolidated Parent Entity 2005 $ 2004 $ 2005 $ 2004 $ 20 Commitments for Expenditure Operating Lease Commitments Payable: - Not later than one year - Later than one year but not later than five years - Later than five years 68,097 ,8,727 - 09,640 54,820 - ,799,824 64,460 - - - - - - - - Parent Entity 2004 (.69) (.69) Consolidated Entity 2005 2.8 2.44 45,44,867 06,854,322 2,893,499 - 67,308,366 06,854,322 4,082,90 ($,809,880) 2 Earning per Share Basic Earnings Per Share (cents per share) Diluted Earnings Per Share (cents per share) Weighted average number of ordinary shares on issue used in the calculation of basic earnings per share: Weighted average number of options outstanding Weighted average number of ordinary shares outstanding used in calculation of dilutive earnings per share Earnings used in the calculation of basic and dilutive earnings per share: 22 Events Subsequent to Reporting Date No other matter or circumstance has arisen since the end of the financial year which has not been dealt with in the financial statements that has significantly affected or may significantly effect: (i) the operations of the Company; (ii) the results of those operations; or (iii) the state of affairs of the Company. 23 Auditor’s Remuneration Operating Lease Commitments Auditors of the Parent Entity - Taylor's & Co Other Services from Auditors of the Parent Entity Other Auditors Other Services from Other Auditors The auditors received no other fees or benefits Consolidated Parent Entity 2005 $ 2004 $ 2005 $ 49,455 - - 84,382 8,650 46,254 20,000 9,050 49,455 - - - 2004 $ - 46,254 20,000 9,050 66 ‘05 Annual Report ‘05 Annual Report 67 directors’ declaration The directors of the TZ Limited declare that:  The financial statements and associated notes of the company and of the economic entity for the financial year ended 30 June 2005: (a) are in accordance with the Corporations Act 200; (b) comply with Accounting Standards and the Corporations Act 200; and (c) give a true and fair view of the company's and consolidated entity's financial position as at 30 June 2005 and the performance for the year ended on that date; 2 the Executive Director and Chief Financial Officer have each declared that: (a) the financial records of the company for the financial year have been properly maintained in accordance with section 286 of the Corporations Act 200; (b) the financial statements and notes for the financial year comply with the Accounting Standards; and (c) the financial statements and notes for the financial year give a true and fair view. 3 In the directors' opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. This declaration is made in accordance with a resolution of the Board of Directors. J Falconer Director Dated this 30th day of September 2005 Sydney independent audit report to the members of TZ Limited Scope The Financial Report and Directors' Responsibility The financial report comprises the statement of financial position, statement of financial performance, statement of cash flows, accompanying notes to the financial statements, and the directors' declaration for TZ Limited (the Company) and the consolidated entity for the year ended 30 June 2005. The consolidated entity comprises both the company and the entities it controlled during the year. The directors of the company are responsible for preparing a financial report that gives a true and fair view of the financial position and performance of the company and the consolidated entity, and that complies with accounting standards in Australia, in accordance with the Corporations Act 200. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error and for the accounting policies and accounting estimates inherent in the financial report. Audit Approach We conducted an independent audit of the financial report in order to express an opinion on it to the members of the company. Our audit was conducted in accordance with Australia Auditing Standards in order to provide reasonable assurance as to whether the report is free of material misstatement. The nature of an audit is influenced by factors such as the use of professional judgment selective testing the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore an audit cannot guarantee that all material misstatements have been detected. We performed procedures to assess whether in all material respects the financial report presents fairly in accordance with the Corporations Act 200, including compliance with Accounting Standards in Australia and other mandatory financial reporting requirements in Australia, a view which is consistent with our understanding of the company's and the consolidated entities financial position and their performance as represented by the results of their operations and cash flows. We formed our audit opinion on the basis of these procedures which included: ◗ examining on a test basis information to provide evidence supporting the amounts and disclosures in the financial report; and ◗ assessing the appropriateness of the accounting procedures and disclosures used and reasonableness of significant accounting estimates made by the directors. While we considered the effectiveness of management's internal controls over financial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurances on internal controls. We performed procedures to assess whether the substance of business transactions was accurately reflected in the financial report. These and our other procedures did not include consideration or judgment of the appropriateness or reasonableness of the business plans or strategies adopted by the directors and management of the company. Independence In conducting our audit, we followed applicable independence requirements of Australian professional ethical pronouncements and the Corporations Act 200. In accordance with ASIC Class Order 05/83, we declare to the best of our knowledge and belief that the auditor's independence declaration set out on page 5 of the financial report has not changed as at the date of providing our audit opinion. Audit Opinion In our opinion the financial report of TZ Limited is in accordance with: a) the Corporations Act 200 including: i) giving a true and fair view of the financial position of TZ Limited and the consolidated entity at 30 June 2005 and of their performance for the year ended on that date; and ii) complying with Accounting Standards in Australia and the Corporations Regulations 200; and b) other mandatory financial reporting requirements in Australia. Taylor & Co. Stephen Taylor Sydney, 30th September 2005 68 ‘05 Annual Report ‘05 Annual Report 69 Sydney (Registered Office) Level 2, 92 Pitt St Sydney NSW 2000 AUSTRALIA Chicago (Operational Headquarters) 350 N LaSalle St, Suite 00B Chicago, IL 6060 USA www.tzlimited.com 

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