TZ Limited Annual Report 2006

Plain-text annual report

31 October 2006 Lodged by ASX Online – 75 pages The Manager Company Announcement Office Australian Stock Exchange Ltd Level 4, 20 Bridge Street Sydney NSW 2000 ANNUAL REPORT Please find attached a copy of the 2006 Annual Report for TZ Limited which was posted to all shareholders today. ==================================== Media Enquiries John Wilson TZI COO jkw@tz.net +1 312 464 1500 x12 (Chicago) Investor Enquiries John Falconer Company Secretary j.falconer@tz.net +61 411 420 720 Sydney (Registered Office) Level 12, 92 Pitt St Sydney NSW 2000 AUSTRALIA Chicago (Operational Headquarters) 350 N LaSalle, Suite 1100B Chicago, IL 60610 United States Web: Email: www.tzlimited.com info@tzlimited.com Ph: Fax: +612 9223 8044 +612 9223 8820 Ph: Fax: +1 312 464 1500 +1 312 464 1540 06 annual report contents 2 highlights 4 ceo’s report 6 operations 8 catalyst for change 10 hold the course 12 platforms for growth 14 building our intellectual capital 16 production focus 18 growth in services 21 financials highlights With just over two years from listing on the Australian Stock Exchange and with the first full year headquartered in the U.S. behind us, by any measure, substantial growth and progress has been made toward our objective of creating a globally recognised industry standard based on our proprietary inventions and to building a company capable of sustained growth and value creation. 2004 Financials YEJ 04 revenue: $1.19M YEJ 04 net assets: $27.9M Market capitalisation: $54.5M Shares on issue: 128.4M Infrastructure 10 employees Australian-based operation Sydney office 2 2006 Financials YEJ 06 revenue: $30.5M YEJ 06 net assets: $48.0M Market capitalisation: $67.8M Shares on issue: 157.2M $30.5M YEJ REVENUE Infrastructure Over 160 employees U.S.-based operations Office locations: • Chicago and Lincolnshire (IL) • Boston (MA) • Plymouth (MN) • Austin (TX) • Coral Springs (FL) • Oxford (UK) • Lviv (Ukraine) 160+ EMPLOYEES IP & Technology 19 patent families Research in SMA actuation Development programs: • Fastening mechanisms • Embedded electronics IP & Technology 55 patent families – over 80 inventions Full product development capability Testing and validation capability Recognised leader in SMA actuation Established technology portfolio in: • Devices and actuation • Embedded electronics and sensing • Communications protocol • Proprietary operating software 80+ IN VE NTIONS Commercialisation Intelligent Fastening (IFT): • Option agreement with TFS • Auto/aerospace application concepts • About ten IFT customer engagements • No IFT related sales FutureWall™ licenses: • Australia • Hong Kong Commercialisation Intelligent Fastening (IFT): • License agreement with TFS • Three fastener families in production • Over 100 IFT customer engagements • $1.4M in IFT related sales FutureWall™ licenses: • Australia • Hong Kong • UK • New Zealand Other licenses: • Two licenses (pet care industry) 100+ IFT CUSTOMER ENGAGEM ENTS Customers Strategic relationships: • Textron Fastening Systems • Alcoa Extrusions Customers Relationships with market leading companies across electronics, medical, consumer products, defence, aerospace, automotive and industrial segments “We view TZ as a catalyst, providing insights into the latest advances in technology” FRANCO LODATO VP, DESIGN EXPLORATION & DEVELOPMENT ceo’s report “In perspective of the challenges overcome, technology advancements made, the refocus of our commercialisation partner and the relationships formed during the course of the year, the Directors believe the Company is well positioned and on steady course to achieve its goals.” 4 In two years, we have progressed breakthrough ideas and concepts to commercial reality by inventing, designing, testing, manufacturing and selling a whole new class of devices – devices that blend advanced mechanical engineering, smart materials actuation and the power of software and electronics. No devices like these have existed before and they have been broadly recognised for their potential to dramatically change the way objects are designed, assembled and serviced. The past 12 months has had its challenges. Last September, Textron Inc., our key licensee and commercialisation partner, signalled to the market its intention to sell its $2B fastening business. This was an unplanned development that, depending on the intentions of the new owners, had the potential to both negatively and positively impact TZ. The Directors consequently put in place plans to mitigate adverse effects and to capitalise on opportunities that might emerge from the Textron decision. These included leading a bid and undertaking due diligence processes to purchase TFS in association with one of the world’s largest financial institutions as equity partner. TZ’s bid advanced to the final round and the Company acquired insights into the process and its participants that it otherwise would not have gained. It also obtained exposure to potential partners and financial backers that will be valuable to TZ’s future endeavours. Although the Directors believed that outright or majority ownership of TFS would burden TZ with leveraged debt and other liabilities that could distract the Company from the primary goals of the business, staying in the process to its conclusion allowed us to keep our options open – a decision that we believed to be the strategically correct course of action. Secondly, the Company needed to plan for the worst. A new TFS owner with little interest in our technology or who was unprepared to accept the license obligations would have set us back two years. To mitigate the risk, we needed to be able to manufacture intelligent fastening devices should we have had to go it alone. This involved significant production engineering, establishing and training a manufacturing partner in Asia, producing the injection mould tooling for three fastener types and developing test and verification methods for volume manufacturing. “The relationship between Textron Fastening Systems and TZ is strong, as evidenced by Intevia® proprietary systems and products introduced into global markets, we have complete faith in this technology and its potential to unlock value for Textron Fastening Systems, its customers and, ultimately, for Platinum Equity as owner of the business.” Mark Barnhill, SVP and Principal, Platinum Equity The execution of these plans required substantial However, due to subsequent amendments to the management time and turned attention away from the agreement, external advisors recommended the revenue core business. It also incurred significant unbudgeted be taken up during the term rather than in the 2006 year. expense. It was, however, the appropriate course of action This deferment did have a negative effect on our 2006 and the Directors believe benefits will still result from financial result. It is, however, indeed positive that this these activities and the relationships formed during the substantial transaction was completed and the Company TFS divestiture process. will derive benefit from it in the future. It is unfortunate that the timing casts a shadow over what has otherwise Platinum Equity is the progressive new owner of TFS and been, in light of its challenges, a solid year’s performance under its direction we anticipate a concentrated initiative to accelerate Intevia® sales volume. We understand this initiative to be an integral part of their TFS growth plans. when taken into account with the unbudgeted one-time costs incurred pursuing the TFS acquisition and related activities. There were also significant technology hurdles to overcome. Conventional fasteners are typically not That is behind us. We go into the 2007-year with increased engineering capability focused on the designed to be used thousands of times. Once a product development plan. We have an Asian manufacturing is made, it may be disassembled for service just a few times. The three Intevia® fastener families in production have a design requirement to operate hundreds of thousands of times, as required by the aerospace industry capability in place with three commercial fasteners in production and two more families ready to go. We booked approximately $1.4 million of Intevia® revenue in the past year. Our key partner is re-energised. PDT continues for its secure latching, access panel attachment and to perform well, with its engineers making valuable interior reconfiguration applications. Also, the fasteners contributions to our development programs. And, our have to be designed for volume production with low other intellectual property areas are on track to contribute variability in performance. Enormous amounts of testing, income this year. production engineering and validation work went into overcoming these challenges and setting up the Asian- On behalf of my co-Directors, our thanks and appreciation based manufacturing capability. Achieving all of this in go to our dedicated management staff and their respective a very short timeframe is a great credit and testament teams who have performed tirelessly to overcome the to the dedication, competency and skill of our technical challenges presented to them during the past year. and engineering teams. Because of this work, we now To our shareholders, we appreciate and thank you for have the ability to cost effectively mass produce fasteners your patience and ongoing support. It has kept the wind to meet very demanding applications – well beyond in our sails as we navigated through a difficult course. anything previously contemplated. It is TFS’ responsibility to undertake large-scale manufacturing; however, it is of strategic significance that we have established this capability within the Company. The business plan anticipated the sale of additional Futurewall™ licenses in the last quarter of the financial year. In June, we reached agreement with the Australian licensee on expansion of its territories and other terms. Chris Kelliher Executive Director, TZ Limited Chief Executive Officer, TZ Group Maximum Force Motor Intelligent Actuation 6 operations overview 888 OPERATIONS | 2006 ANNUAL REPORT catalysts for change In early September 2005, Textron Inc. announced that it would review strategies to improve TFS’ business performance and as such, was considering selling certain or all of TFS assets based on that strategic review. This consideration became a reality in early December when Textron announced that it had commenced a marketing process to sell the business as a whole. On balance, the acquisition of TFS by Platinum Equity in August 2006 represents a positive outcome for the Company. Platinum’s portfolio holding and interest in software, information technology and telecommunications businesses should provide a very supportive environment for the development of the business relationship between TZ and Acument Global Technologies (the new TFS) and to Intevia® commercialisation growth generally. Intevia® features predominantly in Acument Global Technologies’ new brand architecture. TZ management’s intense networking and collaboration with U.S. financial institutions over the course of the TFS divestiture has provided a foundation for strong relationships with significant parties in the financial community. The increased awareness and profile of TZ among the top U.S. investment firms has generated interest in the Company and to its future plans for a NASDAQ listing. 10 hold the course Despite the signiﬁcant distraction on TFS Executives with the divestiture and the constraints on resource allocation and planned investment, positive progress continued to be made in support of Intevia® commercialisation. Revenue from the TFS relationship exceeded expectations, fuelled primarily through funded application engineering programs and prototype development. Royalties on sales did not materialise this year due to delays in customer programs but are anticipated in the 2007 year. TFS recognised that to expand focus and to better manage Intevia® commercialisation efforts across other targeted industry sectors such as automotive, industrial, electronics and security, the Intevia® operation would be better served as an independent business unit under the direct control of corporate business development and strategy, as opposed to incubation within the TFS Aerospace Business. In October 2005, TFS recruited Mr. Steve Brown, a strategic marketing professional with over 17 years experience developing and launching new product initiatives to the major automotive OEMs, to direct the commercial effort and implement an independent Intevia® business unit. Mr. Brown introduced a new approach to Intevia® sales – one based on market focused segmentation and value-based management principles. To provide structure to opportunity identiﬁcation and harvesting, TZ and TFS commissioned a three-day Opportunity Discovery workshop in late January 2006 with SRI Consulting-Business Intelligence (SRIC-BI), a spin-off consulting business from the former Stanford Research Institute. The workshop brought TFS, TZ and PDT resources together with SRIC-BI representatives and speciﬁc industry experts to help identify and evaluate opportunities for Intevia® application outside of the aerospace, defence and automotive sectors, which had been the primary focus for Intevia® commercialisation. Over 200 ideas were generated in new sectors of interest including security, construction, electronics and the medical device industry. Following a structured ﬁltering process, 77 application opportunities were identiﬁed as highly prospective. Of these, 30 applications progressed through a robust analysis process to validate market potential and to deﬁne clear go-to-market strategies. Based on analysis of these initial applications, revenue models were generated by TFS to better quantify the business opportunity and support investment and resource decision-making. The opportunity pool reinforced the signiﬁcant sales potential of Intevia®. Over the year, more than 100 prospects were approached in the targeted segments of aerospace, defence, automotive, industrial, medical and rail. Many of these engagements are progressing through the application discovery phase where market needs and solution beneﬁts are aligned to create a compelling value based Intevia® product offering. To date, the aerospace and defence segments continue to be the lead adopters, although the lengthy adoption cycles resulting from the technology having to be designed into the next product platform means a post-2009 market introduction. TFS is ramping activity in other industry segments that offer shorter lead times to market and opportunities for retroﬁtted solutions. In early January, following months of discussion, TZ and TFS agreed to progress the commercial production of three industrial strength intelligent fastener families for introduction to the market as part of the Intevia® Evaluation Kit (E-Kit). TFS agreed to contribute approximately A$1,100,000 to the program, funding TZ to undertake the design and engineering of the devices and to pioneer production management in Asia. The E-Kit, planned for full commercial launch in late 2006, will showcase the capability of these devices, provide users with the tools to explore the full functionality of Intevia® intelligent fastening solutions and demonstrate the remote communications and networking capability of TZ’s device control operating system (TZ-OS). TFS has communicated an objective over the next 12 months to fully develop its Intevia® business unit and better leverage the competencies of TZ. They plan to embark on a strong marketing and media promotion behind the E-Kit introduction to maximise technology awareness, ramp application potential and increase the rate of adoption of the technology. OPERATIONS | 2006 ANNUAL REPORT 111111 Intevia® Evaluation Kit PDA-driven application software 12 platforms for growth The uncertainty surrounding the TFS divestiture prompted the Company to accelerate commercialisation efforts across its core IP breadth. While the Company’s main focus has been on IFT and building the TFS and Textron relationship, the Company does carry a substantial portfolio of valuable intellectual property on which to build similar license relationships and strategic development partnerships. On Board Technology™ The Company’s On Board Technology™ portfolio comprises the building blocks to empower everyday objects with embedded intelligence. IFT represents only one embodiment of the many variations, adaptations and possibilities. Extension of the IP and technology platform into other devices such as actuators, closures, valves and packaging will provide enormous opportunities for licensing revenue and application growth at a scale equivalent to IFT. To this end, management is pursuing licensing discussions with several market leading companies in the area of intelligent actuation, intelligent closures and intelligent valves. The Company is also exploring development partnerships for the creation and commercialisation of other market changing intelligent products. The development relationship with Larson Manufacturing Company of South Dakota, the largest storm door manufacturer in the U.S. is an example of focused collaboration to design and develop an intelligent product for the residential housing market enabled by TZ’s embedded technologies. platforms for growth OPERATIONS | 2006 ANNUAL REPORT FutureWall™ Technology The FutureWall™ technology is an innovative new approach to the concept of demountable partitions. As an interior building platform, it not only provides a fully flexible partitioning solution, but adds significant value by providing a platform for the integration of storage systems, furniture and quality finishes. Following several months of negotiation, TZ finalised the sale of a FutureWall™ technology license to TechBuilt Interiors Pty Limited, the existing Australian FutureWall™ licensee, extending the term of the existing license in Australia and expanding the licensed territory to include New Zealand and the United Kingdom. The A$3M royalty bearing license deal, effective from 28th June, represented a major step forward in the Company’s efforts to further capitalise on the success of the FutureWall™ IP and technology since its introduction some three years ago. TechBuilt Interiors has a five-year FutureWall™ target to develop and capture a large percentage of the office, hotel and retail market in Australia, giving it clear leadership in flexible interior space solutions. Currently, the major Australian law offices and financial services firms are among the principal users of the FutureWall™ system. Other installations include an 8,000-square-metre fit-out for UNISYS and approximately 10,000-square-metre fit-out for NICTA (National Information and Communication Technology Australia). TZ has plans to continue to develop and exploit the FutureWall™ technology and build on the track record of successful installations in Australia. Plans include the integration of Intevia® devices into the FutureWall™ system to revolutionise installation and demounting processes. This plan will help the FutureWall™ system to take a quantum leap forward in benefit to customers over competing alternatives. TZ is also progressing discussions with interested third parties in Asia for the establishment of a joint venture to exploit the large regional Asian interior fit-out market opportunity. Discussions also continue with a number of prospective U.S. licensees. FUTUREWALL™ BUILDING PLATFORM Kemp Strang Law Offices Sydney, Australia 1 building our intellectual capital TZ On Board™ Proprietary Microprocessors OPERATIONS | 2006 ANNUAL REPORT A year of invention, the IP portfolio grew with 11 new patent application families bringing the total number of patents owned by the Company to 55 patent families. These patent families represent around 80 unique and novel inventions across the technology breadth of the Company. The IP portfolio has been rationalised into four categories: Core IP, Application IP, Licensable IP and Group IP. The latter two categories reflect external business initiatives and new internal innovations respectively. Core IP comprises patent families that directly relate to the field of On Board Technology™. Technology Plan activity this year led to six new patents lodged covering innovations in device technology and actuation concepts. Of the 25 patents in varying stages of prosecution, 13 applications are currently in national phase examination; seven are in the PCT international phase; and five are provisional applications. One patent family titled “Internal Jigging” was granted in the U.S. in May 2006. 1 Application IP relates to patents generated from the collaborative efforts of TZ and TFS and are owned by TFS as part of the license agreement. This portfolio currently comprises 15 patent families of which ten are in PCT international phase and five are in provisional applications. For practical reasons, TZ manages these families on behalf of TFS and works with their IP resources to rationalise and make prosecution decisions. Licensable IP comprises six patent families; two are in national phase; one is in PCT international phase and three applications are pending in the provisional phase. This year, the FutureWall™ “Building Elements” patent was granted in the U.S. and Australia bringing the total number of FutureWall™ Patent and Design Registrations to nine grants. Group IP is a category of patents generated by employees that do not directly relate to core activities but offer potential for licensing revenue. Five new applications were lodged this year bringing the category portfolio to eight patent families. Of these, three patent applications have been licensed under royalty bearing agreements to major companies in the juvenile product and pet care markets who are obligated to develop and market the finished products. TZ is also exploring opportunities to capture complementary third party IP that may offer significant strategic value when bundled with the Company’s proprietary IP portfolio. There is an active program under way looking at IP portfolios and technologies that may be targets for acquisition or licensing. With the continued growth of the Company’s IP portfolio, the need for effective patent portfolio management has been addressed with the successful implementation of a Web-based IP management system. A year in the making, the system will help to reduce prosecution costs and the dependency on external consultants while providing time-savings and a robust auditable system. production focus 16 Intevia® Evaluation Kits Production line assembly Intevia® Evaluation Kits Ready for launch OPERATIONS | 2006 ANNUAL REPORT By far, the focus of the year’s Technology Plan has been the progressive development, testing and transition to production of five intelligent fastener families and the associated electronic platforms and software operating systems. The technology team has successfully taken IFT into full- scale volume production in cost-effective manufacturing centres in Asia. The In-line, Radial and Ring fasteners are now being manufactured in quantity, along with wireless control key fob, communications interface and Bluetooth® linked PDA based software. The establishing of plastics injection moulding and metal die-casting facilities in China with electronics manufacturing and unit assembly in Malaysia has proven that intelligent fasteners can be manufactured in volume to meet application cost targets. To enable a wide range of intelligent fastening applications to be addressed from the fastener family platform, a program of developing modular adaptations has been undertaken. This program allows a proven and validated mechanism core to be coupled with modular adaptors to suit particular physical, environmental and network interface environments. This approach has allowed very rapid response to satisfying customer needs and has led to the harvesting of a number of substantial application opportunities. Establishing volume manufacture has been a significant technical challenge, requiring rapid expansion of technical team resources and competencies. The expanded U.S.-based production development team has made extensive use of the Company’s engineering resources, leveraging group capabilities in the U.S. and in Ukraine. With tooling development and manufacturing resources in the U.S. and China, our technical and manufacturing activities are truly global. In addition to fastener development, the year has seen the design, development and manufacture of the Intevia® Evaluation Kit (E-Kit) which provides fastener mounting, powering, network interconnect and control facilities in a form suitable for use at customer demonstrations, trade shows and for technology evaluation purposes. Advanced concepts such as sensing, auxiliary control and PDA network interfacing via Bluetooth® can be demonstrated using the kit. Later this year, advanced users will be able to have their kits upgraded to an enhanced Developers Kit configuration, allowing them to program complete Intevia® application solutions. In parallel with the production engineering of the first three families of fasteners, TZ’s technical development program has continued to produce new intelligent fastener families. A low-cost morphing Beam fastening device has been developed, tested and successfully demonstrated to customers with positive response. The device is likely to enter volume production in the coming year depending on application demand. A new high-strength fastener family, denoted the Strip fastening device, has also been designed and will be taken to production readiness. During the year, the technology team also focused on the development of Intelligent Actuators. These new devices build off the existing enabling technology platforms, but in their own right, represent a strong licensable IP and technology package for 2007. Linear, quarter-turn and continuous rotary actuator designs along with working prototypes have been developed and are anticipated to move into production designs in the coming year. Relationships are being formed with a number of technology and smart materials providers to strengthen the actuator technology portfolio. Having laid the foundations, the Company is primed to accelerate its technology development and manufacturing program to support business opportunities. Several new intelligent fastener families and modular variants of existing fasteners are planned to enter volume production. A number of additional fastener and actuator families will also be developed. New sources of smart materials will be established, alternative smart material actuation will be explored and the Company is anticipating establishing supply of specialised high- temperature Shape Memory Alloy. Another key development scheduled for 2007 is the incorporation of embedded electronics and TZ’s operating system into an Application Specific Integrated Circuit (ASIC). Development of the ASIC will represent another major achievement and step forward in making embedded intelligence a viable and cost-effective reality and in expanding the functional possibilities of On Board Technology™. 17 growth in services 18 The acquisition of PDT in March 2005 and the agreed earn-out provision ensured strong motivation for PDT to meet its US$3.0m EBITDA objectives for the 2005 calendar year. PDT delivered on its revenue and proﬁtability promises, expanding its customer and revenue base in two strategically important business sectors: medical and military. Medical revenues increased signiﬁcantly as the business continued to build a strong backlog of medical device development programs. Revenues from military- related programs have also expanded and are expected to more than triple in the coming years. To fuel further growth, PDT will become International Trafﬁc in Arms Regulations (ITAR) registered and compliant, which will not only create further opportunities to secure military engineering contracts, but will also support Intevia® defence applications opportunities as well. PDT continued to expand its geographic reach by acquiring a small design and engineering business in Austin, Texas. This year, expansion plans include potential acquisitions on the U.S. East and West coasts as well as building an Asian hub, most likely in Hong Kong. Existing branches in Florida, Minnesota, Ukraine and the UK all continued to build their businesses with expanded service offerings. The UK ofﬁce grew substantially this year and has become a hub for TZ and Intevia® opportunities into Europe. The highly professional but lower labour rate of the Ukrainian operation continues to be a key competitive advantage, giving the business a unique ability to provide round-the- clock client services while keeping rates competitive and proﬁts strong. Securing training visas for 14 Ukrainian engineers will expedite training cycles at U.S. facilities. Other major accomplishments this year include development of a new 18-member electrical engineering and software group and the hiring of a new Global Sourcing Manager to provide the group and our customers broader offshore sourcing capability. On another business front, several new product ideas developed by PDT’s internal innovation think tank generated licensing opportunities with leading manufacturers in the juvenile product and pet care markets. These opportunities promise to add additional sources of revenue in the coming year. In addition to growth from new business initiatives, PDT foresees a strong pipeline of continuing business with current customers in the consumer products, health care and hi-tech sectors. These relationships will continue to fuel service revenues and will open new opportunities for the application of TZ’s unique technology. OPERATIONS | 2006 ANNUAL REPORT LEFT Magnetically driven lancing devices, a PDT innovation RIGHT PDT engineering excellence 19 “Platinum Equity firmly believes that advanced technology products are vital to the future of the fastening industry, and in particular, to our Textron Fastening Systems business. This advanced technology is exemplified by Intevia® Intelligent Fastening Solutions, which TFS is developing in collaboration with TZ. Mark Barnhill SVP and Principal Platinum Equity 20 Platinum + Acument: Little things. Big difference. Fasteners are an essential part of everything from MP3 players to the space shuttle. When Textron decided to divest its Fastening Systems division, they were looking for a partner who could manage this complex global business. They found us, Platinum Equity. The $1.8 billion company, being rebranded as Acument Global Technologies, manufactures and sources mission-critical fasteners for the automotive, aerospace, electronics, construction and industrial markets. Its brands—Camcar, Cherry, Intevia, Avdel, and Elco, among many others–hold well-established positions in important fastening markets and serve blue-chip manufacturers around the world. We’ll bolster their positions and enhance the value of Acument through our unique M&A&O® approach, which will focus on both organic initiatives and follow-on acquisitions. This cornerstone acquisition, purchased in August 2006, is our largest and our most complex to date. It also marks our first acquisition in the industrial fastener market. We’re always looking for partners who pursue value as aggressively as we do. Considering a divestiture? Make Platinum Equity part of your plans. www.platinumequity.com Platinum Equity placed this advertisement in the Financial Times in early October 2006 to announce its acquisition and rebranding of TFS ©Copyright 2006 Platinum Equity Advisors, LLC. All rights reserved. “Mergers. Acquisitions. Operations.” is a service mark and M&A&O is a registered service mark of Platinum Equity, LLC and the trademarks or service marks of Platinum’s associated companies appearing herein are the property of those companies. It is not our intention to claim as our own any third party trademark that may appear in this material. FINANCIALS | 2006 ANNUAL REPORT 22 directors’ report 28 income statement 29 balance sheet 30 statement of changes in equity 32 cash flow statement 33 notes to the financial statements 62 directors’ declaration 63 independent audit report 65 corporate governance 68 additional stock exchange information 71 directory 21 directors’ report The Directors of TZ Limited (TZL) present their report together with the financial reports of the parent entity and its controlled entities for the financial year ended 30 June 2006. Directors The details of Directors of the Company during the year and to the date of this report are: A. Leibowitz Chairman (Resigned 7 July 2006) C. Kelliher Executive Director J. Falconer Non-Executive Director & Company Secretary M. Otten Non-Executive Director (Appointed 7 July 2006) Operating Results The operating profit after income tax for the year ended 30 June 2006 for the consolidated entity was $592,308 (2005: $4,089,910). Review of Operations The Company faced significant challenges during the year when its key commercialisation partner, Textron Fastening Systems (TFS) was offered for sale by its parent, Textron Inc. Given the broad range of possible outcomes from the divestiture and the consequential impact on the Company’s growth plans, revenue targets and ability to continue to commercialise Intelligent Fastening Technology (IFT), the Directors and management of TZL put in place initiatives to ensure that the Company was in a position to respond positively to the divestiture. With the primary objective of controlling the Company’s business destiny and ensuring that the commercialisation initiatives for IFT would not be diminished by new ownership, the TZ Board resolved that TZ Limited should mount a credible bid for the TFS assets. 22 The Directors and management of the Company worked hard to establish appropriate partnerships and engage in strategies for a range of possible outcomes and ownership scenarios. These activities included the establishing of a partnership with one of the world’s largest banking groups as an equity partner in the bid for TFS, as well as developing other strategic relationships to deliver the primary objective, without the Company taking on excessive liability and debt exposure. The sales process was a significant distraction for the management teams of TZL and TFS, which temporarily slowed the rate of commercialisation of IFT. Also the Company did incur significant unbudgeted expense in executing these defensive strategies. However, the Directors believe significant value will accrue in the near future to the Company based on those initiatives. The Company’s financial performance was impacted by these unplanned events and unbudgeted expenditures. Additionally, the recent decision, based on advice from external accountants, to defer FutureWall™ licence revenue has resulted in a lower than expected EBITDA result. If these factors are taken into consideration, the Company’s relative performance was more in line with expectations. The Directors believe the new ownership structure of TFS, in combination with the relationships and alliances formed during the divestiture process, place it well to achieve its objectives and growth aspirations. Principal Activities The principal activities of the consolidated entity during the financial year were: • The development and licensing of intellectual property particularly, Intelligent Fastening, Assembly Enabling and FutureWall™ technologies through Telezygology, Inc. • Providing a full service capability in product development, engineering services, injection moulding tooling and small production run manufacturing through PDT. Additionally, a significant electronic and software engineering capability has been established. The majority of the operations of the consolidated entity are based in Illinois, USA. FINANCIALS | 2006 ANNUAL REPORT directors' report Significant Changes in State of Affairs During the year, the Company issued 9,480,592 shares for $3,268,539 pursuant to the conversion of outstanding options. In March 2006, the Company acquired the business of Mqube Design for a total consideration of $164,000 which included a cash component of $45,000 and the issue of 175,482 fully paid ordinary shares. Likely Developments The particular information required by s299(1) 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. Directors’ Skills, Experience and Expertise Mr. Chris Kelliher Executive Director of TZ Limited and TZ Group Chief Executive Officer Mr. Kelliher’s role is to oversee the Company’s operations and lead its strategic growth initiatives. Mr. Kelliher has over 19 years experience managing technology based companies ranging from start up ventures to subsidiaries of large multinational companies. He was appointed Managing Director of Microsoft South Pacific Region in 1996 after three years as Managing Director of Microsoft’s Australian subsidiary. Prior to this, he spent three years as the founding Managing Director of Microsoft in New Zealand. Before this, he held senior management positions with Digital Equipment Corporation and Philips. Mr. Kelliher is also Director of Mainland Air Services Ltd, a New Zealand based air transport and training company. 23 As at the date of this report, Mr. Kelliher had the following interest in securities in the Company: Interest in shares Interest in options 2,065,175 1,000,000 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 Accounts in Sydney providing specialist services to private and public company clients. He is a Director of Kingsgate Consolidated Limited, the Company Secretary of Tri Origin Minerals Limited, and formally a director of Taragon Property Fund – 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 1,976,365 Interest in options Nil Mr. Michael Otten Non-Executive Director From 1994 to 1998, Mr. Otten was Managing Director of Singleton Advertising in Melbourne before taking the position of Executive General Manager of Marketing at Crown. He has also run his own marketing consultancy business No Compromises for the past 15 years and is currently Executive Director of Pod TV, Australia’s leading developer of retail television networks. As at the date of this report, Mr. Otten had the following interest in securities in the Company: Interest in shares 193,197 Interest in options Nil Mr. Anthony Leibowitz (resigned 7 July 2006) directors' report 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: No. of Meetings Held No. of Meetings Attended A. Leibowitz C. Kelliher J. Falconer M. Otten 4 4 4 - 4 4 4 - 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 15 July 2004 and allowed for a fixed sum not exceeding $250,000. Emoluments paid to Senior Executives of the Company are determined by the Chief Executive Officer 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: Short-term Employee Benefits Share-based Payment Role Salary & Fees Non-cash Benefit Options Total 24 Parent Entity A. Leibowitz Non-Executive Chairman J. Falconer Non-Executive Director M. Otten Non-Executive Director 126,000 60,000 - - - - Economic Entity Executive Directors and Executive Officers C. Kelliher Executive Director and TZ Group Chief Executive Officer 614,044 8,715 J. Wilson TZI Chief Operating Officer 469,462 19,901 D. Rudduck TZI Chief Technology Officer 418,925 19,901 M. Schwartz PDT President and Chief Executive Officer 351,406 17,398 R. Wiltgen PDT Chief Administration Officer 345,779 14,243 PDT General Manager Tooling 345,779 26,598 D. May Total - - - - - - - - - 126,000 60,000 - 622,759 489,363 438,826 368,804 360,022 372,377 2,731,395 106,756 2,838,151 FINANCIALS | 2006 ANNUAL REPORT directors' report Directors’ Benefits Particulars of Directors’ benefits are disclosed in Note 15. 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. Significant After Balance Date Events On the 4 August 2006, the Company issued 5,569,887 fully paid ordinary shares at an issue price of 58.5 cents per share as final settlement of the consideration for the purchase of PDT entered into in March 2005 (refer to note 17(c)). On the 4 August 2006, the Company issued 3,473,419 fully paid ordinary shares on the exercise of 2,982,250 at 34 cents per share and 491,169 at 40 cents per share. On the 17 August 2006, the Company issued 470,139 fully paid ordinary shares at an exercise price of 40 cents per share. On the 25 August 2006, the Company issued 2,652,112 fully paid ordinary shares on the exercise of 1,491,125 at 27 cents per share, 803,506 at 40 cents per share and 357,481 at 34 cents per share. On the 1 September 2006, the Company issued 6,437,862 fully paid ordinary shares on the exercise of 6,352,581 at 34 cents per share and 85,281 at 40 cents per share. No other matters or circumstances have arisen since the end of the financial year that 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. 25 Share Options (i) No options 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 (ii) At the date of this report, options over unissued shares or interests of the Company are as follows: Expiry Date Issue Price Of Shares Number Under Option 26 March 2007 31 December 2006 31 December 2007 $0.45 $0.75 $1.00 2,000,000 1,000,000 1,000,000 Complete details of the above options are in Note 15 to the financial statements. directors' report 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 are set out in the Corporate Governance section of this financial statement. 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 2006. A copy of the declaration is attached to and forms part of the Directors’ report. Signed in Sydney, Australia this 30th day of September 2006 in accordance with a resolution of the Board of Directors. 26 J. Falconer Non-Executive Director and Company Secretary auditor’s independence declaration to the directors of tz limited FINANCIALS | 2006 ANNUAL REPORT In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the Directors of TZ Limited. As auditor of the financial statements of TZ Limited for the financial year ended 30 June 2006, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours faithfully, Taylor & Co. Stephen Taylor 29th September 2006 Sydney, Australia 27 income statement FOR THE FINANCIAL YEAR ENDED 30 JUNE 2006 Consolidated Entity Parent Entity 2 2 2 Revenue Cost of sales Gross profit Other income Employee related expenses Occupancy expenses Communications expenses Depreciation Amortisation of intangibles Note 2006 $ 2005 $ 30,547,698 18,218,464 (18,924,803) (6,147,119) 11,622,895 12,071,345 2006 2005 $ - - - $ - - - 254,416 225,442 854,978 133,799 (3,924,710) (2,751,351) (267,004) (374,852) (132,406) (298,048) - - (316,302) (181,304) (37,834) (20,928) (1,066,388) (420,957) (1,057,663) (318,460) - - - - Professional and corporate services (2,401,493) (1,194,445) (402,823) (361,368) Travel and accommodation Write-off intercompany debts 28 Finance cost Other expenses Profit/(Loss) before income tax expense Income tax expense (benefit) Profit/(Loss) after income tax expense Profit/(Loss) from extraordinary items after related income tax expense Net profit/(loss) Net profit/(loss) attributable to outside equity interests Net profit/(loss) attributable to members of the parent entity Total changes in equity other than those resulting from transactions with owners as owners Basic earnings per share (cents) Diluted earning per share (cents) 3 4 14 13 21 21 (1,058,628) (1,204,134) (208,979) (270,351) - - (451,382) - (195,852) (79,215) (626) (2,029) (1,157,335) (800,550) (118,016) (29,827) 566,534 5,048,323 (631,686) (925,556) (25,774) 210,608 - - 592,308 4,837,715 (631,686) (925,556) - - - - 592,308 4,837,715 (631,686) (925,556) - - - - 592,308 4,837,715 (631,686) (925,556) 592,308 4,837,715 (631,686) (925,556) 0.40 0.35 3.33 2.91 The accompanying notes form part of these financial statements. FINANCIALS | 2006 ANNUAL REPORT balance sheet AS AT 30 JUNE 2006 Current assets Consolidated Entity Parent Entity Note 2006 $ 2005 $ 2006 $ 2005 $ Cash and cash equivalents 17 3,403,156 5,613,544 1,002,405 1,161,631 Trade and other receivables Work in process Total current assets Non-current assets Trade and other receivables Financials assets Property, plant and equipment Intangibles assets Deferred tax assets 5 6 5 7 8 9 10,974,950 9,161,456 4,117,713 4,991,174 700,456 423,812 - - 15,078,562 15,198,812 5,120,118 6,152,805 - - - - 2,931,714 2,385,760 37,555,919 33,203,229 4,266,725 4,171,410 39,698,304 32,006,795 470,343 136,025 - - - - - - Total non-current assets 44,435,372 36,314,230 40,487,633 35,588,989 Total assets 59,513,934 51,513,042 45,607,751 41,741,794 29 5,479,615 5,632,499 4,156,601 2,355,949 875,244 736,735 129,191 424,475 - - - - 7,091,594 6,186,165 4,156,601 2,355,949 Current liabilities Trade and other payables Short-term provisions Short-term borrowing Total current liabilities Non-current liabilities Trade and other payables Long-term borrowing Deferred tax liabilities 10 11 12 10 12 - - 4,097,165 2,028,010 281,170 9,858 - - - - 695,948 - - 695,948 Total non-current liabilities 4,378,335 2,037,868 Total liabilities Net assets Equity Issued capital Reserves Accumulated losses Parent interest Minority equity interest Total equity 11,469,929 8,224,033 4,156,601 3,051,897 48,044,005 43,289,009 41,451,150 38,689,897 13 14 67,780,998 64,398,396 67,780,998 64,398,396 1,103,289 323,203 78,000 67,663 (20,840,283) (21,432,590) (26,407,848) (25,776,162) 48,044,005 43,289,009 41,451,150 38,689,897 - - - - 48,044,005 43,289,009 41,451,150 38,689,897 The accompanying notes form part of these financial statements. statement of changes in equity FOR THE FINANCIAL YEAR ENDED 30 JUNE 2006 Consolidated Entity Share Capital Reserves Note Ordinary Equity- based Payment Foreign Cur- rency Trans- lation Accumulated Losses Balance at 1 July 2004 Shares issued during the period Share issue cost Share-based payment Adjustment from translation of foreign controlled entities Profit attributable to members of parent entity $ 54,565,803 10,540,000 (707,407) $ - - - - - - 67,663 - - $ Total $ (26,270,305) 28,295,453 - - - - 10,540,000 (707,407) 67,663 255,540 $ - - - - 255,540 - 4,837,715 4,837,715 Sub-total 64,398,396 67,663 255,540 (21,432,590) 43,289,009 30 Dividends paid or provided for - - - - - Balance at 30 June 2005 64,398,396 67,663 255,540 (21,432,590) 43,289,009 Balance at 1 July 2005 64,398,396 67,663 255,540 (21,432,590) 43,289,009 Shares issued during the period Share issue cost Adjustment from translation of foreign controlled entities Share-based payment Profit attributable to members of parent entity 3,384,237 (1,635) - - - - - - 10,337 - - - 769,749 - - - - - - 592,308 3,384,237 (1,635) 769,749 10,337 592,308 Sub-total 67,780,998 78,000 1,025,289 (20,840,282) 48,044,005 Dividends paid or provided for - - - - - Balance at 30 June 2006 67,780,998 78,000 1,025,289 (20,840,282) 48,044,005 The accompanying notes form part of these financial statements. FINANCIALS | 2006 ANNUAL REPORT statement of changes in equity FOR THE FINANCIAL YEAR ENDED 30 JUNE 2006 Parent Entity Share Capital Reserves Note Ordinary Equity- based Payment Foreign Currency Translation Accumulated Losses $ $ Total $ - - - - - - - - - - - - - - - - (24,850,606) 29,715,197 - - - 10,540,000 (707,407) 67,663 (925,556) (925,556) (25,776,162) 38,689,87 - - 31 (25,776,162) 38,689,897 (25,776,162) 38,689,897 - - - 3,384,237 (1,635) 10,337 (631,686) (631,686) (26,407,848) 41,451,150 - - (26,407,848) 41,451,150 Balance at 1 July 2004 Shares issued during the period Share issue cost Share-based payment Profit attributable to members of parent entity $ 54,565,803 10,540,000 (707,407) $ - - - - - 67,663 - Sub-total 64,398,396 67,663 Dividends paid or provided for - - Balance at 30 June 2005 64,398,396 67,663 Balance at 1 July 2005 64,398,396 67,663 Shares issued during the period Share issue cost Share-based payment Profit attributable to members of parent entity 3,384,237 (1,635) - - - - 10,337 - Sub-total 67,780,998 78,000 Dividends paid or provided for - - Balance at 30 June 2006 67,780,998 78,000 The accompanying notes form part of these financial statements. cashflow statement FOR THE FINANCIAL YEAR ENDED 30 JUNE 2006 Consolidated Entity Parent Entity Note 2006 $ 2005 $ 2006 $ 2005 $ Cash Flows From Operating Activities Receipts from customers 29,290,513 18,311,805 - - Payments to suppliers and employees (28,437,351) (12,152,189) (1,037,373) (1,068,425) Interest received Interest paid Income tax paid Other income 218,169 (210,070) 311,136 (79,216) (188,849) (163,370) - 3,975 122,782 227,583 (626) (2,029) - - - - Net cash provided by (used in) operating activities 17(b) 672,412 6,232,141 (915,217) (842,871) Cash Flows From Investing Activities Proceeds from sale of investment securities - 10 Payment for plant and equipment (1,029,335) (291,524) - - 10 - Acquisition cost for controlled entity (112,881) (479,774) (112,881) (479,774) Acquisition for controlled entity Escrowed deposit 17(c) 17(c) (1,583,168) (6,563,400) (1,294,027 (6,563,400) - (5,287,185) - - (5,287,185) - 32 Payments for research and development (4,769,780) (2,955,132) Repayment of loan from controlled entity Loan to controlled entity Loans to other person Loans repaid other person Aggregated cash flow from acquired entity - - - - - - - 633,190 5,612,772 (1,630,526) - (34,609) 162,000 49,831 - - - (16,460) 162,000 - Net cash provided by (used in) investing activities (7,495,164) (15,399,783) (2,404,244) (6,572,037) Cash Flows From Financing Activities Share Issues Share Issue costs Repayment of borrowing Repayment of lease obligation Proceeds from line of credit borrowing Proceeds from notes payables 3,161,871 8,077,629 3,161,871 8,077,629 (1,636) (707,406) (1,636) (707,406) (904,459) (121,458) 930,944 1,462,912 - - - - - - - - - - - - Net cash provided by financing activities 4,528,174 7,370,223 3,160,235 7,370,223 Net increase/(decrease) in cash held (2,294,578) (1,797,419) (159,226) (44,685) Cash at beginning of year 17(a) 5,613,544 7,410,963 1,161,631 1,206,316 Effects of exchange rate fluctuations on the bal- ances of cash held in foreign currencies 84,190 - - - Cash at end of year 17(a) 3,403,156 5,613,544 1,002,405 1,161,631 The accompanying notes form part of these financial statements. FINANCIALS | 2006 ANNUAL REPORT notes to the financial statements FOR THE FINANCIAL YEAR ENDED 30 JUNE 2006 1. SUMMARY OF ACCOUNTING POLICIES Statement of Compliance The financial report is a general purpose financial report which has been prepared in accordance with the Corporation Act 2001, Accounting Standards and Urgent Issues Group Interpretations and complies with other requirements of the law. Accounting Standards include Australian equivalents to International Financial Reporting Standards (‘A-IFRS’). Compliance with the A-IFRS ensures that the consolidated financial statements and notes of the consolidated entity comply with International Financial Report- ing Standards (‘IFRS’). The financial statements were authorised for issue by the Directors on 29th September 2006. Basis of Preparation The financial report has been prepared on the basis of historical cost, except for the revaluation of certain financial instruments. Cost is based on the fair values of the consolidation given in exchange for assets. In the application of A-IFRS, Management is required to make judgments, estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstance, the results of which form the basis of making judgements. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgments made by management in the application of A-IFRS that have significant effects on the financial statements and esti- mates with a significant risk of material adjustments in the next year are disclosed, where applicable, in the relevant notes to the financial statements. 33 Accounting policies are selected and applied in a manner which ensures that the resulting financial information satisfies the con- cepts of relevance and reliability, thereby ensuring that the substance of the underlying transactions or other events is reported. The Company changed its accounting policies on 1 July 2005 to comply with A-IFRS. The transition to A-IFRS is accounted for in accordance with Accounting Standard AASB 1 ‘First-time Adoption of Australian Equivalents to International Financial Reporting Standards’ with 1 July 2004 as the date of transition. An explanation of how the transition from superseded policies to A-IFRS has affected the Company’s financial position, financial performance and cash flows is discussed in note 24. The accounting policies set out below have been applied in preparing the financial statements for the year ended 30 June 2006, the comparative information presented in these financial statements for the year ended 30 June 2005 and in the preparation of the opening A-IFRS balance sheet at 1 July 2004 (as disclosed in note 24), the Company’s date of transition. The following significant accounting policies have been adopted in the preparation and presentation of the financial report: (a) Principles of consolidation The consolidated financial statements comprise the financial statements of TZ Limited and all its controlled entities (refer to note 7) other than CAP Asia Pacific Pte Ltd in which the Company currently holds a 25% interest. 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 its indirect investments in CED Hong Kong Limited and CED Philippines Inc., that 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 neces- sary to comply with Accounting Standards. The Directors consider that the net revenues and expenses omitted from the financials report are not significant. notes to the financial statements (b) Cash and cash equivalents Cash and cash equivalents comprise cash on hand, cash in banks and investments in money market instruments with less than 14 days to maturity, net of outstanding bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet. (c) Investments Investments are recognised in the financial statements at cost. (d) 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 recover- able amount. The depreciation rates used for each class of asset are as follows: • Office furniture and equipment 13% - 50% • Leasehold improvement 30% • Motor vehicle 37% - 50% • Plant and 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. 34 (e) Receivables and payables Trade accounts receivable, amounts due from related parties and other receivables represent the principal amounts due at bal- ance date plus accrued interest less, where applicable, any provisions for Impaired accounts. Accounts payable represent the principal amounts outstanding at balance date plus, where applicable, any accrued interest. (f) 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 calcu- lated 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. (g) 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 as- sessable income and comply with the conditions of deductibility imposed by the law to permit a future income tax benefit to be realised. FINANCIALS | 2006 ANNUAL REPORT notes to the financial statements (h) Leases Lease payments under operating leases, where substantially all the risks and benefits remain with the lessor, are charged as ex- penses 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. (i) 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 balance sheet in the financial year in which the exchange rates change as exchange gains or losses. (j) Revenue recognition (i) Sales revenue Sales revenue comprises revenue earned from the provision of products or services to entities outside the consolidated entity. (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. (iv) Royalty revenue Royalty revenue is recognised as it accrues. (k) Goods and services tax 35 Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except: (i) where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or (ii) for receivables and payables which are recognised inclusive of GST. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables. Cash flows are included in the cash flow statement on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows. (l) Share-based payments Equity-settled share-based payments granted after 7 November 2002 that were unvested as of 1 January 2005 are measured at fair value at the date of grant. Fair value is measured by use of a binomial model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural con- siderations. notes to the financial statements The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the consolidated entity’s estimate of shares that will eventually vest. (m) Earnings per share (i) Basic earnings per share Basic earnings per share is determined by dividing the operating profit/(loss) after income tax by the weighted average number of ordinary shares outstanding during the financial year. (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in determining earnings per share by taking into account amounts unpaid on ordinary shares and any reduction in earnings per share that will probably arise from the exercise of options outstanding during the financial year. (n) Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). (o) Intangible assets 36 (i) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the group’s share of the net identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on the acquisition of subsidiaries is included in intangible assets. Goodwill on the acquisition of associates is included in investments in associates. Goodwill acquired in business combinations is not amortised. Instead, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each of those cash-generating units represents the group’s investment in each region of operation by each primary reporting segment. (ii) Trademarks and licences Trademarks and licences have an Indefinite useful life and are carried at cost less any impaired losses. (iii) Research and development Research expenditure is expensed as incurred. An intangible asset arising from development expenditure is only recognised when all recognition criteria can be demonstrat- ed. The recognition criteria for development activity are: • the technical feasibility of completing the intangible asset so that it will be available for use or sale; • the intention to complete the intangible asset and use or sell it; • the ability to use or sell the intangible asset; • whether the intangible asset will generate probable future economic benefits. Among other things, the Company can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it to be used internally, the usefulness of the intangible asset; • the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and • the ability to measure reliably the expenditure attributable to the intangible asset during its development. FINANCIALS | 2006 ANNUAL REPORT notes to the financial statements Development costs are carried at cost less accumulated amortisation and impaired losses. Where recognition criteria are not met, development costs are recognised in the income statement as incurred. A summary of the amortisation policies applied to the consolidated entities intangible assets is as follows: Patents and Licences Development Cost Useful lives Indefinite Finite Method used Not depreciated or revalued 20 year – straight line Internally generated / Acquired Acquired Internally generated Impairment test / Recoverable amount testing Annually and where an indicator of impairment exists Amortisation method reviewed at each reporting period and reviewed at each reporting period for indicator of impairment (p) Financial instruments issued by the company (i) Debt and equity instruments Debt and equity instruments are classified as either liabilities or as equity in accordance with the substance of the contrac- tual arrangement. 37 (ii) Transaction costs on the issue of equity instruments Transaction costs arising on the issue of equity instruments are recognised directly in equity as a reduction of the proceeds of the equity instruments to which the costs relate. Transaction costs are the costs that are incurred directly in connection with the issue of those equity instruments and which would not have been incurred had those instruments not been issued. (iii) Interest and dividends Interest and dividends are classified as expenses or as distributions of profit consistent with the balance sheet classification of the related debt or equity instruments or component parts of compound instruments. notes to the financial statements Consolidated Parent Entity 2. REVENUES FROM OPERATIONS 2006 $ 2005 $ Sales revenue 30,547,698 18,218,464 Cost of goods sold (18,924,803) 6,147,119 2006 2005 $ - - $ - - Other revenue Interest Write-off intercompany debts Sundry revenue items Total other revenue 254,416 215,026 - - - 10,416 145,479 695,948 - 133,799 - - 254,416 225,442 854,978 133,799 3. PROFIT/(LOSS) FROM OPERATION Profit/Loss from continuing activities includes: Net losses on disposals of property, plant & equipment - 21,609 Amortisation of non-current assets: Intellectual property 38 Depreciation Bad and doubtful debts expense 1,066,388 318,460 1,057,663 - 420,957 193,811 - - - - - - - - - - 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% (2005: 30%) Tax effect of permanent differences: Amortisation of Intangibles Other non-allowable expenses Write-off intercompany debts 177,692 1,451,315 (189,506) (257,368) 319,916 95,538 - - - - - - 73,298 - - - Future income tax benefit not brought to account (523,382) (1,336,245) 116,208 257,368 Income tax expense/(credit) attributable to result (25,774) 210,608 - - 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. 4,095,617 4,618,999 2,103,370 1,987,162 The taxation benefits of tax losses and timing differences not brought to account will only be obtained if: • assessable income is derived of a nature and of amount sufficient to enable the benefit from the deductions to be realised; • conditions for deductibility imposed by the law are complied with; and • no changes in tax legislation adversely affect the realisation of the benefit from the deductions. FINANCIALS | 2006 ANNUAL REPORT notes to the financial statements 5. RECEIVABLES Current Trade debtors Sundry debtors Sub-total Consolidated Parent Entity Note 2006 $ 2005 $ 5,809,184 3,912,079 2006 2005 $ - $ - 5,094,913 5,144,694 4,117,713 4,976,174 10,904,097 9,056,773 4,117,713 4,976,174 Other debtors and prepayments 70,853 104,683 - 15,000 10,974,950 9,161,456 4,117,713 4,991,174 Non-current Amounts receivable from: Controlled entities 6. WORK IN PROCESS - - - - 2,931,714 2,385,760 2,931,714 2,385,760 Uncompleted/Unbilled jobs - at cost 700,456 423,812 - - 39 notes to the financial statements 7. INVESTMENTS Shares in controlled entities - at cost note 7(a) Shares - other – unquoted at cost (a) Controlled Entities Consolidated Parent Entity Note 2006 2005 $ - - - $ - - - 2006 $ 2005 $ 37,555,919 33,203,229 - - 37,555,919 33,203,229 Country of Incorporation % Owned 2006 2005 PARENT ENTITY TZ Limited SUBSIDIARIES OF TZ LIMITED Telezygology, Inc. PDT Holdings, Inc. Product Development Technologies, Inc. 40 PDT Tooling, Inc. PDT Southeast Limited Liability Company (LLC)* CJSC PDT Ukraine CED Membership Services Pty Ltd (ii) The Presidential Card Pty Ltd (ii) CUC Australasia Pty Ltd (ii) CED Online Pty Ltd (ii) Golf Partners Australia Pty Ltd (ii) Golf Partners International Pty Ltd (ii) CED Asia Pacific Pte Ltd CED Hong Kong Limited (i) CED Philippines Inc. (i) Australia USA USA USA USA USA Ukraine Australia Australia Australia Australia Australia Australia Singapore Hong Kong Philippines 100 .00 100.00 100.00 100 .00 100.00 90 .00 0.00 0 .00 0 .00 0.00 0 .00 0 .00 5 .00 6.25 6.25 100.00 100.00 100.00 100.00 100.00 90.00 100.00 100.00 100.00 100.00 100.00 100.00 25.00 6.25 6.25 (i) Owned by CED Asia Pacific Pte Ltd (the 6.25% represents TZ Limited indirect interest). (ii) The investment in the dormant Companies was voluntarily deregistered on the 4 April 2006. *An LLC is treated as a partnership for U.S. purposes FINANCIALS | 2006 ANNUAL REPORT Consolidated Parent Entity 2006 $ 2005 $ 2006 $ 2005 $ notes to the financial statements 8. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment Cost Accumulated depreciation 5,776,191 4,564,885 (1,509,466) (393,475) Total property, plant and equipment 4,266,725 4,171,410 MOVEMENTS DURING THE YEAR: Office furniture and equipment Beginning of year Additions Disposals Depreciation expense 1,338,797 90,997 663,801 1,420,694 - (21,609) (579,881) (151,285) Net foreign currency adjustment on translation 3,851 - End of year 1,426,568 1,338,797 Leasehold improvements Beginning of year Additions Depreciation expense Net foreign currency adjustment on translation End of year Motor vehicle Beginning of year Additions Depreciation expense Net foreign currency adjustment on translation End of year Plant and equipment Beginning of year Additions Depreciation expense 508,453 78,826 (118,497) 22,221 - 540,218 (31,765) - 491,003 508,453 137,142 - (35,285) 3,141 - 148,002 (10,860) - 104,998 137,142 2,187,018 - 348,704 2,282,106 (357,844) (95,088) Net foreign currency adjustment on translation 66,278 - End of year 2,244,156 2,187,018 - - - - - - - - - - - - - - - - - - - - - - - - 41 - - - - - - - - - - - - - - - - - - - - - - - - notes to the financial statements 9. INTANGIBLES Goodwill on consolidation Intellectual property Trademarks Total intangibles MOVEMENTS DURING THE YEAR: Goodwill on consolidation 42 Beginning of year Additions End of year Intellectual property Beginning of year Additions Amortisation expense End of year Trademarks Beginning of year Additions End of year 10. PAYABLES Current Trade creditors Consolidated Parent Entity 2005 $ 2004 $ 2005 $ 2004 $ 22,679,131 18,608,927 15,374,642 11,795,854 1,644,531 1,602,014 39,698,304 32,006,795 18,608,927 15,517,807 4,070,204 3,091,120 22,679,131 18,608,927 11,795,854 4,775,230 4,645,176 7,339,081 (1,066,388) (318,457) 15,374,642 11,795,854 1,602,014 29,577 42,517 1,572,437 1,644,531 1,602,014 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2,797,871 2,333,010 38,710 73,181 Contingent liability – refer to note 17 - 2,231,556 - - 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 (2005: non-interest bearing) 2,762,574 1,067,933 4,117,891 2,282,768 5,560,445 5,632,499 4,156,601 2,355,949 - - - - - - 695,948 695,948 notes to the financial statements 11. PROVISIONS Current Employee entitlements Aggregate employee entitlements 12. INTEREST BEARING LIABILITIES Current Bank loans - secured Non-current Bank loans - secured The bank loans are secured by a mortgage over the as- sets of PDT Inc. group assets. 13. ISSUED CAPITAL Issued and paid up capital 157,212,045 (2005: 147,512,100) fully paid ordinary shares MOVEMENTS DURING THE YEAR: FINANCIALS | 2006 ANNUAL REPORT Consolidated Parent Entity 2006 $ 2005 $ 2006 $ 2005 $ 875,244 875,244 129,191 129,191 736,735 424,475 4,097,165 2,028,010 - - - - - - - - 67,274,015 64,398,396 67,274,015 64,398,396 43 Opening balance 64,398,396 54,565,803 64,398,396 54,565,803 Shares issued during the year 120,000 on the 3 August 2005 1,230,189 on the 19 January 2006 144,650 on the 20 February 2006 175,482 on the 10 March 2006 4,903,503 on the 4 April 2006 100,000 on the 21 April 2006 2,982,250 on the 30 May 2006 43,871 on the 28 June 2006 6,000,000 on the 16 July 2004 13,076,923 on the 12 December 2004 Share issue costs Closing balance 48,000 418,264 53,381 114,063 1,672,873 40,000 1,013,965 23,690 - - - - - - - - 48,000 418,264 53,381 114,063 1,672,873 40,000 1,013,965 23,690 - - - - - - - - - - 2,040,000 8,500,000 - - 2,040,000 8,500,000 (1,636) (707,407) (1,636) (707,407) 67,780,998 64,398,396 67,780,998 64,398,396 notes to the financial statements 13. ISSUED CAPITAL (cont.) Opening balance 3 August 2005 19 January 2006 20 February 2006 10 March 2006 4 April 2006 21 April 2006 30 May 2006 28 June 2006 16 July 2004 12 December 2004 Closing balance (i) Share unquoted options 44 Opening balance Options issued: 16 July 2004* 20 January 2005 Options exercised: 3 August 2005 19 January 2006 20 February 2006 4 April 2006 21 April 2006 30 May 2006 Closing balance Consolidated Parent Equity 2006 No. 2005 No. 2006 No. 2005 No. 147,512,100 128,435,177 147,512,100 128,435,177 120,000 1,230,189 144,650 175,482 4,903,503 100,000 2,982,250 43,871 - - - - - - - - 120,000 1,230,189 144,650 175,482 4,903,503 100,000 2,982,250 43,871 - - - - - - - - - - 6,000,000 13,076,923 157,212,045 147,512,100 - - - 6,000,000 13,076,923 147,512,100 23,533,768 19,893,499 23,533,768 19,893,499 - - 2,000,000 1,640,269 - - 2,000,000 1,640,269 (120,000) (1,230,189) (144,650) (4,903,503) (100,000) (2,982,250) - - - - - - (120,000) (1,230,189) (144,650) (4,903,503) (100,000) (2,982,250) - - - - - - 14,053,176 23,533,768 14,053,176 23,533,768 (ii) Employee Share Option Plan No shares have been issued by virtue of an exercise of an option during the year or to the date of this report. *The Company issued 2,000,000 options to acquire shares in the Company as per voted on in the general meeting of shareholders held on the 14 July 2005 to the Company Directors Mr. Chris Kelliher and Mr. Anthony Leibowitz by way of two tranches. The first tranche vested on the 31 December 2004 with an exercisable price of $0.75 and the second tranche on 31 December 2005 with an exercisable price of $1.00. The options will expire on 31 December 2006 and 31 December 2007 respectively. notes to the financial statements FINANCIALS | 2006 ANNUAL REPORT Consolidated Parent Entity 2006 2005 $ - 67,663 67,663 - - - - 67,663 67,663 45 14. RESERVES 2006 $ 2005 $ Foreign currency translation reserve 1,025,289 255,540 Share based payment reserve 78,000 67,663 Total reserves 1,103,289 323,203 MOVEMENTS DURING THE YEAR: Foreign currency translation reserve Opening balance Adjustment arising from the translation of foreign controlled entities’ financial statements 255,540 - 769,749 255,540 Closing balance 1,025,289 255,540 $ - 78,000 78,000 - - - Share-based payment reserve Opening balance Share based payment Closing balance 67,663 10,337 78,000 - 67,663 67,663 67,663 10,337 78,000 15. KEY MANAGEMENT PERSONNEL COMPENSATION (a) Names and positions held of consolidated entity and parent entity key management personnel in office at any time during the financial year are: Directors Anthony Leibowitz Chairman – Non-Executive Director (resigned 7 July 2006) Chris Kelliher CEO TZ Group – Executive Director John Falconer Non-Executive Director Michael Otten Non-Executive Director (appointed 7 July 2006) Specified Executives John Wilson TZ Inc. Chief Operating Officer Dickory Rudduck TZ Inc. Chief Technology Officer Mark Schwartz PDT Inc. President and CEO Ray Wiltgen David May PDT Inc. Chief Administration Officer PDT Inc. General Manager Tooling notes to the financial statements 15. KEY MANAGEMENT PERSONNEL COMPENSATION (cont.) (b) Directors’ remuneration Short-term Employee Benefits Share-based Payment Salary & Fees Non-cash Benefit Options Total 126,000 614,044 60,000 - 800,044 120,000 473,891 60,000 653,891 - 8,715 - - 8,715 - - - - - - - - - 39,000 39,000 - 78,000 126,000 622,759 60,000 - 808,759 159,000 512,891 60,000 731,891 2006 A. Leibowitz C. Kelliher J. Falconer M. Otten Total 2005 A. Leibowitz C. Kelliher J. Falconer Total 46 (c) Specified Executives’ remuneration Short-term Employee Benefits Share-based Payment Salary & Fees Superannuation Contribution Non-cash Benefit Options Total 469,462 418,925 351,406 345,779 345,779 1,931,351 - - - - - - 19,901 19,901 17,398 14,243 26,598 98,041 - - - - - - 489,363 438,826 368,804 360,022 372,377 2,029,392 2006 J. Wilson D. Rudduck M. Schwartz R. Wiltgen D. May Total notes to the financial statements FINANCIALS | 2006 ANNUAL REPORT Short-term Employee Benefits Share-based Payment Salary, Fees & Commissions Superannuation Contribution Non-cash Benefit Options Total 385,131 307,992 103,855 103,855 103,855 103,855 9,000 9,000 7,184 7,184 - - - - - - - - 1,108,543 18,000 14,368 - - - - - - - 401,315 324,176 103,855 103,855 103,855 103,855 1,140,911 2005 J. Wilson** D. Rudduck** M. Schwartz R. Wiltgen S. Semenik D. May Total ** Each of these executives resigned as directors of the Parent Entity on the 15 July 2004. (d) Options and rights holdings Number of options held by Directors and specified Executives Directors A. Leibowitz C. Kelliher J. Falconer M. Otten Total Balance 01/07/05 Remuneration Net Change Other Balance 30/06/06 47 Granted as 1,000,000 4,727,812 1,388,182 - 7,115,994 - - - - - - - - - - 1,000,000 4,727,812 1,388,182 - 7,115,994 Specified Executives Balance 01/07/05 Remuneration Net Change Other Balance 30/06/06 Granted as J. Wilson D. Rudduck M. Schwartz R. Wiltgen D. May Total 1,491,125 1,491,125 - - - 2,982,250 - - - - - - - - - - - - 1,491,125 1,491,125 - - - 2,982,250 notes to the financial statements 15. KEY MANAGEMENT PERSONNEL COMPENSATION (cont.) (e) Shareholdings Number of shares held by Directors and specified Executives Directors A. Leibowitz C. Kelliher J. Falconer Total Balance 01/07/05 Remuneration Net Change Other Balance 30/06/06 Granted as 1,493,748 1,416,569 1,388,182 4,298,499 - - - - 1,120,967 - - 1,120,967 2,614,715 1,416,569 1,388,182 5,419,466 Specified Executives Balance 01/07/05 Remuneration Net Change Other Balance 30/06/06 Granted as J. Wilson D. Rudduck M. Schwartz R. Wiltgen D. May Total 48 4,832,004 7,976,189 - - - 12,808,193 - - - - - - - - - - - - 4,832,004 7,976,189 - - - 12,808,193 (f) Remuneration practices 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 shareholders held on the 15 July 2004 in the amount of $250,000 per annum. FINANCIALS | 2006 ANNUAL REPORT Consolidated Parent Entity 2006 2005 $ - - $ - - 2006 $ 2005 $ 1,630,526 7,754,927 633,190 13,340,549 notes to the financial statements 16. 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. (b) Transaction with Directors Mr. J. Falconer, being a director of Dunbar Associates Pty Ltd, provides corporate services to the Company and charged for its service at normal commercial rates which amounted to $142,454 (2005: $67,245). 17. NOTES TO THE CASH FLOW STATEMENT (a) Reconciliation of cash For the purpose of the cash flow statement, cash includes: Cash at bank and on hand Deposit on call 3,403,156 5,349,625 1,002,405 1,161,631 - 263,919 - - 3,403,156 5,613,544 1,002,405 1,161,631 49 (b) Reconciliation of cash flow from operations with operating result after income tax Operating profit/(loss) after income tax 592,308 4,837,715 (631,686) (925,556) Non-cash flows in operating profit/(loss) Net intercompany debts written-off (benefit) Depreciation Amortisation of intangibles Unrealised exchange loss (gain) Share based payments Employee entitlements Doubtful debts Changes in assets and liabilities (Increase)/Decrease in trade debtors - (244,807) 1,057,663 1,066,388 14,218 10,337 746,053 310,607 318,460 (4,114) 67,663 56,056 - 340,891 (2,567,667) 202,466 - - - 10,337 - - - - - - - 67,663 (15,685) - - (Increase)/Decrease in prepayments and other debtors (Increase)/Decrease in work in process (782,729) (276,644) 13,044 (14,590) 198,355 581,682 - - (Decrease)/Increase in creditors and accruals 812,485 (492,329) (34,471) (167,648) Cash flows provided by/(used in) operations 672,412 6,232,141 (915,217) (842,871) notes to the financial statements 17. NOTES TO THE CASH FLOW STATEMENT (cont.) (c) Acquisition of entities During the year, 100% of the controlled entity PDT Holdings, Inc. was acquired. Details of this transaction are: Purchase consideration (i) 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: 50 Cash Receivable Property, plant and equipment Work in process Intangibles Payables Interest bearing liabilities Goodwill on consolidation Consolidated Parent Entity 2006 $ 2005 $ 2006 $ 2005 $ - - - - - - - - - - - - - - - 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 - - - - - - - - - - - - - - - 12,211,207 6,563,400 3,416,251 2,231,556 12,211,207 - - - - - - - - - - (i) On the 11 March 2004, the Company finalised an agreement to purchase all the shares in PDT Holdings, Inc. for a cash and share consideration of USD$12 million on a going concern basis. The full purchase price is only payable on PDT achieving its 2005 forecasted EBITDA figure of USD$3 million. FINANCIALS | 2006 ANNUAL REPORT notes to the financial statements Under the sale agreement, the Company is required to pay the following consideration: • USD$5 million in cash on the signing of the contract. • A further USD$1 million in cash and current held in an escrow account until after the preparation of audited consolidated financial statements as at 31 December 2004. • The remaining USD$6 million will be paid by a way of USD$3 million in cash current held in escrow and USD$3 million shares in TZ Limited with an ascribed value of USD$1.00 per TZ limited share on achieving its 2005 forecasted EBITDA figure. As at 30 June 2005, the Company had estimated that under current trading activities PDT might not achieve its estimated EBITDA forecasts under the agreement and therefore only estimated the full purchase consideration of USD$9.6 million. During the course of the financial year, PDT achieved EBITDA forecasts as detail in the purchase agreement and as at 30 June 2006 the Company has provided for the full purchase price of USD$12 million. After balance date, the Company issued 5,569,887 ordinary full paid share at an issue price of 58.5 cents per each share as part of it final price consideration as detailed above. The goodwill on consolidation after applying the full price paid at 30 June 2006 amounted to AUD$7,242,153. (d) Non cash financing and investing activities Shares Issued 16 July 2004, the Company issued 6,000,000 ordinary shares as approved in the general meeting of shareholders held 15 July 2004 to the Company’s former Director for services provided in the Company’s recent restructure and capital raising under the prospectus issued in March 2004. 10 March 2006, the Company issued 175,482 ordinary shares in the Company at an issue price of 65 cents per share as part consideration for the purchase of the business Mqube Design from MQBD LLC. 28 June 2006, the Company issued 43,871 ordinary shares in the Company at an issue price of 54 cents per share as the final consideration of its acquisition of the Mqube Design from MQBD LLC after certain performance criteria were reached. 51 18. SEGMENT INFORMATION Segment Revenues Engineering and design Investments Total of all segments Unallocated Consolidated 2006 $ 2005 $ 30,547,698 18,222,578 254,416 215,026 30,802,114 18,437,604 - 6,302 30,802,114 18,443,906 (i) All sales were to customers outside the consolidated entity notes to the financial statements 18. SEGMENT INFORMATION (cont.) Segment Results Engineering and design Investments Total of all segments Eliminations Unallocated Profit before income tax expense Income tax expense/(benefit) Profit after related income tax expense Extraordinary items Net profit 2006 $ 2005 $ 1,102,834 5,152,612 (536,300) (857,893) 566,534 4,294,719 - - 566,534 (25,774) 592,308 - - (1,201) 4,293,518 210,608 4,082,910 - 592,308 4,082,910 52 Segment Assets and Liabilities Engineering and design Investments Total of all segments Unallocated Consolidated Segment Assets Liabilities 2006 $ 2005 $ 2006 $ 2005 $ 54,393,816 43,566,770 11,380,008 5,992,477 5,120,117 6,674,831 89,921 2,231,556 59,513,933 50,241,601 11,469,929 8,224,033 - 61,028 - - 59,513,933 50,302,629 11,469,929 8,224,033 The consolidated entity’s predominant activities is the licensing of its patented intellectual property and operating software, as well as providing application engineering and technology development services to manufacturers in the automotive, aerospace and construction industries. The Company operates its engineering and design division predominantly in the USA, while maintaining a presence in the UK and the Ukraine. The Company operates these geographical locations with the USA operation and are not significant enough to be reported separately. The Company investments division is predominantly in Australia. FINANCIALS | 2006 ANNUAL REPORT notes to the financial statements 19. FINANCIAL INSTRUMENTS (a) Interest rate risk exposure The Company is exposed to interest rate risk through primary financial assets and financial liabilities. The table on the following pages summarises the interest rate risk for the Company, together with the effective weighted average interest rate for each class of financial assets and liabilities. 53 notes to the financial statements 19. FINANCIAL INSTRUMENTS (cont.) Weighted Average Interest Rates Floating Interest Rate $ Fixed Interest Maturing in 1 Year or Less $ 2006 2005 2006 2005 2006 2005 2006 2006 2006 Financial assets Cash Receivables Total financial assets Financial liabilities Bank loan 54 Bills/Installment notes Lease liabilities Trade and sundry creditors 4.55 - 8.25 7.67 7.15 - 3.50 2.54 6.25 7.50 7.15 - 3,403,156 5,610,488 - 1,834,468 3,403,156 7,444,956 1,886,024 1,476,760 - - - - - - - - - - 615,307 - - - - - 43,166 162,411 - - Fixed Interest Maturing in Over 1 to 5 Years $ 2005 Non-interest Bearing $ 2005 Total $ 2005 3,056 3,403,156 5,613,544 10,974,952 7,326,988 10,974,952 9,161,456 10,974,952 7,330,044 14,378,108 14,775,000 - - - - - - - - - - - - - - - - 2,289,406 975,725 2,904,713 975,725 - - - 1,886,024 1,476,760 43,166 162,411 5,479,614 5,469,088 5,479,614 5,469,088 Total financial liabilities 1,886,024 1,476,765 658,476 162,411 2,289,406 975,715 5,479,614 5,469,088 10,313,517 8,083,984 Net financial assets 1,517,132 5,968,191 (658,476) (162,411) (2,289,406) (975,715) 5,495,338 1,860,956 4,064,591 6,691,016 notes to the financial statements FINANCIALS | 2006 ANNUAL REPORT 19. FINANCIAL INSTRUMENTS (cont.) Weighted Average Interest Rates Floating Interest Rate $ Fixed Interest Maturing in 1 Year or Less $ Fixed Interest Maturing in Over 1 to 5 Years $ Non-interest Bearing $ 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 Total $ 2005 Total financial assets 3,403,156 7,444,956 Financial assets Cash Receivables Financial liabilities Bank loan Bills/Installment notes Lease liabilities Trade and sundry creditors 4.55 - 8.25 7.67 7.15 - 3.50 2.54 6.25 7.50 7.15 - 3,403,156 5,610,488 - 1,834,468 - - - - - - - - - - - 1,886,024 1,476,760 - - - - - - 43,166 162,411 - - - - - - - - 615,307 2,289,406 975,725 - - - - - 3,056 3,403,156 5,613,544 10,974,952 7,326,988 10,974,952 9,161,456 10,974,952 7,330,044 14,378,108 14,775,000 - - - - - - 1,886,024 1,476,760 2,904,713 975,725 55 43,166 162,411 5,479,614 5,469,088 5,479,614 5,469,088 Total financial liabilities 1,886,024 1,476,765 658,476 162,411 2,289,406 975,715 5,479,614 5,469,088 10,313,517 8,083,984 Net financial assets 1,517,132 5,968,191 (658,476) (162,411) (2,289,406) (975,715) 5,495,338 1,860,956 4,064,591 6,691,016 notes to the financial statements 19. FINANCIAL INSTRUMENTS (cont.) Reconciliation of net financial assets to net assets Net financial assets above Non-financial assets and liabilities 2006 $ 2005 $ 4,064,591 6,690,016 Work in process 700,456 423,812 Property, plant and equipment 4,266,725 4,171,410 Intangibles Deferred tax assets 39,698,304 32,006,795 470,343 136,025 Provision for employee entitlements (875,244) (129,191) Deferred tax liabilities (281,170) (9,858) Net assets per statement of financial position 48,044,005 43,289,009 (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 56 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. 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 Consolidated Parent Entity 2006 2005 2006 2005 $ $ 844,305 617,809 622,947 1,123,797 - - 1,467,253 1,741,606 $ - - - - $ - - - - notes to the financial statements 21. EARNINGS PER SHARE Basic earnings per share (cents per share) Diluted earnings per share (cents per share) FINANCIALS | 2006 ANNUAL REPORT Consolidated Entity Consolidated Entity 2006 0.40 0.35 2005 3.33 2.89 Weighted average number of ordinary shares on issue used in the calculation of basic earnings per share 149,713,775 145,414,867 Weighted average number of options outstanding 17,238,592 20,617,015 Weighted average number of ordinary shares outstanding used in calculation of dilutive earnings per share 166,952,367 166,031,882 Earning used in the calculation of basic and dilutive earnings per share 592,308 4,837,715 22. EVENTS SUBSEQUENT TO REPORTING DATE On the 4 August 2006, the Company issued 5,569,887 fully paid ordinary shares at an issue price of 58.5 cents per share as final settlement of the consideration for the purchase of PDT entered into in March 2005 (refer to Note 17(c). On the 4 August 2006, the Company issued 3,473,419 fully paid ordinary shares on the exercise of 2,982,250 at 34 cents per share and 491,169 at 40 cents per share. 57 On the 17 August 2006, the Company issued 470,139 fully paid ordinary shares at an exercise price of 40 cents per share. On the 25 August 2006, the Company issued 2,652,112 fully paid ordinary shares on the exercise of 1,491,125 at 27 cents per share, 803,506 at 40 cents per share and 357,481 at 34 cents per share. On the 1 September 2006, the Company issued 6,437,862 fully paid ordinary shares on the exercise of 6,352,581 at 34 cents per share and 85,281 at 40 cents per share. 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 Consolidated Parent Entity 2006 2005 2006 2005 $ $ $ $ Auditors of the parent entity – Taylor & Co. 45,200 49,455 45,200 49,455 Other services from auditors of the parent entity Other auditors - - - - Other services from other auditors 130,869 84,382 - - - - - - The auditors received no other fees or benefits. notes to the financial statements 24. EXPLANATION TO TRANSITION TO AUSTRALIAN EQUIVALENTS OF IFRSS Reconciliation of equity reported under previous Australian Generally Accepted Accounting Principles (AGAAP) to equity under Australian equivalents to IFRSs (AIFRS) as referred to in Note 1(a). Effect of A-IFRS on the balance sheet as at 1 July 2004. Note A GAAP Actual* A-IFRS Impact Current assets Cash and cash equivalent Trade and other receivables Total current assets Non-current assets Investment Property, plant & equipment Intangibles 58 Total non-current assets Total assets Current liabilities Trade and other payables Provisions Total current liabilities Total liabilities Net assets Equity Issued capital Reserves Accumulated losses Total equity b a e $ 7,410,963 3,295,161 10,706,124 10 90,997 19,934,669 20,025,676 30,731,800 2,751,113 73,135 2,824,248 2,824,248 $ - - - - - 387,945 387,945 387,945 - - - - A-IFRS $ 7,410,963 3,295,161 10,706,124 10 90,997 20,322,614 20,413,621 31,119,745 2,751,113 73,135 2,824,248 2,824,248 27,907,552 387,945 28,295,497 54,565,803 - (26,658,251) 27,907,552 - - 387,945 387,945 54,565,803 - (26,270,306) 27,907,552 *Reported financial position for the financial year ended 30 June 2004 under previous Australian GAAP. FINANCIALS | 2006 ANNUAL REPORT notes to the financial statements Effect of A-IFRS on the balance sheet as at 30 June 2005. Note A GAAP Actual* A-IFRS Impact Current assets Cash and cash equivalent Trade and other receivables Work in process Total current assets Non-current assets $ 5,613,544 9,161,456 423,812 15,198,812 Property, plant & equipment 4,171,410 $ - - - - - A-IFRS $ 5,613,544 9,161,456 423,812 15,198,812 4,171,410 Intangibles Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Provisions Interest-bearing liabilities Total current liabilities Non-current liabilities Interest-bearing liabilities Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Accumulated losses Total equity b 30,796,382 1,210,414 32,006,796 136,025 35,103,817 50,302,629 - 136,025 1,210,414 1,210,414 36,314,231 51,513,043 5,632,499 129,191 424,475 6,186,165 2,028,010 9,858 2,037,868 8,224,033 59 - - - - - - - - 5,632,499 129,191 424,475 6,186,165 2,028,010 9,858 2,037,686 8,224,033 42,078,596 1,210,414 43,289,010 a e 64,398,396 255,540 - 64,398,396 67,663 323,203 (22,575,340) 1,142,781 (21,432,559) 42,078,596 1,210,414 43,289,010 *Reported financial position for the financial year ended 30 June 2004 under previous Australian GAAP. notes to the financial statements 24. EXPLANATION TO TRANSITION TO AUSTRALIAN EQUIVALENTS OF IFRSS (cont.) Effect of A-IFRS on the income statement for the financial year ended 30 June 2005. Revenue Cost of sales Gross profit/(loss) Other revenue Employee related expenses Occupancy expenses Communications expenses Depreciation Amortisation of intangibles 60 Professional and corporate service Travel and accommodation Foreign exchange losses Interest paid Other expenses Profit before income tax expense Income tax expense Profit for the period Profit attributable to members of the parent entity Note A GAAP Actual* A-IFRS Impact $ 18,218,464 (6,147,119) 12,071,345 225,442 $ - - - - A-IFRS $ 18,218,464 (6,147,119) 12,071,345 225,442 a b (2,683,690) (67,663) (2,751,353) (2,98,048) (181,304) (420,957) (1,140,928) (1,194,445) (1,204,134) - (79,215) (800,548) 4,293,518 210,608 4,082,910 - - - 822,468 - - - - - (298,048) (181,304) (420,957) (318,460) (1,194,445) (1,204,134) - (79,215) (800,548) 754,805 5,048,323 - 210,608 754,805 4,837,715 4,082,910 754,805 4,837,715 * Reported in the statement of financial performance for the financial year ended 30 June 2005 under previous Australian GAAP. Effect of A-IFRS on the cash flow statement for the financial year ended 30 June 2005. There are no material differences between the cash flow statement presented under A-IFRS and the cash flow statement presented under the superseded policies. FINANCIALS | 2006 ANNUAL REPORT notes to the financial statements Notes to the reconciliations of income and equity (a) Share-based payments For financial year ended 30 June 2005, share-based payments of $67,663 (included in ‘employee benefit expenses’) which were not recognised under the superseded policies were recognised under A-IFRS, with a corresponding increase in the employee equity-settled benefits reserve. (b) Goodwill on consolidation Under AASB 3: Business Combinations, goodwill is capitalised to the balance sheet and subjected to an annual impairment test. Amortisation of goodwill is prohibited. However, goodwill was amortised under the superseded policies on a straight-line basis over a period of 20 years. The Director has reviewed the goodwill on consolidation and has determined that the original amount has not been impaired and therefore the previously amortised amount of $387,945 and $822,469 will be reversed resulting in a corresponding decrease of $387,945 and $822,469 in accumulated losses at 30 June 2004 and 30 June 2005 respectively. (c) Impairment of assets AASB 136 Impairment of assets – assets held by the Company are required to be tested for impairment in the event that any indicators of impairment are present. Impairment of assets has been reviewed at 1 July 2004 and 30 June 2005 and there is considered to be no impact. (d) 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 112 Income Taxes, deferred taxes are meas- ured 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 controlling 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 112, tax 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. However, these have not been brought to account as recovery is not considered to meet the probable test at this time. 61 (e) Accumulated losses The effect of the above adjustments on retained earnings is as follows: Expensing share-based payments Write-back of goodwill amortisation Total adjustment to retained earnings Note a b 1 July 2004 $ 30 June 2005 $ - (67,663) 387,945 1,210,414 387,945 1,142,751 directors’ declaration The Directors of TZ Limited declare that: 1. The financial statements and associated notes of the company and of the economic entity for the financial year ended 30 June 2006: (a) are in accordance with the Corporations Act 2001; (b) comply with Accounting Standards and the Corporations Act 2001; and (c) give a true and fair view of the Company’s and consolidated entity’s financial position as at 30 June 2006 and the per- formance for the year ended on that date; 2. The Chief Executive Officer and Chief Finance 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 2001; (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. 62 J. Falconer Non-Executive Director and Company Secretary Dated this 30th day of September 2006 Sydney, Australia FINANCIALS | 2006 ANNUAL REPORT 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 2006. 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 2001. 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 2001, 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: 63 • • 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 2001. 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. independent audit report to the members of tz limited Audit Opinion In our opinion, the financial report of TZ Limited is in accordance with: (a) the Corporations Act 2001 including: (i) giving a true and fair view of the financial position of TZ Limited and the consolidated entity at 30 June 2006 and of their performance for the year ended on that date; and (ii) complying with Accounting Standards in Australia and the Corporations Regulations 2001; and (b) other mandatory financial reporting requirements in Australia. Taylor & Co. Stephen Taylor 30th September 2006 Sydney, Australia 64 FINANCIALS | 2006 ANNUAL REPORT corporate governance The Board has formally reviewed the ASX Corporate Governance Council paper entitled ‘Principles of Good Corporate Governance and Best Practice Recommendations’ which was published in March 2003. The Company is a small company and accordingly the Directors consider that many of the corporate governance guidelines intended to apply to larger companies are not practical. The Company’s position on those recommendations is set out below; Principle 1: Lay solid foundations for management and oversight Role of the Board The Board’s primary responsibility is to oversee the Company’s business activities and management for the benefit of shareholders which it accomplishes by: • establishing corporate governance, and ethical, business standards; • setting objectives, goals and strategic direction with a view to maximise shareholder value; • approving and monitoring budgets and major investments; • ensuring adequate internal controls exist and are appropriately monitored; • ensuring significant business risks are identified and appropriately managed; • appointing the CEO and monitoring the CEO’s performance; The Board has delegated responsibilities and authorities to management to enable management to conduct the Company’s day-to-day activities. Matters which are not covered by these delegations, such as approvals which exceed certain limits, require Board approval. Apart from the statements on responsibility, the Company has not formalised the functions reserved to the Board and those del- egated to management for the reasons noted above. 65 Principle 2: Structure the board to add value The composition of this Board is determined using the following principles: • The Chairman should be a Non-Executive Director. • The Board should comprise a majority of Non-Executive Directors. • Directors appointed by the Board are subject to election by shareholders at the following annual general meeting and thereafter directors are subject to re-election at least every three years. The names of the Directors in office at the date of this report, the date they were appointed, their status as Non-Executive, Executive or Independent Directors, whether they are retiring by rotation and seeking re-election by shareholders at the 2006 Annual General Meeting, are set out in the table below: Director Appointed Non-Executive Independent Retiring at 2006 AGM Seeking Re-election at 2006 AGM Chris Kelliher 11 December 2003 No Not Applicable Not Applicable Not Applicable John Falconer 6 February 2004 Michael Otten 7 July 2006 Yes Yes No No No No Yes Yes The main areas of divergence with recommended principles are: • The Chairman is not independent, however he is separate from the Chief Executive. • The Company does not have a formally constituted Audit Committee, Board Nominations Committee or Remuneration Committee. • The majority of Directors are not independent. Each Director of the Company has the right to seek independent professional advice at the expense of the Company. corporate governance Principle 3: Promote ethical and responsible decisions-making The Company does not have a formal code of conduct reflecting the Company’s small size and the close interaction of the small number of individuals throughout the organisation. However, the Directors are aware of their legal responsibilities and adhere to the following policy. The Directors will not deal in Company shares: • Except between three and 30 days after either the release of the Company’s half year and annual results to the Australian Stock Exchange, the annual general meeting or any major announcement. • Whilst in possession of price sensitive information. In accordance with the Corporations Act 2001 and the Listing Rules of the Australian Stock Exchange, directors advise the ASX of any transactions conducted by them in shares in the Company. Principle 4: Safeguard integrity in financial reporting The Company Secretary is responsible for producing the financial results and has stated in writing to the other members of the Board that the Company’s consolidated year end financial statements present a true and fair view in all material respects and are in accordance with relevant accounting standards. The Company and its Directors are aware of continuous disclosure requirements under the Listing Rules and Corporations Act and operate in an environment where strong emphasis is placed on full and appropriate disclosure. The Company does not have formal written policies regarding disclosure, but uses strong informal systems underpinned by experienced individuals. Principle 5: Respects the rights of shareholders The Company does not have a communications strategy to promote effective communication with shareholders as it believes this is excessive for small companies. The Company maintains a website which is used in conjunction with timely announcements to the ASX to ensure shareholders are kept fully informed. 66 The Company also aims to ensure that the shareholders are informed of all major developments through: • Despatch of the annual and half yearly financial reports. • Despatch of all notices of meetings of shareholders. • Submitting to a vote of shareholders proposed major changes in the consolidated entity which may impact on share ownership rights. The Board encourages full participation of shareholders at the annual general meeting to ensure high level of accountability and identification of the consolidated entity’s strategic goals. Important issues are presented to the shareholders as single resolutions. The Company requests the external auditor to attend the general meeting. Principle 6: Recognise and manage risk The Company is a small company and does not believe that there is significant need for formal policies on risk oversights and management. However, the Board considers risk exposure and management as a standing agenda item at board meetings. Risk management arrangements are the responsibility of the Board of Directors. Principle 7: Encourage enhanced performance The Company does not have a remuneration committee. There has been no formal performance evaluation of the Board during the past financial year. FINANCIALS | 2006 ANNUAL REPORT corporate governance Principle 8: Remunerate fairly and responsibly There are no formal remuneration policies maintained by the Company. Details of the Company’s policy for determining the nature and amount of emoluments of Board members and Senior Executives of the Company are contained in the Directors’ report. In accordance with Corporations Act requirements, the Company discloses the fees or salaries paid to all Directors, and Executive Officers of the Company. Principle 9: Recognise the legitimate interests of stakeholders The Company does not have a formal Code of Conduct to guide compliance with legal and other obligations. This reflects the Company’s size which makes its legal compliance a less onerous task than with larger companies. The Board of Directors continues to review the situation to determine the most appropriate and effective operational procedures. 67 stock exchange information Statement of Quoted Securities as at 29 September 2006 • • • There are 1,616 shareholders holding a total of 168,317,803 ordinary fully paid shares. The 20 largest shareholders between them hold 51.86% of the total shares on issue. Voting rights are that on a show of hands each member present in person or by proxy or attorney or representative shall have one vote and upon a poll every member so present shall have one vote for every fully paid share held and for each partly paid share held shall have a fraction of a vote pro rata to the amount paid up on each partly paid share relative to its issue price. Distribution of Quoted Shares and Options as at 29 September 2006 Shares Range 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 - and over Number of Holders 122 374 321 594 205 Total Holders 1,616 There were 93 shareholders whose total holding had a market value of less than $500 at 31 August 2006. 68 Substantial Shareholdings as at 29 September 2006 There are no substantial shareholders who have notified the Company that pursuant to the provisions of section 671B of the Corporations Act 2001 that they are substantial shareholders. Directors’ Shareholdings As at 29 September 2006, Directors of the Company held a relevant interest in the following securities on issue by the Company. Director C. Kelliher J. Falconer M. Otten Ordinary Shares Unquoted Options 2,065,175 1,976,364 193,197 1,000,000 Nil Nil On-market Buy-backs There is no on-market buy back currently in place. FINANCIALS | 2006 ANNUAL REPORT 69 stock exchange information Top 20 Holders of Ordinary Shares at 29 September 2006 Shareholder Name Number of Shares % of Total Citicorp Nominees Pty Limited ANZ Nominees Limited National Nominees Limited 23,255,152 18,048,071 6,159,251 Lippo Securities Nominees (BVI) Ltd 6,135,000 Tematec International Pty Ltd Mainland Air Services Limited 4,316,053 3,913,781 Westpac Custodian Nominees Limited 3,430,681 Best Start Services Ltd Davambros Pty Ltd Luik Holding Pty Ltd 3,238,300 2,491,125 2,483,893 Merrill Lynch (Australia) Nominees Pty Ltd 2,240,890 World Capital Holding Limited Profit Pearl Holding Ltd Mr. Dave May Mr. Scott Semenik Mr. Ray Wiltgen 1,681,136 1,564,915 1,255,080 1,255.080 1,255,080 JFT Nominees Pty Ltd 1,216,209 Canonbar Investments Pty Ltd Moggs Creek Pty Ltd Mr. Howard Todd Horberg Total held by top 20 holders of ordinary shares 1,205,000 1,131,481 1,000,000 87,276,178 13.82 10.72 3.66 3.64 2.56 2.33 2.04 1.92 1.48 1.48 1.33 1.00 0.93 0.75 0.75 0.75 0.72 0.72 0.67 0.59 51.89 Note the above list does not identify related party holdings. Readers should have regards to substantial shareholders notices and directors declarations. stock exchange information Voting Rights All shares have equal voting rights. Notice of Correction to the Unaudited Preliminary Final Report Lodged on 13 September 2006 The Directors advise that there is a difference of $1,322,000 between the net profit for the year as disclosed in the attached audited accounts of $592,000 and the net profit for the year as disclosed in the preliminary final report released to the market on 13 September 2006 of $1,914,000. The difference is principally due to the write back of accrued FutureWall™ income included in the preliminary final report. This income was accrued in management accounts and then included in the consolidated result for the year. The original income accrual was calculated with the knowledge that a FutureWall™ licensing agreement with provision for fixed fees from the licensee in future years had further requirements that had to be met. After further consultation with outside accountants, it was agreed that all the revenue would be recognised in future years due to the fact the agreement has some requirements which should be met in future years. The FutureWall™ agreement is the subject of a separate announcement to the market. As detailed in the FutureWall™ announcement, the Directors believe that substantial revenues will flow to the Company over the next 3 to 5 years, and the revenue may be recognised for financial accounting purposes in the 2006/2007 year if all the agreement requirements are met. Other differences related to additional capitalised development costs which were identified after consultation with outside accountants. The comments in the preliminary final report on the 2006 revenues did not incorporate the above details. 70 FINANCIALS | 2006 ANNUAL REPORT 71 directory Directors C. Kelliher J. Falconer M. Otten Company Secretary J. Falconer Registered Office Level 12, 92 Pitt Street Sydney NSW 2000 Telephone +61 2 9223 8044 +61 2 9223 8820 Fax Email: info@tzlimited.com Bankers National Australia Bank Limited Auditors Taylor & Co. Chartered Accountants Level 6,179 Elizabeth Street Sydney NSW 2000 Solicitors Kemp Strang Lawyers 55 Hunter Street Sydney NSW 2000 Share Registry Computershare Investor Services Pty Limited 452 Johnston Street Abbotsford VIC 3067 Telephone +61 3 9415 5000 +61 3 9473 2500 Fax Stock Exchange Australian Stock Exchange Code: TZL 72 ©2006 TZ Limited FutureWall™, On Board Technology™ and TZ On Board™ are trademarks of Telezygology, Inc. Intevia® is a trademark of Acument Intellectual Properties, LLC. Bluetooth® is a registered trademark of Bluetooth, SIG, Inc. 0 6 a n n u a l r e p o r t Sydney (Registered Office) Level 12, 92 Pitt Street Sydney NSW 2000 Australia Chicago (Operational Headquarters) 350 N. LaSalle Street Suite 1100B Chicago, IL 60610 United States www.tzlimited.com

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