TZ Limited Annual Report 2011

Plain-text annual report

TZ Limited ABN 26 073 979 272 21 October 2011 Lodged by ASX Online The Manager Company Announcements Office ASX Limited Level 4, 20 Bridge Street Sydney NSW 2000 Dear Sir/Madam 2011 ANNUAL REPORT Please find attached the Annual Report for TZ Limited (ASX Code: TZL) for the year ended 30 June 2011. A copy of the 2011 Annual Report, as attached, has been dispatched to shareholders who elected to receive a printed copy. Other shareholders are invited to view the Annual Report online on the Company's website, www.tz.net. Yours faithfully, TZ LIMITED Kenneth Ting Company Secretary and Executive Director TZ LimitedLevel 11, 1Chifley Square, Sydney, NSW 2000 AustraliaPhone: +612 9222 8890 Fax: +612 8208 9937 Limited 2011 annual report contents SECTION ONE 1 Chairman’s Welcome A message from Mark Bouris, Executive Chairman, TZ Limited. 5 2011 Highlights 9 Kenneth Ting A message from Kenneth Ting, Executive Director & Company Secretary, TZ Limited. 13 Dickory Rudduck A message from Dickory Rudduck, Executive Director & Founder / Inventor, TZ Limited. 17 John Wilson A message from John Wilson, President & CEO, Telezygology, Inc. 21 Mark Schwartz A message from Mark Schwartz, President & CEO, PDT, Inc. SECTION TWO 1 2011 Financial Statements “ I have never been more excited about the future of this company as I am today.” 1 mark bouris CHAIRMAN’S WELCOME. I am often asked why I got involved with TZ Limited. I have a keen interest in technology and the Internet of Things (IOT), speciﬁcally with regards to how the exchange of information is used to optimise efﬁciency and productivity in the workplace and in life. When I was approached to join the Board at TZ Limited, I did so because I saw uniqueness in the company’s philosophy and a real possibility in the solutions it had created. I’m proud to say that leading into 2012, that possibility I saw in the beginning of my tenure with TZ Limited has become a reality. I have never been more excited about the future of this company as I am today. This past year was about creating an end-to-end solution that could disrupt the market and deliver our products to customers around the world. Whilst technology has always been our foremost priority, 2011 became the year where we could focus on providing the big picture. We had created the framework, built a demand and now we are achieving what we set out to do. Today, TZ Limited is not only developing and manufacturing products, but we’re out there trading with some of the most reputable and forward thinking companies in the world. The best way to describe 2011 is to call it a year of progress. TZ Limited is an innovator, which means that we often create the solution before the problem is identiﬁed. This year, global business and consumer demand ﬁnally caught up with TZ’s supply. In 2011, data centre expansion and online shopping catapulted globally, and today they are two of the most talked about sectors in the technology world. This is the opportunity that TZ Limited and speciﬁcally Telezygology, Inc (TZI) had been waiting for. We were ready for the upsurge, and now we are selling these solutions on an ever-growing international scale. It goes without saying that 2011 was a difﬁcult year, speciﬁcally in TZ Limited’s two largest markets, North America and Europe. Financial headwinds and government uncertainty played a large part in the company’s capacity to close a number of anticipated purchase orders, but these impediments also revealed signiﬁcant opportunities. What we have learned from the current ﬁnancial landscape is that anything can happen, which is why we’ve put much effort into increasing our presence in Asian markets that have demonstrated economic resilience. We’re currently working on licence agreements in China and India and we will look to these markets for signiﬁcant growth in 2012. With regards to business in North America and Europe, we expect that once economic uncertainty clears capital expenditure budgets will open up, particularly in the security and protection sectors. I credit much of our success this year to the relationships we have built with our distributors. Companies such as Anixter and Pitney Bowes are globally recognised inﬂuencers and this year we worked side-by-side to increase our distribution in North America and Europe, and then capitalised on that strength to progress into other markets. We have built an impressive Australasian footprint in a short amount of time and much of this growth can be credited to our partners who believe in our technology and can identify with our vision. TZ Limited is a disruptive software player and sometimes our level of modernisation is not easy to grasp, so I’d like to thank our partners who see where we are headed and have supported us over this past year. I expect TZ Limited is going to be the one to watch in 2012, and we’re proud to have distributors of such a high calibre standing beside us both today and in the future. “ The best way to describe 2011 is to call it a year of progress.” 3 “ I expect TZ is going to be the one to watch in 2012.” I believe 2012 will be a watershed year for TZ Limited. We have laid the foundation, built the distribution capacity and we are set up to align perfectly with two of the biggest booms in technology. TZ Limited has spent the past two years developing our sales resource and now is the time to introduce our next generation technology which will open the door for new applications and opportunities. Strategic insight will be crucial for TZ Limited’s evolution and I’d like to thank Kenneth Ting for his leadership and direction this past year. We have the greatest minds in the industry on our team and these people will be vital to cement TZ Limited as a global leader in our ﬁeld. This company would not be where it is today without the determination of our team and the support of our partners, shareholders and customers. On behalf of the Whilst TZ Limited has spent much of 2011 introducing Board of Directors, I would like to thank everyone who our solutions to international markets, the company has played a part in the evolution of this business. has also been on the forefront of identifying new opportunities for its design sector. As I said earlier, 2011 was a year of progress for TZ Limited, which came about because of the people PDT had an explosive year of not only delivering top line who believed in our capability and possessed a sheer growth and revenue for the business, but also ﬁnding dedication to see it ultimately succeed. There is still ways in which to implement the company’s design and plenty of work to be done, but I am so proud of what innovation into previously unexplored sectors. we have achieved and I look forward to heading into the future with such an exceptional and inspiring team PDT is working with entities in the military, consumer alongside me. and medical ﬁelds to engineer solutions that increase both efﬁciency and precision, and the company is being sought after for projects in the United States, Europe and the Middle East. We expect that the demand for PDT’s innovation will grow substantially as our MARK BOURIS, completed projects gain notoriety for their success. EXECUTIVE CHAIRMAN, TZ LIMITED. 5 2011 highlights (cid:116)(cid:1) (cid:53)(cid:73)(cid:83)(cid:80)(cid:86)(cid:72)(cid:73)(cid:1)(cid:66)(cid:1)(cid:83)(cid:74)(cid:72)(cid:73)(cid:85)(cid:84)(cid:1)(cid:74)(cid:84)(cid:84)(cid:86)(cid:70)(cid:1)(cid:53)(cid:59)(cid:1)(cid:45)(cid:74)(cid:78)(cid:74)(cid:85)(cid:70)(cid:69)(cid:1)(cid:83)(cid:66)(cid:74)(cid:84)(cid:70)(cid:69)(cid:1)(cid:5)(cid:26)(cid:15)(cid:25)(cid:19)(cid:46)(cid:1)(cid:85)(cid:80)(cid:1)(cid:78)(cid:70)(cid:70)(cid:85)(cid:1)(cid:1) ongoing working capital requirements (cid:116)(cid:1) (cid:45)(cid:66)(cid:86)(cid:79)(cid:68)(cid:73)(cid:70)(cid:69)(cid:1)(cid:66)(cid:1)(cid:79)(cid:86)(cid:78)(cid:67)(cid:70)(cid:83)(cid:1)(cid:80)(cid:71)(cid:1)(cid:79)(cid:70)(cid:88)(cid:1)(cid:81)(cid:83)(cid:80)(cid:69)(cid:86)(cid:68)(cid:85)(cid:84)(cid:1)(cid:66)(cid:68)(cid:83)(cid:80)(cid:84)(cid:84)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:67)(cid:86)(cid:84)(cid:74)(cid:79)(cid:70)(cid:84)(cid:84)(cid:1)(cid:1) (cid:1) (cid:1) including TZ Centurion System (July 2010), TZ Centurion Server Enterprise Software (release May 2011), TZ Courier (July 2010), TZ Concierge (January 2011) and most recently TZ APX (June 2011) (cid:116)(cid:1) (cid:52)(cid:86)(cid:81)(cid:81)(cid:77)(cid:90)(cid:1)(cid:66)(cid:79)(cid:69)(cid:1)(cid:37)(cid:74)(cid:84)(cid:85)(cid:83)(cid:74)(cid:67)(cid:86)(cid:85)(cid:74)(cid:80)(cid:79)(cid:1)(cid:34)(cid:72)(cid:83)(cid:70)(cid:70)(cid:78)(cid:70)(cid:79)(cid:85)(cid:1)(cid:88)(cid:74)(cid:85)(cid:73)(cid:1)(cid:49)(cid:74)(cid:85)(cid:79)(cid:70)(cid:90)(cid:1)(cid:35)(cid:80)(cid:88)(cid:70)(cid:84)(cid:1)(cid:34)(cid:86)(cid:84)(cid:85)(cid:83)(cid:66)(cid:77)(cid:74)(cid:66)(cid:1)(cid:9)(cid:49)(cid:35)(cid:34)(cid:10) (cid:116)(cid:1) (cid:37)(cid:70)(cid:81)(cid:77)(cid:80)(cid:90)(cid:70)(cid:69)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:109)(cid:83)(cid:84)(cid:85)(cid:1)(cid:68)(cid:80)(cid:78)(cid:78)(cid:70)(cid:83)(cid:68)(cid:74)(cid:66)(cid:77)(cid:1)(cid:74)(cid:79)(cid:84)(cid:85)(cid:66)(cid:77)(cid:77)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:1)(cid:80)(cid:71)(cid:1)(cid:66)(cid:1)(cid:53)(cid:59)(cid:1)(cid:36)(cid:80)(cid:79)(cid:68)(cid:74)(cid:70)(cid:83)(cid:72)(cid:70)™ packaged asset delivery system at The Sterling Apartments in downtown Chicago (cid:116)(cid:1) (cid:45)(cid:66)(cid:86)(cid:79)(cid:68)(cid:73)(cid:70)(cid:69)(cid:1)(cid:53)(cid:59)(cid:8)(cid:84)(cid:1)(cid:74)(cid:79)(cid:71)(cid:83)(cid:66)(cid:84)(cid:85)(cid:83)(cid:86)(cid:68)(cid:85)(cid:86)(cid:83)(cid:70)(cid:1)(cid:81)(cid:83)(cid:80)(cid:85)(cid:70)(cid:68)(cid:85)(cid:74)(cid:80)(cid:79)(cid:1)(cid:84)(cid:80)(cid:77)(cid:86)(cid:85)(cid:74)(cid:80)(cid:79)(cid:84)(cid:1)(cid:85)(cid:80)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:34)(cid:86)(cid:84)(cid:85)(cid:83)(cid:66)(cid:77)(cid:74)(cid:66)(cid:79)(cid:1)(cid:1) market through exclusive distribution partner Anixter (cid:116)(cid:1) (cid:42)(cid:78)(cid:81)(cid:77)(cid:70)(cid:78)(cid:70)(cid:79)(cid:85)(cid:70)(cid:69)(cid:1)(cid:74)(cid:79)(cid:68)(cid:70)(cid:79)(cid:85)(cid:74)(cid:87)(cid:70)(cid:1)(cid:81)(cid:83)(cid:80)(cid:72)(cid:83)(cid:66)(cid:78)(cid:84)(cid:1)(cid:85)(cid:80)(cid:1)(cid:84)(cid:85)(cid:74)(cid:78)(cid:86)(cid:77)(cid:66)(cid:85)(cid:70)(cid:1)(cid:84)(cid:66)(cid:77)(cid:70)(cid:84)(cid:1)(cid:66)(cid:68)(cid:85)(cid:74)(cid:87)(cid:74)(cid:85)(cid:90)(cid:1)(cid:66)(cid:79)(cid:69)(cid:1)(cid:67)(cid:86)(cid:74)(cid:77)(cid:69)(cid:1)(cid:1) the demand pipeline across the ﬁve major geographic jurisdictions namely the US, Canada, Europe and the Middle East, Latin America and Asia Paciﬁc (cid:116)(cid:1) (cid:52)(cid:70)(cid:68)(cid:86)(cid:83)(cid:70)(cid:69)(cid:1)(cid:66)(cid:1)(cid:79)(cid:86)(cid:78)(cid:67)(cid:70)(cid:83)(cid:1)(cid:80)(cid:71)(cid:1)(cid:84)(cid:85)(cid:83)(cid:66)(cid:85)(cid:70)(cid:72)(cid:74)(cid:68)(cid:1)(cid:47)(cid:80)(cid:83)(cid:85)(cid:73)(cid:1)(cid:34)(cid:78)(cid:70)(cid:83)(cid:74)(cid:68)(cid:66)(cid:79)(cid:1)(cid:84)(cid:66)(cid:77)(cid:70)(cid:84)(cid:1)(cid:85)(cid:80)(cid:1)(cid:40)(cid:80)(cid:87)(cid:70)(cid:83)(cid:79)(cid:78)(cid:70)(cid:79)(cid:85)(cid:1)(cid:1) Institutions and Financial Services providers (cid:116)(cid:1) (cid:37)(cid:70)(cid:87)(cid:70)(cid:77)(cid:80)(cid:81)(cid:70)(cid:69)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:105)(cid:53)(cid:59)(cid:1)(cid:51)(cid:70)(cid:66)(cid:69)(cid:90)(cid:119)(cid:1)(cid:81)(cid:83)(cid:80)(cid:72)(cid:83)(cid:66)(cid:78)(cid:1)(cid:85)(cid:80)(cid:1)(cid:66)(cid:68)(cid:85)(cid:74)(cid:87)(cid:70)(cid:77)(cid:90)(cid:1)(cid:85)(cid:66)(cid:83)(cid:72)(cid:70)(cid:85)(cid:1)(cid:68)(cid:66)(cid:67)(cid:74)(cid:79)(cid:70)(cid:85)(cid:1)(cid:1) (cid:1) manufacturers to support adoption of TZ’s intelligent locking systems as part of their standard offering and to build broader distribution of TZ’s IXP product line (cid:116)(cid:1) (cid:37)(cid:70)(cid:87)(cid:70)(cid:77)(cid:80)(cid:81)(cid:70)(cid:69)(cid:1)(cid:84)(cid:85)(cid:83)(cid:66)(cid:85)(cid:70)(cid:72)(cid:74)(cid:68)(cid:1)(cid:83)(cid:70)(cid:77)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:84)(cid:73)(cid:74)(cid:81)(cid:1)(cid:88)(cid:74)(cid:85)(cid:73)(cid:1)(cid:35)(cid:70)(cid:66)(cid:83)(cid:1)(cid:51)(cid:74)(cid:87)(cid:70)(cid:83)(cid:1)(cid:34)(cid:84)(cid:84)(cid:80)(cid:68)(cid:74)(cid:66)(cid:85)(cid:70)(cid:84)(cid:13)(cid:1)(cid:66)(cid:1)(cid:1) (cid:1) privately-held logistics tracking software development company, for the non-exclusive sale and distribution of TZ Courier in the USA 7 2011 highlights (cid:116)(cid:1) (cid:53)(cid:59)(cid:42)(cid:1)(cid:34)(cid:86)(cid:84)(cid:85)(cid:83)(cid:66)(cid:77)(cid:74)(cid:66)(cid:1)(cid:49)(cid:85)(cid:90)(cid:1)(cid:45)(cid:74)(cid:78)(cid:74)(cid:85)(cid:70)(cid:69)(cid:1)(cid:70)(cid:79)(cid:85)(cid:70)(cid:83)(cid:70)(cid:69)(cid:1)(cid:74)(cid:79)(cid:85)(cid:80)(cid:1)(cid:66)(cid:79)(cid:1)(cid:66)(cid:72)(cid:83)(cid:70)(cid:70)(cid:78)(cid:70)(cid:79)(cid:85)(cid:1)(cid:88)(cid:74)(cid:85)(cid:73)(cid:1)(cid:66)(cid:1)(cid:78)(cid:66)(cid:75)(cid:80)(cid:83)(cid:1)(cid:1) Australian integrated logistics service provider to supply TZ’s intelligent locker systems for trial evaluation as part of a strategic initiative to create and signiﬁcantly enhance consumer options for parcel distribution in Australia (cid:116)(cid:1) (cid:53)(cid:59)(cid:42)(cid:1)(cid:70)(cid:79)(cid:85)(cid:70)(cid:83)(cid:70)(cid:69)(cid:1)(cid:74)(cid:79)(cid:85)(cid:80)(cid:1)(cid:66)(cid:1)(cid:84)(cid:86)(cid:81)(cid:81)(cid:77)(cid:90)(cid:1)(cid:66)(cid:72)(cid:83)(cid:70)(cid:70)(cid:78)(cid:70)(cid:79)(cid:85)(cid:1)(cid:88)(cid:74)(cid:85)(cid:73)(cid:1)(cid:34)(cid:79)(cid:74)(cid:89)(cid:85)(cid:70)(cid:83)(cid:1)(cid:34)(cid:86)(cid:84)(cid:85)(cid:83)(cid:66)(cid:77)(cid:74)(cid:66)(cid:1)(cid:49)(cid:85)(cid:90) Limited and NEXTDC Limited for the supply of the TZ Centurion™ System for NEXTDC’s cabinet-level micro-protection solution for its Brisbane and Melbourne data centres (cid:116)(cid:1) (cid:49)(cid:37)(cid:53)(cid:1)(cid:88)(cid:66)(cid:84)(cid:1)(cid:73)(cid:80)(cid:79)(cid:80)(cid:86)(cid:83)(cid:70)(cid:69)(cid:1)(cid:88)(cid:74)(cid:85)(cid:73)(cid:1)(cid:71)(cid:80)(cid:86)(cid:83)(cid:1)(cid:19)(cid:17)(cid:18)(cid:18)(cid:1)(cid:34)(cid:37)(cid:38)(cid:57)(cid:1)(cid:66)(cid:88)(cid:66)(cid:83)(cid:69)(cid:84)(cid:1)(cid:71)(cid:83)(cid:80)(cid:78)(cid:1)(cid:37)(cid:70)(cid:84)(cid:74)(cid:72)(cid:79) Journal for the 3-D CLEAN UV Disinfection & Sanitation Device, (cid:1) (cid:53)(cid:73)(cid:70)(cid:1)(cid:46)(cid:34)(cid:40)(cid:74)(cid:68)(cid:1)(cid:42)(cid:78)(cid:78)(cid:86)(cid:79)(cid:80)(cid:81)(cid:83)(cid:70)(cid:68)(cid:74)(cid:81)(cid:74)(cid:85)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:1)(cid:52)(cid:66)(cid:78)(cid:81)(cid:77)(cid:70)(cid:1)(cid:49)(cid:83)(cid:80)(cid:68)(cid:70)(cid:84)(cid:84)(cid:80)(cid:83)(cid:13)(cid:1)(cid:53)(cid:73)(cid:70)(cid:1)(cid:47)(cid:70)(cid:89)(cid:85)(cid:1)(cid:1) (cid:1) 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(cid:116)(cid:1) (cid:49)(cid:37)(cid:53)(cid:1)(cid:68)(cid:80)(cid:78)(cid:81)(cid:77)(cid:70)(cid:85)(cid:70)(cid:69)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:88)(cid:70)(cid:77)(cid:77)(cid:1)(cid:81)(cid:86)(cid:67)(cid:77)(cid:74)(cid:68)(cid:74)(cid:84)(cid:70)(cid:69)(cid:1)(cid:69)(cid:70)(cid:71)(cid:70)(cid:79)(cid:68)(cid:70)(cid:1)(cid:81)(cid:83)(cid:80)(cid:72)(cid:83)(cid:66)(cid:78)(cid:1)(cid:71)(cid:80)(cid:83)(cid:1)(cid:36)(cid:80)(cid:80)(cid:77)(cid:109)(cid:83)(cid:70)(cid:1)(cid:1) Solutions to develop SCOUT, a SATCOM Toolkit modelled after a smartphone that combines 160 pounds of disconnected pieces of equipment and applications into a robust, yet sleek, package controlled by an Apple iPhone (cid:116)(cid:1) (cid:53)(cid:59)(cid:1)(cid:49)(cid:66)(cid:68)(cid:76)(cid:66)(cid:72)(cid:70)(cid:69)(cid:1)(cid:34)(cid:84)(cid:84)(cid:70)(cid:85)(cid:1)(cid:37)(cid:70)(cid:77)(cid:74)(cid:87)(cid:70)(cid:83)(cid:90)(cid:1)(cid:52)(cid:80)(cid:77)(cid:86)(cid:85)(cid:74)(cid:80)(cid:79)(cid:84)(cid:1)(cid:88)(cid:66)(cid:84)(cid:1)(cid:66)(cid:1)(cid:109)(cid:79)(cid:66)(cid:77)(cid:74)(cid:84)(cid:85)(cid:1)(cid:74)(cid:79)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:34)(cid:86)(cid:84)(cid:85)(cid:83)(cid:66)(cid:77)(cid:74)(cid:66)(cid:79)(cid:1)(cid:1) (cid:1) (cid:42)(cid:79)(cid:85)(cid:70)(cid:83)(cid:79)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:66)(cid:77)(cid:1)(cid:37)(cid:70)(cid:84)(cid:74)(cid:72)(cid:79)(cid:1)(cid:34)(cid:88)(cid:66)(cid:83)(cid:69)(cid:84)(cid:1)(cid:66)(cid:79)(cid:69)(cid:1)(cid:83)(cid:70)(cid:68)(cid:70)(cid:74)(cid:87)(cid:70)(cid:69)(cid:1)(cid:66)(cid:1)(cid:40)(cid:80)(cid:80)(cid:69)(cid:1)(cid:37)(cid:70)(cid:84)(cid:74)(cid:72)(cid:79)(cid:1)(cid:34)(cid:88)(cid:66)(cid:83)(cid:69) “ we have some of the most reputable and innovative companies in the world using our products.” 9 kenneth ting EXECUTIVE DIRECTOR & (cid:36)(cid:48)(cid:46)(cid:49)(cid:34)(cid:47)(cid:58)(cid:1)(cid:52)(cid:38)(cid:36)(cid:51)(cid:38)(cid:53)(cid:34)(cid:51)(cid:58)(cid:13)(cid:1)(cid:53)(cid:59)(cid:1)(cid:45)(cid:42)(cid:46)(cid:42)(cid:53)(cid:38)(cid:37)(cid:15) I have spent most of my working life commercialising technology, and the two questions that are always at the front of my mind are, “Will this technology be the next big thing?” and “Can this technology make money?” I often wonder how I would have answered these two questions if I was introduced to TZ back some twelve years ago when Dickory lodged the ﬁrst TZ patents. At that time the Internet was slow, most mobile phones were not web enabled and the microprocessors proposed to run our SMArt Devices™ were large in size and very (cid:70)(cid:89)(cid:81)(cid:70)(cid:79)(cid:84)(cid:74)(cid:87)(cid:70)(cid:15)(cid:1)(cid:37)(cid:70)(cid:84)(cid:81)(cid:74)(cid:85)(cid:70)(cid:1)(cid:85)(cid:73)(cid:74)(cid:84)(cid:13)(cid:1)(cid:74)(cid:79)(cid:1)(cid:53)(cid:59)(cid:8)(cid:84)(cid:1)(cid:18)(cid:26)(cid:26)(cid:25)(cid:1)(cid:35)(cid:86)(cid:84)(cid:74)(cid:79)(cid:70)(cid:84)(cid:84)(cid:1)(cid:49)(cid:77)(cid:66)(cid:79)(cid:13)(cid:1)(cid:37)(cid:74)(cid:68)(cid:76)(cid:80)(cid:83)(cid:90)(cid:1) predicted that mobile phones would be used to communicate with and control our SMArt Devices™. Today, the Internet is fast and ubiquitous and microprocessors, costing as little as 50 cents, are more powerful than super computers the size of a small room were 30 years ago. Dickory’s prediction is now a reality and our customers are using their smart phones to communicate with TZ products to solve real world problems. In 2011, we have some of the most reputable and innovative companies in the world using our products because they think that we can provide them with an edge over their competitors. The technological advances in the last decade have created a world where things and people are becoming increasingly inter connected. This is the era of the Internet of Things (IOT). This is an era where sensors on everyday things transmit information and statistics about their environments and pre-programmed algorithms initiate actions based on that transmitted information. Take for example an intelligent fridge – if there is no milk in the fridge, the fridge senses the need and will order more milk or send you an SMS reminding you to pick up milk on the way home. Consider that same capability in the As economic conditions improve in North America and scope of TZ’s data centre offering, Europe, we will continue to build our sales pipeline, sensors attached to TZ SlideHandle™ maintain a credible track record of high proﬁle deployments can tell a technician via SMS that he and increase brand recognition for TZ technology. needs to replace something in the data cabinet and can also order the There are many IOT companies attempting to establish parts for him. a footprint for their networked devices. For example, a Californian based venture capital-backed company is Technology pundits say that in the addressing mass adoption by integrating and networking next decade, IOT will be the most with LED lighting — based on the principle that electric disruptive and most important lighting is needed everywhere. They believe their footprint technological advancement for of IOT devices can be rolled out quickly by attaching mankind. Now that most of the sensors to networked LED lights in new buildings. technological challenges of IOT have been resolved, the biggest challenge Using smart locks and fastening devices, TZ has facing the IOT movement is building approached the IOT mass adoption problem from a a large footprint of networked different angle. Our approach is based on the principle devices. Until there is a large global that virtually everything needs to be fastened or locked ecosystem of networked IOT devices, together. With power and data infrastructure being there cannot be mass adoption. available in almost all environments today and with security Anixter and Pitney Bowes are two being an increasing driver for change, the spread and of the largest distributors and most potential application of our technology is signiﬁcant. We are respected companies in their sectors also fortunate in that PDT provides a channel to introduce and our partnerships with these our technology into their customer’s new products. two leading companies give me great conﬁdence that we have the At the core of all TZ product offering is software and one networks and distribution bandwidth of TZ’s ﬁve patented types of fasteners. One of the ﬁve to support mass deployment of our fasteners that most shareholders will be familiar with to IOT technology. We have seen that date is the TZ Radial™ which is used in our IXP and PAD with the help of our partners and the product offering. Most IOT devices today are focused relatively strong economy in Australia around sensing and the communication of information with in 2011, we were able to build an other devices in the same IOT ecosystem but what makes impressive footprint in Australia in a our SMArt Devices™ unique is that in addition to sensing relatively short period of time. and communication capability, our devices also perform a physical function through our unique SMA technology 11 3 “ we were able to build an impressive footprint in Australia in a relatively short period of time.” which enables remote actuation (physical movement). (cid:40)(cid:80)(cid:80)(cid:72)(cid:77)(cid:70)(cid:1)(cid:66)(cid:79)(cid:69)(cid:1)(cid:42)(cid:35)(cid:46)(cid:1)(cid:74)(cid:84)(cid:84)(cid:86)(cid:70)(cid:69)(cid:1)(cid:66)(cid:1)(cid:75)(cid:80)(cid:74)(cid:79)(cid:85)(cid:1)(cid:84)(cid:85)(cid:66)(cid:85)(cid:70)(cid:78)(cid:70)(cid:79)(cid:85)(cid:1)(cid:84)(cid:66)(cid:90)(cid:74)(cid:79)(cid:72)(cid:1)(cid:85)(cid:73)(cid:66)(cid:85)(cid:1) Without actuation to perform a responsive action at they will invest their resources and attention to quickly the remote location, there is limited utility in just having (cid:78)(cid:66)(cid:76)(cid:70)(cid:1)(cid:42)(cid:48)(cid:53)(cid:1)(cid:66)(cid:1)(cid:83)(cid:70)(cid:66)(cid:77)(cid:74)(cid:85)(cid:90)(cid:15)(cid:1)(cid:53)(cid:73)(cid:70)(cid:1)(cid:36)(cid:73)(cid:74)(cid:79)(cid:70)(cid:84)(cid:70)(cid:1)(cid:40)(cid:80)(cid:87)(cid:70)(cid:83)(cid:79)(cid:78)(cid:70)(cid:79)(cid:85)(cid:1)(cid:69)(cid:70)(cid:68)(cid:77)(cid:66)(cid:83)(cid:70)(cid:69)(cid:1) sensors and intelligence reporting on status. their goal to become an IOT world leader and Chinese (cid:53)(cid:80)(cid:69)(cid:66)(cid:90)(cid:13)(cid:1)(cid:39)(cid:66)(cid:68)(cid:70)(cid:67)(cid:80)(cid:80)(cid:76)(cid:1)(cid:68)(cid:80)(cid:79)(cid:79)(cid:70)(cid:68)(cid:85)(cid:84)(cid:1)(cid:78)(cid:80)(cid:83)(cid:70)(cid:1)(cid:85)(cid:73)(cid:66)(cid:79)(cid:1)(cid:25)(cid:17)(cid:17)(cid:1)(cid:78)(cid:74)(cid:77)(cid:77)(cid:74)(cid:80)(cid:79)(cid:1)(cid:86)(cid:84)(cid:70)(cid:83)(cid:84)(cid:1) of sensors and intelligent objects with the plan to supply globally. One of the reasons for Facebook’s quick mass a growing market and establish global standards that manufacturers have started focusing on the new world adoption is the fact that is has opened its software API aid interoperability. so that other social networks and software platforms can interact with it. The interoperability of TZ’s SMArt Every day, more and more mobile phone manufacturers Devices™ ecosystem with other IOT ecosystems could such as Apple, Blackberry and Samsung are introducing likewise fuel mass adoption of TZ technology. improvements to their hardware and software, making it easier for humans to interact with the IOT ecosystem. All of TZ’s products have been built with an open (cid:56)(cid:74)(cid:85)(cid:73)(cid:1)(cid:68)(cid:80)(cid:78)(cid:81)(cid:66)(cid:79)(cid:74)(cid:70)(cid:84)(cid:1)(cid:66)(cid:79)(cid:69)(cid:1)(cid:40)(cid:80)(cid:87)(cid:70)(cid:83)(cid:79)(cid:78)(cid:70)(cid:79)(cid:85)(cid:84)(cid:1)(cid:74)(cid:79)(cid:87)(cid:70)(cid:84)(cid:85)(cid:74)(cid:79)(cid:72)(cid:1)(cid:78)(cid:74)(cid:77)(cid:77)(cid:74)(cid:80)(cid:79)(cid:84)(cid:1)(cid:80)(cid:71)(cid:1) architecture to ensure operability with as many third dollars in building the environment for mass adoption of party technologies as possible. Our goal is to create a IOT devices, TZ technology is well placed to beneﬁt from permissions-based “Facebook of Things” in which other this wave of market sentiment. IOT ecosystems can seamlessly communicate with our networked SMArt Devices™ ecosystem to ensure a rich Our task ahead is to continue to be at the forefront and intelligent environment. of the IOT movement and to ensure that our SMArt So how real is a global ecosystem of TZ SMArt with other companies’ technologies and that we Devices™? In the last year, several events have occurred carefully select the right sectors to roll-out our SMArt that facilitates the mass adoption of TZ technology. Devices™. We also need to be vigilant in continuing to Devices™ and software continue to interoperate improve our core device technology and to keeping abreast of advancements in sensor development and communication protocol. So with the technological advancements that have occurred since we lodged our ﬁrst patents and knowing the robust platform for growth that we have taken the time to build in the last two years, if I were asked today if TZ technology is the next big thing and if this technology can make money? I would respond with a resounding (cid:105)(cid:58)(cid:70)(cid:84)(cid:2)(cid:119)(cid:1)(cid:1) “This year’s technology development push was driven around supporting the TZ Infrastructure Protection (IXP) and TZ Packaged Asset Delivery (PAD) product lines.” 13 dickory rudduck DIRECTOR & FOUNDER / INVENTOR, TZ LIMITED. The past year’s focus on sales has given the technology development team an unprecedented opportunity to listen to customers and apply what we hear to successfully place our devices in the real world. Every day we’re using this insight to target the right devices on which to focus for growth and to choose the right companies with which to align. This year’s technology development push was driven around supporting the TZ Infrastructure Protection (IXP) and TZ Packaged Asset Delivery (PAD) product lines. As a result of that focus, both product lines have been strengthened signiﬁcantly at both the hardware and software levels. The hardware has, at its core, the TZ Radial™ device — one of TZ’s ﬁve patented families of fasteners. Technical development has continuously expanded the capability and functionality of this device and its connecting system — due in large part by incorporating the TZ Radial™ into more and more new products. For the new IXP “TZ Ready” program, the TZ Radial™ — in the form of the TZ SlideHandle™(cid:1)(cid:137)(cid:1)(cid:74)(cid:84)(cid:1)(cid:68)(cid:80)(cid:78)(cid:81)(cid:66)(cid:85)(cid:74)(cid:67)(cid:77)(cid:70)(cid:1)(cid:88)(cid:74)(cid:85)(cid:73)(cid:1)(cid:80)(cid:87)(cid:70)(cid:83)(cid:1)(cid:25)(cid:17)(cid:6)(cid:1)(cid:80)(cid:71)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:78)(cid:66)(cid:75)(cid:80)(cid:83)(cid:1) cabinets supplied in the market. The TZ SlideHandle™ has also successfully been adapted from cabinet locking to offering solutions for sliding door locking on data centre cages. Many enhancements have been added to this system, including improved bridge capabilities and a Wiegand RFID reader, to name just two new value-added features. For PAD, the TZ Radial™ has been incorporated into a new locking raceway that streamlines the system, reduces costs and strengthens our intellectual property (IP) position. With this raceway system approach and a complete re-engineering of the locker construction, we are now able to deliver cost TZ now has its devices connected to the outside world via effective customisation of a modular the Internet. Our devices, systems and software are clearly system to meet speciﬁc customer validating the Internet of Things (IOT) phenomena and the requirements. The PAD program is in power of connectivity with real customers. Our IP, much of it a very competitive space and we have put into place a decade ago, is now providing the platform for implemented several market ﬁrsts, participation in this movement, creating new niches every day. such as recipient recognition through OCR capabilities and using QR codes Technology Looking Forward for veriﬁed pickup that will keep us at (cid:53)(cid:59)(cid:1)(cid:66)(cid:77)(cid:88)(cid:66)(cid:90)(cid:84)(cid:1)(cid:84)(cid:66)(cid:88)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:80)(cid:81)(cid:81)(cid:80)(cid:83)(cid:85)(cid:86)(cid:79)(cid:74)(cid:85)(cid:90)(cid:1)(cid:85)(cid:73)(cid:66)(cid:85)(cid:1)(cid:54)(cid:79)(cid:74)(cid:109)(cid:68)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:1)(cid:80)(cid:71)(cid:1)(cid:40)(cid:77)(cid:80)(cid:67)(cid:66)(cid:77)(cid:1) the forefront of technology capability. Communication would bring to our technology — a trend that But it is our software that makes our (cid:85)(cid:80)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:42)(cid:79)(cid:85)(cid:70)(cid:83)(cid:79)(cid:70)(cid:85)(cid:1)(cid:80)(cid:71)(cid:1)(cid:53)(cid:73)(cid:74)(cid:79)(cid:72)(cid:84)(cid:13)(cid:1)(cid:54)(cid:79)(cid:74)(cid:109)(cid:68)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:1)(cid:80)(cid:71)(cid:1)(cid:40)(cid:77)(cid:80)(cid:67)(cid:66)(cid:77)(cid:1)(cid:36)(cid:80)(cid:78)(cid:78)(cid:86)(cid:79)(cid:74)(cid:68)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:1) devices and systems so uniquely has enabled TZ’s devices to be SMArt Devices™ — actuating, functional, and a signiﬁcant effort sensing and controlling things at the extreme reaches of the a decade ago was symbolised by the cell phone. In addition has been made in this area to enable Internet. the licencing of our software from a “cloud-based” infrastructure. We have This year, as TZ started to gain sales traction, the Board, built support and testing capabilities particularly through Kenneth Ting’s enthusiasm for the latest with in-house server capability and trends in technology and IOT, has encouraged the team to we are rapidly moving towards an look forward towards the next generation of product. integrated software platform for all of our technology. Delivering More with Less through Modularity The fundamental building blocks behind the future Behind the advancements in TZ development of our technology were debated and a plan was hardware and software lies the put into place. There are ﬁve areas of activity, which when continuous process of IP protection. joined together, deﬁne our technology: Last year, we made ﬁve product and system ﬁllings, largely around (cid:116)(cid:1) (cid:34)(cid:68)(cid:85)(cid:86)(cid:66)(cid:85)(cid:80)(cid:83)(cid:84)(cid:1) (cid:116)(cid:1) (cid:46)(cid:70)(cid:68)(cid:73)(cid:66)(cid:79)(cid:74)(cid:84)(cid:78)(cid:84) software systems and PAD product (cid:116)(cid:1) (cid:48)(cid:79)(cid:1)(cid:35)(cid:80)(cid:66)(cid:83)(cid:69)(cid:1)(cid:53)(cid:70)(cid:68)(cid:73)(cid:79)(cid:80)(cid:77)(cid:80)(cid:72)(cid:90)(cid:1)(cid:9)(cid:70)(cid:77)(cid:70)(cid:68)(cid:85)(cid:83)(cid:80)(cid:79)(cid:74)(cid:68)(cid:84)(cid:16)(cid:84)(cid:70)(cid:79)(cid:84)(cid:80)(cid:83)(cid:84)(cid:10) innovations. In the U.S., three (cid:116)(cid:1) (cid:36)(cid:80)(cid:79)(cid:79)(cid:70)(cid:68)(cid:85)(cid:74)(cid:87)(cid:74)(cid:85)(cid:90)(cid:1)(cid:84)(cid:90)(cid:84)(cid:85)(cid:70)(cid:78)(cid:84) important patents were granted: (cid:116)(cid:1) (cid:52)(cid:80)(cid:71)(cid:85)(cid:88)(cid:66)(cid:83)(cid:70) “closures for a compartment”, “stud fastener and stabilising device” and In all of these areas, the key word is “modularity.” Through “strip fasteners.” modularity, we will be able multiply our opportunities, reduce costs and scale up to the challenges of IOT. 15 3 In addition to the Internet of Things, Uniﬁcation “ (cid:80)(cid:71)(cid:1)(cid:40)(cid:77)(cid:80)(cid:67)(cid:66)(cid:77)(cid:1)(cid:36)(cid:80)(cid:78)(cid:78)(cid:86)(cid:79)(cid:74)(cid:68)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:1)(cid:73)(cid:66)(cid:84)(cid:1)(cid:70)(cid:79)(cid:66)(cid:67)(cid:77)(cid:70)(cid:69)(cid:1)(cid:53)(cid:59)(cid:8)(cid:84)(cid:1) devices to be SMArt Devices™ – actuating, sensing and controlling things at the extreme reaches of the Internet.” On Board Technology (electronics/sensors) TZ’s systems use decentralised computing power to harness the power of movement and sensing at the extremes of the internet. Moore’s Law states that processing power and sensing are exponentially advancing, this offers tantalising new possibilities for our devices. A modular approach will allow backward integration to existing communication systems while enabling TZ to expand into the latest technologies. This approach will expand our current offers and at the same time will enable wireless, battery-powered connection to Internet and cellular systems. Connectivity Systems Our sister company PDT has been gaining tremendous experience in wireless and cell phone architecture. The incredible rate at which this has evolved and the fact that the capabilities this architecture offers are exactly the things we visualised a decade ago, makes it inevitable that this technology Actuators Based on our existing granted IP, will become dominant in TZ device connectivity. speciﬁcally that which relates to the SMA networked Again, modularity is the key word and serendipitously beam devices, a second family of devices will be PDT is exploring Modular Android Technology for its developed using the inherent stroke ampliﬁcation own customer base. and re-biasing of bending structures. SMA bending structures are arguably the cheapest form of the Software Overlaying all TZ products is software. powerful actuator our devices require. A guiding Moving from our existing TZ enterprise software base, principle behind the design will be that the form we simplify the user experience though the development factor allows it to be embodied in multiple devices. of TZ “apps.” Mobile applications streamline the user experience, making advanced technologies accessible Mechanisms TZ has discovered the importance to the ordinary user. We believe this approach will of device ﬂexibility. That is, the ability to add “modular” broaden TZ’s user base whilst strengthening our existing mechanisms and accessories to create multiple (cid:84)(cid:66)(cid:77)(cid:70)(cid:84)(cid:15)(cid:1)(cid:53)(cid:73)(cid:74)(cid:79)(cid:76)(cid:1)(cid:80)(cid:71)(cid:1)(cid:73)(cid:80)(cid:88)(cid:1)(cid:69)(cid:66)(cid:85)(cid:66)(cid:1)(cid:71)(cid:83)(cid:80)(cid:78)(cid:1)(cid:40)(cid:49)(cid:52)(cid:1)(cid:73)(cid:66)(cid:84)(cid:1)(cid:67)(cid:70)(cid:70)(cid:79)(cid:1)(cid:78)(cid:66)(cid:69)(cid:70)(cid:1) products to satisfy market demand. This front-end easily accessible to millions of end users via various modularity will allow us to compete in completely map applications. “Apps” will make TZ devices as part new areas of electronic locking. of the Internet of Things equally as user friendly. “It feels like we’ve cast a small stone into a big pond and we are just experiencing the ﬁrst ripples of activity.” 17 john wilson PRESIDENT & CEO, (cid:53)(cid:38)(cid:45)(cid:38)(cid:59)(cid:58)(cid:40)(cid:48)(cid:45)(cid:48)(cid:40)(cid:58)(cid:13)(cid:1)(cid:42)(cid:47)(cid:36)(cid:15) I remember Mark Bouris’ clear directive to me a month after I took on the CEO role. “Build a new way of working here,” he said. “We need a rhythm that deﬁnes what TZ is all about.” When I asked him to explain what he meant by “rhythm” he explained, “Band members rely on rhythm to play tunes; a coxswain needs to establish rhythm to synchronise his rowers and a successful CEO will create a unique operating rhythm in the business that aligns and motivates its employees to achieve the best.” So with a newly formed and committed management team, we set about to build a unique TZ rhythm in every aspect of our business from sales and market development, customer management, product development to production implementation, aligning our employees to a very clear and simple strategic intent; to create value for our shareholders, to maintain a technology leadership position and to focus on people, processes and performance. Twelve months on, I believe we have built the right enabling conditions for the business to succeed. We’ve created a great team based culture, solid business systems that help us to efﬁciently focus on the important things and new resources with the right skills and single minded perseverance to drive the business forward. Thank you to Will Leong, Vice President of Operations, for building and leading our delivery capability. Despite this, success for TZ means we need to fast-track the adoption of our technology and prove that commercially we can sell our offerings proﬁtably and create value for our shareholders. At the best of times with new technology, even with greatest of interest, customers often take an inordinate and unpredictable amount of time to fully appreciate, internally promote and buy new products. Coupled with the sub-optimum economic conditions in the US and Europe, which have not been conducive for major corporates to making capital investment in infrastructure, this has been by far our greatest challenge. Today, I’m pleased to say I believe we’ve made signiﬁcant headway. Firstly, we’ve strengthened our channel partner relationships through consistently providing high levels of support and commitment to drive lead generation and opportunity creation. We’ve now established a level of visibility across a broad range of targeted early adopters that are signiﬁcant corporations across the US, Europe and Australia. We’ve developed very close collaborative relationships with these “lead end-user customers” and built trusted relationships with internal “TZ champions” within these corporations that understand and believe in our value proposition. These customers provide a solid foundation for repeat purchases and sales proliferation as well as validation of the technology proposition. All this could not have been possible without a committed sales team solely focused on making things happen. “ If someone asked me how to describe the last twelve months, I would have to say it’s been quite a remarkable journey.” 319 “ It’s great to be at a start on a journey to what I believe will lead to great things.” Our promotional and marketing initiatives with our If someone asked me how to describe the last 12 credible channel partners have helped us build months, I would have to say it’s been quite a remarkable awareness with our targeted customers. journey – a journey of systematically putting all the pieces in place and to getting a glimpse of what this This in turn has provided the opportunities to deploy company is capable of. our systems in phase one trials and we have actively supported each and every pilot, managing every aspect I’m excited by the growth opportunities for our company. of deployment and committing resources to ensure that With each and every passing day, new opportunities we fully service our customers’ needs in training and emerge that keep reinforcing the fact that we have implementation. We’ve also actively worked with our something special to offer. customers to ensure both upstream and downstream integration into their existing networks of other products It feels like we’ve cast a small stone into a big pond and and processes and as result earned credibility with we are just experiencing the ﬁrst ripples of activity. our customers and increased the conﬁdence of our channel partners. I am proud of our team, with what we’ve achieved so far and look forward to what we are committed to achieving Our Technical Services team has done a phenomenal in these next 12 months. It’s great to be at a start on a job in managing customer’s expectations and ensuring journey to what I believe will lead to great things. that the after sales experience delivers on the promise of the technology. To Mark, thanks for the words of wisdom and for setting the pulse for the business, to Kenneth, thanks for your active participation, contribution to business and operational development and for keeping me on task, and to Dickory, my good friend and co-founder, thank you for having the vision. Finally, to the shareholders, thank you for your belief, trust and on-going support. “ This is a strong statement of our business model and the brand and reputation we have built at PDT.” 21 mark schwartz PRESIDENT AND CEO, (cid:49)(cid:51)(cid:48)(cid:37)(cid:54)(cid:36)(cid:53)(cid:1)(cid:37)(cid:38)(cid:55)(cid:38)(cid:45)(cid:48)(cid:49)(cid:46)(cid:38)(cid:47)(cid:53)(cid:1)(cid:53)(cid:38)(cid:36)(cid:41)(cid:47)(cid:48)(cid:45)(cid:48)(cid:40)(cid:42)(cid:38)(cid:52)(cid:15) I’m particularly proud of the PDT performance this last year. Despite the blizzard of poor economic news and employment data, PDT persevered and had another solid year. This is a strong statement of our business model and the brand and reputation we have built at PDT. With this strong revenue growth came some challenges. We had to ramp up quickly – investing in people, equipment and space. Projects have gotten larger, more complex and more multi- disciplined. In most cases we handled the extra load well, in others our weaknesses were found and corrective action taken to shore up our personnel, tools and processes. We have emerged as a stronger and better equipped company that is well positioned to handle the larger and more complex projects, particularly in the military and medical device world. PDT Medical continued to adapt and improve on our long-term vision of developing the three separate but complimentary vertical markets of Medical, Military and Consumer Products. PDT Medical continued to grow its revenues as we created more (cid:84)(cid:85)(cid:83)(cid:86)(cid:68)(cid:85)(cid:86)(cid:83)(cid:70)(cid:1)(cid:85)(cid:80)(cid:1)(cid:80)(cid:86)(cid:83)(cid:1)(cid:83)(cid:70)(cid:72)(cid:86)(cid:77)(cid:66)(cid:85)(cid:70)(cid:69)(cid:1)(cid:81)(cid:83)(cid:80)(cid:68)(cid:70)(cid:84)(cid:84)(cid:70)(cid:84)(cid:15)(cid:1)(cid:42)(cid:79)(cid:1)(cid:39)(cid:58)(cid:1)(cid:19)(cid:17)(cid:18)(cid:18)(cid:13)(cid:1)(cid:49)(cid:37)(cid:53)(cid:1)(cid:68)(cid:83)(cid:70)(cid:66)(cid:85)(cid:70)(cid:69)(cid:1) a new lead position in the medical vertical designed to further develop our processes to ensure ongoing compliance with the Food and Drug Administration (FDA). These investments are critical to the continued momentum we are building in this area. It also further distances us from our competitors and positions us for projects that have a high barrier to entry. Conversely, these types of projects carry complex, more expensive and longer sales cycles. PDT Medical also continues to develop strategic alliances with industry leading partners were we recognise a gap in our capabilities. These partnerships allow us to scale quickly and offer the seamless, turnkey process our customers demand. Exciting things are ahead for our medical business. It’s very gratifying to be involved in these life-improving projects. Similarly we also created a lead position within the PDT Military business sector. This is also a regulated industry that requires us to be diligent with our policies and (cid:81)(cid:83)(cid:80)(cid:68)(cid:70)(cid:84)(cid:84)(cid:70)(cid:84)(cid:15)(cid:1)(cid:42)(cid:79)(cid:1)(cid:39)(cid:58)(cid:1)(cid:19)(cid:17)(cid:18)(cid:18)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:72)(cid:83)(cid:80)(cid:86)(cid:81)(cid:1)(cid:86)(cid:79)(cid:69)(cid:70)(cid:83)(cid:85)(cid:80)(cid:80)(cid:76)(cid:1)(cid:66)(cid:1)(cid:79)(cid:86)(cid:78)(cid:67)(cid:70)(cid:83)(cid:1)(cid:80)(cid:71)(cid:1) complex programs, several of which are in the proof of concept phase and we expect these programs to continue (cid:74)(cid:79)(cid:1)(cid:39)(cid:58)(cid:1)(cid:19)(cid:17)(cid:18)(cid:19)(cid:15) In addition, substantial investment has been made into sales in the tight knit military community. We are building good relationships through personal interaction and the word is spreading with regard to our expertise in the area of military communication devices. While many programs are slow to get started, we believe we are in a good position to have (cid:84)(cid:85)(cid:83)(cid:80)(cid:79)(cid:72)(cid:1)(cid:72)(cid:83)(cid:80)(cid:88)(cid:85)(cid:73)(cid:1)(cid:74)(cid:79)(cid:1)(cid:39)(cid:58)(cid:1)(cid:19)(cid:17)(cid:18)(cid:19)(cid:1)(cid:66)(cid:84)(cid:1)(cid:80)(cid:86)(cid:83)(cid:1)(cid:70)(cid:71)(cid:71)(cid:80)(cid:83)(cid:85)(cid:84)(cid:1)(cid:66)(cid:79)(cid:69)(cid:1)(cid:74)(cid:79)(cid:87)(cid:70)(cid:84)(cid:85)(cid:78)(cid:70)(cid:79)(cid:85)(cid:84)(cid:1) convert to purchase orders. Our software group has grown substantially in the last year. We expect that the demand for these services will continue to grow but will also be tied to speciﬁc project demands. We are taking care to hire carefully and use partners and temporary staff to ﬁll the peak periods. This has proven to be an effective strategy. In the last annual report, we highlighted our growth into the front end of the process, namely research and strategy. Our goal was to get involved in product development projects even earlier in the process to give us a leg up on the downstream product development work. We were immediately successful in getting engaged on a number of strategically aligned programs, including a large medical device program involving complex and extensive user “ PDT Medical also continues to develop strategic alliances with industry leading partners.” 323 “ Our software group has grown substantially in the last year.” research. This global study encompassed nearly 300 This past year, PDT’s brand attracted signiﬁcant in-depth interviews and more than 20 stakeholder recognition in the media with nearly 100 press categories across 10 diverse health care markets – mentions in print and online. Our talented team with nearly a half terabyte of support data archived to members were sought out as thought leaders by support future development. On the strength of this business media time and again, most notably in research effort, we are conﬁdent this work will convert publications whose distribution consists of valued to a substantial amount of development work. medical and defence prospects. (cid:54)(cid:79)(cid:74)(cid:82)(cid:86)(cid:70)(cid:1)(cid:49)(cid:37)(cid:53)(cid:1)(cid:81)(cid:83)(cid:80)(cid:72)(cid:83)(cid:66)(cid:78)(cid:84)(cid:1)(cid:77)(cid:74)(cid:76)(cid:70)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:34)(cid:70)(cid:84)(cid:74)(cid:83)(cid:1)(cid:34)(cid:70)(cid:12)(cid:58)(cid:13)(cid:1)(cid:66)(cid:1)(cid:73)(cid:70)(cid:66)(cid:69)(cid:14) (cid:85)(cid:86)(cid:83)(cid:79)(cid:74)(cid:79)(cid:72)(cid:1)(cid:81)(cid:73)(cid:80)(cid:79)(cid:70)(cid:1)(cid:78)(cid:66)(cid:69)(cid:70)(cid:1)(cid:80)(cid:71)(cid:1)(cid:18)(cid:25)(cid:1)(cid:68)(cid:66)(cid:83)(cid:66)(cid:85)(cid:1)(cid:72)(cid:80)(cid:77)(cid:69)(cid:1)(cid:66)(cid:79)(cid:69)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1) revolutionary Satellite Communications Operational User Toolkit (SCOUT), which packs 160 pounds of equipment and applications into an intuitive, yet robust six pound device, have propelled our work into strategic publications. PDT also continued its winning heritage with awards for products that are truly making a difference in the (cid:77)(cid:74)(cid:87)(cid:70)(cid:84)(cid:1)(cid:80)(cid:71)(cid:1)(cid:85)(cid:73)(cid:70)(cid:74)(cid:83)(cid:1)(cid:86)(cid:84)(cid:70)(cid:83)(cid:84)(cid:15)(cid:248)(cid:1)(cid:53)(cid:73)(cid:70)(cid:1)(cid:47)(cid:70)(cid:89)(cid:85)(cid:1)(cid:40)(cid:70)(cid:79)(cid:70)(cid:83)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:1)(cid:49)(cid:70)(cid:83)(cid:76)(cid:74)(cid:79)(cid:84)(cid:16)(cid:34)(cid:49)(cid:41)(cid:1) Braille Writer, the 3-D CLEAN Ultraviolet Disinfection (cid:66)(cid:79)(cid:69)(cid:1)(cid:52)(cid:66)(cid:79)(cid:74)(cid:85)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:1)(cid:37)(cid:70)(cid:87)(cid:74)(cid:68)(cid:70)(cid:13)(cid:1)(cid:85)(cid:73)(cid:70)(cid:1)(cid:46)(cid:34)(cid:40)(cid:74)(cid:68)(cid:1)(cid:42)(cid:78)(cid:78)(cid:86)(cid:79)(cid:80)(cid:81)(cid:83)(cid:70)(cid:68)(cid:74)(cid:81)(cid:74)(cid:85)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:1) Sample Processor and the STERIS Surgical Scrub Sink all won accolades for superior product development. 2011 ﬁnancial statements TZ Limited ABN 26 073 979 272 Annual Report - 30 June 2011 TZ Limited Corporate directory 30 June 2011 Directors Mark Bouris - Chairman Kenneth Ting Dickory Rudduck Company secretary Kenneth Ting Notice of annual general meeting The annual general meeting of TZ Limited: Registered office Principal place of business Share register Auditor Solicitors Bankers will be held at time date Lower ground floor Radisson Hotel 27 O’Connell Street Sydney NSW 2000 10:00 AM Tuesday 22 November 2011 Level 11, 1 Chifley Square Sydney NSW 2000 Tel: +61 2 9222 8890 TZ Limited, Level 11, 1 Chifley Square, Sydney NSW 2000 Telezygology Inc., 1017 W. Washington Blvd, Unit 2C, Chicago IL 60607, USA PDT Inc, One Corporate Drive, Suite 110, Lake Zurich IL 60047, USA Computershare Investor Services Pty Limited Yarra Falls 452 Johnston Street Abbotsford VIC 3067 Tel: +61 3 9415 5000 Fax: +61 3 9473 2500 BDO Audit (NSW-VIC) Pty Limited Level 19, 2 Market Street Sydney NSW 2000 Landerer & Company Level 31, 133 Castlereagh Street Sydney NSW 2000 St George Bank Limited Level 3, 1 Chifley Square Sydney NSW 2000 Stock exchange listing TZ Limited shares are listed on the Australian Securities Exchange (ASX code: TZL) Website address www.tz.net TZ Limited's public website contains information regarding its products and the company, including an investor services section E-mail: info@tz.net 1 TZ Limited Review of operations 30 June 2011 The Board is pleased to advise that TZ Limited (‘TZL’ or the ‘company’) has delivered on its top line revenue expectations for the financial year ending 30 June 2011 underpinned by a very strong and above plan performance from Product Development Technologies Inc. (‘PDT’), our design and development services division, under the stewardship of CEO, Mark Schwartz. Telezygology, Inc. (‘TZI’), which develops and markets world-class patented SMArt Device Technology and Systems, set its internal revenue target for the financial year assuming a recovery of the US economy and solid infrastructure growth in the government and banking sectors. However, the US economy did not recover as originally expected and as a result, TZI did not meet its internal revenue targets although TZI’s revenue shortfall has however, been offset by PDT’s strong revenue performance. TZI sales targets were skewed towards the second half of the 2011 financial year and we saw an increase in revenue in Q4. Notwithstanding the continued economic softness of North America and Europe and acknowledging that we cannot create infrastructure demand, TZI has shown significant progress under the management of Chief Executive Officer (‘CEO’), John Wilson, and has improved business fitness, developed a solid opportunity pipeline, cultivated strong customer relationships with major corporates and has a growing track record of successful deployments. The business showed significant revenue growth in the last quarter of the 2011 financial year and currently has a very healthy pipeline of trials with major customers globally which, if successful, will translate into impressive sales in the short to medium term. The Board believes that this will place the business unit in a strong position to generate revenue growth during the 2012 financial year. Overall the results represent a year of establishing solid enabling conditions to support sustainable revenue growth across the TZ Group. Testimony to this has been the efforts to successfully recapitalise the company to support implementation of its business growth plans through 2011 and 2012. To this end, TZL successfully raised US$4.1M via a secured loan facility with major shareholder and creditor, QVT, in July 2010 (subsequently converted into secured convertible notes in December 2010) followed by a $12.7M placement and rights issue in November and December 2010. This investment has been invaluable and has made the significant difference between TZ being a viable company going forward and being a company with limited options as it was at the end of the 2010 financial year. TZ is currently in discussions with QVT in which, if agreement is reached, the terms of the convertible notes held by QVT will be restructured to remove the requirement for TZ to have to pay the interest to QVT for the 2011 calendar year and, in exchange, TZ will issue further securities to QVT, likely to be in the form of additional options to acquire ordinary shares. No binding agreement has yet been reached between TZ and QVT and, even if agreement is reached, any such arrangement will be subject to shareholder approval. TELEZYGOLOGY, INC. (TZI) Over the course of the year, TZI has focused its energies on delivering three high level objectives to build a foundation for future growth: 1. We have transitioned from a predominant product development focus into a sales and marketing organisation focused around specific product offers that deliver qualified value to defined market segments. Our clearly defined IXP and PAD business offerings supported by dedicated regional sales resources and targeted marketing and promotional programs are testimony to this cultural shift. 2. We have expanded sales geographically from the predominant US centric business focus into a global business with regional sales strategies targeting the European and Asian Pacific markets. The commercialisation activities in the US, Canada, Europe and Australia have generated sales across the globe validating that we not only have a global addressable market but a universal value proposition. 3. We have shifted TZI’s product mix from proprietary hardware sales to a total system solution offering comprising hardware sales, software licensing, annuity software maintenance contracts and service based technical support and implementation. Our IXP and PAD system offerings and our turn-key and committed approach to quality supply, responsive service and fault-free implementation ensures a holistic approach to meeting customer’s expectations - a true solution provider mentality. From an organisational perspective, we have developed and implemented the critical processes core to the commercial delivery of our products to the market and the servicing of those products, including the back-end business systems for production scheduling, inventory management, customer relationship management and sales forecasting. New operational standards have also been institutionalised to significantly improve business fitness to ensure an efficient customer focused sales orientation. 2 TZ Limited Review of operations 30 June 2011 We have also invested in building a new sales capability by recruiting high calibre sales and technical services resources to bring a strong sales culture to the business. In the last year, we have grown from an organisation with only one full-time sales resource to a dedicated team of nine regional sales managers and four technical service managers. These resources are located in the key regional markets where our channel partners have established business. We have also progressively updated our marketing presence including the development of new brand positioning for each of our business streams reinforced by a substantial revamp of our web-sites, sales brochures, relevant technical sales material and other collateral. A structured integrated marketing strategy has also been implemented and this has generated a much broader based awareness about what we offer to the market which will continue to help us drive customer take-up and drive sales proliferation. In terms of market participation, we have strengthened and re-vitalised our relationships with our major channel partners, Anixter and Pitney Bowes, and leveraged their global reach by replicating the US distribution model into new markets outside of the USA. We now have distribution channels and sales initiatives in place in Canada, Latin America, Europe, Middle East, Southeast Asia and Australia/New Zealand supported by in-market resources in Canada, UK, Amsterdam and Australia. Over the course of the year, we have segmented our markets and launched new product and service offerings to these targeted sectors shifting our previously component sales oriented business into a business of selling total system solutions. Testimony to our product development and commercialisation efforts is the launch of a number of new products across our business units including TZ Centurion System (July 2010), TZ Centurion Server Enterprise Software (release May 2011), TZ Courier (July 2010), TZ Concierge (January 2011) and most recently TZ APX (June 2011). These new products all incorporate application specific software or signal our move into enterprise level software, which have enabled us to establish an annuity based software licensing, service and maintenance business. These new offerings significantly expand our addressable market opportunities and are testimony to a fundamental shift into high value system solutions that are built on our state-of-the-art SMArt Device Technology platform with the unique attribute of being highly customisable through a rich software control layer. IXP, Infrastructure Protection With heightened regulations and compliance mandates, businesses across a wide variety of industries are being compelled to look for new levels of security beyond just controlling access to buildings and spaces. Physical security and environmental monitoring right down to the asset level are fast becoming standard requirements. As a consequence of this market trend, we are starting to be recognised as a technology leader and provider of micro-protection solutions that can open up new opportunities for asset and infrastructure protection. The adoption of the company’s IXP products by credible fortune 100 corporations, major co-location data centre service providers and government agencies in North America, Europe and Australia is a huge endorsement of the product’s potential. Over the course of the year, we have seen our business migrate from sales categorised as trial and system evaluation deployments in a small number of data centre cabinets to major beach-head deployments that establish TZ as the preferred micro-security solution. Our successful deployments of total hardware and software solutions at major co-location facilities have not only provided influential credibility of TZ’s offering to the targeted market segment but are also driving a demonstrable ground swell of interest and awareness of TZ as a leading technology. This increased market awareness is also supporting strong specification sales into new private and government contracts which will lay a solid foundation for future sales revenue. Our sales opportunity pool has grown substantially as we expand our breadth and depth of market penetration and are seeing a healthy conversion of these opportunities into purchase orders as we drive demand directly with end-user customers. Although relatively early in the commercialisation phase, the quarter on quarter sales revenue growth is very positive. 3 TZ Limited Review of operations 30 June 2011 Part of the successful implementation has been our ability to better leverage the market strength of our major channel partner, Anixter, working in each of its key regional markets facilitating product launches in several regions including US, Canada, Latin America, Europe, Middle East and Asia Pacific. With dedicated TZ in-market sales personnel, TZI has been able to pro-actively train Anixter sales operations and increase the awareness and education of Anixter’s inside and outside sales teams on how to sell TZ’s products. A large proportion of Anixter offices across the US, Canada, EMEA and APAC have now received initial training. This enabling activity has greatly improved effectiveness of the Anixter sales operations and vastly increased TZ’s sales coverage. In addition, Anixter has now launched specific promotional programs and demand creation initiatives in each of their regions of North America, Latin America, EMEA and APAC and has established minimum holdings of TZI products in stock in Europe and Australia to ensure product availability. TZI is also expanding its channels to market to enable a far broader coverage through tier providers. The focus on engaging with OEM cabinet manufacturers in all regions has enabled the offering of “TZ Ready” cabinets to the market. This initiative delivers a high value added utility to customers providing for the installation of TZ SlideHandles in the factory and for the cabinets to be deployed ready to use with the minimal amount of on-site disruption. In the upcoming financial years, we expect to extend our product portfolio with new value added offerings and to expand into adjacent market segments. Traction has already been experienced in Health Care and Life Services, Retail, Casinos, and Industrial Automation sectors. PAD, Packaged Asset Delivery The potential for the PAD business unit stretches across the Corporate Mail, High Density Residential and Community Postal Service Industries and represents a significant market opportunity for TZI. The uplift in e- retailer activity is driving substantial growth in the number of parcels and packages delivered to consumers and the issue of last mile delivery is becoming a costly logistical problem. TZ’s PAD solutions effectively address these emerging needs. Although the sales cycle has been lengthy, a significant pipeline of opportunities and high level business prospects has been developed for our PAD business and a number of corporate trials are currently underway in the US with major IT and Financial Services corporations. Successful trials may lead to substantial sales as we anticipate these major customers will seek to install TZ Courier in other buildings or departments that they control and/or acquire additional locker banks to service a greater number of end-user recipients. Outside of the US, TZ Courier trial deployments are underway with Pitney Bowes in the UK, in the Middle East, and in Australia, where the company has formed an exclusive supply and distribution relationship with Pitney Bowes Australia Pty Limited to support local commercialisation. The emerging Australian opportunities are significant with well-respected national logistics providers. During the 2011 financial year, the company successfully restructured its supply and distribution relationships and now has properly structured channel and pricing strategies to support market penetration. These include new and direct commercial relationships with Pitney Bowes Management Service (PBMS), IOPC and Bear River Associates. The formation of a direct relationship with Pitney Bowes has meant that the business now provides a total turn-key solution instead of indirectly supplying hardware and software components through a third party intermediary. This has significantly increased the dollars per order and the gross margin that TZI receives. As a result of this direct working relationship, the company is working far closer with PBMS product management and has rolled-out an extensive awareness and training program to all in-market sales resources to ensure broad base coverage across all of PBMS corporate clients, although the launch of this program was substantially delayed to early 2011 due to major restructuring of the Pitney Bowes sales organisation late last year. TZI has also launched the APX System, for distribution by IOPC under a new agreement finalised in March 2011. The product is now being rolled out through IOPC’s national dealer network of approximately 50 system furniture dealers and we expect to see the first sales of this offering in the October to December 2011 quarter. TZI has formed a strategic relationship with Bear River Associates, a privately-held logistics tracking software development company located in Oakland, California, for the non-exclusive sale and distribution of TZ Courier in the USA. Bear River markets software solutions and performance tools to Fortune 500 and large public sector clients and will promote and market an integrated solution that combines the TZ Courier with their BearTracks software to defined corporate and public sector customers. We have recently received the first purchase order through this channel for a major government organisation. 4 TZ Limited Review of operations 30 June 2011 We have also successfully developed and deployed our TZ Concierge offering to the residential market with our first installation at the Sterling Private Residences, a 400+ apartment building in Chicago in January 2011. The System has since received resounding support from tenants, the Condominium board and property management. As a result of this successful deployment, we are generating significant interest for TZ Concierge from a number of local Chicago property management groups and are aggressively promoting the offering to targeted prospects in other major city centres. With parcel delivery continuing to increase and last mile delivery becoming a major strategic consideration for logistics providers, we are confident that our Packaged Asset Delivery solutions will be a substantial play for TZI moving forward. AAM, Aerospace Asset Maintainability Due to the heavy compliance and regulatory requirements in the aerospace and defence industries, we are pursuing a licensing partnership with a major OEM enabler to allow commercialisation of our technology in this sector. Despite a very tangible licensing opportunity with an interested party early in the 2011 financial year, the sale of our prospect’s business in late 2010 has delayed the implementation of this initiative. We continue to monitor progress in this sector and maintain contact and dialogue with identified prospects although it is clear that the prospect of a near term licensing deal is unlikely. PRODUCT DEVELOPMENT TECHNOLOGIES (PDT) PDT posted strong top line growth as it continues to take advantage of its accumulated skills and decades of design experience. PDT is enjoying strong interest and growth from not only consumer product companies but increasingly large prime contractors in the Defence and Military sector and also the medical device business. It is taking on more complex projects which in some cases have a steep learning curve but the payoff is that PDT is recognised for innovation, teamwork and cutting edge problem solving. International companies are also increasingly seeking PDT’s design skills with especially strong demand in Europe and the Middle East. To take advantage of this growth PDT reorganised its management structure into three main verticals: Defense/Military, Consumer Products and Medical Devices. This realignment brings clarity to the organisation, pushes down decision making to three senior people freeing up the CEO to create and drive the vision for the company and show potential clients the types of skill sets that exist within the global family of PDT. The medical device world is growing with the need for speed, remote access and smaller packaging, all skills PDT has but with that comes more complex rules and guidelines from the US Federal Government. The reorganisation allows focus on these new rules but also active participation in the Contiua Health Alliance which is a non-profit group of 200 technology, health care and medical device companies who joined together to improve personal health care. Part of the realignment has been establishing a new and secure area to comply with Federal Government mandates for bidding on sensitive projects where high levels of security clearances are needed. Given our history in this field coupled with the new secure office we are getting the attention of the large global US Military contractors. This combined with our ITAR credential present a significant barrier to entry for many would be competitors. PDT recently demonstrated its capabilities by taking on a very complex defence project which had a goal of reducing 200 pounds of traditional military communications equipment to a small eight pound package. With PDT's reputation for not only solving large problems but also using its experience in the cell phone, WiFi and GPS space, the project was completed on time and within budget. In another example PDT accepted the very difficult challenge of creating a new communication device in the medical field using multiple communications platforms. It was Android based and as the Android software platform becomes the dominant system used globally this project was needed to build PDT’s knowledge. Despite the benefit of building new technical expertise the project and job proved to be a challenge. The project incurred losses including a $195K non-cash expense that was accrued as of period end due to PDT’s percentage- of- completion revenue recognition method. The knowledge and technical experience gained has enabled PDT to bid for Android based contracts which it could not previously do. 5 TZ Limited Review of operations 30 June 2011 One of PDT’s strengths often unseen by its clients is its laser focus on new and emerging technologies and changes in the global economy. New technology causes very competitive companies to want to innovate to stay ahead of competitors and with PDT has a partner who understands the global landscape and competitive pressures. PDT will see change and initiate calls to customers anticipating their needs. In the same way PDT’s attention to the global economy, especially the USA, allows it to sense a downturn in demand from one sector and allow it to deploy its resources in other sectors. The US Military is a prime example, as the complexities of the US political system affect Defence spending. PDT stays in touch with its major customers so we know in advance how spending may be affected. PDT’s operation in the Ukraine provides low cost and timely engineering skills that enable competitive pricing for certain projects but also provides flexibility for rush projects. PDT’s branch offices continue to push it into the global arena and source projects not normally associated with a Chicago based company. To create a presence in the San Francisco/Silicon Valley area we are sharing office space with TZI in downtown San Francisco. This will not only enable direct access to the large tech companies but the medical device funds as well as the large teaching hospitals where much of the medical innovation comes from. PDT is an ever changing workplace and an environment where engineers are challenged with new projects every day which provides the challenges that engineers thrive on. CONCLUSIONS While not openly evident in our financials, it is important to recognise that there have been significant day-to-day achievements and major accomplishments by our dedicated teams in TZI and PDT. The Directors would like to thank the TZI and PDT operations teams lead by John Wilson and Mark Schwartz for their significant efforts and contributions. Their commitment, passion and motivation have helped the Board put this business back into the position of positive growth. Special thanks are also extended to our shareholders for their on-going support and patience and confidence and trust in the Board to do what it needed to do. The Directors are also pleased to note that all matters of litigation with various parties have now been settled. The Board is very excited about the future of the TZ Group notwithstanding the incredibly volatile time in our two largest markets, North America and Europe, and because our product is not constrained by geographic territories we are now making significant headway in the Asia Pacific region particularly Australia and in that regard we will continue to invest in good outcomes in those strong regions. In relation to North America and Europe we will continue to invest for the future and target clients and customers who have a need for our product, notwithstanding budgetary constraints. 6 TZ Limited Significant changes in the state of affairs 30 June 2011 Issue of Series IIIB Convertible Notes On 24 December 2010 the company issued 4,275 secured Series IIIB Convertible Notes, each with a face value of $1,000, to QVT Fund LP and Quintessence Fund L.P. (‘QVT Funds’). The Series IIIB Convertible Notes were issued in repayment of all outstanding principal and interest owing under the loan facility between the QVT Funds, the company and Telezygology, Inc. (‘TZI’) pursuant to which the QVT Funds lent US$4,100,000 to TZI. The conversion price for each Series IIIB Convertible Note is the lesser of 42 cents and the lowest price at which shares may be subsequently issued by the company while the Series IIIB Convertible Notes remain on issue. As of the date of this report, the conversion price remains 42 cents. Conversion of Series II Convertible Notes to Shares During the year, all of the Series II Convertible Notes previously held by Sydcomp Pty Limited were converted into ordinary fully paid shares (‘Shares’) or redeemed by the company. 10,229,760 Shares were issued as a result of the conversion of all of the principal and interest owing on 4,008,500 Series II Convertible Notes at a conversion price of $0.42 per Share, which was the conversion price determined under the original terms of issue of the Series II Convertible Notes as of the relevant dates of conversion of those notes. A further 2,048,431 Shares were issued upon the conversion of the principal and interest owing on 732,500 Series II Convertible Notes at the amended conversion price of $0.3913 per Share in accordance with resolutions 8 and 9 passed by the company's shareholders at the 2010 AGM. The remaining 500,000 Series II Convertible Notes were redeemed by the company. Issue of shares During the year the company issued 59,882,750 Shares as follows: 12,278,191 Shares were issued upon the conversion of the Series II Convertible Notes; 1,480,000 Shares were issued upon the exercise of 1,480,000 Rights issued under the company's Director and Executive Equity Plan; 1,198,196 Shares were issued to the QVT Funds in satisfaction of the company's liability to pay $1,198,196 to the QVT Funds in respect of moneys paid by the QVT Funds on behalf of the company in accordance with resolution 9(a) passed at the 2009 AGM; 4,613,333 Shares were issued to the QVT Funds in payment of $4,613,333 in interest owing to the QVT Funds under the Series I Convertible Notes for the period from the date of issue of the Series I Convertible Notes to 31 December 2009 in accordance with resolutions 9(c) and (d) passed at the 2009 AGM; 3,795,121 Shares were issued to the QVT Funds in payment of $1,328,292.35 in interest owing to the QVT Funds under the Series I, Series III and Series IIIB Notes for the 2010 calendar year 357,144 Shares were issued by way of placement to sophisticated investors at $0.42 per Share to raise $150,000; 8,091,446 Shares were issued by way of placement to various professional and sophisticated investors at $0.35 per Share to raise $2,832,009.10; and 28,069,319 Shares were issued under the company's 1 for 3 renounceable rights issue at an issue price of $0.35 per share to raise $9,824,261.65. Settlement of FutureWall Dispute and Incorporation of Intanova Pty Limited As announced on 30 July 2010, the company successfully resolved a long standing dispute between TZI and Techbuilt Interiors Pty Limited (‘Techbuilt’) in relation to a licence of rights pertaining to TZI's FutureWall System granted by TZI to Techbuilt. As a consequence of the settlement, a joint venture was formed, Intanova Pty Limited, to leverage the existing awareness and acceptance of the FutureWall System in the marketplace. Intanova carries on the business of marketing, supply and interior fit-out solutions in Australia. TZI currently holds a 50% interest in Intanova Pty Limited being the registered owner of 2,000,002 of the 4,000,004 ordinary class shares on issue. Incorporation of TZI Australia Pty Limited A new wholly owned subsidiary of the company, TZI Australia Pty Limited (‘TZIA’), was incorporated to facilitate the sale and marketing of IXP and PAD solutions in the Australian and New Zealand markets through direct end-user accounts and through the channel partnerships with Anixter Australia Pty Limited (‘Anixter Australia’) and Pitney Bowes Australia Pty Limited (‘PBA’). Agreement with Anixter Australia Pty Limited On 6 August 2010, Telezygology Inc. entered into a distribution agreement with Anixter Australia for the distribution of the company’s infrastructure protection products in Australia. The agreement references the terms and conditions set out in the 2009 Distributor Agreement with Anixter Inc. 7 TZ Limited Significant changes in the state of affairs 30 June 2011 Agreement with IOPC relating to PBMS supply On 1 January 2011, Telezygology Inc. entered into a new supply agreement with International Office Products Cooperative, Inc. (‘IOPC’) providing for the non-exclusive supply and manufacture of modular “millwork” locker units. In addition to standard terms and conditions relating to locker fabrication, quality assurance and system assembly, IOPC also undertook to terminate its existing contractual locker supply agreement with Pitney Bowes Management Services, Inc. (‘PBMS’) to enable TZ to pursue a direct supply relationship with PBMS, subject to commission being paid primarily on the TZ software and services provided. Agreement with Pitney Bowes Australia As announced by the company on 3 May 2011, TZIA entered into an exclusive supply and distribution agreement with Pitney Bowes Australia Pty Limited for the supply and distribution of certain of TZI's Packaged Assets Delivery solutions. Under the agreement PBA was appointed exclusive distributor of a range of standard configurations of TZI's Intelligent Locker system offerings (such as TZ Automated Parcel Exchange and TZ Courier) in the corporate mail services and postal markets in Australia and New Zealand until 31 December 2013, subject to certain performance obligations being met by PBA. 8 TZ Limited Directors' report 30 June 2011 The directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the 'consolidated entity') consisting of TZ Limited (referred to hereafter as the 'company' or 'parent entity') and the entities it controlled for the year ended 30 June 2011. Directors The following persons were directors of TZ Limited during the whole of the financial year and up to the date of this report, unless otherwise stated: Mark Bouris - Chairman Kenneth Ting Dickory Rudduck Principal activities During the financial year the principal continuing activities of the consolidated entity consisted of: the development of intelligent devices and smart device systems that enable the commercialisation of hardware and software solutions for the management, control and monitoring of business assets and the provision of associated value added services through Telezygology Inc, ('TZI'); and providing a fee for service product design and engineering consulting (services) Development Technologies Inc, ('PDT'). through Product All of the operations of the consolidated entity are based in Australia, the United States of America, United Kingdom and Ukraine. Dividends There were no dividends paid or declared during the current or previous financial year. Review of operations The loss for the consolidated entity after providing for income tax amounted to $8,784,000 (30 June 2010: $26,347,000). For a detailed review of the operations of the consolidated entity, please refer to the 'Review of operations' report which precedes this directors report. Significant changes in the state of affairs For details of the significant changes in the state of affairs of the consolidated entity, please refer to the 'Significant changes in the state of affairs' report which precedes this directors report. There were no other significant changes in the state of affairs of the consolidated entity during the financial year. 9 TZ Limited Directors' report 30 June 2011 Matters subsequent to the end of the financial year Settlement of the dispute with former director and related parties The company entered into a deed of settlement with Mr Andrew Sigalla and persons and entities associated with him, including ZMS Investments Pty Limited ('ZMS') (Receivers and Managers Appointed - In Liquidation) and BZI Pty Limited ('BZI'), to settle all legal proceedings between the parties (the 'Proceedings'), the hearing for which was due to commence in the Supreme Court of New South Wales on 5 September 2011. The deed of settlement was conditional on formal court orders being entered by the Supreme Court of New South Wales to discontinue the Proceedings on a without prejudice basis and on the removal of ASIC's freezing orders against Mr Sigalla and BZI. These conditions were satisfied on 23 August 2011. Under the terms of the deed of settlement, the company has agreed to accept a sum of money in full and final settlement of all claims that the company was alleging against Mr Sigalla, ZMS and BZI. The company and its related corporations have released Mr Sigalla, ZMS and BZI from all claims that the company and its related corporations were alleging in the Proceedings. Mr Sigalla has also released the company and its related corporations from all claims he was alleging in the Proceedings. It was represented to the company that the settlement moneys received by the company on 25 August 2011 came from a third party and not from either Mr Sigalla, ZMS or BZI. The company had sought the consent of the trustee in bankruptcy to Mr Sigalla’s bankrupt estate to the terms of the deed of settlement and the trustee's agreement that the bankrupt estate will have no claim to any of the settlement moneys to be paid to the company. The company was unable to obtain that consent or agreement from the trustee in bankruptcy to Mr Sigalla's bankrupt estate. The settlement was reached on the basis that there were no admissions of liability made by any party to the proceedings. Participation in Joint Venture - Intanova Pty Limited The company has an option to purchase 500,000 additional shares in Intanova Pty Limited. This option was exercisable between 1 February 2011 and 15 March 2011. The option was not exercised, however, the shareholders of Intanova Pty Limited have been in negotiations regarding numerous terms of the original shareholders agreement, including an extension of the option exercise period until 31 December 2011. At the date of this report the new agreement had not been finalised. Distribution Agreement with Anixter International Limited On 28 July 2011, Telezygology Inc. entered into a distribution agreement with Anixter International Limited for the distribution of the company’s infrastructure protection products in Europe, the Middle East and Africa. The agreement references the terms and conditions set out in the 2009 Distributor Agreement with Anixter Inc. with specific amendments to address regional preferences for initial inventory and preferential payment terms. Supply and Distribution Agreement with Bear River Associates On 22 August 2011, Telezygology Inc. entered into a supply and distribution agreement with Bear River Associates, a privately-held logistics tracking software development company, located in Oakland, California for the turn-key supply and distribution of the company’s TZ Courier products. Under the terms of the supply and distribution agreement, Bear River will promote and market an integrated solution that combines the TZ Courier™ Intelligent Locker System with its BearTracks software to an exclusive and defined list of established Bear River corporate and public sector customers in the United States. Supply Agreement with NEXTDC Limited and Anixter Australia Pty Limited On 7 September 2011, TZ Limited and its wholly owned subsidiary, Telezygology Inc. entered into a supply agreement with TZI's distributor, Anixter Australia Pty Limited ('Anixter'), and NEXTDC Limited ('NEXTDC') for the supply of the TZ Centurion™ System for NEXTDC’s cabinet-level micro-protection solution at its Brisbane and Melbourne data centres in accordance with agreed purchase orders. Under the terms of the supply agreement, TZ Limited agrees to guarantee the performance of TZI's and Anixter's obligations under the supply agreement. 10 TZ Limited Directors' report 30 June 2011 Likely developments and expected results of operations Information on likely developments in the operations of the consolidated entity and the expected results of operations have not been included in this report because the directors believe it would be likely to result in unreasonable prejudice to the consolidated entity. Environmental regulation The consolidated entity is not subject to any significant environmental regulation under Australian Commonwealth or State law. Information on directors Name: Title: Qualifications: Experience and expertise: Other current directorships: Former directorships (in the last 3 years): Special responsibilities: Interests in shares: Interests in options/rights: Mark Bouris Executive Chairman BCom (UNSW), MCom, Adjunct Professor at the Australian School of Business Mark Bouris is the Executive Chairman of Yellow Brick Road Wealth Management, a financial services company that offers comprehensive products and advice for home loans, financial planning, insurance, term deposits, accounting and tax through its national branch network. Mark has over 25 years experience in the finance and property sectors and was the founder of Wizard Home Loans, one of Australia’s largest non-bank lenders. Under Mark’s direction, Wizard grew to approximately 300 branches across Australia, New Zealand and India before the company was sold to General Electric in 2004. Mark is an Adjunct Professor for Banking & Finance and Business Law & Tax at University of New South Wales Australian School of Business and sits on the UNSW Australian School of Business Advisory Council Board. Mark is the author of Wealth Wizard and The Yellow Brick Road to Your Financial Security, and he writes a number of financial columns for some of Australia’s most recognised publications. He’s a board member of the Sydney Roosters and the host of Channel 9’s 'The Apprentice Australia' and 'Celebrity Apprentice Australia'. Executive Chairman of Yellow Brick Road Holdings Limited (previously known as ITS Capital Investments Limited), Non-Executive Chairman of Anteo Diagnostics Limited (appointed on 2 August 2011), Chairman of Serena Resources Limited and Board Member of the Sydney Roosters. None None 1,087,967 ordinary shares 3,000,000 options and 800,000 rights over ordinary shares 11 TZ Limited Directors' report 30 June 2011 Name: Title: Qualifications: Experience and expertise: Other current directorships: Former directorships (in the last 3 years): Special responsibilities: Interests in shares: Interests in options/rights: Name: Title: Experience and expertise: Kenneth Ting Executive Director and Company Secretary Bachelor of Commerce and Bachelor of Law (First Class Honours) and a member of the Institute of Chartered Accountants. Kenneth Ting has a background in accounting, law and investment banking with a focus on the commercialisation of technology and public and private equity raisings. Kenneth joined Deutsche Bank in 1997 after 4 years at PricewaterhouseCoopers Corporate Finance and Tax division. He was Vice President of Technology Investment Banking at Deutsche Bank and worked in Deutsche Bank's Sydney, San Francisco and London offices. Kenneth has a passion for technology and has worked with technology companies throughout his career. He has been involved in the completion of over $5 billion in M&A, private equity and IPO assignments in Australia, USA and Europe. His industry specialisation is in the electronics manufacturing, software, IT services, telecommunication and Internet sectors. None None None 1,000,975 ordinary shares 2,250,000 options and 600,000 rights over ordinary shares Dickory Rudduck Executive Director Dickory Rudduck is a prolific inventor and is the founder and source behind TZ Limited's technology and thinking. An Architect by profession, Dickory established and built a successful Sydney based industrial architectural practice over a 20-year consulting career. He is recognised as a respected industrial and interior designer. The success of his consulting practice enabled Mr Rudduck to focus on his interest in innovation and invention, establishing Intellectual Exchange Pty Ltd in 1996, with the objective of developing intellectual property with global relevance and application. Since then, he has successfully commercialised many of his creations, the most lucrative being patented furniture systems with revenues in excess of $40 million. He has explored a diverse range of patented concepts from electronic hardware and software developments, building and construction systems to even sporting inventions. Other current directorships: Former directorships (in the last 3 years): Special responsibilities: Interests in shares: Interests in options/rights: None None None 992,498 ordinary shares 10,000 options over ordinary shares 'Other current directorships' quoted above are current directorships for listed entities only and excludes directorships in all other types of entities, unless otherwise stated. 'Former directorships (in the last 3 years)' quoted above are directorships held in the last 3 years for listed entities only and excludes directorships in all other types of entities, unless otherwise stated. Company secretary Kenneth Ting is the company secretary and also a director of the company. See 'Information on directors'. 12 TZ Limited Directors' report 30 June 2011 Meetings of directors The number of meetings of the company's Board of Directors held during the year ended 30 June 2011, and the number of meetings attended by each director were: M Bouris K Ting D Rudduck Full Board Attended 14 14 14 Held 14 14 14 Held: represents the number of meetings held during the time the director held office. Remuneration report (audited) The remuneration report, which has been audited, outlines the director and executive remuneration arrangements for the consolidated entity and the company, in accordance with the requirements of the Corporations Act 2001 and its Regulations. The remuneration report is set out under the following main headings: A B C D E Principles used to determine the nature and amount of remuneration Details of remuneration Service agreements Share-based compensation Additional information A Principles used to determine the nature and amount of remuneration The objective of the consolidated entity's and company's executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with the achievement of strategic objectives and the creation of value for shareholders, and conforms with the market best practice for delivery of reward. The Board of Directors ('the Board') ensures that executive reward satisfies the following key criteria for good reward governance practices: set competitive remuneration packages to attract and retain high calibre employees; link executive rewards to shareholder value creation; and establish appropriate demanding performance hurdles for variable executive remuneration. The Board reviews and is responsible for the consolidated entity’s remuneration policies, procedures and practices. Remuneration policies have not been directly linked to the company’s performance in the past. However, at the 2009 Annual General Meeting ('AGM') approval was granted to establish the Director and Executive Equity Plan to attract, retain, motivate and reward senior executives and directors (including non-executive directors) of the company (collectively the 'Participants') by issuing either or both rights and options to the Participants to allow the Participants to acquire fully paid ordinary class shares in the company upon exercising the rights or options, as the case may be. The exercise of each right or option entitles the holder of that right or option, as the case may be, to acquire one fully paid ordinary class share in the capital of the company. Under the Director and Executive Equity Plan, the number of rights and options that may be issued to a Participant and the performance criteria and hurdles to be met prior to the issue or exercise of such Rights and Options is to be set by the board of directors of the company in reliance on the advice of an independent remuneration consultant. 13 TZ Limited Directors' report 30 June 2011 Non-executive directors remuneration Fees and payments to non-executive directors reflect the demands which are made on, and the responsibilities of, the directors. Non-executive directors' fees and payments are reviewed annually by the Board. The Board considers advice from shareholders, and takes into account the fees paid to non–executive directors of comparable companies, when undertaking the annual review process. The chairman's fees are determined independently to the fees of other non-executive directors based on comparative roles in the external market. The chairman is not present at any discussions relating to determination of his own remuneration. Non-executive directors do not receive share options or other incentives. ASX listing rules require that the aggregate non-executive directors remuneration shall be determined periodically by a general meeting. The amount of aggregate remuneration sought to be approved by shareholders and the manner in which it is apportioned amongst directors is reviewed annually. The most recent determination was at the AGM held on 30 November 2006, where the shareholders approved an aggregate remuneration of $500,000. Executive remuneration The consolidated entity and company aims to reward executives with a level and mix of remuneration based on their position and responsibility, which is both fixed and variable. The executive remuneration and reward framework has four components: base pay and non-monetary benefits short-term performance incentives share-based payments other remuneration such as superannuation and long service leave The combination of these comprises the executive's total remuneration. Fixed remuneration, consisting of base salary, superannuation and non-monetary benefits, are reviewed annually by the Board, based on individual and business unit performance, the overall performance of the consolidated entity and comparable market remunerations. Executives can receive their fixed remuneration in the form of cash or other fringe benefits (for example motor vehicle benefits) where it does not create any additional costs to the consolidated entity and adds additional value to the executive. The short-term incentives ('STI') program is designed to align the targets of the business units with the targets of those executives in charge of meeting those targets. STI payments are granted to executives based on specific annual targets and key performance indicators ('KPI') being achieved. KPI’s include profit contribution, customer satisfaction, leadership contribution and product management. The long-term incentives ('LTI') includes long service leave and share-based payments. As noted above, a Director and Executive Equity Plan has been set up to reward executives based on long term incentive measures in the form of options and rights. These include increase in shareholders value relative to the entire market and the increase compared to the consolidated entity's direct competitors. Consolidated entity performance and link to remuneration Remuneration for certain individuals is directly linked to the performance of the consolidated entity. Executives and other employees can be issued with options and rights to acquire shares in the consolidated entity. The number and the terms of the options and rights issued are determined by the directors after consideration of the employee's performance and their ability to contribute to the achievement of the consolidated entity's objectives. Refer to section E of the remuneration report for details of the last five years earnings and total shareholders return. As the options and rights confer a right but not an obligation on the recipient of the options, the directors do not consider it necessary to establish a policy in relation to the person limiting his or her exposure to risk as a consequence of owning the options or rights. 14 TZ Limited Directors' report 30 June 2011 B Details of remuneration Amounts of remuneration Details of the remuneration of the directors, other key management personnel (defined as those who have the authority and responsibility for planning, directing and controlling the major activities of the consolidated entity) and specified executives of TZ Limited are set out in the following tables. The key management personnel of the consolidated entity consisted of the directors of TZ Limited and the following executives: Mark Schwartz - Chief Executive Officer of PDT Inc. Paul Casey - Non-Executive Director of PDT Inc (appointed on 12 May 2011) John Wilson - Chief Executive Officer of Telezygology Inc. William Leong - Vice President of Operations of Telezygology Inc. (appointed on 1 October 2010) Timothy Koehler - Chief Financial Officer of Telezygology Inc. 2011 Name Executive Directors: M Bouris K Ting D Rudduck Other Key Management Personnel: M Schwartz P Casey (appointed 12 May 2011) * J Wilson W Leong (appointed 1 October 2010) T Koehler Short-term benefits Post- employment benefits Share-based payments Cash salary and fees $ Other $ Non- monetary $ Super- annuation $ Options $ Rights $ Total $ 368,647 289,651 218,764 10,200 6,000 - - - - - - - 843,175 632,381 - 472,601 354,451 - 1,694,623 1,282,483 218,764 364,890 302 6,947 6,994 83,657 390,000 - - - - - - - - - - 379,133 - - 83,657 390,000 141,479 121,630 1,978,718 283 174 16,959 6,947 5,966 19,860 2,122 3,041 12,157 - - 1,475,556 - - 827,052 150,831 130,811 4,330,302 * P Casey's remuneration includes $71,567 in short term benefits received for the period prior to his appointment as a Non-Executive Director of PDT Inc. 15 TZ Limited Directors' report 30 June 2011 2010 Name Non-Executive Directors: W de Vlugt (resigned 31 May 2010) Executive Directors: M Bouris K Ting D Rudduck (appointed 14 May 2010) * Other Key Management Personnel: M Schwartz J Wilson (appointed 17 May 2010) J Freese (COO until 17 May 2010) T Koehler R Pagorek (resigned 10 August 2009) Short-term benefits Post- employment benefits Share-based payments Cash salary and fees $ Other $ Non- monetary $ Super- annuation $ Options $ Rights $ Total $ 76,845 472,264 398,163 181,732 389,018 45,000 188,703 129,396 57,850 1,938,971 - - - - - - - - - - - - - - - - - - - - - - - - 6,504 - 5,085 3,531 - 67,200 144,045 355,750 266,813 871,399 653,549 1,699,413 1,318,525 - - 181,732 - - - - - 395,522 - 45,000 - - 193,788 132,927 1,446 16,566 - 622,563 - 1,592,148 59,296 4,170,248 * D Rudduck's remuneration includes $165,143 in short appointment as an Executive Director. term benefits received for the period prior to his 16 TZ Limited Directors' report 30 June 2011 The proportion of remuneration linked to performance and the fixed proportion are as follows: Name Non-Executive Directors: W de Vlugt Executive Directors: M Bouris K Ting D Rudduck Other Key Management Personnel: M Schwartz P Casey J Wilson W Leong T Koehler J Freese R Pagorek C Service agreements Fixed remuneration 2011 2010 At risk - STI At risk - LTI 2011 2010 2011 2010 - % 53% 22% 23% 100% 100% 100% 100% 100% 100% - % - % 28% 30% 100% 100% - % 100% - % 100% 100% 100% - % - % - % - % - % - % - % - % - % - % - % - % - % - % - % - % - % - % - % - % - % - % - % 47% 78% 77% - % - % - % - % - % - % - % - % 72% 70% - % - % - % - % - % - % - % - % Remuneration and other terms of employment for key management personnel are formalised in service agreements. Details of these agreements are as follows: Name: Title: Agreement commenced: Term of agreement: Details: Name: Title: Agreement commenced: Term of agreement: Details: Name: Title: Agreement commenced: Term of agreement: Details: Name: Title: Agreement commenced: Term of agreement: Details: Dickory Rudduck Executive Director 1 June 2011 2 years with automatic renewal periods of one year. Base salary of USD$210,000 per annum with a notice period of 30 days. Mark Schwartz Chief Executive Officer of PDT Inc. 1 December 2008 3 years Base salary of US$360,000 and notice period of 6 months. Paul Casey Non-Executive Director of PDT Inc. 12 May 2011 No fixed term Base salary of US$150,000 and notice period by negotiation. John Wilson Chief Executive Officer of Telezygology Inc. 17 May 2010 No fixed term Base salary of $420,000 and notice period by negotiation. 17 TZ Limited Directors' report 30 June 2011 Name: Title: Agreement commenced: Term of agreement: Details: Name: Title: Agreement commenced: Term of agreement: Details: William Leong Vice President Operations of Telezygology Inc. 1 October 2010 No fixed term Base salary of US$150,000 and notice period by negotiation. Tim Koehler Chief Financial Officer of Telezygology Inc. 1 February 2008 No fixed term Base salary of US$120,000 and notice period by negotiation. Key management personnel have no entitlement to termination payments in the event of removal for misconduct. D Share-based compensation Issue of shares Details of shares issued to directors and other key management personnel as part of compensation during the year ended 30 June 2011 are set out below: Name M Bouris K Ting Date No of shares Issue price $ 19 July 2010 19 July 2010 800,000 600,000 $0.00 $0.00 - - The above shares were issued on the exercise of rights and were issued at nil consideration. Options There were no options issued to directors and other key management personnel as part of compensation that were outstanding as at 30 June 2011. 18 TZ Limited Directors' report 30 June 2011 Details of options over ordinary shares issued to directors and other key management personnel as part of compensation during the year ended 30 June 2011 are set out below: Name W de Vlugt (resigned on 31 May 2010) M Bouris K Ting Number of options granted during the year Number of options vested during the year 2011 2010 2011 2010 - - - 450,000 3,000,000 2,250,000 - 1,000,000 750,000 - - - Vesting conditions for options granted as compensation during the year ended 30 June 2010 The options are separated into three tranches and exercise periods: (i) The first tranche of 1,750,000 options (1,000,000 Mark Bouris and 750,000 Kenneth Ting) will be exercisable in the period from 1 July 2011 (or, if securities in the company or any related body corporate of the company are listed on the NASDAQ prior to 1 July 2011, the date that is 30 days after the date of that listing) to and including 30 June 2016, at an exercise price of $1.00 per option. (ii) The second tranche of 1,750,000 options (1,000,000 Mark Bouris and 750,000 Kenneth Ting) will be exercisable in the period from 1 July 2012 (or, if securities in the company or any related body corporate of the company are listed on the NASDAQ prior to 1 July 2012, the date that is 30 days after the date of that listing) to and including 30 June 2017, at an exercise price of $2.00 per option. (iii) The third tranche of 1,750,000 options (1,000,000 Mark Bouris and 750,000 Kenneth Ting) will be exercisable in the period from 1 July 2013 (or, if securities in the company or any related body corporate of the company are listed on the NASDAQ prior to 1 July 2013, the date that is 30 days after the date of that listing) to and including 30 June 2018, at an exercise price of $3.00 per option. The options granted are not subject to the satisfaction of performance conditions. The grants were made under the Director and Executive Equity Plan to attract, retain, motivate and reward senior executives and Directors (including non-executive directors) of the company. The options will lapse if not exercised by the respective expiry date or if employment ceases (apart from if due to death, incapacity or redundancy). There are no other vesting conditions in respect of these options. Performance rights The terms and conditions of each grant of performance rights affecting remuneration in this financial year or future reporting years are as follows: Grant date Vesting date and exercisable date Expiry date Share price target for vesting Fair value per right at grant date 26 February 2010 30 June 2011 / 1 July 2011 30 June 2012 $0.00 $0.840 Performance rights granted carry no dividend or voting rights. 19 TZ Limited Directors' report 30 June 2011 Details of performance rights over ordinary shares issued to directors and other key management personnel as part of compensation during the year ended 30 June 2011 are set out below: Name W de Vlugt (resigned on 31 May 2010) M Bouris K Ting Number of rights granted during the year Number of rights vested during the year 2011 2010 2011 2010 - - - 200,000 1,600,000 1,200,000 - 800,000 600,000 80,000 800,000 600,000 Terms of grant of rights In accordance with resolutions 12, 13 and 15 of the 2009 Annual General Meeting ('AGM'), rights were granted to the directors under the Director and Executive Equity Plan. The grant of rights formed part of the remuneration of the directors and was based upon advice from an independent remuneration consultant. the time that A total of 3,000,000 rights were granted with a nil exercise price. Of the total, 1,480,000 were exercisable immediately after approval was given at the AGM, and 120,000 were forfeited. This parcel of 1,480,000 rights was not subject to a performance hurdle. At the directors remuneration packages were reviewed the circumstances confronting the company precluded it from being able to pay appropriate cash remuneration, and this issue of rights was in recognition of the level of commitment they had shown since their appointment. The balance of 1,400,000 is subject to the satisfaction of a performance hurdle and exercisable from and including 1 July 2011 to 30 June 2012 provided the performance hurdle is satisfied. The rights will lapse if not exercised by the respective expiry date or if employment ceases (apart from if due to death, incapacity or redundancy). There are no other vesting conditions in respect of these rights. Performance hurdle The performance hurdle that must be satisfied before the second tranche of rights can be exercised is satisfaction of each of the following conditions: (i) the company completing a capital raising during the year ended 31 December 2010 raising at least $5,000,000; (ii) the effective management of the litigation to which the company is currently party; (iii) the progressive development of the current Information Technology platforms of the consolidated entity and effective engagement of the company's management located in the USA; and (iv) expansion of the consolidated entity's market extension into Europe and other regions of the world over the period to 30 June 2011. 20 TZ Limited Directors' report 30 June 2011 E Additional information The earnings of the consolidated entity for the five years to 30 June 2011 are summarised below: Sales and services revenue EBITDA EBIT Loss after income tax 2007 $'000 2008 $'000 2009 $'000 2010 $'000 2011 $'000 15,865 (8,438) (9,785) (10,807) 14,973 (9,787) (11,073) (12,331) 17,696 (18,277) (20,317) (24,408) 17,308 (19,264) (21,682) (26,347) 22,399 (1,390) (3,246) (8,784) The factors that are considered to affect total shareholders return (TSR) are summarised below: 2007 2008 2009 2010 2011 Share price at financial year end ($A) Basic earnings per share (cents per share) 2.40 (25.30) 3.55 (29.04) 0.96 (50.00) 0.44 (49.46) 0.24 (9.01) This concludes the remuneration report, which has been audited. Shares under option Unissued ordinary shares of TZ Limited under option at the date of this report are as follows: Grant date January 2008 to August 2008 24 October 2008 24 October 2008 15 May 2009 26 February 2010 26 February 2010 26 February 2010 19 February 2008 * 24 December 2010 * Expiry date 25 August 2011 24 October 2011 24 October 2011 15 May 2012 30 June 2016 30 June 2017 30 June 2018 19 February 2013 19 February 2013 Exercise price Number under option $6.00 $2.50 $2.50 $2.50 $1.00 $2.00 $3.00 $1.00 $0.42 116,666 850,000 150,000 65,000 1,750,000 1,750,000 1,750,000 3,000,000 3,000,000 12,431,666 * These options were granted to QVT, a hedge fund in the USA. Shares under performance rights Unissued ordinary shares of TZ Limited under performance rights at the date of this report are as follows: Grant date 26 February 2010 Expiry date 1 July 2012 Exercise price Number under rights $0.00 1,400,000 Shares issued on the exercise of options There were no shares of TZ Limited issued on the exercise of options during the year ended 30 June 2011. 21 TZ Limited Directors' report 30 June 2011 Shares issued on the exercise of performance rights The following ordinary shares of TZ Limited were issued during the year ended 30 June 2011 on the exercise of performance rights granted: Date rights granted 26 February 2010 Vesting price Number of shares issued $0.00 1,480,000 Indemnity and insurance of officers The company has indemnified the directors and executives of the company for costs incurred, in their capacity as a director or executive, for which they may be held personally liable, except where there is a lack of good faith. During the financial year, the company paid a premium in respect of a contract to insure the directors and executives of the company against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of liability and the amount of the premium. Indemnity and insurance of auditor The company has not, during or since the financial year, indemnified or agreed to indemnify the auditor of the company or any related entity against a liability incurred by the auditor. During the financial year, the company has not paid a premium in respect of a contract to insure the auditor of the company or any related entity. Proceedings on behalf of the company Except for Mr Andrew Sigalla and persons and entities associated with him that is detailed in 'Matters subsequent to the end of the financial year' no other matter or circumstance has arisen since 30 June 2011 that has significantly affected, or may significantly affect the consolidated entity's operations, the results of those operations, or the consolidated entity's state of affairs in future financial years. Non-audit services Details of the amounts paid or payable to the auditor for non-audit services provided during the financial year by the auditor are outlined in note 35 to the financial statements. The directors are satisfied that the provision of non-audit services during the financial year, by the auditor (or by another person or firm on the auditor's behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are of compromise the external auditor’s independence for the following reasons: the opinion that the services as disclosed in note 35 to the financial statements do not all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor, and none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision- making capacity for the company, acting as advocate for the company or jointly sharing economic risks and rewards. Officers of the company who are former audit partners of BDO Audit (NSW-VIC) Pty Limited There are no officers of the company who are former audit partners of BDO Audit (NSW-VIC) Pty Limited. Rounding of amounts The company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to 'rounding-off'. Amounts in this report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. 22 TZ Limited Directors' report 30 June 2011 Auditor's independence declaration A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out on the following page. Auditor BDO Audit (NSW-VIC) Pty Limited continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the directors ________________________________ Mark Bouris Director ________________________________ Kenneth Ting Director 30 September 2011 Sydney 23 24 TZ Limited Statement of Corporate Governance This 2011 Corporate Governance Statement sets out the corporate governance principles adopted by the board of directors (the ‘Board’) in governing TZ Limited (the ‘Company’) and its subsidiaries (collectively, the ‘Group’) and reflects the corporate governance principles which have been adopted during the financial year ended 30 June 2011. In adopting the principles the Board formally reviewed the Corporate Governance Principles and Recommendations issued by the ASX Corporate Governance Council. The Company is a small company and accordingly the Board considers 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 The Board's primary responsibility is to oversee the Company's business activities and management for the benefit of Company's 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; and appointing senior executives and monitoring their 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 above, the Company has not formalised the functions reserved to the Board and those delegated to management due to the relatively small size of the Company. Similarly, the Company has not adopted a formal process for evaluating the performance of senior executives for the reasons outlined above. The evaluation of the performance of senior executives takes place at meetings of the Board and occurred during the current reporting period. Principle 2: Structure the board to add value Directors appointed by the Board by reason of a vacancy are subject to re-election by the Company's shareholders at the following annual general meeting. Directors are subject to re-election by rotation at least every three years. The names of the directors in office at the date of this Report, the date they were appointed, the date of their most recent re-election by the Company's shareholders and their status as non-executive, executive or independent directors are set out in the table below: Director Mark Bouris Kenneth Ting Dickory Rudduck Appointed 18 June 2009 18 June 2009 14 May 2010 Re-Elected 17 November 2010 26 February 2010 17 November 2010 Non-Executive No No No Independent No No No Mr Ting is standing for re-election by rotation at the 2011 annual general meeting. The skills and experience of each director are set out in the Director’s Report in the Company's 2011 Annual Report. The Company's directors are appointed based on the specific governance skills required by the Company, including an appropriate blend of relevant experience appropriate to the Company's field of operations, accounting and financial management and following consideration of the Company's objectives with respect to diversity. 25 TZ Limited Statement of Corporate Governance The areas of divergence with recommended principles are set out below: The majority of directors are not independent as they are all executive directors. The Chairman is not independent and is an executive director As the whole Board only consists of three directors, the Company does not have a formally constituted Nomination Committee as the Board believes it would not be a more efficient mechanism than the full Board focussing the Company on specific issues. Currently, the Board as a whole performs the roles and functions of a Nomination Committee. These roles and functions include: devising criteria for Board membership; regularly reviewing the need for various skills and experience on the Board; considering the Company's objectives with respect to diversity when selecting candidates; and identifying specific individuals for nomination as directors. The Board also oversees management succession plans and evaluates the Chairman's and the Board's performance and makes recommendations for the appointment and removal of directors. When a vacancy exists on the Board or where it is considered that a director with particular skills or experience is required, the Board selects a panel of candidates with the appropriate expertise and experience from which the most suitable candidate is appointed on merit. The Company does not have a formal process for evaluating the performance of the Board and the individual directors, other than as set out above. The above areas of divergence are due to the relatively small size of the Company and its operations. Each director of the Company has the right to seek independent professional advice at the expense of the Company. Principle 3: Promote ethical and responsible decision making Board members, executive management and Company officers are made aware of the requirements to follow corporate policies and procedures, to obey the law and to maintain appropriate standards of honesty and integrity at all times. The Company does not have a formal written 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 continues to review the situation to determine the most appropriate and effective operational procedures. The Board is committed to an inclusive workplace that embraces and promotes diversity. The Company is committed to setting measurable objectives for attracting and engaging women at the Board level, in senior management positions and across the Group as a whole. Progress against set diversity related targets will be included in future annual reports. The gender representation profile of the Company and the Group as a whole is as follows: Board Level: Key management personnel: Group as a whole: 0 % 0 % 16 % Principle 4: Safeguard integrity in financial reporting The Company was not a company required by ASX Listing Rule 12.7 to have an Audit Committee during the year. The Board has determined that, due to the relatively small size of the Company, it would not be efficient to appoint a formal audit committee. Nevertheless, the Board has adopted procedures to adequately address issues related to the integrity of the Company’s financial reporting and to oversee the independence of the external auditors. The procedures include the following main responsibilities: Monitor the integrity of the financial statements of the Company and review significant financial reporting changes. Review the Company’s internal financial control system and risk management systems. Appoint the external auditor and to approve the remuneration and terms of engagement of the external auditor. Monitor and review the external auditor’s independence, objectivity and effectiveness, taking into consideration relevant professional and regulatory requirements. Develop and implement policy on the engagement of the external auditor to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm The skills and experience of each director is set out in the Director’s Report in the annual financial report for the year ended 30 June 2011. 26 TZ Limited Statement of Corporate Governance Principle 5: Make timely and balanced disclosure 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 has formal written policies regarding disclosure which is publicly available on the Company’s website. Principle 6: 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. 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; and 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 7: Recognise and manage risk The Board has adopted the role of identification, assessment, monitoring and managing the significant areas of risk applicable to the consolidated entity and its operations. The Board has not established a separate committee to deal with these matters as the directors consider the size of the Company and its operations does not warrant a separate committee at this time. The directors have identified the significant areas of risk applicable to the consolidated entity and its operations and the Board considers the matter of risk management as a standing agenda item at board meetings. For the reasons set out above the Company has not established formal policies on risk management. The Board endeavours to mitigate any risks by continually reviewing the activities of the Company in order to identify key business and operational risks and ensuring that they are appropriately assessed and managed. The Company has received assurances from the chief financial officers (or equivalents) and chief executive officers (or equivalents) of the group that the declaration under section 295A of the Corporations Act is founded on a system of risk management and internal control which is operating effectively in all material respects in relation to financial reporting risks. Principle 8: Remunerate fairly and responsibly Because of the relatively small size of the Company and its operations, the Board does not consider it appropriate, at this time, to form a separate committee to deal with executive remuneration. Accordingly, the Company does not have a remuneration committee made up of a majority of independent members, chaired by an independent member as recommended by the ASX Corporate Governance Council. Instead, the Board as a whole establishes and reviews annually the remuneration of the executive directors and senior executives, as well as superannuation arrangements, the remuneration framework for all directors and remuneration by gender. 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. 27 TZ Limited Financial report For the year ended 30 June 2011 Contents Financial report Statement of comprehensive income Statement of financial position Statement of changes in equity Statement of cash flows Notes to the financial statements Directors' declaration Independent auditor's report to the members of TZ Limited Page 29 30 31 33 34 93 94 General information The financial report covers TZ Limited as a consolidated entity consisting of TZ Limited and the entities it controlled. The financial report is presented in Australian dollars, which is TZ Limited's functional and presentation currency. The financial report consists of declaration. the financial statements, notes to the financial statements and the directors' TZ Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business are: Registered office Level 11, 1 Chifley Square Sydney NSW 2000 Principal place of business TZ Limited, Level 11, 1 Chifley Square, Sydney NSW Telezygology Inc., 1017 W. Washington Blvd, Unit 2C, Chicago IL 60607, USA PDT Inc, One Corporate Drive, Suite 110, Lake Zurich IL 60047, USA A description of the nature of the consolidated entity's operations and its principal activities are included in the directors' report, which is not part of the financial report. The financial report was authorised for issue, in accordance with a resolution of directors, on 30 September 2011. The directors have the power to amend and reissue the financial report. 28 TZ Limited Statement of comprehensive income For the year ended 30 June 2011 Revenue Other income Expenses Raw materials and consumables used Subcontractors costs Employee benefits expense Occupancy expense Depreciation and amortisation expense Communications expense Professional and corporate services Travel and accommodation expense Development costs Net loss on movement in fair value of derivative liabilities Net loss on conversion of convertible notes Share of net losses of joint venture accounted for using the equity method Other expenses Finance costs Loss before income tax (expense)/benefit Income tax (expense)/benefit Note Consolidated 2011 $'000 2010 $'000 5 6 7 7 8 23,470 17,696 6,800 1,108 (1,471) (7,833) (14,599) (767) (1,856) (349) (3,322) (1,504) (904) - - (217) (2,025) (4,098) (975) (4,577) (12,139) (934) (2,228) (247) (4,894) (971) (114) (6,158) (5,627) - (1,446) (5,006) (8,675) (26,512) (109) 165 Loss after income tax (expense)/benefit for the year attributable to the owners of TZ Limited 30 (8,784) (26,347) Other comprehensive income Foreign currency translation Other comprehensive income for the year, net of tax Total comprehensive income for the year attributable to the owners of TZ Limited Basic earnings per share Diluted earnings per share Refer to note 3 for detailed information on restatement of comparatives. (4,043) (1,706) (4,043) (1,706) (12,827) (28,053) Cents Cents 45 45 (9.01) (9.01) (49.46) (49.46) The above statement of comprehensive income should be read in conjunction with the accompanying notes 29 TZ Limited Statement of financial position As at 30 June 2011 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Investment in short term deposit Total current assets Non-current assets Investments accounted for using the equity method Property, plant and equipment Intangibles Deferred tax Other Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Borrowings Derivative financial instruments Provisions Other Total current liabilities Non-current liabilities Borrowings Derivative financial instruments Deferred tax Other Total non-current liabilities Total liabilities Net assets Equity Contributed equity Other contributed equity Reserves Accumulated losses Total equity Note Consolidated 2011 $'000 2010 $'000 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 1,146 4,913 331 5,500 11,890 187 1,884 19,750 751 179 22,751 232 4,733 167 - 5,132 - 1,976 24,545 635 148 27,304 34,641 32,436 4,575 729 - 116 368 5,788 10,206 4,411 945 507 16,069 4,708 5,919 746 87 531 11,991 5,897 8,316 829 533 15,575 21,857 27,566 12,784 4,870 149,113 - (6,997) (129,332) 125,907 4,768 (2,954) (122,851) 12,784 4,870 Refer to note 3 for detailed information on restatement of comparatives. The above statement of financial position should be read in conjunction with the accompanying notes 30 TZ Limited Statement of changes in equity For the year ended 30 June 2011 Consolidated Balance at 1 July 2009 Other comprehensive income for the year, net of tax Loss after income tax (expense)/benefit for the year Total comprehensive income for the year Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs Share-based payments Conversion of convertible notes Shares to be issued to extinguish liabilities $'000 Contributed equity $'000 114,727 - - - - - - 1,100 - 10,080 Other contributed equity $'000 Reserves $'000 Accumulated losses $'000 Total equity $'000 - - - - - - - 999 (101,093) 14,633 (3,953) 2,247 (1,706) - (26,347) (26,347) (3,953) (24,100) (28,053) - - - - - 2,342 - - 1,100 2,342 10,080 4,768 - 4,768 Balance at 30 June 2010 - 125,907 4,768 (2,954) (122,851) 4,870 The above statement of changes in equity should be read in conjunction with the accompanying notes 31 TZ Limited Statement of changes in equity For the year ended 30 June 2011 Contributed equity $'000 Contributed equity $'000 Other contributed equity $'000 Reserves $'000 Accumulated losses $'000 Total equity $'000 125,907 4,768 (2,954) (122,851) 4,870 - - - - - - - 12,806 5,098 1,139 (605) - - - - - - - - 4,768 (4,768) (4,043) - (4,043) - (8,784) (8,784) (4,043) (8,784) (12,827) - - - - - - 2,303 - 2,303 12,806 - - - - 5,098 1,139 (605) - Consolidated Balance at 1 July 2010 Other comprehensive income for the year, net of tax Loss after income tax (expense)/benefit for the year Total comprehensive income for the year Transactions with owners in their capacity as owners: Share-based payments Contributions of equity Conversion of convertible notes Conversion of liabilities to equity Less: transaction costs on shares issued Transfer to contributed equity upon issue of shares Balance at 30 June 2011 - 149,113 - (6,997) (129,332) 12,784 The above statement of changes in equity should be read in conjunction with the accompanying notes 32 TZ Limited Statement of cash flows For the year ended 30 June 2011 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Interest received Other revenue Interest and other finance costs paid Income taxes refunded Income taxes paid Net cash used in operating activities Cash flows from investing activities Payments for new joint venture capital invested Payments for property, plant and equipment Payments for intangibles Investment in short term deposits Proceeds from sale of property, plant and equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Transaction costs on shares issued Proceeds from borrowings Repayment of borrowings Net cash from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash Cash and cash equivalents at the end of the financial year 9 Note Consolidated 2011 $'000 2010 $'000 44 14 15 27 21,130 (29,329) 16,465 (20,865) (8,199) 264 514 (61) - (71) (4,400) 63 - (27) 12 - (7,553) (4,352) (200) (946) (577) (5,500) 8 - (256) (1,577) - 3 (7,215) (1,830) 12,806 (605) 5,301 (1,400) 50 - 6,662 (680) 16,102 6,032 1,334 232 (420) 1,146 (150) 566 (184) 232 The above statement of cash flows should be read in conjunction with the accompanying notes 33 TZ Limited Notes to the financial statements 30 June 2011 Note 1. Significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. New, revised or amending Accounting Standards and Interpretations adopted The consolidated entity has adopted all of the new, revised or amending Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') that are mandatory for the current reporting period. Any new, revised or amending Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. Any significant impact on the accounting policies of the consolidated entity from the adoption of these Accounting Standards and Interpretations are disclosed in the relevant accounting policy. The adoption of these Accounting Standards and Interpretations did not have any impact on the financial performance or position of the consolidated entity. The following Accounting Standards and Interpretations are most relevant to the consolidated entity: AASB 2 Share-based Payment Transactions - amendments for Group Cash-settled Share-based Payment Transactions The consolidated entity has applied the amendments to AASB 2 from 1 July 2010. The amendments clarified the scope of AASB 2 by requiring an entity that receives goods or services in a share-based payment arrangement to account for those goods or services no matter which entity in the consolidated entity settles the transaction, and no matter whether the transaction is settled in shares or cash. AASB 2009-5 Amendments to Australian Accounting Standards arising from the Annual Improvements Project The consolidated entity has applied AASB 2009-5 amendments from 1 July 2010. The amendments result in some accounting changes for presentation, recognition or measurement purposes, while some amendments that relate to terminology and editorial changes had no or minimal effect on accounting. The main changes were: AASB 101 'Presentation of Financial Statements' - classification is not affected by the terms of a liability that could be settled by the issuance of equity instruments at the option of the counterparty; AASB 107 'Statement of Cash Flows' - only expenditure that results in a recognised asset can be classified as a cash flow from investing activities; AASB 117 'Leases' - removal of specific guidance on classifying land as a finance or operating lease; AASB 118 'Revenue' - provides additional guidance to determine whether an entity is acting as a principal or agent; and AASB 136 'Impairment of Assets' - clarifies that the largest unit permitted for allocating goodwill, acquired in a business combination, is the operating segment as defined in AASB 8 'Operating Segments' before aggregation for reporting purposes. AASB 2010-3 Amendments to Australian Accounting Standards arising from the Annual Improvements Project The consolidated entity has applied AASB 2010-3 amendments from 1 July 2010. The amendments result in some accounting changes for presentation, recognition or measurement purposes, while some amendments that relate to terminology and editorial changes had no or minimal effect on accounting. The main changes were: AASB 127 'Consolidated and Separate Financial Statements' and AASB 3 Business Combinations - clarifies that contingent consideration from a business combination that occurred before the effective date of revised AASB 3 is not restated; the scope of the measurement choices of non-controlling interest is limited to when the rights acquired include entitlement to a proportionate share of net assets in the event of liquidation; requires an entity in a business combination to account transactions, unreplaced and voluntarily replaced, by splitting between consideration and post combination expenses. for the replacement of acquiree's share-based payment 34 TZ Limited Notes to the financial statements 30 June 2011 Note 1. Significant accounting policies (continued) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') and the Corporations Act 2001. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board ('IASB'). Historical cost convention The financial statements have been prepared under the historical cost convention, except for derivative financial instruments at fair value. Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the consolidated entity's accounting policies. The judgement or complexity, or areas where assumptions and estimates are areas involving a higher degree of significant to the financial statements, are disclosed in note 2. Parent entity information In accordance with the Corporations Act 2001, these financial statements present the results of the consolidated entity only. Supplementary information about the parent entity is disclosed in note 40. Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of TZ Limited ('company' or 'parent entity') as at 30 June 2011 and the results of all subsidiaries and special purpose entities for the year then ended. TZ Limited, its subsidiaries and special purpose entities together are referred to in these financial statements as the 'consolidated entity'. Subsidiaries are all those entities over which the consolidated entity has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The effects of potential exercisable voting rights are considered when assessing whether control exists. Subsidiaries are fully consolidated from the date on which control is transferred to the consolidated entity. They are de-consolidated from the date that control ceases. Special purpose entities ('SPEs') are those entities where the consolidated entity, in substance, controls the SPE so as to obtain the majority of benefits without having any ownership interest. Intercompany transactions, balances and unrealised gains on transactions between entities in the consolidated entity are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries and special purpose entities have been changed where necessary to ensure consistency with the policies adopted by the consolidated entity. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. Refer to the 'business combinations' accounting policy for further details. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent. Where the consolidated entity loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non-controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The consolidated entity recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. Operating segments Operating segments are presented using the 'management approach', where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers ('CODM'). The CODM is responsible for the allocation of resources to operating segments and assessing their performance. 35 TZ Limited Notes to the financial statements 30 June 2011 Note 1. Significant accounting policies (continued) Foreign currency translation The financial report is presented in Australian dollars, which is TZ Limited's functional and presentation currency. Foreign currency transactions Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Foreign operations The assets and liabilities of foreign operations are translated into Australian dollars using the exchange rates at the reporting date. The revenues and expenses of foreign operations are translated into Australian dollars using the average exchange rates, which approximates the rate at the date of the transaction, for the period. All resulting foreign exchange differences are recognised in the foreign currency reserve in equity. The foreign currency reserve is recognised in profit or loss when the foreign operation or net investment is disposed of. Revenue recognition Revenue is recognised when it is probable that the economic benefit will flow to the consolidated entity and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable. Sale of goods Sale of goods revenue is recognised at the point of sale, which is where the customer has taken delivery of the goods, the risks and rewards are transferred to the customer and there is a valid sales contract. Amounts disclosed as revenue are net of sales returns and trade discounts. Rendering of services Revenue from engineering design services is recognised in accordance with the percentage of completion method. Stage of completion is measured by reference to labour hours incurred to date as a percentage of total estimated labour hours for each contract. Where the contract outcome cannot be reliably estimated, revenue is only recognised to the extent of the recoverable costs incurred to date. Interest Interest revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. 36 TZ Limited Notes to the financial statements 30 June 2011 Note 1. Significant accounting policies (continued) Income tax The income tax expense or benefit for the period is the tax payable on that period's taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and unused tax losses and under and over provision in prior periods, where applicable. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or When the taxable temporary difference is associated with investments in subsidiaries, associates or interests in joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entity's which intend to settle simultaneously. Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any provision for impairment. Trade receivables are generally due for settlement within 30 days. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off by reducing the carrying amount directly. A provision for impairment of trade receivables is raised when there is objective evidence that the consolidated entity will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation and default or delinquency in payments (more than 60 days overdue) are considered indicators that the trade receivable may be impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. Other receivables are recognised at amortised cost, less any provision for impairment. 37 TZ Limited Notes to the financial statements 30 June 2011 Note 1. Significant accounting policies (continued) Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises all direct materials, direct labour and an appropriate portion of variable and fixed overheads. Fixed overheads are allocated on the basis of normal operating capacity. Costs are assigned to inventories using the weighted average basis. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated selling cost of completion and selling expenses. Work in progress Work in progress is recognised in accordance with revenue recognition policies and is based on the percentage of completion method. Derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. Derivatives are classified as current or non-current depending on the expected period of realisation. Joint ventures A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. Investments in joint ventures are accounted for using the equity method. Under the equity method, the share of the profits or losses of the joint venture is recognised in profit or loss and the share of the movements in equity is recognised in other comprehensive income. Income earned from joint venture entities is recognised as a reduction in the carrying amount of the investment. Investments and other financial assets Investments and other financial assets are measured at either amortised cost or fair value depending on their classification. Classification is determined based on the purpose of the acquisition and subsequent reclassification to other categories is restricted. The fair values of quoted investments are based on current bid prices. For unlisted investments, the consolidated entity establishes fair value by using valuation techniques. These include the use of recent arms length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the consolidated entity has transferred substantially all the risks and rewards of ownership. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are carried at amortised cost using the effective interest rate method. Gains and losses are recognised in profit or loss when the asset is derecognised or impaired. Impairment of financial assets The consolidated entity assesses at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. Objective evidence includes significant financial difficulty of the issuer or obligor; a breach of contract such as default or delinquency in payments; the lender granting to a borrower concessions due to economic or legal reasons that the lender would not otherwise do; it becomes probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for the financial asset; or observable data indicating that there is a measurable decrease in estimated future cash flows. The amount of the impairment allowance for loans and receivables carried at amortised cost is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. If there is a reversal of impairment, the reversal cannot exceed the amortised cost that would have been had the impairment not been recognised and is reversed to profit or loss. 38 TZ Limited Notes to the financial statements 30 June 2011 Note 1. Significant accounting policies (continued) Property, plant and equipment Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of property, plant and equipment over their expected useful lives as follows: Leasehold improvements Plant and equipment Motor vehicles Office equipment 20 - 33% 20% 20% 15 - 35% The residual values, useful reporting date. lives and depreciation methods are reviewed, and adjusted if appropriate, at each Leasehold improvements and plant and equipment under lease are depreciated over the unexpired period of the lease or the estimated useful life of the assets, whichever is shorter. An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to the consolidated entity. Leases Lease payments under operating leases, where substantially all the risks and benefits remain with the lessor, are charged as expenses in the period in which they are incurred. Lease incentives under operating leases are recognised as a liability and amortised on a straight-line basis over the life of the lease term. 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. Intangible assets Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangibles are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Goodwill Where an entity or operation is acquired in a business combination, the identifiable net assets acquired are measured at fair value. The excess of the fair value of the cost of the acquisition over the fair value of the identifiable net assets acquired is brought to account as goodwill. Goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed. is not amortised. Instead, goodwill Trade names Trade names have an indefinite useful life and are carried at cost less accumulated impairment losses. Trade names are reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired 39 TZ Limited Notes to the financial statements 30 June 2011 Note 1. Significant accounting policies (continued) Patents Expenditure directly attributable to the registration of patents is capitalised at cost and is amortised over the useful life of between 15 to 20 years. Customer relationships Customer relationships acquired as part of a business combination are recognised separately from goodwill and are carried at their fair value at date of acquisition less accumulated amortisation and impairment losses. Amortisation is calculated based on a straight line basis over the estimated useful life of between 10 - 15 years. Research and development costs Research costs are expensed as incurred. Development expenditure incurred on an individual project is capitalised if the product or service is technically feasible, adequate resources are available to complete the project, it is probable that future economic benefits will be generated and expenditure attributable to the project can be measured reliably. Expenditure capitalised comprises costs of materials, services, direct labour and an appropriate portion of overheads. Capitalised development expenditure is stated at cost less accumulated amortisation and any impairment losses, and are amortised over the period of expected future sales from the related projects which vary from 3 to 11 years. Re-acquired right (Intevia licence) Re-acquired rights are initially recognised at cost, then amortised over their expected useful life of 13.5 years. The re- acquired rights related to technology and know-how that is collectively referred to as the 'Intevia licence'. The right to exploit this technology was re-acquired from Textron Inc on 22 January 2007. Impairment of non-financial assets Goodwill and other intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other non-financial assets 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. Recoverable amount is the higher of an asset’s fair value less costs to sell and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. Trade and other payables These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and not discounted. The amounts are unsecured and are usually paid within 30 to 60 days of recognition. 40 TZ Limited Notes to the financial statements 30 June 2011 Note 1. Significant accounting policies (continued) Borrowings Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. Where there is an unconditional right to defer settlement of the liability for at least 12 months after the reporting date, the loans or borrowings are classified as non-current. Convertible notes The component of the convertible notes that exhibits characteristics of a liability is recognised as a liability in the statement of financial position, net of transaction costs. On the issue of the convertible notes the fair value of the liability component is determined using a market rate for an equivalent non-convertible bond and this amount is carried as a non-current liability on the amortised cost basis until extinguished on conversion or redemption. The increase in the liability due to the passage of time, is recognised as a finance cost. The remainder of the proceeds are allocated to the conversion option that is recognised and included in shareholders equity as other contributed equity, net of transaction costs. The carrying amount of the conversion option is not remeasured in the subsequent years. The corresponding interest on convertible notes is expensed to profit or loss. Under the terms of the Convertible Note Subscription Deed and the subsequent amendments, the conversion price is the lower of (a) the agreed conversion price and (b) the issue price of any subsequent share issue during the term of this clause the note holders equity risk is eliminated, and therefore the the convertible notes. As a result of instruments are treated as debt instruments with an embedded derivative. The fair value of the debt portion of the convertible notes is determined after calculating the fair value of the embedded derivative on inception. The debt portion is subsequently measured at amortised cost and the embedded derivative financial instrument is measured at fair value at each reporting date with any movement in fair value reported in profit or loss. Issue costs are apportioned between the liability and equity components of convertible notes based on the allocation of proceeds to the debt and equity components (if any) when the instruments are first recognised. Finance costs Finance costs attributable to qualifying assets are capitalised as part of the asset. All other finance costs are expensed in the period in which they are incurred, including: - interest on short-term and long-term borrowings Provisions Provisions are recognised when the consolidated entity has a present (legal or constructive) obligation as a result of a past event, it is probable the consolidated entity will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the risks and uncertainties surrounding the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate specific to the liability. The increase in the provision resulting from the passage of time is recognised as a finance cost. taking into account the reporting date, 41 TZ Limited Notes to the financial statements 30 June 2011 Note 1. Significant accounting policies (continued) Employee benefits Wages and salaries and annual leave Liabilities for wages and salaries, including non-monetary benefits, and annual leave expected to be settled within 12 months of the reporting date are recognised in current liabilities in respect of employees' services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. Long service leave The liability for long service leave is recognised in current and non-current liabilities, depending on the unconditional right to defer settlement of the liability for at least 12 months after the reporting date. The liability is measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Defined contribution superannuation expense Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred. Share-based payments Equity-settled and cash-settled share-based compensation benefits are provided to employees (including directors). The Directors and Employee Equity Plan also gives directors and senior executives the opportunity to participate in the consolidated entity's equity in exchange for their services. Equity-settled transactions are awards of shares, or options over shares, that are provided to employees in exchange for the rendering of services. Cash-settled transactions are awards of cash for the exchange of services, where the amount of cash is determined by reference to the share price. The cost of equity-settled transactions are measured at fair value on grant date. Fair value is independently determined using either the Binomial or Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non-vesting conditions that do not determine whether the consolidated entity receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions. The cost of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods. 42 TZ Limited Notes to the financial statements 30 June 2011 Note 1. Significant accounting policies (continued) The cost of cash-settled transactions is initially, and at each reporting date until vested, determined by applying either the Binomial or Black-Scholes option pricing model, taking into consideration the terms and conditions on which the award was granted. The cumulative charge to profit or loss until settlement of the liability is calculated as follows: during the vesting period, the liability at each reporting date is the fair value of the award at that date multiplied by the expired portion of the vesting period. from the end of the vesting period until settlement of the award, the liability is the full fair value of the liability at the reporting date. All changes in the liability are recognised in profit or loss. The ultimate cost of cash-settled transactions is the cash paid to settle the liability. Market conditions are taken into consideration in determining fair value. Therefore any awards subject to market conditions are considered to vest irrespective of whether or not that market condition has been met, provided all other conditions are satisfied. If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification. If the non-vesting condition is within the control of the consolidated entity or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the consolidated entity or employee and is not satisfied during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited. If equity-settled awards are cancelled, it is treated as if it has vested on the date of cancellation, and any remaining expense is recognised immediately. If a new replacement award is substituted for the cancelled award, the cancelled and new award is treated as if they were a modification. Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. 43 TZ Limited Notes to the financial statements 30 June 2011 Note 1. Significant accounting policies (continued) Business combinations The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred is the sum of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquiree and the amount of any non- controlling interest in the acquiree. For each business combination, the non-controlling interest in the acquiree is measured at either fair value or at the proportionate share of the acquiree's identifiable net assets. All acquisition costs are expensed as incurred to profit or loss. the acquisition-date fair values of On the acquisition of a business, the consolidated entity assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the consolidated entity's operating or accounting policies and other pertinent conditions in existence at the acquisition-date. Where the business combination is achieved in stages, the consolidated entity remeasures its previously held equity interest in the acquiree at the acquisition-date fair value and the difference between the fair value and the previous carrying amount is recognised in profit or loss. Contingent consideration to be transferred by the acquirer is recognised at the acquisition-date fair value. Subsequent changes in the fair value of contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. The difference between the acquisition-date fair value of assets acquired, liabilities assumed and any non-controlling interest in the acquiree and the fair value of the consideration transferred and the fair value of any pre-existing investment in the acquiree is recognised as goodwill. If the consideration transferred and the pre-existing fair value is less than the fair value of the identifiable net assets acquired, being a bargain purchase to the acquirer, the difference is recognised as a gain directly in profit or loss by the acquirer on the acquisition-date, but only after a reassessment of the identification and measurement of the net assets acquired, the non-controlling interest in the acquiree, if any, the consideration transferred and the acquirer's previously held equity interest in the acquirer. Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts the provisional amounts recognised and also recognises additional assets or liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition-date. The measurement period ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the acquirer receives all the information possible to determine fair value. Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of TZ Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. 44 TZ Limited Notes to the financial statements 30 June 2011 Note 1. Significant accounting policies (continued) Goods and Services Tax ('GST') and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. Comparative information Certain comparatives have been reclassified to be consistent with current year presentation. Rounding of amounts The company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to 'rounding-off'. Amounts in this report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the consolidated entity for the annual reporting period ended 30 June 2011. The consolidated entity's assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to the consolidated entity, are set out below. AASB 10 Consolidated Financial Statements This standard is applicable to annual reporting periods beginning on or after 1 January 2013. The standard has a new definition of ‘control’. Control exists when the reporting entity is exposed, or has the rights, to variable returns (e.g. dividends, remuneration, returns that are not available to other interest holders including losses) from its involvement with another entity and has the ability to affect those returns through its ‘power’ over that other entity. A reporting entity has power when it has rights (e.g. voting rights, potential voting rights, rights to appoint key management, decision making rights, kick out rights) that give it the current ability to direct the activities that significantly affect the investee’s returns (e.g. operating policies, capital decisions, appointment of key management). The consolidated entity will not only have to consider its holdings and rights but also the holdings and rights of other shareholders in order to determine whether it has the necessary power for consolidation purposes. The adoption of this standard from 1 July 2013 may have an impact where the consolidated entity has a holding of less than 50% in an entity, has de facto control, and is not currently consolidating that entity. AASB 11 Joint Arrangements This standard is applicable to annual reporting periods beginning on or after 1 January 2013. The standard defines which entities qualify as joint ventures and removes the option to account for joint ventures using proportional consolidation. Joint ventures, where the parties to the agreement have the rights to the net assets will use equity accounting. Joint Operations, where the parties to the agreements have the rights to the assets and obligations for the liabilities will account revenues and expenses separately, using proportionate consolidation. The adoption of this standard from 1 July 2013 will not have a material impact on the consolidated entity. the assets, liabilities, for 45 TZ Limited Notes to the financial statements 30 June 2011 Note 1. Significant accounting policies (continued) AASB 12 Disclosure of Interests in Other Entities This standard is applicable to annual reporting periods beginning on or after 1 January 2013. It contains the entire disclosure requirement associated with other entities, being subsidiaries, associates and joint ventures. The disclosure requirements have been significantly enhanced when compared to the disclosures previously located in AASB 127 ‘Consolidated and Separate Financial Statements’, AASB 128 ‘Investments in Associates’, AASB 131 ‘Interests in Joint Ventures’, Interpretation 12 'Service Concession Arrangements’ and Interpretation 13 'Customer Loyalty Programmes. The adoption of this standard from 1 July 2013 will significantly increase the amount of disclosures required to be given by the consolidated entity such as significant judgements and assumptions made by the Consolidated Entity in determining whether it has a controlling or non-controlling interest in another entity and the type of non-controlling interest and the nature and risks involved. AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 This standard and its consequential amendments are applicable to annual reporting periods beginning on or after 1 January 2013. The standard provides a single robust measurement framework, with clear measurement objectives, for measuring fair value using the ‘exit price’ and it provides guidance on measuring fair value when a market becomes less active. The ‘highest and best use’ approach would be used to measure assets, but not liabilities. As the standard does not introduce any new requirements for the use of fair value, its impact on adoption by the consolidated entity from 1 July 2013 should be minimal, although there will be increased disclosures where fair value is used. AASB 119 Employee Benefits (September 2011) This revised standard is applicable to annual reporting periods beginning on or after 1 January 2013. The amendments eliminate the corridor approach for the deferral of gains and losses; streamlines the presentation of changes in assets and liabilities arising from defined benefit plans, including requiring remeasurements to be presented in other comprehensive income; and enhances the disclosure requirements for defined benefit plans. The adoption of the revised standard from 1 July 2013 will require increased disclosures by the consolidated entity. AASB 9 Financial Instruments, 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 and 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 This standard and its consequential amendments are applicable to annual reporting periods beginning on or after 1 January 2013 and completes phase I of the IASB's project to replace IAS 39 (being the international equivalent to AASB 139 'Financial Instruments: Recognition and Measurement'). This standard introduces new classification and measurement models for financial assets, using a single approach to determine whether a financial asset is measured at amortised cost or fair value. To be classified and measured at amortised cost, assets must satisfy the business model test for managing the financial assets and have certain contractual cash flow characteristics. All other financial instrument assets are to be classified and measured at fair value. This standard allows an irrevocable election on initial recognition to present gains and losses on equity instruments (that are not held-for-trading) in other comprehensive income, with dividends as a return on these investments being recognised in profit or loss. In addition, those equity instruments measured at fair value through other comprehensive income would no longer have to apply any impairment requirements nor would there be any ‘recycling’ of gains or losses through profit or loss on disposal. The accounting for financial liabilities continues to be classified and measured in accordance with AASB 139, with one exception, being that the portion of a change of fair value relating to the entity’s own credit risk is to be presented in other comprehensive income unless it would create an accounting mismatch. The consolidated entity will adopt this standard from 1 July 2013 but the impact of its adoption is yet to be assessed by the consolidated entity. 46 TZ Limited Notes to the financial statements 30 June 2011 Note 1. Significant accounting policies (continued) AASB 124 Related Party Disclosures (December 2009) This revised standard is applicable to annual reporting periods beginning on or after 1 January 2011. This revised standard simplifies the definition of a related party by clarifying its intended meaning and eliminating inconsistencies from the definition. The definition now identifies a subsidiary and an associate with the same investor as related parties of each other; entities significantly influenced by one person and entities significantly influenced by a close member of the family of that person are no longer related parties of each other; and whenever a person or entity has both joint control over a second entity and joint control or significant influence over a third party, the second and third entities are related to each other. This revised standard introduces a partial exemption of disclosure requirement for government-related entities. The adoption of this standard from 1 July 2011 will not have a material impact on the consolidated entity. AASB 127 Separate Financial Statements (Revised) AASB 128 Investments in Associates and Joint Ventures (Reissued) These standards are applicable to annual reporting periods beginning on or after 1 January 2013. They have been modified to remove specific guidance that is now contained in AASB 10, AASB 11 and AASB 12. The adoption of these revised standards from 1 July 2013 will not have a material impact on the consolidated entity. AASB 1054 Australian Additional Disclosures This Standard is applicable to annual reporting periods beginning on or after 1 July 2011. The standard sets out the Australian-specific disclosures, which are in addition to International Financial Reporting Standards, for entities that have adopted Australian Accounting Standards. The adoption of these amendments from 1 July 2011 will not have a material impact on the consolidated entity. AASB 2009-12 Amendments to Australian Accounting Standards These amendments are applicable to annual reporting periods beginning on or after 1 January 2011. These amendments make numerous editorial amendments to a range of Australian Accounting Standards and Interpretations, which have no major impact on the requirements of the amended pronouncements. The main amendment is to AASB 8 'Operating Segments' and requires an entity to exercise judgement in assessing whether a government and entities known to be under the control of that government are considered a single customer for the purposes of certain operating segment disclosures. The adoption of these amendments from 1 July 2011 will not have a material impact on the consolidated entity. AASB 2009-14 Amendments to Australian Interpretations - Prepayments of a Minimum Funding Requirement These amendments are applicable to annual reporting periods beginning on or after 1 January 2011. These amendments arise from the issuance of Interpretation 14 ‘AASB 119 - The Limit on Defined Benefit Asset, Minimum Funding Requirements and their Interaction as a consequence of the issuance of Prepayments of a Minimum Funding Requirements’ (Amendments to IFRIC 14). The amendments to IFRIC 14 meant that entities with minimum funding requirements could not treat any surplus in a defined benefit pension plan as an economic benefit. The amendments in AASB 2009-14 allow entities to treat the benefit of early payment as a pension asset. The adoption of these amendments from 1 July 2011 will not have a material impact on the consolidated entity as there are no surpluses in the defined benefit scheme. AASB 2010-4 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project These amendments are applicable to annual reporting periods beginning on or after 1 January 2011. These amendments are a consequence of the annual improvements project and make numerous non-urgent but necessary amendments to a range of Australian Accounting Standards and Interpretations. The amendments provide clarification of disclosures in AASB 7 'Financial Instruments: Disclosures', in particular emphasis of the interaction between quantitative and qualitative disclosures and the nature and extent of risks associated with financial instruments; clarifies that an entity can present an analysis of other comprehensive income for each component of equity, either in the statement of changes in equity or in the notes in accordance with AASB 101 'Presentation of Financial Statements'; and provides guidance on the disclosure of significant events and transactions in AASB 134 'Interim Financial Reporting'. The adoption of these amendments from 1 July 2011 will not have a material impact on the consolidated entity. 47 TZ Limited Notes to the financial statements 30 June 2011 Note 1. Significant accounting policies (continued) AASB 2010-5 Amendments to Australian Accounting Standards These amendments are applicable to annual reporting periods beginning on or after 1 January 2011. These amendments makes numerous editorial amendments to a range of Australian Accounting Standards and Interpretations, International Financial Reporting Standards by the International Accounting Standards Board. The adoption of these amendments from 1 July 2011 will not have a material impact on the consolidated entity. including amendments to reflect changes made to the text of AASB 2010-6 Amendments to Australian Accounting Standards - Disclosures on Transfers of Financial Assets These amendments are applicable to annual reporting periods beginning on or after 1 July 2011. These amendments add and amend disclosure requirements in AASB 7 about transfer of financial assets, including the nature of the financial assets involved and the risks associated with them. The adoption of these amendments from 1 July 2011 will increase the disclosure requirements on the consolidated entity when an asset is transferred but is not derecognised and new disclosure required when assets are derecognised but the consolidated entity continues to have a continuing exposure to the asset after the sale. AASB 2010-8 Amendments to Australian Accounting Standards - Deferred Tax: Recovery of Underlying Assets These amendments are applicable to annual reporting periods beginning on or after 1 January 2012 and a practical approach for the measurement of deferred tax relating to investment properties measured at fair value, property, plant and equipment and intangible assets measured using the revaluation model. The measurement of deferred tax for these specified assets is based on the presumption that the carrying amount of the underlying asset will be recovered entirely through sale, unless the entity has clear evidence that economic benefits of the underlying asset will be to quantify the tax effect of adopting these consumed during its economic life. The consolidated entity is yet amendments from 1 July 2012. AASB 2011-1 Amendments to Australian Accounting Standards arising from the Trans-Tasman Convergence Project The amendments are applicable to annual reporting periods beginning on or after 1 July 2011. They make changes to a range of Australian Accounting Standards and Interpretations for the purpose of closer alignment to IFRSs and harmonisation between Australian and New Zealand Standards. The amendments remove certain guidance and definitions from Australian Accounting Standards for conformity of drafting with International Financial Reporting Standards but without any intention to change requirements. The adoption of these amendments from 1 July 2011 will not have a material impact on the consolidated entity. AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirement These amendments are applicable to annual reporting periods beginning on or after 1 July 2013, with early adoption not permitted. They amend AASB 124 ‘Related Party Disclosures’ by removing the disclosure requirements for individual key management personnel ('KMP'). The adoption of these amendments from 1 July 2013 will remove the duplication of relating to individual KMP in the notes to the financial statements and the directors report. As the aggregate disclosures are still required by AASB 124 and during the transitional period the requirements may be included in the Corporations Act or other legislation, it is expected that the amendments will not have a material impact on the consolidated entity. 48 TZ Limited Notes to the financial statements 30 June 2011 Note 1. Significant accounting policies (continued) AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards The amendments are applicable to annual reporting periods beginning on or after 1 January 2013. The amendments makes numerous consequential changes to a range of Australian Accounting Standards and Interpretations, following the issuance of AASB 10, AASB 11, AASB 12 and revised AASB 127 and AASB 128. The adoption of these amendments from 1 July 2013 will not have a material impact on the consolidated entity. AASB 2011-9 Amendments to Australian Accounting Standards – Presentation of Items of Other Comprehensive Income The amendments are applicable to annual reporting periods beginning on or after 1 July 2012. The amendments requires grouping together of items within other comprehensive income on the basis of whether they will eventually be ‘recycled’ to the profit or loss (reclassification adjustments). The change provides clarity about the nature of items presented as other comprehensive income and the related tax presentation. The adoption of the revised standard from 1 July 2012 will impact the consolidated entity’s presentation of its statement of comprehensive income. Note 2. Critical accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. liabilities, contingent Share-based payment transactions The consolidated entity measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by using either the Binomial or Black-Scholes model taking into account the terms and conditions upon which the instruments were granted. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact profit or loss and equity. Provision for impairment of receivables The provision for impairment of receivables assessment requires a degree of estimation and judgement. The level of provision is assessed by taking into account the recent sales experience, the ageing of receivables, historical collection rates and specific knowledge of the individual debtors financial position. Estimation of useful lives of assets The consolidated entity determines the estimated useful lives and related depreciation and amortisation charges for its property, plant and equipment and definite life intangible assets. The useful lives could change significantly as a result of technical innovations or some other event. The depreciation and amortisation charge will increase where the useful lives are less than previously estimated lives, or technically obsolete or non-strategic assets that have been abandoned or sold will be written off or written down. Goodwill and other indefinite life intangible assets The consolidated entity tests annually, or more frequently if events or changes in circumstances indicate impairment, whether goodwill and other indefinite life intangible assets have suffered any impairment, in accordance with the accounting policy stated in note 1. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of assumptions, including estimated discount rates based on the current cost of capital and growth rates of the estimated future cash flows. 49 TZ Limited Notes to the financial statements 30 June 2011 Note 2. Critical accounting judgements, estimates and assumptions (continued) Impairment of non-financial assets other than goodwill and other indefinite life intangible assets The consolidated entity assesses impairment of non-financial assets other than goodwill and other indefinite life intangible assets at each reporting date by evaluating conditions specific to the consolidated entity and to the particular asset that may lead to impairment. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves fair value less costs to sell or value-in-use calculations, which incorporate a number of key estimates and assumptions. Income tax The consolidated entity is subject to income taxes in the jurisdictions in which it operates. Significant judgement is required in determining the provision for income tax. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The consolidated entity recognises liabilities for anticipated tax audit issues based on the consolidated entity’s current understanding of the tax law. Where the final tax outcome of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in the period in which such determination is made. Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences only if the consolidated entity considers it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Valuation of embedded derivatives and convertible note debt portion The terms of the Convertible Note Subscription Deed are such that the note holders are able to convert to equity at the conversion date at the lower of: (a) the agreed conversion price; and (b) the issue price of any subsequent share issue during the term of the convertible note. The convertible notes, as a result of this clause which eliminates the note holder's equity risk, are therefore debt instruments which host an embedded derivative in accordance with AASB 132. Upon inception, the derivative element of the convertible notes is separated and valued in accordance with AASB 139. Thereafter the derivative is designated as fair value through profit and loss, and accordingly is fair valued at the end of each reporting period, with any movement in the fair value reported through profit and loss. The convertible note debt portion is measured at fair value on inception and subsequently measured at amortised cost. To value the derivative, the Black-Scholes valuation method was used. In doing so, a judgement was made that the conversion price, although impossible to predict due to the terms of the convertible note deed, could reasonably be assumed to be the current conversion price at the date the valuation is performed. At 30 June 2011, under the terms of the convertible notes, the current conversion price is $0.35 per share for Series I and III and $0.42 per share for Series IIIB based on the most recent shares issued of TZ Limited. Judgement and estimation was also exercised regarding other valuation inputs such as life of the derivative and share price volatility. The carrying values at 30 June 2011 of the derivative and convertible note liabilities are $4,410,717 and $10,205,707 respectively (2010: derivative $9,061,958 and convertible note $11,075,075) as detailed in notes 23 and 24). 50 TZ Limited Notes to the financial statements 30 June 2011 Note 3. Restatement of comparatives Comparative reclassifications and restatements Certain comparatives have been reclassified and restated in the prior year. The reclassifications and restatements have had no effect on the prior year results for loss after tax or net assets of the consolidated entity. In the statement of financial position the restatement has occured as a result of the entity now rounding its figures to the nearest thousand dollars ($'000) or to reclassify items to be in line with current year disclosure requirements for the statement of financial position or to restate prior period errors. In the statement of comprehensive income, the reclassification was due to the entity previously disclosing its expenses by a mix of nature and function and in the current year moving to disclose its expenses by nature only in line with accounting standards. The following tables highlight these reclassifications. In the statement of financial position the reclassifications and restatements are due to the following: - $400,000 of unbilled revenue reclassified from work-in-progress to other receivables; - $148,000 in relation to a security deposit reclassified from current to non-current receivables; - $531,000 of deferred revenue split out into a separate note; - $4,768,000 of other contributed equity split out into a separate note; - $2,247,000 restatement of foreign currency translation reserve to opening retained earnings following a review of the movements in the reserve. There is no impact on the net assets of the consolidated entity. Third statement of financial position When there is a restatement of comparatives, it is mandatory to provide a third statement of financial position at the beginning of the earliest comparative period, being 1 July 2009. However, as there were no adjustments made as at 1 July 2009, the consolidated entity has elected not to show the 1 July 2009 statement of financial position. There was also no impact on the comparative statement of financial position, due to the reclassification. The following tables highlight these reclassifications. 51 TZ Limited Notes to the financial statements 30 June 2011 Note 3. Restatement of comparatives (continued) Statement of comprehensive income Revenue Other income Expenses Cost of sales Raw materials and consumables used Subcontractors costs Employee benefits expense Occupancy expense Depreciation and amortisation expense Communications expense Professional and corporate services Travel and accommodation expense Development costs Net loss on movement in fair value of derivative liabilities Net loss on conversion of convertible notes Share of net losses of joint venture accounted for using the equity Other expenses Finance costs Loss before income tax (expense)/benefit Income tax (expense)/benefit 2010 $'000 Reported Consolidated $'000 Adjustment 2010 $'000 Restated 17,696 1,108 (11,590) - - (6,558) (934) (2,228) (247) (4,894) (514) (114) (6,158) (5,627) - (1,446) (5,006) (26,512) 165 - - 17,696 1,108 11,590 (975) (4,577) (5,581) - - - - (457) - - - - - - - - - (975) (4,577) (12,139) (934) (2,228) (247) (4,894) (971) (114) (6,158) (5,627) - (1,446) (5,006) (26,512) 165 Loss after income tax (expense)/benefit for the year attributable to the owners of TZ Limited (26,347) - (26,347) Other comprehensive income Foreign currency translation Other comprehensive income for the year, net of tax (1,706) (1,706) - - (1,706) (1,706) Total comprehensive income for the year attributable to the owners of TZ Limited (28,053) - (28,053) Statement of financial position at the beginning of the earliest comparative period When there is a restatement of comparatives, it is mandatory to provide a third statement of financial position at the beginning of the earliest comparative period, being 1 July 2009. However, as there were no adjustments made as at 1 July 2009, the consolidated entity has elected not to show the 1 July 2009 statement of financial position. 52 TZ Limited Notes to the financial statements 30 June 2011 Note 3. Restatement of comparatives (continued) Statement of financial position at the end of the earliest comparative period Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Investment in short term deposit Total current assets Non-current assets Investments accounted for using the equity method Property, plant and equipment Intangibles Deferred tax Other Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Borrowings Derivative financial instruments Provisions Other Total current liabilities Non-current liabilities Borrowings Derivative financial instruments Deferred tax Other Total non-current liabilities Total liabilities Net assets Equity Contributed equity Other contributed equity Reserves Accumulated losses Total equity 2010 $'000 Reported Consolidated $'000 Adjustment 2010 $'000 Restated 232 4,483 567 - 5,282 - 1,974 24,543 635 - 27,152 32,434 5,237 5,919 746 87 - 11,989 5,897 8,316 829 533 15,575 27,564 4,870 - 250 (400) - (150) - 2 2 - 148 152 232 4,733 167 - 5,132 - 1,976 24,545 635 148 27,304 2 32,436 (529) - - - 531 2 - - - - - 2 - 4,708 5,919 746 87 531 11,991 5,897 8,316 829 533 15,575 27,566 4,870 130,675 - (707) (125,098) (4,768) 4,768 (2,247) 2,247 125,907 4,768 (2,954) (122,851) 4,870 - 4,870 53 TZ Limited Notes to the financial statements 30 June 2011 Note 4. Operating segments Identification of reportable operating segments The consolidated entity is organised into two operating segments. These operating segments are based on the internal reports that are reviewed and used by the executive management committee (who are identified as the Chief Operating Decision Makers ('CODM')) in assessing performance and in determining the allocation of resources. There is no aggregation of operating segments. The CODM comprises the executive directors, chief executive officer, chief financial officer and divisional managers. The CODM reviews both adjusted earnings before interest, tax, depreciation and amortisation (segment result) and profit before income tax. The information reported to the CODM is on at least a monthly basis. Types of products and services The principal products and services of each of these operating segments are as follows: PDT Holdings Inc ('PDT') Telezygology Inc ('TZI') PDT Group operates its engineering and design division predominantly in the USA, whilst maintaining a presence in the UK and the Ukraine. TZI’s primary role is the development and commercialisation of hardware and software products primarily in the US market. Intersegment transactions Intersegment transactions were made at market rates. Intersegment transactions are eliminated on consolidation. Intersegment receivables, payables and loans Intersegment loans are initially recognised at the consideration received. Intersegment loans receivable and loans payable that earn or incur non-market interest rates. Intersegment loans are eliminated on consolidation. interest are not adjusted to fair value based on market Major customers During the year ended 30 June 2011 approximately 35.10% (2010: 37.35%) of the consolidated entity's external revenue was derived from sales to one customer of PDT. Segment information The consolidated entity has adopted AASB 8 Operating Segments from 1 July 2009 whereby segment information is presented using a 'management approach', i.e. segment information is provided on the same basis as information used for internal reporting purposes by the CODM. 54 TZ Limited Notes to the financial statements 30 June 2011 Note 4. Operating segments (continued) Operating segment information 2011 $'000 $'000 PDT (USA) $'000 TZI (USA) $'000 Intersegment eliminations/ unallocated Consolidated $'000 $'000 21,229 275 21,504 21 21,525 1,152 225 1,377 203 1,580 1,391 (5,837) - - 7,165 7,165 - 7,552 (5,827) (1,856) (4,098) (4,229) 22,381 500 22,881 7,389 30,270 (4,446) 7,552 (5,827) (1,856) (4,098) (8,675) (109) (8,784) PDT (USA) $'000 TZI (USA) $'000 Intersegment eliminations/ unallocated Consolidated $'000 $'000 16,608 186 16,794 22 16,816 1,008 199 1,207 (18) 1,189 1,939 (2,565) - - - 799 799 - 76 (18,728) (2,228) (5,006) (25,886) 17,616 385 18,001 803 18,804 (626) 76 (18,728) (2,228) (5,006) (26,512) 165 (26,347) Revenue Sales to external customers Intersegment sales Total sales revenue Other income Total revenue EBITDA Head office revenue / income Head office costs Depreciation and amortisation Interest expenses Profit/(loss) before income tax expense Income tax expense Loss after income tax expense - - - - - - - - - - - 2010 $'000 $'000 Revenue Sales to external customers Intersegment sales Total sales revenue Other income Total revenue EBITDA Head office revenue / income Head office costs Depreciation and amortisation Interest expenses Profit/(loss) before income tax benefit Income tax benefit Loss after income tax benefit - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 55 TZ Limited Notes to the financial statements 30 June 2011 Note 4. Operating segments (continued) Geographical information Australia United States of America United Kingdom Canada Netherlands Norway Korea Hong Kong Denmark Other * Sales to external customers 2011 $'000 2010 $'000 Geographical non-current assets 2011 2010 $'000 $'000 78 17,483 649 3,679 65 - - - 398 136 162 13,332 1,083 2,675 - 70 46 95 - 153 - 27,586 317 - - - - - - - - 33,072 41 - - - - - - - 22,488 17,616 27,903 33,113 The geographical non-current assets above are exclusive of, where applicable, financial instruments, deferred tax assets, post employment benefits assets and rights under insurance contracts. * Other relates to Taiwan, China and Ireland Note 5. Revenue Sales revenue Sales and services revenue Other revenue Management fees Interest Royalty Other revenue Revenue Consolidated 2011 $'000 2010 $'000 22,399 17,308 8 264 89 710 1,071 - 20 308 60 388 23,470 17,696 - - - - 56 TZ Limited Notes to the financial statements 30 June 2011 Note 6. Other income Net gain on disposal of property, plant and equipment Net gain on issue of shares to extinguish liabilities Net gain on movement in fair value of derivative liabilities Consolidated 2011 $'000 2010 $'000 3 190 6,607 - 1,108 - Other income - - 6,800 1,108 Note 7. Expenses Loss before income tax includes the following specific expenses: Depreciation Leasehold improvements Plant and equipment Motor vehicles Office equipment Total depreciation Amortisation Re-acquired right (Intevia Licence) Other intangible assets Total amortisation Total depreciation and amortisation Cost of sales Direct material Direct employment related expenses Subcontractors Company overheads Other cost of sales Consolidated 2011 $'000 2010 $'000 202 291 - 164 657 166 1,033 380 317 5 285 987 717 524 - - - - - - 1,199 1,241 1,856 2,228 1,068 6,831 7,833 467 403 815 5,581 4,577 457 160 Total cost of sales - - 16,602 11,590 Finance costs Interest and finance charges paid/payable Net foreign exchange loss Net foreign exchange loss 4,098 5,006 366 17 57 TZ Limited Notes to the financial statements 30 June 2011 Note 7. Expenses (continued) Net loss on disposal Net loss on disposal of property, plant and equipment Superannuation expense Defined contribution superannuation expense Share-based payments expense Share-based payments expense Note 8. Income tax expense/(benefit) Income tax expense/(benefit) Current tax Deferred tax Aggregate income tax expense/(benefit) Deferred tax included in income tax expense/(benefit) comprises: Increase in deferred tax assets (note 16) Increase in deferred tax liabilities (note 25) Numerical reconciliation of income tax expense/(benefit) to prima facie tax payable Loss before income tax (expense)/benefit Tax at the Australian tax rate of 30% Current year tax losses not recognised Difference in overseas tax rates Consolidated 2011 $'000 2010 $'000 - 15 157 10 2,303 2,342 Consolidated 2011 $'000 2010 $'000 109 - 109 (116) 116 - 16 (181) (165) (227) 46 (181) (8,675) (26,512) (2,603) (7,954) 2,822 (110) 8,279 (490) - - - - - - - - Income tax expense/(benefit) - - 109 (165) Tax losses not recognised The consolidated entity are in the process of determining their tax loss position to carry forward. 58 TZ Limited Notes to the financial statements 30 June 2011 Note 9. Current assets - cash and cash equivalents Cash at bank Note 10. Current assets - trade and other receivables Trade receivables Less: Provison for impairment of receivables Other receivables Goods and services tax receivable Prepayments - - Consolidated 2011 $'000 2010 $'000 1,146 232 Consolidated 2011 $'000 2010 $'000 3,977 (165) 3,812 842 48 211 3,993 (153) 3,840 495 195 203 Impairment of receivables The consolidated entity has recognised a loss of $83,000 (2010: $71,000) in profit or loss in respect of impairment of receivables for the year ended 30 June 2011. The ageing of the impaired receivables recognised above are as follows: - - 4,913 4,733 Past due 30 days Past due 90 days + Movements in the provision for impairment of receivables are as follows: - - Opening balance Additional provisions recognised Foreign exchange Receivables written off during the year as uncollectable Closing balance - - Consolidated 2011 $'000 2010 $'000 - 165 165 23 130 153 Consolidated 2011 $'000 2010 $'000 153 122 (27) (83) 165 129 95 - (71) 153 59 TZ Limited Notes to the financial statements 30 June 2011 Note 10. Current assets - trade and other receivables (continued) Past due but not impaired Customers with balances past due but without provision for impairment of receivables amount to $748,000 as at 30 June 2011 ($622,000 as at 30 June 2010). The consolidated entity did not consider a credit risk on the aggregate balances after reviewing agency credit terms of customers based on recent collection practices. information and credit The ageing of the past due but not impaired receivables are as follows: Past due 0 - 30 days Past due 30 - 60 days Past due 60 - 90 days Past due 90 days + Note 11. Current assets - inventories - - Inventories Note 12. Current assets - investment in short term deposit Term deposits Note 13. Non-current assets - investments accounted for using the equity method Investment in joint venture - Intanova Pty Limited Refer to note 42 for detailed information on interests in joint ventures. Consolidated 2011 $'000 2010 $'000 409 57 132 150 748 363 45 176 38 622 Consolidated 2011 $'000 2010 $'000 331 167 Consolidated 2011 $'000 2010 $'000 5,500 - Consolidated 2011 $'000 2010 $'000 187 - 60 TZ Limited Notes to the financial statements 30 June 2011 Note 14. Non-current assets - property, plant and equipment Leasehold improvements - at cost Less: Accumulated depreciation Plant and equipment - at cost Less: Accumulated depreciation Motor vehicles - at cost Less: Accumulated depreciation Office equipment - at cost Less: Accumulated depreciation Consolidated 2011 $'000 2010 $'000 1,608 (893) 715 1,615 (886) 729 - - - 998 (558) 440 1,629 (691) 938 1,282 (595) 687 30 (30) - 744 (393) 351 1,884 1,976 - - - - - - - - - - Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Leasehold improvements $'000 Plant and equipment $'000 Motor vehicles $'000 Office furniture and equipment $'000 Total $'000 $'000 1,023 124 (66) (77) (317) 687 364 (4) (27) (291) 729 6 - - (1) (5) - - - - - - 554 136 (19) (35) (285) 351 385 - (132) (164) 3,028 339 (193) (211) (987) 1,976 950 (4) (381) (657) 440 1,884 Consolidated Balance at 1 July 2009 Additions Disposals Exchange differences Depreciation expense Balance at 30 June 2010 Additions Disposals Exchange differences Depreciation expense Balance at 30 June 2011 - - - - - - - - - - - 1,445 79 (108) (98) (380) 938 201 - (222) (202) 715 61 TZ Limited Notes to the financial statements 30 June 2011 Note 15. Non-current assets - intangibles Goodwill - at cost Trade names - at cost Re-acquired right (Intevia Licence) - at cost Less: Accumulated amortisation Patents - at cost Less: Accumulated amortisation Development costs - at cost Less: Accumulated amortisation Customer relationships - at cost Less: Accumulated amortisation Consolidated 2011 $'000 2010 $'000 8,941 8,941 1,146 1,146 8,721 (3,195) 5,526 1,334 (229) 1,105 1,735 (277) 1,458 3,101 (1,527) 1,574 10,848 10,848 1,342 1,342 9,963 (2,537) 7,426 1,408 (180) 1,228 1,695 (259) 1,436 3,762 (1,497) 2,265 19,750 24,545 - - - - - - - - - - - - - - Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2009 Additions Exchange differences Amortisation expense Balance at 30 June 2010 Additions Exchange differences Amortisation expense Balance at 30 June 2011 $'000 Goodwill $'000 Trade names $'000 Re-acquired right $'000 Other intangibles * $'000 Total $'000 - - - - - - - - - 11,526 - (678) - 10,848 - (1,907) - 1,512 - (170) - 1,342 5 (200) (1) 8,679 - (536) (717) 7,426 - (1,242) (658) 4,110 1,602 (259) (524) 4,929 573 (825) (540) 25,827 1,602 (1,643) (1,241) 24,545 578 (4,174) (1,199) 8,941 1,146 5,526 4,137 19,750 * Other intangibles in the above reconciliation includes Patents, Development costs and Customer relationships. 62 TZ Limited Notes to the financial statements 30 June 2011 Note 15. Non-current assets - intangibles (continued) Impairment testing of cash-generating units containing goodwill Goodwill, trade names, re-acquired right and other intangible assets have been allocated to the following cash- generating units: Goodwill - PDT Holdings Inc. - Telezygology Inc. Trade names - PDT Holdings Inc. - Telezygology Inc. Re-acquired right - Telezygology Inc. Other intangible assets - PDT Holdings Inc. - Telezygology Inc. Consolidated 2011 $'000 2010 $'000 5,016 3,925 1,134 12 6,087 4,761 1,328 14 5,526 7,426 1,828 2,309 2,563 2,366 19,750 24,545 The recoverable amount of all cash-generating units is based on value-in-use calculations which use cash flow projections based on budgets approved by management covering a 5 year period in the case of PDT Holdings Inc. and a 9 year period in the case of Telezygology Inc. The growth rate used in these budgets does not exceed the long- term average growth rate for the business in which cash-generating units operate. PDT Holdings Inc.('PDT') Key assumptions for value-in-use calculations for PDT are as follows: - Discount rate - 16.71% - Gross margins - budgeted gross profit margins are between 25% and 31%, historical gross margins ranged between 21% to 30% - Revenue growth rates - 2012 (1%) and 2013 to 2016 (5%). Management believes these growth rates are conservative and they are confident the forecasted revenue growth can be achieved. Revenue growth for the year ended 30 June 2011 was 38% (2010: 18%). Management determined budgeted gross margin is based on past performance and its expectations for the future. Discount rates used are pre-tax and are specific to relevant segments and countries in which they operate. The recoverable amount of the goodwill, trade names, re-acquired right and other intangible assets of PDT is estimated to be $15,753,995 (2010: $15,282,060) which exceeds the carrying amount at 30 June 2011 by $7,775,995 (2010: $7,854,037). If a discount rate of 28.9% was used instead of 16.71%, the recoverable amount of goodwill, trade names, re-acquired right and other intangible assets would equal the carrying amount. 63 TZ Limited Notes to the financial statements 30 June 2011 Note 15. Non-current assets - intangibles (continued) Telezygology Inc. Key assumptions for value-in-use calculations for Telezygology Inc. are as follows: - Discount rate - 16.6% - Gross margins - budgeted gross profit margins are between 57% and 60%, historical gross margins ranged between 57% to 64% - Revenue growth rates - 2012 (445%), 2013 (62%), 2014 (57%), 2015 (37%) and 2016 through 2020 (5%). The forecasted and projected revenues for upcoming financial years show significant growth, and an overall sales level well above what TZI has experienced previously. There are several factors contributing to the workup of the financial information, and the material points are noted below: • TZI's products/solutions for these business units have only recently been commercialised, with sales in the last two fiscal years representing lower levels that are accustomed to new products. • The data centre micro-security market is estimated to be a $1.5 billion market that will grow at 4% - 6% annually in the near term. • Commercial partnerships with the signing of key distribution and reseller agreements. • A strong sales pipeline is in place to support sales anticipated for the 2012 financial year and beyond. • TZI has achieved positive results post year end in excess of those forecast. Management believes these growth rates are achievable and they are confident the forecasted revenue growth can be achieved. Management determined budgeted gross margin is based on expectations for the future after redetermining the product strategy for TZI and securing commercial partnerships for distribution. Discount rates used are pre-tax and are specific to relevant segments and countries in which they operate. the goodwill, trade names, re-acquired right and other intangible assets of TZI is The recoverable amount of estimated to be $22,004,976 (2010: $22,620,537) which exceeds the carrying amount at 30 June 2011 by $10,232,976 (2010: $8,044,351). If a discount rate of 30.1% was used instead of 16.6%, the recoverable amount of goodwill, trade names, re-acquired right and other intangible assets would equal the carrying amount. 64 TZ Limited Notes to the financial statements 30 June 2011 Note 16. Non-current assets - deferred tax The balance comprises temporary differences attributable to: Amounts recognised in profit or loss: Tax losses Property, plant and equipment Intangible assets Doubtful debts Allowance / reserve Research and development credit Other liabilities Deferred tax asset Movements: Opening balance Credited to profit or loss (note 8) Closing balance - - Note 17. Non-current assets - other Security deposits Note 18. Current liabilities - trade and other payables Trade payables Employee expense payables Lease incentive liability Interest payable Other payables Consolidated 2011 $'000 2010 $'000 43 200 - 64 (354) 480 318 751 635 116 751 686 155 115 59 (380) - - 635 408 227 635 Consolidated 2011 $'000 2010 $'000 179 148 Consolidated 2011 $'000 2010 $'000 1,739 173 61 899 1,703 2,349 299 111 952 997 Refer to note 33 for detailed information on financial instruments. - - 4,575 4,708 65 TZ Limited Notes to the financial statements 30 June 2011 Note 19. Current liabilities - borrowings Bank loans Convertible notes payable Consolidated 2011 $'000 2010 $'000 729 - 729 741 5,178 5,919 - - Refer to note 23 for further information on assets pledged as security and financing arrangements and note 33 for detailed information on financial instruments. Note 20. Current liabilities - derivative financial instruments Consolidated 2011 $'000 2010 $'000 - 746 Consolidated 2011 $'000 2010 $'000 116 87 Consolidated 2011 $'000 2010 $'000 368 531 Consolidated 2011 $'000 2010 $'000 10,206 5,897 Derivative instrument liabilities Refer to note 33 for detailed information on financial instruments. Note 21. Current liabilities - provisions Employee benefits Note 22. Current liabilities - other Deferred revenue Note 23. Non-current liabilities - borrowings Convertible notes payable Refer to note 33 for detailed information on financial instruments. 66 TZ Limited Notes to the financial statements 30 June 2011 Note 23. Non-current liabilities - borrowings (continued) Total secured liabilities The total secured liabilities (current and non-current) are as follows: Bank loans Consolidated 2011 $'000 2010 $'000 729 741 The credit facility has a limit of USD$1,200,000, however, the capacity is decreased as the amount of security decreases below USD$1,200,000. Security consists of accounts receivable less than 60 days old, and eligible receivables are subject to a 20% reduction in value. A breakdown of the credit facility is shown in the financing arrangements table below. Assets pledged as security The bank overdraft and loans are secured by a mortgage over the assets of PDT Inc Group. Financing arrangements Unrestricted access was available at the reporting date to the following lines of credit: Total facilities Bank loans Used at the reporting date Bank loans Unused at the reporting date Bank loans Consolidated 2011 $'000 2010 $'000 1,132 1,374 729 741 403 633 67 TZ Limited Notes to the financial statements 30 June 2011 Note 23. Non-current liabilities - borrowings (continued) Convertible notes Series I The convertible notes were issued under the terms of a Convertible Note and Option Subscription Deed dated 24 December 2007. 24,000 notes were issued each with a face value of $1,000. The notes have a 5 year term, are convertible at the lower of: (a) the agreed conversion price; and (b) the issue price of any subsequent share issue during the terms of the convertible notes. At the time of issue the conversion price was $4.00 per share. The notes pay interest at a rate of 10%. The 24,000 convertible notes were reorganised so that the conversion price was reduced from $4.00 per ordinary share in the company to $1.00 per ordinary share for 12,000 convertible notes and to $1.20 per ordinary share for the remaining 12,000 notes which was approved by the company’s shareholders at the 2009 annual general meeting. Series II The convertible notes were issued under the terms of the convertible note subscription deed dated 16 July 2009 and amended 13 October 2009. 5,241,000 were issued each with a face value of $1. The notes were convertible at the lesser of: (a) $1.00; and (b) the lowest price at which ordinary shares may be issued by TZL after 15 July 2009 and prior to conversion. Interest accrues on each Series II Convertible Note at 10% per annum, payable annually in arrears or on the date the Convertible Note is redeemed. On 15 July 2010, 3,918,500 convertible notes plus an outstanding interest of $281,888 were converted into 10,000,924 ordinary shares at an issue price of $0.42 per share. On 22 July 2010, 90,000 convertible notes plus an outstanding interest of $6,111 were converted into 228,836 ordinary shares at an issue price of $0.42 per share. On 25 November 2010, 732,500 convertible notes plus an outstanding interest of $69,051 were converted into 2,048,431 ordinary shares at an issue price of $0.39 per share. The remaining 500,000 notes were fully redeemed at $1 each by the note holders on 18 November 2010 and 29 November 2010. A total amount of $33,194 representing the outstanding interest was paid upon the redemptions. Series III 1,714 Series III convertible notes with a face value of $1,000 each were issued under the terms of an Issue and Amendment Deed with QVT Funds dated 23 April 2010. The notes have a five year term and are convertible at a variable rate, being the lesser of: (i) $1.00; and (ii) the issue price of any subsequent share issue during the terms of the convertible notes. Interest will accrue on each Series III note at 10% per annum, payable on 31 December each year. Series IIIB 4,275 Series IIIB convertible notes with a face value of $1,000 each were issued on 24 December 2010 as a result of shareholders’ approval of Resolution 5 at the company’s 2010 annual general meeting held on 17 November 2010. The notes have a five year term and are convertible at a variable rate, being the lesser of: (i) $0.42; and (ii) the lowest issue price of any subsequent share issues during the term of the convertible notes. Interest will accrue on each Series IIIB note at 10% per annum, payable on 31 December each year. Under the terms of the convertible notes, the current conversion price is $0.35 per share for Series I & III and $0.42 per share for Series IIIB based on the most recent share issues of TZ Limited. 68 TZ Limited Notes to the financial statements 30 June 2011 Note 24. Non-current liabilities - derivative financial instruments Derivative instrument liabilities Refer to note 33 for detailed information on financial instruments. Note 25. Non-current liabilities - deferred tax The balance comprises temporary differences attributable to: Amounts recognised in profit or loss: Goodwill Other intangibles Deferred tax liability Movements: Opening balance Charged to profit or loss (note 8) Closing balance - - Note 26. Non-current liabilities - other Lease incentive liability Note 27. Equity - contributed Consolidated 2011 $'000 2010 $'000 4,411 8,316 Consolidated 2011 $'000 2010 $'000 815 130 945 829 116 945 829 - 829 783 46 829 Consolidated 2011 $'000 2010 $'000 507 533 Ordinary shares - fully paid 122,731,123 62,848,373 149,113 125,907 Consolidated Consolidated 2011 Shares 2010 Shares 2011 $'000 2010 $'000 69 TZ Limited Notes to the financial statements 30 June 2011 Note 27. Equity - contributed (continued) Movements in ordinary share capital Details Date No of shares Fair value $'000 Balance Issue of shares Issue of shares on conversion of convertible notes Issue of shares 1 July 2009 7 January 2010 26 March 2010 30 June 2010 Balance Issue of shares Issue of shares on conversion of convertible note Issue of shares on exercise of rights Issue of shares on conversion of convertible note Transfer to contributed equity Issue of shares Issue of shares on conversion of convertible note Issue of shares Issue of shares on conversion of liabilities to equity Transfer to contributed equity Less: share issue costs 30 June 2010 1 July 2010 15 July 2010 19 July 2010 22 July 2010 11 October 2010 20 November 2010 25 November 2010 21 December 2010 14 April 2011 24 May 2011 49,479,325 1,250,000 12,000,000 119,048 62,848,373 357,144 10,000,924 1,480,000 228,836 1,198,196 8,091,446 2,048,431 28,069,319 3,795,121 4,613,333 $0.84 $0.84 $0.42 $0.42 $0.42 $0.00 $0.42 $0.84 $0.35 $0.39 $0.35 $0.27 $0.84 114,727 1,050 10,080 50 125,907 150 4,200 - 96 1,007 2,832 802 9,824 1,025 3,875 (605) Balance 30 June 2011 122,731,123 149,113 Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Share buy-back There is no current on-market share buy-back. Unquoted options and rights At 30 June 2011 there were 12,431,666 (2010: 10,643,041) options. Each option entitles the holder to subscribe for one fully paid share in the company at the exercise price per share at any time from the date of issue until expiry of the options subject to various vesting dates. At 30 June 2011 there were 1,400,000 (2010: 2,880,000) performance rights outstanding. Each performance right entitles the holder to subscribe for one fully paid share in the company at the exercise price of $nil per share at any time from the date the performance hurdle has been achieved. 70 TZ Limited Notes to the financial statements 30 June 2011 Note 27. Equity - contributed (continued) Capital risk management The consolidated entity monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including 'trade and other payables' and 'borrowings' as shown in the statement of financial position) less 'cash and cash equivalents' as shown in the statement of financial position. Total capital is calculated as 'total equity' as shown in the statement of financial position (including non- controlling interest) plus net debt. The gearing ratio at the reporting date was as follows: Current liabilities - trade and other payables (note 18) Current liabilities - borrowings (note 19) Non-current liabilities - borrowings (note 23) Total borrowings Current assets - cash and cash equivalents (note 9) Net debt Total equity Total capital Gearing ratio Consolidated 2011 $'000 2010 $'000 4,575 729 10,206 15,510 (1,146) 14,364 12,784 27,148 4,708 5,919 5,897 16,524 (232) 16,292 4,870 21,162 53% 77% - - - - 0% - - - - 0% The gearing ratio has decreased significantly as a result of (a) the decrease in trade and other liabilities; (b) the conversion of accrued interest on all convertible notes up to 31 December 2010 to equity; (c) the conversion of the convertible notes (Series II) to equity; and (d) the share capital raised during the year. There are no externally imposed capital requirements the consolidated entity has to comply with. Note 28. Equity - other contributed equity Other contributed equity Consolidated 2011 $'000 2010 $'000 - 4,768 Other contributed equity represents shares that were issued during the current financial year in respect of the extinguishment of liabilities of interest and other expenses on 26 February 2010. Note 29. Equity - reserves Foreign currency reserve Consolidated 2011 $'000 2010 $'000 (6,997) (2,954) 71 TZ Limited Notes to the financial statements 30 June 2011 Note 29. Equity - reserves (continued) Consolidated Balance at 1 July 2009 Foreign currency translation Restatement of foreign currency translation Balance at 30 June 2010 Foreign currency translation Balance at 30 June 2011 Revaluation surplus $'000 Available- for-sale $'000 Share-based payments $'000 Foreign currency $'000 Total $'000 $'000 - - - - - - - - 999 (1,706) 999 (1,706) (2,247) (2,247) (2,954) (4,043) (2,954) (4,043) (6,997) (6,997) Foreign currency reserve The reserve is used to recognise exchange differences arising from translation of the financial statements of foreign operations to Australian dollars. It is also used to recognise gains and losses on hedges of the net investments in foreign operations. Note 30. Equity - accumulated losses Accumulated losses at the beginning of the financial year Loss after income tax (expense)/benefit for the year Transfer from share based payments reserve Transfer from foreign currency reserve - - Consolidated 2011 $'000 2010 $'000 (122,851) (8,784) 2,303 - (101,093) (26,347) 2,342 2,247 Accumulated losses at the end of the financial year - - (129,332) (122,851) Note 31. Equity - dividends There were no dividends paid or declared during the current or previous financial year. 72 TZ Limited Notes to the financial statements 30 June 2011 Note 32. Performance rights Performance rights Opening balance Issued Exercised Expired/forfeited Closing balance Consolidated 2011 $'000 2010 $'000 2,880 - (1,480) - - 3,000 - (120) - - 1,400 2,880 In accordance with resolutions 12, 13 and 15 of the 2009 Annual General Meeting, rights were granted to the directors under the Director and Executive Equity Plan. The grant of rights formed part of the remuneration of the directors and were based upon advice from an independent remuneration consultant. A total of 3,000,000 rights were granted with a zero exercise price. Of the total, 1,480,000 were exercisable immediately after approval was given at the AGM, and 120,000 were forfeited. The balance of 1,400,000 is subject to the satisfaction of a Performance Hurdle and exercisable from and including 1 July 2011 to 30 June 2012 provided the Performance Hurdle is satisfied. Note 33. Financial instruments Financial risk management objectives The consolidated entity's activities expose it to a variety of financial risks: market risk (including foreign currency risk and interest rate risk), credit risk and liquidity risk. The consolidated entity's overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the consolidated entity. The consolidated entity uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate and foreign exchange, and ageing analysis for credit risk. Risk management is carried out by senior finance executives ('finance') under policies approved by the Board of Directors ('Board'). These policies include identification and analysis of the risk exposure of the consolidated entity and appropriate procedures, controls and risk limits. Finance identifies, evaluates and hedges financial risks within the consolidated entity's operating units. Finance reports to the Board on a monthly basis. Market risk Foreign currency risk The consolidated entity undertakes certain transactions denominated in foreign currency and are exposed to foreign currency risk through foreign exchange rate fluctuations. Foreign exchange risk arises from future commercial transactions and recognised financial assets and financial liabilities denominated in a currency that is not the entity’s functional currency. The risk is measured using sensitivity analysis and cash flow forecasting. The consolidated entity's foreign exchange risk is managed to ensure sufficient funds are available to meet US financial commitments in a timely and cost-effective manner. The consolidated entity will continually monitor this risk and consider entering into forward foreign exchange, foreign currency swap and foreign currency option contracts if appropriate. Creditors and debtors as at 30 June 2011 were reviewed to assess currency risk at year end. The value of transactions denominated in a currency other than the functional currency of the respective subsidiary was insignifcant and therefore the risk was determined as immaterial. 73 TZ Limited Notes to the financial statements 30 June 2011 Note 33. Financial instruments (continued) Price risk The consolidated entity has derivative liabilities, the fair value of which is linked to the share price of TZ Limited. Price fluctuations that are inherent in such a share market impact the value of the liabilities. Based on this exposure, had the share price weakened by 10%/strengthened by 10% (2010: weakened by 10%/strengthened by 10%) and all other variables held constant, the consolidated entity's profit after tax for the year would have been $466,455 higher/$766,481 lower (2010: $3,522,250 lower/$801,934 higher) and equity would have been $466,455 higher/$766,481 lower (2010: $3,522,250 lower/$801,934 higher). Interest rate risk The consolidated entity's main interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the consolidated entity to interest rate risk. Borrowings issued at fixed rates expose the consolidated entity to fair value interest rate risk. The consolidated entity invests surplus cash in term deposits with fixed returns. The Board makes investment decisions after considering advice received from professional advisors. The consolidated entity monitors its interest rate exposure continuously. As at the reporting date, the consolidated entity had the following variable rate cash and borrowings outstanding: Consolidated Cash and cash equivalents Bank loans Net exposure to cash flow interest rate risk 2011 2010 Weighted average interest rate % 3.16 6.25 Weighted average interest rate % 3.04 3.25 Balance $'000 1,146 (729) 417 Balance $'000 232 (741) (509) An analysis by remaining contractual maturities in shown in 'liquidity and interest rate risk management' below. The consolidated entity has net cash and cash equivalents and bank loans assets totalling $417,000 (2010: liabilities of $509,000). An official increase/decrease in interest rates of one (2010: one) percentage point would have an adverse/favourable affect on profit before tax of $4,000 (2010: $5,000) per annum. The percentage change is based on the expected volatility of interest rates using market data and analysts forecasts. 74 TZ Limited Notes to the financial statements 30 June 2011 Note 33. Financial instruments (continued) Credit risk Credit risk is managed on a consolidated entity basis. Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the consolidated entity. The consolidated entity has a strict code of credit, including obtaining agency credit information, confirming references and setting appropriate credit limits. The consolidated entity obtains guarantees where appropriate to mitigate credit risk. The maximum exposure to credit risk at the reporting date to recognised financial assets is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the statement of financial position and notes to the financial statements. The consolidated entity does not hold any collateral. The consolidated entity has a credit risk exposure with one customer, which as at 30 June 2011 owed the consolidated entity $1,247,491 (33% of trade receivables) (2010: $1,352,343 (35% of trade receivables)). This balance was within its terms of trade and no impairment was made as at 30 June 2011. There are no guarantees against this receivable but management closely monitors the receivable balance on a monthly basis and is in regular contact with this customer to mitigate risk. There is a concentration of credit risk for cash at bank and cash on deposit as all monies in Australia (including Term Deposit) is with one financial institution, St George Bank. Liquidity risk Vigilant liquidity risk management requires the consolidated entity to maintain sufficient liquid assets (mainly cash and cash equivalents) and available borrowing facilities to be able to pay debts as and when they become due and payable. The consolidated entity manages liquidity risk by maintaining adequate cash reserves and available borrowing facilities by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. The consolidated entity raises capital in the form of ordinary shares and convertible notes, as and when needed to fund its cash flow requirements. The consolidated entity also negotiates, where applicable, for the conversion of convertible notes into equity (refer to note 21) and debt for equity swaps in relation to capitalised interest and expenses reimbursement. Financing arrangements Unused borrowing facilities at the reporting date: Bank loans Consolidated 2011 $'000 2010 $'000 403 633 Subject to the continuance of satisfactory credit ratings, the bank loan facilities may be drawn at any time. 75 TZ Limited Notes to the financial statements 30 June 2011 Note 33. Financial instruments (continued) Remaining contractual maturities The following tables detail the consolidated entity's remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of financial position. Consolidated - 2011 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing - variable Bank loans Interest-bearing - fixed rate Convertible notes Interest payable on convertible notes Total non-derivatives Consolidated - 2010 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing - variable Bank loans Interest-bearing - fixed rate Convertible notes Interest payable on convertible notes Total non-derivatives Weighted average interest rate % 1 year or less $'000 Between 1 and 2 years $'000 Between 2 and 5 years Over 5 years $'000 $'000 - - 1,739 2,602 6.25 729 - - - - - - 10.00 - 12,000 5,989 - 1,799 6,869 1,368 13,368 1,358 7,347 - - - - - - Weighted average interest rate % 1 year or less $'000 Between 1 and 2 years $'000 Between 2 and 5 years Over 5 years $'000 $'000 - - 2,349 1,369 3.25 741 - - - - - - 10.00 5,241 - 13,714 - 2,918 12,618 1,371 1,371 514 14,228 - - - - - - Remaining contractual maturities $'000 1,739 2,602 729 17,989 4,525 27,584 Remaining contractual maturities $'000 2,349 1,369 741 18,955 4,803 28,217 The cash flows in the maturity analysis above are not expected to occur significantly earlier than disclosed. 76 TZ Limited Notes to the financial statements 30 June 2011 Note 33. Financial instruments (continued) Fair value of financial instruments The following tables detail the consolidated entity's fair values of financial instruments categorised by the following levels: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs) Consolidated - 2011 Liabilities Derivative instrument liabilities Total liabilities Consolidated - 2010 Liabilities Derivative instrument liabilities Total liabilities Level 1 $'000 Level 2 $'000 Level 3 $'000 Total $'000 - - 4,411 4,411 Level 1 $'000 Level 2 $'000 Level 3 $'000 - - 9,062 9,062 - - - - 4,411 4,411 Total $'000 9,062 9,062 There were no transfers between levels during the financial year. Unless otherwise stated, the carrying amounts of financial instruments reflect their fair value. The carrying amounts of trade receivables and trade payables are assumed to approximate their fair values due to their short-term nature. The fair value of financial liabilities is estimated by discounting the remaining contractual maturities at the current market interest rate that is available for similar financial instruments. Note 34. Key management personnel disclosures Directors The following persons were directors of TZ Limited during the financial year: Mark Bouris Kenneth Ting Dickory Rudduck Executive Chairman Executive Director and Company Secretary Executive Director Other key management personnel The following persons also had the authority and responsibility for planning, directing and controlling the major activities of the consolidated entity, directly or indirectly, during the financial year: Mark Schwartz Paul Casey (appointed on 12 May 2011) John Wilson William Leong (appointed on 1 October 2010) Timothy Koehler Chief Executive Officer of PDT Inc. Non-Executive Director of PDT Inc. Chief Executive Officer of Telezygology Inc. Vice President Operations of Telezygology Inc. Chief Financial Officer of Telezygology Inc. 77 TZ Limited Notes to the financial statements 30 June 2011 Note 34. Key management personnel disclosures (continued) Compensation The aggregate compensation made to directors and other members of key management personnel of consolidated entity is set out below: the Short-term employee benefits Post-employment benefits Share-based payments Consolidated 2011 $ 2010 $ 2,015,537 12,157 2,302,608 1,938,971 16,566 2,214,711 - - 4,330,302 4,170,248 Shareholding The number of shares in the parent entity held during the financial year by each director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: 2011 Ordinary shares M Bouris K Ting D Rudduck M Schwartz P Casey * J Wilson Balance at the start of the year Received as part of remuneration Additions Disposals/ other - 72,725 992,498 80,016 - 58,142 1,203,381 800,000 600,000 - - - - 1,400,000 287,967 328,250 - - 90,000 - 706,217 - - - (80,016) - - (80,016) Balance at the end of the year 1,087,967 1,000,975 992,498 - 90,000 58,142 3,229,582 * Additions represent existing shareholding at necessarily a purchase of shares in the year time of apppointment as key management personnel, not The number of shareholdings held nominally are as follows: M Bouris - 1,066,667; K Ting - 1,000,975; D Rudduck - 978,596; P Casey - 90,000; and J Wilson - 58,142. Balance at the start of the year Received as part of remuneration Additions Disposals/ other 72,725 1,100,000 80,016 58,142 5,000 1,315,883 - - - - - - - - - - - - - (107,502) - - (5,000) (112,502) Balance at the end of the year 72,725 992,498 80,016 58,142 - 1,203,381 represents individuals who are no longer key management personnel, not a disposal of 2010 Ordinary shares K Ting D Rudduck M Schwartz J Wilson J Freese * * Disposal/other shareholding. 78 TZ Limited Notes to the financial statements 30 June 2011 Note 34. Key management personnel disclosures (continued) Option holding The number of options over ordinary shares in the parent entity held during the financial year by each director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: 2011 Options over ordinary shares M Bouris K Ting D Rudduck M Schwartz W Leong * T Koehler Balance at the start of the year 3,000,000 2,250,000 10,000 85,000 - 35,000 5,380,000 Granted Exercised Expired/ forfeited/ other Balance at the end of the year - - - - 10,000 - 10,000 - - - - - - - - - - (75,000) - (5,000) (80,000) 3,000,000 2,250,000 10,000 10,000 10,000 30,000 5,310,000 * Granted relates to option holding at time of appointment to key management personnel, not necessarily a grant of options during the year. 2011 Options over ordinary shares M Bouris K Ting D Rudduck M Schwartz W Leong T Koehler 2010 Options over ordinary shares W de Vlugt M Bouris K Ting D Rudduck M Schwartz T Koehler J Freese * R Pagorek * Vested and exercisable Vested and unexercisable - - 10,000 10,000 10,000 30,000 60,000 1,000,000 750,000 - - - - 1,750,000 Vested at the end of the year 1,000,000 750,000 10,000 10,000 10,000 30,000 1,810,000 Balance at the start of the year Granted Exercised - - - 10,000 85,000 35,000 172,500 66,666 369,166 450,000 3,000,000 2,250,000 - - - - - 5,700,000 - - - - - - - - - Expired/ forfeited/ other Balance at the end of the year (450,000) - - - - - (172,500) (66,666) (689,166) - 3,000,000 2,250,000 10,000 85,000 35,000 - - 5,380,000 * Expired/forfeited/other represents individuals who are no longer key management personnel, not a physical disposal 79 TZ Limited Notes to the financial statements 30 June 2011 Note 34. Key management personnel disclosures (continued) 2010 Options over ordinary shares D Rudduck M Schwartz T Koehler J Freese R Pagorek Vested and exercisable Vested and unexercisable 10,000 85,000 35,000 172,500 66,666 369,166 - - - - - - Vested at the end of the year 10,000 85,000 35,000 172,500 66,666 369,166 Performance rights holding The number of performance rights over ordinary shares in the parent entity held during the financial year by each director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: 2011 Performance rights over ordinary shares M Bouris K Ting 2011 Performance rights over ordinary shares M Bouris K Ting 2010 Performance rights over ordinary shares W de Vlugt * M Bouris K Ting Balance at the start of the year 1,600,000 1,200,000 2,800,000 Granted Exercised Expired/ forfeited/ other Balance at the end of the year - - - (800,000) (600,000) (1,400,000) - - - 800,000 600,000 1,400,000 Vested and exercisable Vested and unexercisable Vested at the end of the year - - - 800,000 600,000 1,400,000 800,000 600,000 1,400,000 Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year - - - - 200,000 1,600,000 1,200,000 3,000,000 - - - - (200,000) - - (200,000) - 1,600,000 1,200,000 2,800,000 * Expired/forfeited/other represents individuals who are no longer key management personnel, not a physical disposal 2010 Performance rights over ordinary shares M Bouris K Ting Vested and exercisable Vested and unexercisable Vested at the end of the year 800,000 600,000 1,400,000 - - - 800,000 600,000 1,400,000 80 TZ Limited Notes to the financial statements 30 June 2011 Note 34. Key management personnel disclosures (continued) Related party transactions Related party transactions are set out in note 39. Note 35. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by BDO Audit (NSW-VIC) Pty Limited, the auditor of the company, and its related practices: Audit services - BDO Audit (NSW-VIC) Pty Limited Audit or review of the financial report Other services - BDO Audit (NSW-VIC) Pty Limited Corporate advisory Audit services - related practices Audit or review of the financial report Other services - related practices Audit of the benefit plan Related practices above relate to BDO USA LLP. Consolidated 2011 $ 2010 $ 110,000 149,205 12,000 - - - 122,000 149,205 96,452 71,887 13,177 - - - 109,629 71,887 81 TZ Limited Notes to the financial statements 30 June 2011 Note 36. Contingent assets Litigation proceedings - Australia (i) Reimbursement from QVT of withholding tax (ii) Consolidated 2011 $'000 2010 $'000 - 760 760 14,056 582 14,638 - - (i) A hearing was scheduled in the Supreme Court of New South Wales for 5 September 2011. The consolidated entity was seeking to recover $13,230,536 loans to and receivables from directors and related entities, plus costs to 30 June 2010 of $826,407. Settlement has been reached with the defendants on 17 August 2011, and the hearing will not be proceeding at this time. Refer also to note 36 for details of the contingent liability in respect of this. (ii) Under the terms of the Convertible Note Subscription Deed, in the event that withholding tax is payable on any interest payments to QVT, TZ Limited is required to gross up the interest payments such that QVT receives the same amount of interest that would have been received if withholding tax was not applicable. Furthermore, the Deed provides that in the event that QVT receives a benefit, in the form of a tax credit, QVT will reimburse TZ Limited for this amount. Note 37. Contingent liabilities A Sigalla Claim A claim was received during the 2010 financial year by the consolidated entity from former director Andrew Sigalla in the amount of $1,160,000 plus health care and related Visa costs which Mr Sigalla claims is owing to him and ZMS Investments Pty Limited. The claim is made in respect of Mr Sigalla's resignation as an employee in June 2009. As part of a settlement deed entered with Mr Sigalla on 17 August 2011, Mr Sigalla has abandoned this claim. Participation in joint venture – Intanova Pty Limited Under the shareholders agreement between TZ Limited (‘TZL’), Telezygology Inc ('TZI'), Interco Pty Limited (‘Interco’) and Yatabi Australia Pty Limited (‘Yatabi’), TZI had the option to subscribe to a further 500,000 shares in Intanova Pty Limited (‘the company’) at a price of $0.80. This option has now expired. By choosing not to exercise the option by the due date, under clause 19.3(v) of the Deed and until such time as a Reversionary Notice is served, the status quo shall continue unaltered. If a Reversionary Notice is served and provided that such a notice is not subsequently overturned in accordance with the procedure set out in clause 19.3(b) to (d) of the Deed, then the following shall occur: • TZI must transfer all of its shares in Interco to Yatabi and Interco for $1.00. • TZI must pay $81,657.80 to each of Interco and Yatabi. • TZI must grant the royalty-bearing Reversionary License to the company and make available the TZI Manufacturing Assets (the Traditional License will automatically terminate). • TZI must appoint the company as non-exclusive distributor of New Products (products which are specifically designed by TZI to integrate with Future Wall) in Australia, NZ and the UK. 82 TZ Limited Notes to the financial statements 30 June 2011 Note 38. Commitments for expenditure Lease commitments - operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years More than five years Consolidated 2011 $'000 2010 $'000 749 2,009 700 750 1,868 - - - 3,458 2,618 The consolidated entity leases various premises under non-cancellable operating leases expiring between one and six years. All leases have annual CPI escalation clauses. The above commitments do not include any turnover rentals which are contingent upon the consolidated entity achieving defined sales levels. Nor do they include commitments for any renewal options on leases. Lease terms usually run for 5 years with a 5 year renewal option. Lease conditions do not impose any restrictions on the ability of TZ Limited and its subsidiaries from borrowing further funds or paying dividends. Note 39. Related party transactions Parent entity TZ Limited is the parent entity. Subsidiaries Interests in subsidiaries are set out in note 41. Joint ventures Interests in joint ventures are set out in note 42. Key management personnel Disclosures relating to key management personnel are set out in note 34 and the remuneration report in the directors' report. 83 TZ Limited Notes to the financial statements 30 June 2011 Note 39. Related party transactions (continued) Transactions with related parties The following transactions occurred with related parties: Payment for other expenses: Accounting fees charged by Yellow Brick Road Accounting and Wealth Management Pty Limited, a company in which Mark Bouris is a director. Consultancy fees charged by IX Consulting Pty Limited, a company in which John Wilson is a director. Rent and serviced office expenditure paid to State Capital Property Pty Limited, a company in which Mark Bouris is a director. Directors and Officers Insurance Policy was arranged by Yellow Brick Road Wealth Management Pty Limited (formerly YBR General Insurance Brokers Pty Limited), a company in which Mark Bouris is a director. Total booking fees paid to The Surf Travel Company Holdings Pty Ltd, a company in which Mark Bouris is an associate. Administration fees and storage costs paid to YBR Services Pty Ltd, a company in which Mark Bouris is a director. Marketing expenses paid to Yellow Brick Road Group Pty Limited, a company in which Mark Bouris is a director. Consolidated 2011 $ 2010 $ 431,699 335,087 390,000 107,526 127,408 140,931 7,500 7,500 360 1,571 39,670 100,000 - - Receivable from and payable to related parties The following balances are outstanding at the reporting date in relation to transactions with related parties: Current payables: Accounting fees payable to Yellow Brick Road Accounting and Wealth Management Pty Ltd, a company in which Mark Bouris is a director. Consultancy fee payable to IX Consulting Pty Limited, a company in which John Wilson is a director. Phone expense and remaining rental bond payable to State Capital Property Pty Limited, a company in which Mark Bouris is a director. Loans to/from related parties There were no loans to or from related parties at the reporting date. Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. Consolidated 2011 $ 2010 $ 36,183 50,145 38,500 47,183 - - 84 TZ Limited Notes to the financial statements 30 June 2011 Note 40. Parent entity information Set out below is the supplementary information about the parent entity. Statement of comprehensive income Loss after income tax Total comprehensive income Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Equity Contributed equity Other contributed equity Accumulated losses Total equity Parent 2011 $'000 2010 $'000 (14,634) (27,564) (14,634) (27,564) Parent 2011 $'000 2010 $'000 6,095 287 29,428 47,563 2,028 7,998 16,644 22,211 149,113 - (136,329) 125,907 4,768 (105,323) 12,784 25,352 Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2011. Capital commitments - Property, plant and equipment The parent entity had no capital commitments for property, plant and equipment at as 30 June 2011 and 30 June 2010. Significant accounting policies The accounting policies of the parent entity are consistent with those of the consolidated entity, as disclosed in note 1, except for the following: Investments in subsidiaries are accounted for at cost, less any impairment. Investments in joint ventures are accounted for in the parent entity financial statements using the cost method, less any impairment. Income earned from joint venture entities is recognised as revenue in the parent entity’s profit or loss. 85 TZ Limited Notes to the financial statements 30 June 2011 Note 41. Subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1: Name of entity Telezygology, Inc. PDT Holdings, Inc. Product Development Technologies, Inc PDT Tooling, Inc. PDT Southeast Limited Liability Company (LLC) * CJSC PDT Ukraine TZI Australia Pty Limited Country of incorporation United States of America United States of America United States of America United States of America United States of America Ukraine Australia * An LLC is treated as a partnership for US purposes. Note 42. Interests in joint ventures Equity holding 2011 % 2010 % 100.00 100.00 100.00 100.00 100.00 90.00 100.00 100.00 100.00 100.00 100.00 100.00 90.00 - Interests in joint ventures are accounted for using the equity method of accounting. Information relating to joint ventures is set out below: Joint venture Principal activities Consolidated Percentage interest 2011 2010 % % Intanova Pty Limited Marketing, supply and interior fit-out solutions in Australia 50.00 - Intanova Pty Limited is a joint venture formed between Telezygology Inc. ('TZI'), Yatabi Australia Pty Ltd and Interco Pty Ltd to leverage the existing awareness and acceptance of the FutureWall System in the marketplace. TZI currently holds a 50% interest in Intanova Pty Limited. Intanova carries on the business of marketing, supply and interior fit-out solutions in Australia. 86 TZ Limited Notes to the financial statements 30 June 2011 Note 42. Interests in joint ventures (continued) Information relating to the joint venture partnership is set out below. Share of assets and liabilities Current assets Non-current assets Total assets Current liabilities Total liabilities Net assets Share of revenue, expenses and results Revenue Expenses - - - - - - Loss before income tax - - Consolidated 2011 $'000 2010 $'000 94 31 125 41 41 84 63 (280) (217) - - - - - - - - - 87 TZ Limited Notes to the financial statements 30 June 2011 Note 43. Events occurring after the reporting date Settlement of the dispute with former director and related parties The company entered into a deed of settlement with Mr Andrew Sigalla and persons and entities associated with him, including ZMS Investments Pty Limited ('ZMS') (Receivers and Managers Appointed - In Liquidation) and BZI Pty Limited ('BZI'), to settle all legal proceedings between the parties (the 'Proceedings'), the hearing for which was due to commence in the Supreme Court of New South Wales on 5 September 2011. The deed of settlement was conditional on formal court orders being entered by the Supreme Court of New South Wales to discontinue the Proceedings on a without prejudice basis and on the removal of ASIC's freezing orders against Mr Sigalla and BZI. These conditions were satisfied on 23 August 2011. Under the terms of the deed of settlement, the company has agreed to accept a sum of money in full and final settlement of all claims that the company was alleging against Mr Sigalla, ZMS and BZI. The company and its related corporations have released Mr Sigalla, ZMS and BZI from all claims that the company and its related corporations were alleging in the Proceedings. Mr Sigalla has also released the company and its related corporations from all claims he was alleging in the Proceedings. It was represented to the company that the settlement moneys received by the company on 25 August 2011 came from a third party and not from either Mr Sigalla, ZMS or BZI. The company had sought the consent of the trustee in bankruptcy to Mr Sigalla’s bankrupt estate to the terms of the deed of settlement and the trustee's agreement that the bankrupt estate will have no claim to any of the settlement moneys to be paid to the company. The company was unable to obtain that consent or agreement from the trustee in bankruptcy to Mr Sigalla's bankrupt estate. The settlement was reached on the basis that there were no admissions of liability made by any party to the proceedings. Participation in Joint Venture - Intanova Pty Limited The company has an option to purchase 500,000 additional shares in Intanova Pty Limited. This option was exercisable between 1 February 2011 and 15 March 2011. The option was not exercised, however, the shareholders of Intanova Pty Limited have been in negotiations regarding numerous terms of the original shareholders agreement, including an extension of the option exercise period until 31 December 2011. At the date of this report the new agreement had not been finalised. Distribution Agreement with Anixter International Limited On 28 July 2011, Telezygology Inc. entered into a distribution agreement with Anixter International Limited for the distribution of the company’s infrastructure protection products in Europe, the Middle East and Africa. The agreement references the terms and conditions set out in the 2009 Distributor Agreement with Anixter Inc. with specific amendments to address regional preferences for initial inventory and preferential payment terms. Supply and Distribution Agreement with Bear River Associates On 22 August 2011, Telezygology Inc. entered into a supply and distribution agreement with Bear River Associates, a privately-held logistics tracking software development company, located in Oakland, California for the turn-key supply and distribution of the company’s TZ Courier products. Under the terms of the supply and distribution agreement, Bear River will promote and market an integrated solution that combines the TZ Courier™ Intelligent Locker System with its BearTracks software to an exclusive and defined list of established Bear River corporate and public sector customers in the United States. Supply Agreement with NEXTDC Limited and Anixter Australia Pty Limited On 7 September 2011, TZ Limited and its wholly owned subsidiary, Telezygology Inc. entered into a supply agreement with TZI's distributor, Anixter Australia Pty Limited ('Anixter'), and NEXTDC Limited ('NEXTDC') for the supply of the TZ Centurion™ System for NEXTDC’s cabinet-level micro-protection solution at its Brisbane and Melbourne data centres in accordance with agreed purchase orders. Under the terms of the supply agreement, TZ Limited agrees to guarantee the performance of TZI's and Anixter's obligations under the supply agreement. 88 TZ Limited Notes to the financial statements 30 June 2011 Note 44. Reconciliation of loss after income tax to net cash used in operating activities Loss after income tax (expense)/benefit for the year - - (8,784) (26,347) Consolidated 2011 $'000 2010 $'000 Adjustments for: Depreciation and amortisation Share-based payments Foreign exchange differences Interest accrued on convertible notes Net fair value loss/(gain) of derivatives Net fair value loss on convertible notes Loss/(gain) on debt for equity swap Change in operating assets and liabilities: Increase in trade and other receivables (Increase)/decrease in inventories Increase in deferred tax assets Increase in prepayments Increase in trade and other payables Increase in provision for income tax Increase in deferred tax liabilities Increase/(decrease) in employee benefits Decrease in other operating liabilities 1,856 2,303 - 3,899 (6,607) - (190) (172) (164) (116) (8) 410 38 116 29 (163) 2,228 2,342 17 4,978 6,158 5,627 (1,108) (1,648) 120 (227) - 3,467 - 47 (6) - Net cash used in operating activities - - (7,553) (4,352) Note 45. Earnings per share Consolidated 2011 $'000 2010 $'000 Loss after income tax attributable to the owners of TZ Limited (8,784) (26,347) Weighted average number of ordinary shares used in calculating basic earnings per share 97,532,407 53,268,007 Weighted average number of ordinary shares used in calculating diluted earnings per share 97,532,407 53,268,007 Number Number Basic earnings per share Diluted earnings per share Cents Cents (9.01) (9.01) (49.46) (49.46) For the purpose calculating the diluted earnings per share the denominator has excluded the number of options as the effect would be anti-dilutive. 89 TZ Limited Notes to the financial statements 30 June 2011 Note 46. Share-based payments Director and Executive Equity Plan The Director and Executive Equity Plan ('DEEP') was approved by shareholders at 2009 Annual General Meeting that was held on 26 February 2010. It gives directors and senior executives the opportunity to participate in the plan. There were three tranches of options and two tranches of rights granted to the directors during the year. Each tranche of options has a fixed number granted with vesting periods from 1 to 3 years. The rights granted to the directors are at a zero exercise price, which entitle the holder to acquire fully paid ordinary shares in the company, without payment. Each right entitles the holder to acquire one fully paid ordinary share in the company. The first tranche of rights vested immediately. In the case of the second tranche of rights, the satisfaction of a performance hurdle must be achieved before the rights can be exercised. There were three tranches of options granted to the directors during the year ended 30 June 2010. Each option, when validly exercised, entitles the holder to received one fully paid share in the company. The first tranche of options will be exercisable in the period from 1 July 2011 to 30 June 2016 at an exercise price of $1.00 per option. The second tranche of options will be exercisable in the period from 1 July 2012 to 30 June 2017 at an exercise price of $2.00 per option. The third tranche of options will be exercisable in the period from 1 July 2013 to 30 June 2018 at an exercise price of $3.00 per option. There were no share options or performance rights granted in the current financial year. Set out below are summaries of options granted under the plan: 2011 Grant date Expiry date 02/07-01/08 31/05/11 01/08-08/08 25/08/11 * 01/08-11/08 11/11-12/11 01/01/08 31/12/10 18/01/08 18/01/11 18/01/08 19/01/11 20/01/08 20/01/11 08/02/08 07/02/11 24/10/08 24/10/11 * 24/10/08 24/10/11 * 15/05/09 15/05/12 * 26/02/10 30/06/16 26/02/10 30/06/17 26/02/10 30/06/18 05/03/10 05/03/11 Exercise price Balance at the start of the year Granted Exercised Expired $4.88 $6.00 $6.00 $6.00 $3.75 $3.75 $3.00 $6.00 $2.50 $2.50 $2.50 $1.00 $2.00 $3.00 $1.00 90,000 116,666 142,250 310,125 100,000 195,000 149,000 75,000 850,000 150,000 65,000 1,750,000 1,750,000 1,750,000 150,000 7,643,041 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (90,000) - (142,250) (310,125) (100,000) (195,000) (149,000) (75,000) - - - - - - (150,000) (1,211,375) Balance at the end of the year - 116,666 - - - - - - 850,000 150,000 65,000 1,750,000 1,750,000 1,750,000 - 6,431,666 90 TZ Limited Notes to the financial statements 30 June 2011 Note 46. Share-based payments (continued) 2010 Grant date Expiry date 02/07-01/08 31/05/11 * 01/08-08/08 01/11-08/11 * 01/08-11/08 11/11-12/11 * 01/01/08 31/12/10 * 18/01/08 18/01/11 * 18/01/08 19/01/11 * 20/01/08 20/01/11 * 08/02/08 07/02/11 * 24/10/08 24/10/11 * 24/10/08 24/10/11 * 15/05/09 15/05/12 * 26/02/10 30/06/16 26/02/10 30/06/17 26/02/10 30/06/18 05/03/10 05/03/11 * Other options ** Exercise price Balance at the start of the year Granted Exercised $4.88 $6.00 $6.00 $6.00 $3.75 $3.75 $3.00 $6.00 $2.50 $2.50 $2.50 $1.00 $2.00 $3.00 $1.00 90,000 116,666 142,250 310,125 100,000 195,000 149,000 75,000 850,000 150,000 65,000 - - - - 1,260,833 3,503,874 - - - - - - - - - - 1,900,000 1,900,000 1,900,000 150,000 - 5,850,000 - - - - - - - - - - - - - - - - - Expired/ forfeited - - - - - - - - - - - (150,000) (150,000) (150,000) - (1,260,833) (1,710,833) Balance at the end of the year 90,000 116,666 142,250 310,125 100,000 195,000 149,000 75,000 850,000 150,000 65,000 1,750,000 1,750,000 1,750,000 150,000 - 7,643,041 * These options were fully exercisable at the end of the financial year. ** Of the expired/forfeited other options in the 2010 financial year, 1,000,000 expired and the remaining 260,833 were forfeited. The weighted average remaining contractual life of options outstanding at the end of the financial year was 4.96 years (2010: 5.09 years). Set out below are summaries of performance rights granted under the plan: 2011 Grant date Expiry date Share price target for vesting Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year 26/02/10 30/06/12 $0.00 2,880,000 2,880,000 - - (1,480,000) (1,480,000) - - 1,400,000 1,400,000 2010 Grant date Expiry date Share price target for vesting Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year 26/02/10 30/06/12 $0.00 - - 3,000,000 3,000,000 - - (120,000) (120,000) 2,880,000 2,880,000 The weighted average remaining contractual life of performance rights outstanding at the end of the financial year was 1 year (2010: 2 years). 91 TZ Limited Notes to the financial statements 30 June 2011 Note 46. Share-based payments (continued) The following table highlights the share-based payment expense per categories: Share-based payment expense recognised during the financial year: Options issued to employees Options issued under Director & Executive Equity Plan Rights issued under Director & Executuve Equity Plan Options issued for other compensation Consolidated 2011 $'000 2010 $'000 - 1,476 827 - 93 623 1,592 34 - - 2,303 2,342 92 TZ Limited Directors' declaration In the directors' opinion: the attached financial statements and notes thereto comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; the attached financial statements and notes thereto comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 1 to the financial statements; the attached financial statements and notes thereto give a true and fair view of the consolidated entity's financial position as at 30 June 2011 and of its performance for the financial year ended on that date; and there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. The directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of directors made pursuant to section 295(5) of the Corporations Act 2001. On behalf of the directors ________________________________ Mark Bouris Director ________________________________ Kenneth Ting Director 30 September 2011 Sydney 93 94 95 96 TZ Limited Shareholder information 30 June 2011 The shareholder information set out below was applicable as at 9 September 2011. Distribution of equitable securities Analysis of number of equitable security holders by size of holding: Number of holders of options over ordinary shares Number of holders of ordinary shares 875 920 295 474 136 2,700 956 - 2 104 3 4 113 - - - - - - - 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Holding less than a marketable parcel Equity security holders Twenty largest quoted equity security holders The names of the twenty largest security holders of quoted equity securities are listed below: Ordinary shares % of total shares issued Number held Deutsche Bank AG London National Nominees Limited Deutsche Bank AG London HSBC Custody Nominees (Australia) Limited NGP Investments (No 2) Pty Limited NEFCO Nominees Pty Ltd Colbern Fiduciary Nominees Pty Ltd Surflodge Pty Ltd JP Morgan Nominees Australia Limited Mr John Michael Bouman + Ms Amanda Louise Mitchell Harrolds at Toorak Pty Ltd Deutsche Bank AG London Mr Patrick Chew Penson Australia Nominees Pty Ltd Mr Vincent Hua Kae Tan Mark Leigh Bouris Mr Edward Saxon Reeve + Ms Debbie Lynette Winfield Mr Martin Patrick McManus Mr Kenneth Ting Mr Lindsay James Gallagher + Mrs Esme Gallagher 14,399,999 13,919,807 11,971,769 7,118,027 4,649,087 2,398,708 2,341,998 2,248,600 1,499,691 1,404,022 1,366,218 1,300,947 1,197,055 1,127,185 1,100,000 1,066,667 948,108 891,938 850,000 809,657 11.73 11.34 9.75 5.80 3.79 1.95 1.91 1.83 1.22 1.14 1.11 1.06 0.98 0.92 0.90 0.87 0.77 0.73 0.69 0.66 72,609,483 59.15 97 TZ Limited Shareholder information 30 June 2011 Unquoted equity securities Performance rights over ordinary shares issued Substantial holders Substantial holders in the company are set out below: Deutsche Bank AG London National Nominees Limited Deutsche Bank AG London HSBC Custody Nominees (Australia) Limited Voting rights The voting rights attached to ordinary shares are set out below: Number on issue Number of holders 1,400,000 2 Ordinary shares % of total shares issued 11.73 11.34 9.75 5.80 Number held 14,399,999 13,919,807 11,971,769 7,118,027 Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. There are no other classes of equity securities. 98 Limited TZ Limited Level 11, 1 Chiﬂey Square Sydney, NSW 2000 Australia Telezygology, Inc. 1017 W. Washington Blvd, Unit 2C Chicago, Illinois, 60607 United States PDT, Inc. One Corporate Drive, Suite 110 Lake Zurich, Illinois, 60047 United States www.tz.net

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