NEW ZEALAND EXCHANGE LIMITED ANNUAL REPORT€¦ · NZX has been investing diligently right across the spectrum, and will continue to do so, building real muscle into New Zealand’s

2 0 0 5N E W Z E A L A N D E X C H A N G E L I M I T E D A N N U A L R E P O R T

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C o n t e n t s

1 . C h a i r m a n ’ s R e p o r t

2 . C h i e f E x e c u t i v e ’ s R e p o r t

5 . F i n a n c i a l R e v i e w

1 1 . B o a r d o f D i r e c t o r s

1 9 . F i n a n c i a l s

3 9 . S t a t u t o r y I n f o r m a t i o n

4 7 . D i r e c t o r y

2 0 0 5N E W Z E A L A N D E X C H A N G E L I M I T E D A N N U A L R E P O R T

I s s u e d 3 1 M a rc h 2 0 0 6

Annual Meeting

Annual Meeting of shareholders of NZX will be held at The Icon Room, Level 2, Te Papa

Cable Street, Wellington, New Zealand on Thursday 8 June 2006, commencing at 3.30pm.

Full details, including the business to be dealt with, are contained in the Notice of Meeting

which will be sent to shareholders on or around 22 May 2006.

Financial Calendar

31 December 2005 2005 Financial Year end

17 February 2006 Preliminary Full Year Financial Results issued

March 2006 2005 Annual Report issued

17 March 2006 Record date for dividend payment

7 April 2006 Dividend payment

3.30pm, 6 June 2006 Latest time for receipt of proxies for Annual Meeting

3.30pm, 8 June 2006 Annual Meeting

July 2006 Preliminary Half Year Announcement issued

September 2006 2006 Half Year Report issued

31 December 2006 2006 Financial Year end

AGM AND FINANCIAL CALENDAR

1

CHAIRMAN’S REPORT

2005 has been a strong year for NZX. While the headlines have largely been written about a

national economic downturn, NZX has developed the independent and sustainable revenue

streams that have contributed to an excellent result.

As we stated at the time of our 2005 half-year results, it is incumbent upon NZX, as a key

player in New Zealand’s capital markets, to deliver a high standard of transparency to our

shareholders and to the wider markets. To give that clarity and transparency, we have grouped

this commentary around four key result themes.

Resilience: Th e majority of the 23% increase in operating EBITDA can be attributed to

consistent, reliable and sustainable revenue streams. NZX is now largely independent of short

term market sentiment. While we no longer rely heavily on new listings and index performance,

new listings are of course a vital component of a healthy capital market and we welcome all our

stakeholders playing a part in educating various business sectors in the benefi ts of listing and

encouraging new businesses to access the capital markets.

Operating leverage: NZX’s business is operating to scale. Our revenue is growing faster

then our expenditure and this is proven by a 19% revenue growth and an increase of 46% in

EBITDA.

Subsidiary businesses: Smartshares and Link have reached break even points in scale and,

going forward, will contribute positively to the NZX Group cashfl ow.

Strong cashfl ow: Th e sound operating EBITDA result reiterates sustainability and allows us to

have fl exibility in our capital and dividend policy.

Together these form a picture of a business that is built to withstand – and thrive in – any

climatic conditions.

In addition, we have made a signifi cant announcement regarding the NZX capital policy.

NZX’s new dividend policy is based on a payout ratio of around 60% of NPAT. Th e dividend

for the 2005 fi nancial year will be $.25 per share, fully imputed. NZX will also distribute

approximately $16.2 million to shareholders by way of a return of its entire store of available

subscribed capital pro-rata to all shareholders.

Th is signals an exciting new step along NZX’s evolutionary path, and also serves as an

acknowledgement of the critical role played by our shareholders in our success.

NZX will continue to aggressively pursue growth and even after this signifi cant return of capital,

will maintain signifi cant capacity to fund growth. Given NZX’s strong track record since listing

two and a half years ago, NZX is in a position to take advantage of numerous fi nancing options,

including raising debt, should this prove attractive.

On behalf of the Board and the team at NZX, I off er my congratulations and thanks to our

shareholders for the ongoing confi dence we share in the future of New Zealand’s capital markets.

Simon Allen, Chairman

30 March 2006

2 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

NZX is about infrastructure

Infrastructure. It’s invariably expensive, often invisible and inevitably taken for granted, but

economies and civilisations would not survive without it.

NZX is about infrastructure. NZX builds, maintains and constantly improves the infrastructure

of New Zealand’s capital markets. It’s a job we’re proud to do.

Healthy capital markets ensure New Zealand’s competitiveness for global

investment fl ows. Th ey encourage a strong savings culture amongst New

Zealanders. Th ey lead to effi cient, low cost delivery of investment products.

And they support a competitive environment for investment services.

In past years capital markets infrastructure in New Zealand suff ered

neglect. Its associated assets were stripped, leaving an emaciated frame in

slightly shabby clothing.

NZX could care less about the clothes, but we care intensely about the

health of the body underneath. Th at body is our infrastructure, and it’s

critical for the sustainability and competitiveness of New Zealand’s

fi nancial markets and the plethora of associated industries.

Th e four key components of capital market infrastructure are:

Trust and confi dence

Technology and systems

Business processes and standards

Regulation and policy.

NZX has been investing diligently right across the spectrum, and will continue to do so, building

real muscle into New Zealand’s capital markets.

For investors in NZX, muscle-building means certainty about our strategy and exposure to solid

long term growth. For investors in New Zealand and in NZX listed securities, it means easy

access to a range of sound choices, and all the information they need to make the best savings and

investment decisions. For listed companies, it means local and international access to investors

who have increasing confi dence in the quality of New Zealand investments. It also means

accurate and predictable pricing for their stock available, real time, around the world. And for

the New Zealand economy, it means our entrepreneurial export, manufacturing, agricultural,

technology and, increasingly, energy and infrastructure sectors have access to capital via an

investment-hungry universe: capital that is essential to grow, to forge new markets, to develop

new capabilities, to employ more people and, ultimately, to reinvest for further growth.

CHIEF EXECUTIVE’S REPORT

Healthy capital markets ensure

New Zealand’s competitiveness

for global investment flows.

They encourage a strong savings

culture amongst New Zealanders.

They lead to efficient, low cost

delivery of investment products.

3

NZX in 2005 – muscle moves markets

Trading activity, measured by average daily value traded, increased 16%. Th e average

annual increase over the last two years has been 18%.

Automated trading strategies, through the use of DMA, have increased the average daily

new or amended orders in our market by 82%.

Our market supervision team handled 135 rulings and waivers and in each case met their

delivery commitments. In the last three years the eff ectiveness of this team has increased

dramatically.

Two of New Zealand’s four major banks have become distribution and underwriting

sponsors, signaling the value delivered by NZX infrastructure in supporting effi cient

distribution of investment grade credit products.

NZX co-led a group of market stakeholders to initiate a change to the tax treatment of

stock lending transactions, which means market participants can prepare for a new level of

transactional activity.

Th e listing of Vector set an important precedent for public ownership of important utility

and infrastructure assets. Th e successful fl oat leaves the Trustees of Auckland Energy

Consumer Trust in control of 75% of voting shares while providing New Zealand investors

an investment opportunity. We are confi dent more will follow this path.

NZX has also matured as a company. Since I joined in 2002, we have grown our team to 65

people from a base of 30. We have strong and passionate team dedicated living and working to

our core values: Brave, Vital, Team, Results, Accountable, Leader and Advancing

New Zealand.

NZX in 2006

Th is year NZX is building more muscle and stamina into our markets, delivering greater

value to shareholders, to our wider stakeholder community and, ultimately, to the New

Zealand economy.

Muscle is the economic value delivered by NZX…

… reflected in:

Th e number of new companies and new sectors represented on our markets.

Continued growth in secondary capital raisings.

Ongoing growth in trading volumes, more and more of which will be facilitated by DMA and new trading strategies.

Stimulated growth in demand for information about our markets both domestically and, increasingly, off shore.


Stamina is the network value sustained by NZX…

…reflected in:

Growing numbers of investors, in New Zealand and off shore, being supported by a highly skilled and information-rich professional community.

Listed companies being increasingly partnered by that same community.

Increasing reach throughout New Zealand capital markets via the attraction of new participants and provision of services that extend beyond core equity markets.

An evolving market supervision framework that builds confi dence and trust in our markets.

A broadening range of products.

More points of entry for new investors and more leverage for sophisticated investors.

Speedy, reliable and appropriately costed services to all users.

At the same time we are identifying and examining options for future

growth within the framework of New Zealand’s capital markets

infrastructure.

Our major investments to date - Smartshares and Link Market Services

- have, in addition to delivering solid fi nancial performance, given our

team a much better understanding of the challenges posed by markets

infrastructure in its current state. Th is knowledge and experience

leaves us well placed to make informed investment decisions, both

within, and external to, our current business in future.

We believe there is still enormous potential to invest in and shape the

muscle of New Zealand’s capital markets infrastructure that will yield

major benefi ts for all participants, including banks, custodians, brokers, fi nancial planners,

investment managers and, most importantly, New Zealand investors.

We have confi dence in the long term future of our country. Equally, we know our future will

demand even more markets muscle. NZX is geared to build that muscle through investing in

our people, in market trust and confi dence, and in bringing creative solutions to New Zealand’s

capital market challenges.

Mark WeldonChief Executive Offi cer30 March 2006

CHIEF EXECUTIVE’S REPORT CONTINUED

Smartshares and LINK have, in

addition to delivering solid financial

performance, given our team a

much better understanding of

the challenges posed by markets

infrastructure in its current state.

5

2 0 0 5N E W Z E A L A N D E X C H A N G E L I M I T E D F I N A N C I A L R E V I E W


FINANCIAL REVIEW

I. OVERALL RESULTS

Strong fi nancial results in 2005 refl ect the signifi cant progress made in transforming

NZX’s core business and success with key investments. Just two and half years since

listing, NZX has established a resilient business model that generates a more stable

and dependable revenue. The introduction of a dividend policy and the announcement

of the intention to return $16.2 million of available subscribed capital is a signal, both

of confi dence in NZX’s business model and that all available forms of fi nancing will be

considered to fund further growth.

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NZX MARKETS BUSINESS

NZX’s Markets delivered a particularly strong result. Our core revenue lines of listings,

transactions, and market information increased by 13%, 14%, and 21% respectively. Total

revenue reached $18.1 million, a 13% increase versus 2004. Meanwhile, operating expenses

reached $10.7 million, a 9% increase versus 2004. The overall result was a 15% increase in

EBITDA and refl ects the operating leverage of this business.

Listing fees received from issuers of equity and debt securities for the services provided by

NZX’s market infrastructure totalled $6.6 million, a 13% increase versus 2004. Services

to issuers include the provision of trading facilities, collection and dissemination of market

announcements, the global dissemination of pricing information, and the facilitation of

settlement. While NZX expects medium to long term prospects for major capital raisings

to be strong, shorter term fl uctuations in this activity will not seriously impair NZX fi nancial

performance. NZX has established stable levels of revenue despite an actual decrease in

initial listings or IPO activity. In 2005 revenue received from initial listing fees decreased by

$221,000, or 18% versus 2004.

Importantly, revenue generated from annual, or recurring, fees increased by $655,000, or

18% versus 2004.

NZX MARKETS SMARTSHARES LINK*

$NZ 000s FY 2004 FY 2005 % FY 2004 FY 2005 % FY 2005

OPERATING REVENUE 16,015 18,139 13% 673 1,432 113% 3,117

OPERATING EXPENDITURE 9,818 10,685 9% 652 1,558 139% 2,501

OPERATING EBITDA 6,197 7,454 20% 21 (126) -700% 616

Gain/(loss) on Investments 92 (63) -168% 0 0 0% 0

Non Recurring Income/(Expenditure) (494) (704) 43% (1,043) 0 -100% 0

EBITDA 5,795 6,687 15% (1,022) (126) -88% 616

Depreciation (553) (751) 36% 0 0 0% (413)

Amortisation (55) (129) 135% 0 (28) -100% (113)

EBIT 5,187 5,807 12% (1,022) (154) -85% 90

II. FINANCIAL PERFORMANCE BY BUSINESS UNIT

NZX BUSINESS UNITS STATEMENT OF FINANCIAL PERFORMANCE

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There was an average of 2,587 transactions for $126 million in value per day on NZX’s

markets in 2005. Compared to 2004, average daily transactions were 5% higher and

average daily value was 16% higher. Activity was particularly strong early in the year, but

cooled down during the second half of 2005. Transaction revenue, however, increased

to $4.8 million, a 14% increase versus 2004.

In addition to facilitating the matching of bids and offers, NZX infrastructure also

facilitates fully electronic delivery versus payment settlement of transactions between

market participants, and also the legal title transfer of securities from participants to

their clients.

NZX has made signifi cant investments in the transactions area over the past two

years and expects transaction numbers increase as a result. An open interface to

our trading engine facilitating Direct Market Access (DMA) was introduced for the fi rst

time in the August 2004. Since that time DMA has played a key role in facilitating new

types of automated trading and pricing activity in our market. It also supports product

development efforts by our participants including the introduction of warrants, CFD’s

and options.

Source: NZX Data

FINANCIAL REVIEW CONTINUED

9

In addition to technical infrastructure, NZX has worked hard to support a change in

tax law that will enable stock lending activity. This regulatory infrastructure change is

expected to take effect by mid 2006 and is expected to open our market to additional

levels of trading activity and liquidity.

NZX will continue to invest in development and improvement of the transactional

infrastructure in New Zealand to ensure low cost, effi cient, and standard methods

of trading, clearing and settlement are available to our participants. We expect this

investment to drive further increases in trading activity on our markets.

TRANSACTIONS - NUMBER

FY CHANGE

NZSX 614,766 4%

NZDX 26,829 -2%

NZAX 7,635 26%

Total 649,230 4%

Daily Average 2,587 5%

TRANSACTIONS - VALUE ($M)

FY CHANGE

NZSX 29,630 16%

NZDX 1,952 2%

NZAX 58 67%

Total 31,640 15%

Daily Average 126 16%

Market information revenues are the other major component of our NZX Markets

business revenue. Like listings, this stable revenue is sourced from a large number of

customers both within and outside Australasia. There are more than 7,500 individual

consumers of NZX real time information around the world. Market Information revenue

reached $3.4 million, an increase of 21% versus 2004. This increase has been driven

by a pricing change in July 2005, but also refl ects an increase in underlying demand for

our real time pricing and news information.

While NZX Group expenditure increased by 16%, Markets business expenditure

increased by only 9% in 2005. Total expenditure for the Markets business was $10.7

million; over half of that expenditure covered staff and related costs. Total staff in the

Markets business has remained constant at around 60 throughout the year.

SUBISIDIARIES AND ASSOCIATES

NZX Group has made signifi cant investments outside its core Markets business. In

2004 NZX increased the size and scope of its passive funds management business

and launched Smartshares. Near the end of 2004 NZX also announced a joint venture

in the registry business, Link Market Services. These two businesses are both

performing to expectations and have broken through initial scale thresholds to ensure

future profi tability and operating leverage.

Source: NZX Operating Metrics, Full Year 2005


SMARTSHARES

Smartshares is New Zealand’s leading passive funds manager with four equity based

products. Smartshares manages $195 million in retail funds and also manages over

$100 million of wholesale funds. Smartshares recently received the mandate to run

a passively–managed New Zealand equity sector of the New Zealand Superannuation

Fund (NZSF).

In 2005 Smartshares generated $1.4 million in revenue, a 113% increase versus

2004. This increase is evidence of the growth during 2004 from one fund to four

funds. Importantly, Smartshares has a scalable and effi cient operational model that

will produce increasing profi tability as the business grows. Key product enhancements

such as the Smartshares savings plan and direct purchase are new additions and

enhance the ability to collect additional funds. Smartshares is a 100% owned subsidiary

of NZX Group; its result has been consolidated.

LINK MARKET SERVICES

Link Market Services (LINK) is the second largest share registry services provider in

New Zealand with over 100 clients. LINK was founded in 2004 as a 50/50 joint

venture with Link Market Services Australia. In addition to attracting new clients, LINK

in 2005 acquired BK Registries, and generated $3.1 million in revenue and an EBITDA

of $616,000.

LINK completed a busy year in 2005 with the introduction of a new registry system to

the New Zealand market. During this transition LINK extended its client base and now

serves fi ve of the top NZX 50 companies, including three trans-Tasman issuers.

LINK’s contribution to the NZX Group result is equity accounted and refl ects the impact

of depreciation and amortisation expenses.

III. CASHFLOW AND CAPITAL EXPENDITURE

NZX Group’s cash (or cash equivalent) balance was $25.1 million at 31 December 2005

and has remained very consistent at year end over the last three years. During this same

period, NZX has undergone a signifi cant corporate transformation, made signifi cant

capital investment, and paid a special dividend of $0.40 per share ($5.4 million) in

May 2005. NZX’s stable cash balance demonstrates the quality and dependability of

NZX cashfl ow during a period in which NZX has carried no debt. Importantly, this track

record of performance enables NZX Group to take advantage of capital market fi nancing

options that were not available to it in 2003.

smartshares

FINANCIAL REVIEW CONTINUED

11

Capital expenditure within the Markets business, and the NZX Group, totalled $1.9

million in 2005. The majority of this expenditure was driven by a relocation of

premises within Wellington in July 2005. NZX’s new home at NZX Centre (11 Cable

Street, Wellington) provides an improved working environment and suitable venue for

demonstrating leadership within New Zealand’s capital markets. The vast majority of

the remaining capital expenditure covered the replacement of major computer hardware

supporting transaction settlement.

Major capital expenditure prior to 2005 has included the following items:

Link Market Services - $3.3 million.

Smartshares Funds purchases - $500,000.

Trading engine enhancements, including DMA - $500,000.

SFE agreement to list NZFOX products.

In addition to these capital investments, NZX has also incurred signifi cant non recurring

expenditure to grow the Smartshares business. The launch of funds in 2004 generated

non-recurring expenditure of $1.0 million. Additionally, the collapse of Access Brokerage

in 2004 has generated $838,000 of non-recurring expenditure in 2004 and 2005.

Normal capital expenditure, excluding acquisitions or major development activities, is

generally expected to be less than $500,000 per year.

IV. CAPITAL AND DIVIDEND POLICY

In conjunction with the announcement of its full year result on 17 February 2006, NZX

announced a dividend policy of approximately 60% of NPAT and a return of capital

totaling $16.2 million. The dividend announced for the 2005 fi nancial year was $.25

per share and its payment date is 7 April.

Going forward, NZX will aggressively pursue growth, and will fi nance that growth through

the most effi cient means possible.

Source: NZX Data

12 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORTNEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

DIRECTORS: MARK WELDON, HENRY VAN DER HEYDEN, SIMON ALLEN (CHAIRMAN), NIGEL WILLIAMS (DEPUTY CHAIRMAN), NEIL PAVIOUR-SMITH, ANDREW HARMOS

BOARD OF DIRECTORS

13

BOARD OF DIRECTORS

Simon Christopher Allen – CHAIRMAN BSc, BCom, FSCAP

Simon is Chief Executive of ABN AMRO in New Zealand and has 23 years’ experience in the New Zealand and Australian capital markets.

Simon established BZW (now ABN AMRO) in 1988. ABN AMRO group is a registered bank in New Zealand and provides products and services to Government, corporate and investors. Simon is also a director of several ABN AMRO group companies including 50% owned ABN AMRO Craigs Limited.

Simon has involvement in the New Zealand Business & Parliament Trust (Trustee), St. Cuthbert’s College Trust Board (Director) and is a Fellow of the Institute of Finance Professionals.

Nigel Williams – DEPUTY CHAIRMAN BCom

Nigel has over 20 years’ experience in both New Zealand and overseas capital markets, including his current role as Managing Director, Institutional Markets for the combined ANZ New Zealand Limited and National Bank New Zealand Limited. He has held various senior management roles within the National Bank of New Zealand Limited, including Treasurer, and is currently a member of the Bank‘s principal governance committees. Nigel is also a director of Interchange and Settlement Limited.

Nigel graduated from the University of Otago with a Bachelor of Commerce in Marketing, Accounting and Finance and has also attended advanced management training at the University of Michigan, USA and Oxford University, England.

Andrew William Harmos LLB (Hons), BCom

Andrew is one of the founding partners of Harmos Horton Lusk, an Auckland-based specialist corporate legal advisory fi rm. Andrew was formerly a senior partner of Russell McVeagh, which he left in 2002 after 21 years with that fi rm. He specialises in takeover advice and structuring, securities offerings, company and asset acquisitions and disposals, strategic and board corporate legal advice. He was appointed a director of NZX in 2002, and prior to that has held a number of other listed company directorships. He is a director of the Westfi eld New Zealand group.

Neil Paviour-Smith BCA, CA, ACIS, FCFIP

Neil is Managing Director of Forsyth Barr Limited, a nationwide sharebroking and investment management fi rm, and a director of various related companies. Neil has 17 years’ experience in the New Zealand securities industry including several years in equity funds management and research roles. Neil is a director of listed companies Global Equity Market Securities Limited and Global Corporate Credit Limited.


Neil is an NZX Advisor, a Fellow and past Chairman of the Institute of Finance Professionals NZ, a member of the Institute of Chartered Accountants of NZ, the Institute of Directors, the Institute of Chartered Secretaries NZ, and the CFA Society of NZ.

Henry van der Heyden BEng (Agr) Hons

Henry was appointed to the NZX Board on 6 September 2005. He became Chairman of Fonterra Co-operative Group in September 2002 and is a founding director of the co-operative, which is New Zealand’s largest company operating in over 100 countries internationally. He has contributed to industry governance for 13 years, as both a director and chairman, and played a considerable role in the industry rationalisation that led to Fonterra’s establishment. He has extensive experience in the disciplines of large-scale manufacturing and international exporting and the fi nancial, regulatory, trade and customer infl uences on them. He is a director of Innovation Waikato Limited, Independent Egg Producers (IEP) and King St Advertising, and serves on Waikato University’s School of Management Advisory Board. He is also a Trustee of Asia:New Zealand.

Mark Rhys Weldon – CHIEF EXECUTIVE BA BCom, MEcon (First Class Hons), Doc Jur, Dip

Int’l Law (Hons)

Mark is the Chief Executive of NZX, and works closely with management to implement the Board’s strategies. Mark is also a director of NZX Funds Management Limited and Chairman of Link Market Services Limited.

Mark graduated from Auckland University with a Masters degree in Economics (First Class Honours), a Bachelor of Commerce and a Bachelor of Arts. Mark then studied at the Columbia University School of Law in New York, graduating in 1997 with a Doctorate in Jurisprudence and a Diploma in International Law.

Mark joined leading New York law fi rm Skadden, Arps, Slade, Meagher & Flom as an attorney. While there, he worked extensively in securities law and on mergers and acquisitions. Mark went on to work at the New York offi ce of McKinsey & Company. He specialised in stock exchanges, asset management and wholesale banking (investment and commercial), and general corporate strategy. Mark is a member of the NZX Business Advisory Board and the New Zealand Olympic Committee.

BOARD COMMITTEES

The Remuneration

Committee comprises

Simon Allen (Chair),

Nigel Wiliams and

Henry van der Heyden

The Audit Committee

comprises

Neil Paviour-Smith

(Chair), Nigel Williams

and Simon Allen

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OUR VALUES BRAVE VITAL ACCOUNTABLE LEADER TEAM ADVANCING NEW ZEALAND RESULTS

VITAL ACCOUNTABLE LEADER TEAM ADVANCING NEW ZEALAND RESULTS VITAL ACCOUNTABLE

LEADER TEAM ADVANCING NEW ZEALAND RESULTS VALUES BRAVE VITAL LEADER ACCOUNTABLE

ADVANCING NEW ZEALAND RESULTS VITAL ACCOUNTABLE LEADER TEAM ADVANCING NEW ZEALAND

RESULTS VITAL ACCOUNTABLE LEADER TEAM ADVANCING NEW ZEALAND RESULTS VALUES

BRAVE VITAL ACCOUNTABLE LEADER TEAM ACCOUNTABLE ADVANCING NEW ZEALAND RESULTS


LEADER TEAM ADVANCING NEW ZEALAND RESULTS VALUES BRAVE VITAL ACCOUNTABLE

LEADER TEAM ADVANCING NEW ZEALAND RESULTS VITAL ACCOUNTABLE LEADER TEAM


RESULTS VALUES BRAVE VITAL ACCOUNTABLE LEADER TEAM ADVANCING NEW ZEALAND RESULTS

VITAL ACCOUNTABLE LEADER TEAM ADVANCING NEW ZEALAND RESULTS VITAL

ACCOUNTABLE LEADER TEAM ADVANCING NEW ZEALAND RESULTS VALUES BRAVE VITAL LEADER

ACCOUNTABLE ADVANCING NEW ZEALAND RESULTS VITAL ACCOUNTABLE LEADER TEAM ADVANCING

NEW ZEALAND RESULTS VITAL ACCOUNTABLE LEADER TEAM ADVANCING NEW ZEALAND RESULTS

VALUES BRAVE VITAL ACCOUNTABLE LEADER TEAM ACCOUNTABLE ADVANCING NEW ZEALAND RESULTS

VITAL ACCOUNTABLE LEADER TEAM ADVANCING NEW ZEALAND RESULTS VITAL ACCOUNTABLE LEADER

TEAM ADVANCING NEW ZEALAND RESULTS VALUES BRAVE VITAL ACCOUNTABLE LEADER TEAM

ADVANCING NEW ZEALAND RESULTS VITAL ACCOUNTABLE LEADER TEAM ADVANCING NEW ZEALAND RESULTS

VITAL ACCOUNTABLE LEADER TEAM ADVANCING NEW ZEALAND RESULTS VALUES BRAVE VITAL RESULTS


LEADER TEAM ADVANCING NEW ZEALAND RESULTS VALUES BRAVE VITAL LEADER ACCOUNTABLE


RESULTS VITAL ACCOUNTABLE LEADER TEAM ADVANCING NEW ZEALAND RESULTS VALUES


VITAL ACCOUNTABLE LEADER TEAM ADVANCING NEW ZEALAND RESULTS VITAL

ACCOUNTABLE LEADER TEAM ADVANCING NEW ZEALAND RESULTS VALUES BRAVE VITAL ACCOUNTABLE

LEADER TEAM ADVANCING NEW ZEALAND RESULTS VITAL ACCOUNTABLE LEADER TEAM ADVANCING

NEW ZEALAND RESULTS VITAL ACCOUNTABLE LEADER TEAM ADVANCING NEW ZEALAND RESULTS



LEADER RESULTS ADVANCING NEW ZEALAND RESULTS VALUES BRAVE VITAL LEADER


NZX is committed to ensuring it employs best practice governance structures and principles

in keeping with Appendix 16 of the NZSX Listing Rules (Rules) and the Corporate Governance

Principles and Guidelines published by the Securities Commission.

NZX believes good governance starts at the top with the Board of Directors (the Board) who

are elected by shareholders to direct and control NZX’s activities.

OPERATION OF THE BOARD

The Board is responsible for the overall direction and strategy of NZX. It selects the Chief

Executive and delegates the day to day operation of NZX’s business to the Chief Executive. The

Chief Executive implements policies and strategies set by the Board and is responsible to it.

The Board has established a Code of Ethics that provides a set of principles for Directors to

apply in their conduct and work for NZX. The principles include managing confl icts of interest,

the required skills of Directors, trading in NZX’s shares, and maintaining confi dentiality of

information received in their capacity as Directors of NZX.

BOARD OF DIRECTORS

The Board currently comprises six Directors of whom fi ve are non-Executive Directors. In

accordance with Rule 3.3.1B, the Board has determined that fi ve of the six Directors are

Independent as defi ned in the Rules. The Independent Directors are Simon Allen (Chairman),

Nigel Williams (Deputy Chairman), Andrew Harmos, Neil Paviour-Smith and Henry van der

Heyden. Mark Weldon, the Chief Executive, is the only non-Independent Executive Director on

the Board.

In accordance with the constitution, one third of the Directors are required to retire by rotation

and offer themselves for re-election by shareholders each year.

Meetings of the Board are scheduled in advance. Meeting agenda and papers must be

circulated at least fi ve business days before each meeting to allow Directors suffi cient time

to prepare.

The Board has access to executive management and from time to time, key executive managers

are invited to attend and participate in meetings of the Board. Annually, each executive manager

must present a business plan for their area of responsibility to the Board for approval.

The Board holds regular scheduled meetings (every six weeks) and also holds ad hoc meetings

to consider time sensitive or specifi c issues. During the 2005 fi nancial year, the Board met

(including via teleconference) 12 times.

CORPORATE GOVERNANCE

H R L Morrison announced his retirement as a director of NZX at the meeting on 9 June 2005.

T E C Saunders announced his retirement as a director of NZX at the meeting on 9 June 2005.

The Board appointed H van der Heyden a director of NZX in September 2005

17

COMMITTEES

The Board has two standing committees: an audit committee and a remuneration committee.

AUDIT COMMITTEE

The audit committee operates under a charter, which sets out its role in assisting the Board

with corporate fi nancial matters. It may only comprise Independent Directors and at least one

member of the audit committee must have expertise in accounting.

The audit committee has a clear line of communication with the independent and internal

auditor, and it may, at its discretion, meet with the independent auditor without company

management being present.

The audit committee met four times in the 2005 fi nancial year. The audit committee met with

the independent auditor three times in the 2005 fi nancial year.

REMUNERATION COMMITTEE

The remuneration committee operates under a charter that sets out its role. It assists the

Board in reviewing the remuneration policies and practices of NZX as they relate to the

Directors including any committees that Directors may serve on, and the remuneration of the

Chief Executive.

The remuneration committee comprises entirely non-Executive Directors. The remuneration

committee met three times in the 2005 fi nancial year.

NOMINATIONS

Given the size of the Board, there is no nominations and succession committee. Rather, the

full Board is involved in the Director nomination process.

2005 NZX DIRECTORS’ ATTENDANCE RECORD

Director NZX Board Audit Committee

Remuneration Committee

Simon Allen 12/12 3/4 3/3

Lloyd Morrison 8/9

Andrew Harmos 12/12

Neil Paviour-Smith 12/12 4/4 3/3

Tim Saunders 5/7 3/3

Mark Weldon 12/12

Nigel Williams 12/12 2/2 3/3

Henry van der Heyden 4/4 1/1

H R L Morrison announced his retirement as a director of NZX at the meeting on 9 June 2005.


DISCLOSURE

NZX has internal procedures in place to ensure that key fi nancial and material information

is communicated to the market in a clear and timely manner. In addition to its disclosure

obligations under the Rules, NZX has adopted a quarterly reporting regime and produces

operating metrics monthly. This additional information provides transparency and assists

the market in evaluating NZX’s performance. NZX also maintains a website which provides

contact points for the public and is continuously updated with information regarding NZX and

its releases.

RISK MANAGEMENT

The Board is responsible for ensuring that key business and fi nancial risks are identifi ed and

appropriate controls and procedures are in place to effectively manage those risks. Directors

may seek independent professional advice to assist with their responsibilities. During the

2005 fi nancial year Directors sought independent professional advice where necessary.

INSURANCE AND INDEMNIFICATION

NZX provides indemnity insurance cover to Directors and executive employees. This is explained

further on page 41.

SHARE TRADING

The company has adopted a formal NZX Securities Trading Policy to address insider trading

requirements under the Securities Markets Act 1988. The NZX Securities Trading Policy is

modeled on the Insider Trading (Approved Procedure for Company Offi cers) Notice 1996

(the Notice) and administered by the NZX Securities Trading Committee that consists of the

Corporate Counsel and Chairman of the Board. The NZX Securities Trading Policy restricts

trading in the fi nancial year by prohibiting trading in NZX’s securities during ‘black-out’ periods

set out in the Notice.

If a Director or offi cer wishes to trade NZX securities in a ‘trading window’, that person must

fi rst apply, and obtain, consent from the NZX Securities Trading Committee.

Because of the nature of NZX’s business, any employee who wishes to buy or sell any security

listed on NZX’s markets must follow the NZX Securities Trading Policy and apply to NZX for

consent to trade. This policy is reinforced through individual Employment Agreements.

CORPORATE GOVERNANCE CONTINUED

19

2 0 0 5N E W Z E A L A N D E X C H A N G E L I M I T E D F I N A N C I A L S TAT E M E N T S


Parent Group

Note Dec 2005$000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

Operating revenue 1 18,139 16,015 19,500 16,390

Equity accounted earnings of associate (LINK) - - (34) -

Operating expenses 2 10,685 9,818 12,172 10,469

Operating EBITDA 7,454 6,197 7,294 5,921

Unrealised gain/(loss) on investment bonds (63) 92 (63) 92

Non-recurring income/(expenditure) 10 (704) (494) (704) (1,538)

EBITDA 6,687 5,795 6,527 4,475

Interest expense/(income) (1,647) (1,661) (1,647) (1,661)

Depreciation 2 751 553 751 553

Amortisation 8 129 55 156 55

Surplus before tax 7,454 6,848 7,267 5,528

Tax expense 11 1,985 2,286 2,380 1,851

Net Surplus after tax 5,469 4,562 4,887 3,677

STATEMENT OF FINANCIAL PERFORMANCE

FOR YEAR ENDED 31 DECEMBER 2005

21

STATEMENT OF MOVEMENTS IN SHAREHOLDERS’ FUNDS


Parent Group

Dec 2005$000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

Net Surplus after tax 5,469 4,562 4,887 3,677

Total recognised revenue & expenditure 5,469 4,562 4,887 3,677

Issue of Share Capital 1,780 - 1,780 -

Dividend payment (5,398) - (5,398) -

CEO Share Scheme Shares (1,141) - (1,141) -

Shares held in Subsidiary Company - - 1,141 -

Movement in Shareholders’ funds for the period 710 4,562 1,269 3,677

Shareholders’ funds at beginning of period 32,655 28,093 29,638 25,961

Shareholders’ funds at end of period 33,365 32,655 30,907 29,638


STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2005

S C Allen N Paviour-Smith M R Weldon

Chairman Director Chief Executive Offi cer

Parent Group

Note Dec 2005$000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

ASSETS

Current assets:

Cash at bank 718 151 1,546 187

Cash investments 3 18,100 19,931 18,100 19,931

Receivables & prepayments 5 2,911 2,501 3,416 2,183

21,729 22,583 23,062 22,301

Non current assets:

Advances 14 1,146 2,132 154 -

Fixed assets 7 2,453 1,327 2,453 1,327

Investments 4 11,792 10,398 8,758 8,898

Deferred tax 11 397 361 438 361

15,788 14,218 11,803 10,586

Goodwill 8 306 527 808 1,055

Total assets 37,823 37,328 35,673 33,942

LIABILITIES AND SHAREHOLDERS’ FUNDS

Accounts payable and other current liabilities 6 4,612 4,277 4,920 4,423

Provision for taxation 11 (154) 396 (154) (119)

4,458 4,673 4,766 4,304

Share capital 15 17,372 16,733 16,381 14,601

Retained earnings 15 15,993 15,922 14,526 15,037

Total Shareholders’ funds 33,365 32,655 30,907 29,638

Total liabilities & shareholders’ funds 37,823 37,328 35,673 33,942

Th ese fi nancial statements were authorised for release on 16 February 2006.

23

STATEMENT OF CASH FLOWS


Parent Group

Dec 2005$000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

CASH FLOWS FROM OPERATING ACTIVITIES

Cash was provided from:

Cash received from customers and others 21,551 18,249 22,612 18,951

Net GST received/(paid) (901) (934) (901) (934)

Interest received 1,563 1,577 1,773 1,698

22,213 18,892 23,484 19,715

Cash was applied to:

Cash paid to suppliers and employees 13,531 11,063 15,510 12,885

Taxation paid 2,571 2,255 2,571 2,255

16,102 13,318 18,081 15,140

Net cash fl ows from operating activities 6,111 5,574 5,403 4,575

CASH FLOWS FROM INVESTING ACTIVITIES


Decrease in bank deposits 1,831 5,848 1,831 5,848

1,831 5,848 1,831 5,848


Purchase of fi xed assets 1,876 1,073 1,876 1,073

Increase in other assets 268 - 268 -

Increase in investments 1,458 10,306 (42) 9,335

3,602 11,379 2,102 10,408

Net cash fl ows from investing activities (1,771) (5,531) (271) (4,560)

CASH FLOWS FROM FINANCING ACTIVITIES


Proceeds from issue of shares 1,625 - 1,625 -

1,625 - 1,625 -


Dividend payment 5,398 - 5,398 -

5,398 - 5,398 -

Net cash fl ows from fi nancing activities (3,773) - (3,773) -

Net increase in cash held 567 43 1,359 15

Opening cash balance 151 108 187 172

Cash at end of period 718 151 1,546 187




Parent Group

Dec 2005$000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

RECONCILIATION OF SURPLUS FOR THE PERIOD TO

NET CASH FLOWS FROM OPERATING ACTIVITIES

Surplus for the period

5,469 4,562 4,887 3,677

Add non cash items:

Depreciation 751 553 751 553

Amortisation 129 55 156 55

Goodwill impairment 360 - 360 -

Unrealised (gain)/loss on investment bonds 63 (92) 63 (92)

Equity accounted earnings of associate (LINK) - - 34 -

6,772 5,078 6,251 4,193

Decrease/(increase) in accounts receivable (410) (237) (1,233) 17

Decrease/(increase) in deferred tax (36) (43) (77) (43)

Increase/(decrease) in accounts payable 335 1,148 497 1,295

Increase/(decrease) in provision for tax (550) 74 (35) (441)

Increase/(decrease) in Fidelity Fund - (446) - (446)

Net cash fl ows from operating activities 6,111 5,574 5,403 4,575

25

STATEMENT OF ACCOUNTING POLICIES


ENTITIES REPORTING

Th e fi nancial statements presented for the “Parent” comprise New Zealand Exchange Limited (“NZX”). Th e consolidated

fi nancial statements for the “Group” are for the economic entity comprising NZX, its subsidiaries and associate.

STATUTORY BASE

NZX is a company registered under the Companies Act 1993 and is an issuer in terms of the Securities Act 1978. Th ese

fi nancial statements are presented in compliance with the Financial Reporting Act 1993 and the Companies Act 1993.

MEASUREMENT BASE

Th e fi nancial statements have been prepared on the basis of historical cost with the exception of certain items for which specifi c

accounting policies are identifi ed.

ACCOUNTING POLICIES

Th e fi nancial statements are prepared in accordance with New Zealand generally accepted accounting practice. Th e accounting

policies that materially aff ect the measurement of fi nancial performance, fi nancial position and cash fl ows are set out below.

GROUP FINANCIAL STATEMENTS

Subsidiaries are those entities controlled, directly or indirectly, by the Parent. Th e Group fi nancial statements consolidate the

fi nancial statements of NZX and its subsidiaries using the purchase method.

Associates are entities in which the Group has signifi cant infl uence, but not control, over the operating and fi nancial policies.

Th e Group fi nancial statements include the Group’s share of the net surplus of associates on an equity accounted basis.

All material transactions between Parent and subsidiaries are eliminated on consolidation. Shares in NZX held by subsidiary

companies are shown as a deduction from share capital.

REVENUE RECOGNITION

Income earned in the normal course of business is recognised at the time the service is provided. When revenue is received in

advance it is amortised evenly over the period the service will be provided.

Interest income is accounted for as earned.

FIXED ASSETS AND DEPRECIATION

All fi xed assets are initially recorded at cost and include the cost of acquisition along with the value of other directly

attributable costs which have been incurred in bringing the asset to the location and condition necessary for their intended

use. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately

to its recoverable amount.


Fixed assets have been depreciated on a straight line basis so as to expense the cost of the assets over their useful lives as follows:

Computer equipment: 33.3%

Furniture & equipment: 20%

Leasehold improvements: 10%

SHARE ISSUE COSTS

Costs associated with the issue of shares are recognised as a reduction of the amount collected per share.

TAXATION

Tax expense is based on accounting surpluses, adjusted for the permanent diff erences between accounting and tax rules.

Th e impact of all timing diff erences between accounting and taxable income is recognised as a deferred tax liability or asset. Th is

is the comprehensive basis for the calculation of deferred tax under the liability method.

A deferred tax asset, or the eff ect of losses carried forward that exceeds the deferred tax liability, is recognised in the fi nancial

statements only where there is virtual certainty that the benefi t of timing diff erences, or losses, will be utilised.

GOODS AND SERVICES TAX (GST)

Th e Statement of Financial Performance and Statement of Cash Flows have been prepared so that all components are stated

exclusive of GST. All items in the Statement of Financial Position are stated net of GST, with the exception of receivables and

payables, which include GST invoiced.

FINANCIAL INSTRUMENTS

Financial instruments carried in the Statement of Financial Position include cash and bank balances, investments, accounts

receivable and accounts payable. Th e particular recognition methods adopted are disclosed in the individual policy statements

associated with each item.

INVESTMENTS

Investments in subsidiaries and associates are stated at cost in the Statement of Financial Position.

Investment Bonds are stated at market value and any resultant gain or loss is recognised in the Statement of Financial

Performance. All other investments are stated at the lower of cost or net realisable value.

GOODWILL

Goodwill is reviewed as it relates to each specifi c transaction. Th e amount recognised as Goodwill will be amortised on a

straight line basis over the shorter of its estimated useful life or 20 years.

IMPAIRMENT

Annually, the directors assess the carrying value of each asset. Where the estimated recoverable amount of the asset is less than

its carrying amount, the asset is written down. Th e impairment loss is recognised in the Statement of Financial Performance.

STATEMENT OF ACCOUNTING POLICIES CONTINUED


27

ACCOUNTS RECEIVABLE

Accounts receivable are carried at estimated realisable value after providing against debts where collection is doubtful.


Th e following are the defi nitions of the items used in the Statement of Cash Flows:

Operating activities include all transactions and other events that are not investing or fi nancing activities.

Investing activities are those activities relating to the acquisition, holding and disposal of property, furniture and equipment

and of investments. Investments can include securities not falling within the defi nition of cash.

Financing activities are those activities that result in changes in the size and composition of the capital structure. Th is

includes both equity and debt not falling within the defi nition of cash.

Cash is considered to be cash on hand and current accounts in banks, net of bank overdrafts.

OPERATING LEASES

Operating lease payments are recognised as an expense in the periods the amounts are payable.

COMPARATIVES

Comparative fi gures where necessary have been restated to correspond with current year classifi cations.

CHANGES IN ACCOUNTING POLICIES

Th ere were no material changes in accounting policies during the period.



NOTES TO THE FINANCIAL STATEMENTS


1. Operating revenue

Parent Group

Dec 2005$000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

Listings 6,618 5,835 6,547 5,784

Participant fees 1,313 1,067 1,313 1,067

Trading, clearing & settlement 4,814 4,239 4,814 4,239

Market information 3,367 2,780 3,367 2,780

Regulatory 1,753 1,626 1,753 1,626

Smartshares Limited - - 1,432 696

Other Income 274 468 274 198

18,139 16,015 19,500 16,390

2. Operating expenses

Parent Group

Dec 2005$000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

Employee & related costs 6,250 5,567 6,743 5,650

Information technology 1,824 1,619 1,824 1,619

Legal 475 435 514 531

Marketing 211 382 421 382

General administration 1,467 1,316 2,148 1,748

Directors’ fees 295 290 302 300

Audit fees 50 48 90 78

Other auditors’ services 26 151 43 151

Doubtful Debts 87 10 87 10

10,685 9,818 12,172 10,469

Depreciation – computer equipment 635 535 635 535

Depreciation – furniture & equipment 53 18 53 18

Depreciation – leasehold improvements 63 - 63 -

751 553 751 553

29


3. Cash and cash investments

Parent Group

Dec 2005 Interest rates Maturities Dec 2005$000

Dec 2005$000

Cash at bank 6.95% Call 718 1,546

Bank deposits – at call - Call - -

Bank deposits – 30 day 7.52%-7.60% 30 Days 18,100 18,100

18,818 19,646

Parent Group

Dec 2004 Interest rates Maturities Dec 2004$000

Dec 2004$000

Cash at bank 0% Call 151 187

Bank deposits – at call 6.5% Call 500 500

Bank deposits – 30 day 6.62%-6.67% 30 Days 19,431 19,431

20,082 20,118

4. Other investments

Parent Group

Dec 2005$000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

Investment in associate 3,213 3,255 3,179 3,255

Investment in subsidiaries 3,000 1,500 - -

Investment bonds 5,579 5,643 5,579 5,643

11,792 10,398 8,758 8,898

INVESTMENT IN SUBSIDIARIES

Th e Parent’s investment in subsidiaries comprises shares at cost. Subsidiaries comprise:

Interest held by Group

Name of entity Principal activities Dec 2005 Dec 2004

Smartshares Limited Funds Management 100% 100%

Tane Nominees Limited Nominee Company 100% 100%

NZX Executive Share Plan Nominees Limited Nominee Company 100% 0%

All subsidiary entities have a balance date of 31 December. All subsidiary entities are incorporated in New Zealand.


NOTES TO THE FINANCIAL STATEMENTS CONTINUED


INVESTMENT IN ASSOCIATE

Name of entity Principal activities Interest held by Group Group carrying amount

Dec 2005 %

Dec 2004 %

Dec 2005 $000

Dec 2004 $000

Link Market Services Limited Registrar 50% 50% 3,179 3,255

Link Market Services Limited is jointly owned by NZX and Link Market Services Limited Australia (formerly ASX Perpetual

Registrars Limited). It is incorporated in New Zealand and has a balance date of 31 December.

Link Market Services Limited was incorporated on 15 December 2004.

Results of Associate

Dec 2005 $000

Dec 2004 $000

Share of operating revenue 1,559 -

Share of operating expenses 1,250 -

Share of EBITDA 309 -

Share of depreciation & amortisation 264 -

Share of Interest expense 47 -

Share of surplus/(defi cit) before tax (2) -

Share of tax expense (32) -

Share of total recognised revenue and expenditure (34) -

Interest in Associate Parent Group

Dec 2005$000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

Shares at cost (including cost of acquisition) 3,213 3,255 - -

Carrying value:

Balance at beginning of year - - 3,255 -

Reduction in the cost of acquisition - - (42) -

Associate acquisition during the year - - - 3,255

Share of total recognised revenue and expenditure - - (34) -

Balance at end of year - - 3,179 3,255

31


5. Receivables and Prepayments

Parent Group

Dec 2005$000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

Trade receivables 2,181 1,291 2,502 1,461

Prepayments 287 378 329 415

Intercompany receivable 70 543 - -

Accrued interest 92 98 92 98

Accrued income 281 191 493 209

2,911 2,501 3,416 2,183

6. Accounts Payable and Other Current Liabilities

Parent Group

Dec 2005$000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

Trade creditors 335 661 364 708

Unearned income 2,711 2,453 2,711 2,453

Employee entitlements 221 155 223 155

Accrued expenses 1,111 905 1,388 1,004

GST 234 103 234 103

4,612 4,277 4,920 4,423

7. Fixed Assets

Dec 2005 Cost$000

Accumulated Depreciation

$000

Book Value Dec 2005

$000

Computer equipment 5,063 4,154 909

Furniture & equipment 555 230 325

Leasehold improvements 1,282 63 1,219

6,900 4,447 2,453


Dec 2004 Cost$000

Accumulated Depreciation

$000

Book Value Dec 2004

$000

Computer equipment 4,660 3,520 1,140

Furniture & equipment 250 177 73

Capital work in progress 114 - 114

5,024 3,697 1,327

Fixed assets for both the Parent and the Group are the same.

8. Goodwill

Parent Group

Dec 2005$000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

Balance at beginning of period 527 - 1,055 -

Goodwill arising on acquisition 268 582 268 1,110

Impairment (360) - (360) -

Amortisation (129) (55) (156) (55)

Balance at end of period 306 527 808 1,055

9. New Zealand Exchange Limited Fidelity Guarantee Fund

On 3 May 2004 the NZX Participant Rules (the Participant Rules) came into force, replacing the NZX Business Rules 2003.

Th e Participant Rules contain provision for a Fidelity Guarantee Fund (Fund) on the same terms as existed before their

commencement. Th e relevant sections of the NZX Participant Rules are 8.11 – 8.14.

Under the Participant Rules, the liability of the Fund for any one particular failure remains limited to $500,000 or such greater

amount as may be determined from time to time by NZX. Furthermore the maximum amount payable to any one claimant in

respect of a failure is limited to $20,000 or such greater amount as NZX may determine in that particular case. Th ese provisions

refl ect the position pre-demutualisation under the NZX Business Rules 2003.

On 6 September 2004 Access Brokerage Limited was put into liquidation. NZX applied the Fidelity Guarantee Fund to

investors who suff ered loss as a consequence of the Access Brokerage Limited failure in accordance with the terms of the

Participant Rules. Th e provision held in the Statement of Financial Position at 31 December 2005 is nil (2004: nil).

10. Non-recurring Items

Non-recurring items reported include expenditure incurred in investigating the default of Access Brokerage Limited and

preparation for the NZX Discipline hearing for Access Brokerage Limited of $344,000, and the impairment to goodwill from

the Sydney Futures Exchange (SFE) contract of $360,000. At December 2004 non-recurring items included $494,000 related

to the default of Access Brokerage Limited, $621,000 related to Smartshares marketing expenditure for the launch of new funds

and IPO Brokerage Fees of $423,000 for the launch of new funds.



33

11. Taxation

Parent Group

Income Tax Dec 2005$000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

Operating surplus before tax 7,454 6,848 7,267 5,528

Permanent differences:

Non-deductible expenditure 35 79 65 79

Equity accounted earnings of associate - - 34 -

Surplus subject to tax 7,489 6,927 7,366 5,607

Tax at 33% 2,471 2,286 2,431 1,851

Loss offset for 2004 & 2005 year (435) - - -

Foreign tax credits (68) - (68) -

Prior year under/(over) provision 17 - 17 -

Income tax recognised in Statement of Financial Performance 1,985 2,286 2,380 1,851

Comprising:

Current tax 2,021 2,329 2,457 1,894

Deferred tax (36) (43) (77) (43)

1,985 2,286 2,380 1,851

Deferred tax

Balance at beginning of period 361 318 361 318

Current year charge 57 - 98 -

Transfer from tax expense (21) 43 (21) 43

Balance at end of period 397 361 438 361

Imputation Credit account

Balance at beginning of period 3,943 1,688 3,943 1,688

Income tax paid 2,571 2,255 2,571 2,255

Imputation credits attached to dividends paid (2,444) - (2,444) -

Balance at end of period 4,070 3,943 4,070 3,943



12. Financial Instruments

FAIR VALUE

Th e fair value of the fi nancial instruments is considered to be approximately equivalent to the value as refl ected in the Statement

of Financial Position.

CREDIT RISK

Th e maximum credit risk associated with the fi nancial instruments held by NZX is considered to be the value refl ected in the

Statement of Financial Position. Th e risk of non-recovery of these amounts is considered to be minimal.

NZX does not require collateral or other security to support fi nancial instruments with credit risk.

Concentrations of credit risk arise where NZX is exposed to the risk that a party may fail to discharge an obligation in the

normal course of business. NZX Treasury policy is to limit the exposure to counterparties to $10 million for registered banks

and to $3 million for other institutions with a minimum credit rating of A-.

INTEREST RATE RISK

NZX is exposed to interest rate risk in that future interest rate movements will aff ect cash fl ows and the market value of fi xed

interest and other investment assets. NZX does not use any derivative products to manage interest rate risk.

13. Commitments

Dec 2005$000

Dec 2004$000

Up to 1 year

Lease of premises 665 290

Capital fi t out of new premises - 1,486

SFE Trading Infrastructure - 275

1 – 2 years 665 496

2 – 5 years 1,995 1,488

> 5 years 2,993 2,687



35

14. Related Party Transactions

During the period, NZX’s subsidiary Smartshares Limited managed the NZX MidCap Index Fund (MIDZ), NZX Australian

MidCap Index Fund (MOZY), NZX 10 Fund (TENZ) and NZX 50 Portfolio Index Fund (FONZ). At 31 December,

Smartshares Limited had an intercompany debt with NZX of $70,000 (Dec 2004: $543,000).

NZX had a related party receivable from its associate, Link Market Services Limited, of $181,000 at 31 December 2005 (Dec

2004: nil).

No amounts owed by related parties have been written off or forgiven during the period.

In 2003, fi nancial assistance was provided to the Chief Executive Offi cer, Mark Weldon. A disclosure document was provided

to all shareholders on 15 September 2003 setting out details of a proposal by the Company to give fi nancial assistance to

the Chief Executive Offi cer and Director of the Company, Mark Weldon. Th e fi nancial assistance was in connection to the

acquisition by a nominee company (“Nominee”) of 634,275 Share Scheme Shares in NZX, to be held by the Nominee on behalf

of Mr Weldon in accordance with the terms of the NZX CEO Share Scheme (“Scheme”).

Th e terms of the Scheme, and the proposed fi nancial assistance, were approved by members of the Company’s predecessor, the

New Zealand Stock Exchange, at the time of demutualisation, and were fully described in the NZX Prospectus and Investment

Statement registered on 3 June 2003.

Th e directors of NZX authorised NZX to give fi nancial assistance to Mr Weldon to fund the acquisition of the Shares, by way

of a loan of $2,132,433, which is the aggregate of the issue prices for the 634,275 ordinary shares to be issued under the Scheme.

In July 2005, 380,565 Share Scheme Shares qualifi ed under the NZX CEO Share Scheme and Mr Weldon repaid $1,140,426

to NZX, reducing his fi nancial assistance to $992,007.

Th e directors of NZX authorised NZX to give fi nancial assistance to some NZX employees in February 2005 to assist them

in the acquisition of NZX ordinary shares under the NZX Executive Share Plan. Th e total fi nancial assistance provided under

the NZX Executive Share Plan was $319,205. At 31 December 2005, NZX employees had repaid $164,998; the balance

outstanding is $154,207.

15. Share Capital

On 1 January 2003 there were 3,310,000 shares on issue which were split 1:1 on 30 May 2003. In June 2003 there was a

combined off er comprising a 1:2 renounceable rights issue of 3,290,000 shares at $1.50 and an off er to the public of $10,000,000

of shares at the fi nal price of $3.60. As at 31 December 2005 there were 13,137,569 ordinary shares issued and fully paid (Dec

2004: 12,685,504). All ordinary shares rank equally with one vote attached to each fully paid ordinary share.

In February 2005, NZX issued 71,500 ordinary shares to NZX Executive Share Plan Nominees Limited at $8.94 (Dec 2004:

nil). During 2005, 37,000 shares were transferred out of the nominee company to NZX employees in accordance with the

terms of the NZX Executive Share Plan. Th e remaining 34,500 shares are held in trust by the nominee company.

In July 2005, 380,565 Share Scheme Shares qualifi ed under the NZX CEO Share Scheme. Th ese shares were transferred out

of the nominee company to Mr Weldon and reclassifi ed as ordinary shares.

In December 2003 186,410 options to acquire ordinary shares were issued to staff under the NZX Executive Share Option

Plan. A portion of these options have lapsed; there are 131,310 remaining on issue which have an exercise date in July 2006.



Movement in Share Capital Parent Group

Dec 2005$000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000


Share issue during the period

Ordinary Shares 1,780 - 1,780 -

Executive Share Scheme Shares (1,141) - (1,141) -

Shares held by Subsidiary Company - - 1,141 -


Movement in Retained Earnings Parent Group

Dec 2005$000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000


Surplus for the period 5,469 4,562 4,887 3,677

Dividend payment (5,398) - (5,398) -


16. Distribution to Shareholders

A fully imputed special dividend of 40 cents per share was paid in May 2005.

17. Contingent Liabilities

Th ere are no Contingent Liabilities at 31 December 2005 (Dec 2004: nil).

18. Segmented Reporting

Th e company and its subsidiaries operate within the fi nancial markets industry. All signifi cant operations take place in

New Zealand.



37

19. Earnings per Share

Group

Dec 2005$000

Dec 2004 $000

Earnings per share (cents per share) 37.77 28.99

Earnings per share are calculated by dividing the operating surplus attributable to shareholders by the weighted average number

of ordinary shares on issue during the period.

20. New Zealand International Financial Reporting Standards

In December 2002 the New Zealand Accounting Standards Review Board announced that the New Zealand equivalents to

International Financial Reporting Standards (IFRS) will apply to all New Zealand entities for the periods commencing on or

after 1 January 2007 with the opportunity to early adopt by up to two years. NZX intends to adopt NZIFRS for the year ended

31 December 2007.

NZX has a project to identify the diff erences between existing NZ GAAP and NZIFRS as they impact on NZX.

21. Significant Events after Balance Date

Th ere were no signifi cant announcements or events after balance date.



Auditors’ Report to the shareholders of New Zealand Exchange Limited

We have audited the fi nancial statements on pages 20 to 37. The fi nancial statements provide information about the past fi nancial performance and cash fl ows of the Company and Group for the year ended 31 December 2005 and their fi nancial position as at that date. This information is stated in accordance with the accounting policies set out on pages 25 to 27.

Directors’ ResponsibilitiesThe Company’s Directors are responsible for the preparation and presentation of the fi nancial statements which give a true and fair view of the fi nancial position of the Company and Group as at 31 December 2005 and their fi nancial performance and cash fl ows for the year ended on that date.

Auditors’ ResponsibilitiesWe are responsible for expressing an independent opinion on the fi nancial statements presented by the Directors and reporting our opinion to you.

Basis of OpinionAn audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in the fi nancial statements. It also includes assessing:(a) the signifi cant estimates and judgements made by the Directors in the preparation of the fi nancial

statements; and(b) whether the accounting policies are appropriate to the circumstances of the Company and Group,

consistently applied and adequately disclosed.

We conducted our audit in accordance with generally accepted auditing standards in New Zealand. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary to provide us with suffi cient evidence to give reasonable assurance that the fi nancial statements are free from material misstatements, whether caused by fraud or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the fi nancial statements.

We have no relationship with or interests in the Company or any of its subsidiaries other than in our capacity as auditors, tax advisors and providers of other assurance services.

Unqualifi ed Opinion

We have obtained all the information and explanations we have required.

In our opinion:(a) proper accounting records have been kept by the Company as far as appears from our examination of

those records; and(b) the fi nancial statements on pages 20 to 37:

(i) comply with generally accepted accounting practice in New Zealand; and(ii) give a true and fair view of the fi nancial position of the Company and Group as at 31 December

2005 and their fi nancial performance and cash fl ows for the year ended on that date.

Our audit was completed on 21 February 2006 and our unqualifi ed opinion is expressed as at that date.

Chartered Accountants Wellington

PricewaterhouseCoopers113-119 The TerracePO Box 243WellingtonNew ZealandTelephone +64 4 462 7000Facsimile +64 4 462 7001

39

1. Business Operations

Th ere have been no changes in the business undertakings of the company, subsidiaries and associate during the year.

2. Interests Register

Th e Group is required to maintain an Interests Register in which particulars of certain transactions and matters involving the

directors must be recorded.

Th e following matters were recorded in the Interests Register in 2005.

3. Directors’ Interests

Th e directors have declared interests in the following entities:

Director Interest Entity

S C Allen Director ABN AMRO Craigs Limited

Director ABN AMRO New Zealand Limited

Director ABN AMRO Group Companies in New Zealand

Director Xylem Investments Limited

Director Big Bonds NZ Limited

Chairman Innofl ow Technologies Limited

A W Harmos Partner Harmos Horton Lusk

Director Westfi eld New Zealand Group

N Paviour - Smith Director Forsyth Barr Group Limited and Associated Companies

Director Forsyth Barr Limited

Director Leveraged Equities Finance Limited

Director Global Equity Market Securities Limited

Director Global Corporate Credit Limited

N Williams Director Interchange & Settlement Limited

Director ANZ Securities (NZ) Limited

Director ANZMAC Securities (NZ) Nominees Limited

Director Arawata Capital Limited

Director Arawata Trust Company

Director Arawata Finance Limited

Director Samson Funding Limited

Director Norway Funds Limited

Director Bage Investments Limited

STATUTORY INFORMATION



Director Interest Entity

Director Endeavour Equities Limited

Director Endeavour Finance Limited

Director Endeavour Securities Limited

Director Tui Endeavour Limited

Director Tui Securities Limited

Director Trillium Holdings Limited

Director Alos Holdings Limited

H van der Heyden Director Fonterra Co-operative Group Limited

Director King St Advertising

Director Innovation Waikato Limited

Director Independent Egg Producers Co-Op Limited

Trustee Asia : NZ Foundation

Member University of Waikato Business Management School Advisory Board

M R Weldon Chairman Link Market Services Limited

Director Smartshares Limited

Member New Zealand Olympic Committee

Member University of Auckland School of Business Advisory Board

4. Information used by Directors

Th ere were no notices from directors of the company requesting to disclose or use company information received in their

capacity as directors which would not otherwise have been available to them.

5. Directors holding Office and their Remuneration

Th e directors holding offi ce during the year are listed on the following page. Th e total amount of the remuneration and other

benefi ts received by each director during the year, and responsibility held, is listed next to their names.

STATUTORY INFORMATION CONTINUED

41


Directors Remuneration Special Responsibility

S C Allen $87,500 Chairman

Chairman Remuneration Committee

Member Audit Committee

A W Harmos $43,750

N Paviour-Smith $46,250 Chairman Audit Committee

N Williams $44,500 Deputy Chairman

Member Audit Committee

Member Remuneration Committee

H van der Heyden1 $16,667 Member Remuneration Committee

M R Weldon $851,000 Chief Executive Offi cer

H R L Morrison2 $25,000

T E C Saunders3 $25,250

1 Th e Board appointed H van der Heyden a Director of NZX in September 2005

2 H R L Morrison announced his retirement as a Director of NZX at the Annual Meeting in June 2005

3 T E C Saunders announced his retirement as a Director of NZX at the Annual Meeting in June 2005.

6. Indemnification and Insurer of Executive and Director

During the year, the company paid insurance premiums in respect of directors’ and executive employees’ liability insurance. Th e

policies do not specify the premium for individuals.

Th is insurance provides cover against costs and expenses involved in defending legal actions and any resulting payments arising

from a liability to persons (other than the company or a related body corporate) incurred in their position as director or executive

employee unless the conduct involves a wilful breach of duty or an improper use of inside information or position to gain

advantage.

7. Subsidiary Companies Directors

Mr Mark Weldon, Mr Geoff rey Brown and Mr Don Trow held offi ce as directors of the subsidiary company, Smartshares

Limited at the end of the fi nancial year. Mr Don Trow was paid director fees of $12,500 in relation to this directorship. Ms

Elaine Campbell is the sole director of Tane Nominees Limited. Mr Simon Allen and Mr Neil Paviour-Smith are the directors

of NZX Executive Share Plan Nominees Limited. Th e remuneration of employees acting as directors of subsidiaries is disclosed

in the relevant banding of remuneration set out under Employee Remuneration.


8. Employee Remuneration

During the year a number of employees or former employees (excluding directors) received remuneration and other benefi ts,

including non cash benefi ts and NZX shares in accordance with the NZX Executive Share Plan, in their capacity as employees

of the company. Th e value of those exceeding $100,000 per annum were as follows:

Remuneration Ranges Employee

100,000 – 109,999 5

110,000 – 119,999 2

120,000 – 129,999 1

130,000 – 139,999 -

140,000 – 149,999 -

150,000 – 159,999 -

160,000 – 169,999 2

170,000 – 179,999 1

180,000 – 189,999 -

190,000 – 199,999 -

200,000 – 209,999 1

210,000 – 219,999 -

220,000 – 229,999 -

230,000 – 239,999 -

240,000 – 249,999 -

250,000 – 259,999 -

260,000 – 269,999 -

270,000 – 279,999 1

280,000 – 289,999 2

290,000 – 299,999 -

As stated in Note 15 to the Financial Statements, as at 31 December 2005 there were 131,310 options to acquire ordinary shares

issued to staff under the terms of the NZX Executive Share Option Plan. Th e fi rst exercise date of options issued under the

Plan is July 2006. NZX has to meet certain criteria to enable these options to be exercised. Th e value of the options has not

been included as part of the employee remuneration.

STATUTORY INFORMATION CONTINUED

43


9. Director Transaction in Securities of the Parent Company

Director Date No. of securities acquired/(disposed)

Securities held Non-Benefi cial as

at 31 Dec 2005

Securities held Benefi cial as at

31 Dec 2005

S C Allen 50,833

A W Harmos 20,833

N Paviour-Smith 25,958

N Williams 10,000

H van der Heyden 0

M R Weldon 19 Sep 2005 31,805 703,9131

10. Auditors

Th e auditor of the parent company and group is PriceWaterhouseCoopers. PriceWaterhouseCoopers provide audit and other

services for which they are remunerated.

Parent Group

$000’s $000’s

Audit services 50 90

Taxation services 14 14

Other services 12 29

1 450,203 shares and 253,710 share scheme shares


1. Top 20 Security Holders

Th e following table shows the names and holdings of the 20 largest holdings of securities in the Company as at 31 January 2006.

Shares Held %

Probatus Investments Limited 1,018,146 7.75

TEA Custodians Limited 769,706 5.86

New Zealand Superannuation 464,314 3.53

Premier Nominees Limited 410,629 3.13

Accident Compensation 405,413 3.09

Peter H Masfen 383,473 2.92

Nigel Babbage 374,178 2.85

Custodial Services Limited 372,423 2.83

Asteron Life Limited 315,333 2.40

Ithaca (Custodians) Limited 310,500 2.36

ASB Nominees Limited 300,000 2.28

TEA Custodians Limited 279,770 2.13

Leveraged Equities Finance 255,550 1.95


David M Odlin 172,000 1.31

ASB Nominees Limited 169,984 1.29

Lola Nominees Limited 150,203 1.14

NZ Guardian Trust Investment 132,558 1.01

Westpac Banking Corporation 125,142 0.95


6,722,819 51.16

SECURITY HOLDER INFORMATION


45

2. Spread of Ordinary Shareholders as at 31 January 2006

Size of Holding Shareholders Shares

Number % Number %

1 to 1,000 1,439 58.90 815,986 6.21

1,001 to 5,000 777 31.81 1,753,371 13.35

5,001 to 10,000 101 4.13 842,346 6.41

10,001 to 20,000 62 2.54 1,025,263 7.80

20,001 to 30,000 35 1.43 953,663 7.26

30,001 to 40,000 8 0.33 277,062 2.11

40,001 to 50,000 3 0.12 145,000 1.10

> 50,000 18 0.74 7,324,878 55.76

2,443 100.00 13,137,569 100.00

Domicile of Holders Shareholders Shares

Number % Number %

New Zealand 2,403 98.36 12,585,479 95.80

Australia 23 0.94 93,713 0.71

Other 17 0.70 458,377 3.49

2,443 100.00 13,137,569 100.00

3. Substantial Security Holders

Th e following information is given pursuant to section 26 of the Securities Markets Act 1988. According to the fi le kept by

the Company under section 25 of the Securities Markets Act 1988 the following were substantial holders in the Company as at

31 January 2006. Th e total number of voting securities on issue as at 31 January 2006 was 13,509,089, comprising 13,137,569

ordinary shares, 253,710 Share Scheme Shares and 117,810 options to acquire ordinary shares.

Relevant Interest

%

Fisher Funds Management Limited 1,225,617 9.07

Probatus Investments Limited Bare Trustee and Nominee for Forsyth Barr Exchange Holdings Limited

1,018,146 7.53

ING NZ Limited 783,527 5.79

M R Weldon 703,913 5.21



4. Waivers from the Listing Rules

Of all waivers set out in the Prospectus and Investment Statement dated 3 June 2003 only those relating to the CEO Share

Scheme remain applicable as at 31 December 2005. Th ose applicable waivers are:

A waiver from the application of Listing Rule 7.3.1(a) to allow NZX to issue shares where under the terms of the CEO

Scheme, it is obliged or entitled to do so, and to allow NZX to issue shares under the Off er.

A waiver from the application of Listing Rule 7.6.1 to allow NZX to purchase its own shares where, under the terms of the

CEO Scheme it is obliged or entitled to do so.

A waiver from the application of Listing Rule 7.6.3 to allow NZX to redeem its own shares where, under the terms of the

CEO Scheme, it is obliged to do so.

A waiver from Listing Rule 7.6.5 to allow NZX or a wholly owned subsidiary to provide fi nancial assistance to Mr Weldon

for the purposes of implementing the CEO Share Scheme.

A waiver from the application of Listing Rule 7.6.6 to exempt and share acquisitions or redemptions by NZX, and the

provision of fi nancial assistance given for the purposes of the CEO Share Scheme from the requirement that any such

acquisition, redemption or fi nancial assistance to be made or given within 12 months (for acquisition) or six months (for

redemption or fi nancial assistance).

5. Securities Issued by NZX

NZX’s ordinary shares (including those Share Scheme Shares that converted to ordinary shares in July 2005) are quoted on

the NZSX Market. NZX’s options, issued pursuant to the Executive Share Option Plan, are not quoted on any market. Th ose

Share Scheme Shares issued pursuant to the CEO Share Scheme that have not qualifi ed for conversion to ordinary shares are

not quoted on any market and will not do so until such time as they qualify and are converted into ordinary shares of NZX.

SECURITY HOLDER INFORMATION CONTINUED


47

Registered Office

New Zealand Exchange Limited

NZX Centre

Level 2

11 Cable Street

PO Box 2959

WELLINGTON

Tel: +64 4 472 7599

[email protected]

www.nzx.com

Board of Directors

Simon Allen

Nigel Williams

Neil Paviour-Smith

Henry van der Heyden

Mark Weldon

Th e directors can be contacted at NZX’s

registered offi ce.

DIRECTORY

Auditors

PricewaterhouseCoopers

113-119 Th e Terrace

WELLINGTON

Share Registrar

Link Market Services Limited

PO Box 91976

AUCKLAND 1030

Investor Enquiries +64 9 375 5998

Fax +64 9 375 5990

[email protected]

www.linkmarketservices.com

Documents

NEW ZEALAND EXCHANGE LIMITED ANNUAL REPORT€¦ · NZX has been investing diligently right across the spectrum, and will continue to do so, building real muscle into New Zealand’s