Nzx Annual Report 2005

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NEW ZEALAND EXCHANGE LIMITED ANNUAL REPORT

IMAGES: NZX CENTRE

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NEW ZEALAND EXCHANGE LIMITED ANNUAL REPORT

Issued 31 March 2006

Contents 1 . C h a i r m a n ’s R e p o r t 2 . C h i e f E xe c u t i v e ’s R e p o r t 5. Financial Review 11. Board of Directors 19. Financials 39. Statutory Information 47. Directory

AGM AND FINANCIAL CALENDAR

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

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: The 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 benefits 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 cashflow. Strong cashflow: The sound operating EBITDA result reiterates sustainability and allows us to have flexibility 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 significant announcement regarding the NZX capital policy. NZX’s new dividend policy is based on a payout ratio of around 60% of NPAT. The dividend for the 2005 financial 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. This 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 significant return of capital, will maintain significant 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 financing options, including raising debt, should this prove attractive. On behalf of the Board and the team at NZX, I offer my congratulations and thanks to our shareholders for the ongoing confidence we share in the future of New Zealand’s capital markets.

Simon Allen, Chairman 30 March 2006 1

CHIEF EXECUTIVE’S 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 flows. They encourage a strong savings culture amongst New Zealanders. They lead to efficient, low cost delivery of investment products.

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. And they support a competitive environment for investment services. In past years capital markets infrastructure in New Zealand suffered 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. That body is our infrastructure, and it’s critical for the sustainability and competitiveness of New Zealand’s financial markets and the plethora of associated industries.

The four key components of capital market infrastructure are: Trust and confidence 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 confidence 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.

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NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

NZX in 2005 – muscle moves markets Trading activity, measured by average daily value traded, increased 16%. The 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 effectiveness 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 efficient 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. The listing of Vector set an important precedent for public ownership of important utility and infrastructure assets. The successful float 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 confident 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 This 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: The 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, offshore.

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CHIEF EXECUTIVE’S REPORT CONTINUED

Stamina is the network value sustained by NZX… …reflected in: Growing numbers of investors, in New Zealand and offshore, 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 confidence 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.

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.

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 financial performance, given our team a much better understanding of the challenges posed by markets infrastructure in its current state. This 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 benefits for all participants, including banks, custodians, brokers, financial planners, investment managers and, most importantly, New Zealand investors. We have confidence 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 confidence, and in bringing creative solutions to New Zealand’s capital market challenges.

Mark Weldon Chief Executive Officer 30 March 2006

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NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

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NEW ZEALAND EXCHANGE LIMITED FINANCIAL REVIEW

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FINANCIAL REVIEW

I. OVERALL RESULTS Strong financial results in 2005 reflect the significant 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 confidence in NZX’s business model and that all available forms of financing will be considered to fund further growth. DE:G6I>C<:7>I96

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II. FINANCIAL PERFORMANCE BY BUSINESS UNIT NZX BUSINESS UNITS STATEMENT OF FINANCIAL PERFORMANCE SMARTSHARES

FY 2004

FY 2005

%

16,015

18,139

OPERATING EXPENDITURE

9,818

OPERATING EBITDA

6,197 92

OPERATING REVENUE

Gain/(loss) on Investments

FY 2004

FY 2005

13%

673

1,432

10,685

9%

652

7,454

20%

21

(63)

-168%

0

LINK* %

FY 2005

113%

3,117

1,558

139%

2,501

(126)

-700%

616

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)

5,187

5,807

12%

(1,022)

(154)

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EBIT

Source: NZX Data

NZX MARKETS $NZ 000s

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 reflects 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 fluctuations in this activity will not seriously impair NZX financial 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.

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FINANCIAL REVIEW CONTINUED

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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 significant 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 first 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.

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NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

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, efficient, 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

TRANSACTIONS - VALUE ($M) FY

CHANGE

FY

CHANGE

NZSX

614,766

4%

NZSX

29,630

16%

NZDX

26,829

-2%

NZDX

1,952

2%

NZAX Total Daily Average

7,635

26%

NZAX

649,230

4%

Total

2,587

5%

Daily Average

58

67%

31,640

15%

126

16%

Source: NZX Operating Metrics, Full Year 2005

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 reflects 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 significant 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 profitability and operating leverage.

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FINANCIAL REVIEW CONTINUED

smartshares

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 efficient operational model that will produce increasing profitability 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 five of the top NZX 50 companies, including three trans-Tasman issuers. LINK’s contribution to the NZX Group result is equity accounted and reflects 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 significant corporate transformation, made significant 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 cashflow 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 financing options that were not available to it in 2003.

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NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

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. COM
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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 significant 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 financial year was $.25 per share and its payment date is 7 April. Going forward, NZX will aggressively pursue growth, and will finance that growth through the most efficient means possible. 11

BOARD OF DIRECTORS

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

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

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 firm. Andrew was formerly a senior partner of Russell McVeagh, which he left in 2002 after 21 years with that firm. 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 Westfield New Zealand group.

Neil Paviour-Smith BCA, CA, ACIS, FCFIP Neil is Managing Director of Forsyth Barr Limited, a nationwide sharebroking and investment management firm, 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.

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O V L A R B 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.

V BOARD COMMITTEES

L The Remuneration

L

Henry van der Heyden BEng (Agr) Hons

Committee comprises

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 largescale manufacturing and international exporting and the financial, regulatory, trade and customer influences 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.

Simon Allen (Chair),

A

Nigel Wiliams and

R

Henry van der Heyden

V

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

A The Audit Committee comprises

A

Neil Paviour-Smith

N

(Chair), Nigel Williams

V

and Simon Allen

V

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 firm 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 office 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.

T A V V L A R B V A L N B

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LEADER

CORPORATE GOVERNANCE

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 conflicts of interest, the required skills of Directors, trading in NZX’s shares, and maintaining confidentiality of information received in their capacity as Directors of NZX. BOARD OF DIRECTORS The Board currently comprises six Directors of whom five are non-Executive Directors. In accordance with Rule 3.3.1B, the Board has determined that five of the six Directors are Independent as defined 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 five business days before each meeting to allow Directors sufficient 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 specific issues. During the 2005 financial year, the Board met (including via teleconference) 12 times.

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

16

NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

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 financial 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 financial year. The audit committee met with the independent auditor three times in the 2005 financial 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 financial 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 3/3

Neil Paviour-Smith

12/12

4/4

Tim Saunders

5/7

3/3

Mark Weldon

12/12

Nigel Williams

12/12

Henry van der Heyden

4/4

2/2

3/3 1/1

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

17

CORPORATE GOVERNANCE CONTINUED

DISCLOSURE NZX has internal procedures in place to ensure that key financial 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 financial risks are identified 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 financial 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 Officers) 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 financial year by prohibiting trading in NZX’s securities during ‘black-out’ periods set out in the Notice. If a Director or officer wishes to trade NZX securities in a ‘trading window’, that person must first 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.

18

NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

2

0

0

5

N 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

19

STATEMENT OF FINANCIAL PERFORMANCE FOR YEAR ENDED 31 DECEMBER 2005

Parent Note Operating revenue

1

Equity accounted earnings of associate (LINK) Operating expenses

2

Operating EBITDA Unrealised gain/(loss) on investment bonds Non-recurring income/(expenditure)

10

EBITDA Interest expense/(income)

Dec 2005 $000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

18,139

16,015

19,500

16,390

-

-

(34)

-

10,685

9,818

12,172

10,469

7,454

6,197

7,294

5,921

(63)

92

(63)

92

(704)

(494)

(704)

(1,538)

6,687

5,795

6,527

4,475

(1,647)

(1,661)

(1,647)

(1,661)

Depreciation

2

751

553

751

553

Amortisation

8

129

55

156

55

7,454

6,848

7,267

5,528

11

1,985

2,286

2,380

1,851

5,469

4,562

4,887

3,677

Surplus before tax Tax expense Net Surplus after tax

20

Group

NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

STATEMENT OF MOVEMENTS IN SHAREHOLDERS’ FUNDS FOR YEAR ENDED 31 DECEMBER 2005

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

-

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

Movement in Shareholders’ funds for the period

21

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2005

Parent Note

Group

Dec 2005 $000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

718

151

1,546

187

ASSETS Current assets: Cash at bank 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: 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

Advances

Goodwill

397

361

438

361

15,788

14,218

11,803

10,586

8

Total assets

306

527

808

1,055

37,823

37,328

35,673

33,942

4,612

4,277

4,920

4,423

LIABILITIES AND SHAREHOLDERS’ FUNDS Accounts payable and other current liabilities

6

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

These financial statements were authorised for release on 16 February 2006.

S C Allen Chairman

22

N Paviour-Smith Director

NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

M R Weldon Chief Executive Officer

STATEMENT OF CASH FLOWS FOR YEAR ENDED 31 DECEMBER 2005

Parent

Group

Dec 2005 $000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

21,551

18,249

22,612

18,951

CASH FLOWS FROM OPERATING ACTIVITIES Cash was provided from: Cash received from customers and others 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

13,531

11,063

15,510

12,885

2,571

2,255

2,571

2,255

16,102

13,318

18,081

15,140

6,111

5,574

5,403

4,575

1,831

5,848

1,831

5,848

1,831

5,848

1,831

5,848

Purchase of fixed 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

(1,771)

(5,531)

(271)

(4,560)

1,625

-

1,625

-

1,625

-

1,625

-

5,398

-

5,398

-

5,398

-

5,398

-

Cash was applied to: Cash paid to suppliers and employees Taxation paid

Net cash flows from operating activities

CASH FLOWS FROM INVESTING ACTIVITIES Cash was provided from: Decrease in bank deposits

Cash was applied to:

Net cash flows from investing activities

CASH FLOWS FROM FINANCING ACTIVITIES Cash was provided from: Proceeds from issue of shares

Cash was applied to: Dividend payment

Net cash flows from financing 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

23

STATEMENT OF CASH FLOWS FOR YEAR ENDED 31 DECEMBER 2005

Parent

Group

Dec 2005 $000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

5,469

4,562

4,887

3,677

Depreciation

751

553

751

553

Amortisation

129

55

156

55

Goodwill impairment

360

-

360

-

63

(92)

63

(92)

RECONCILIATION OF SURPLUS FOR THE PERIOD TO NET CASH FLOWS FROM OPERATING ACTIVITIES Surplus for the period Add non cash items:

Unrealised (gain)/loss on investment bonds Equity accounted earnings of associate (LINK)

Decrease/(increase) in accounts receivable Decrease/(increase) in deferred tax Increase/(decrease) in accounts payable Increase/(decrease) in provision for tax Increase/(decrease) in Fidelity Fund Net cash flows from operating activities

24

NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

-

-

34

-

6,772

5,078

6,251

4,193

(410)

(237)

(1,233)

17

(36)

(43)

(77)

(43)

335

1,148

497

1,295

(550)

74

(35)

(441)

-

(446)

-

(446)

6,111

5,574

5,403

4,575

STATEMENT OF ACCOUNTING POLICIES FOR YEAR ENDED 31 DECEMBER 2005

ENTITIES REPORTING The financial statements presented for the “Parent” comprise New Zealand Exchange Limited (“NZX”). The consolidated financial 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. These financial statements are presented in compliance with the Financial Reporting Act 1993 and the Companies Act 1993. MEASUREMENT BASE The financial statements have been prepared on the basis of historical cost with the exception of certain items for which specific accounting policies are identified. ACCOUNTING POLICIES The financial statements are prepared in accordance with New Zealand generally accepted accounting practice. The accounting policies that materially affect the measurement of financial performance, financial position and cash flows are set out below. GROUP FINANCIAL STATEMENTS Subsidiaries are those entities controlled, directly or indirectly, by the Parent. The Group financial statements consolidate the financial statements of NZX and its subsidiaries using the purchase method. Associates are entities in which the Group has significant influence, but not control, over the operating and financial policies. The Group financial 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 fixed 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.

25

STATEMENT OF ACCOUNTING POLICIES CONTINUED FOR YEAR ENDED 31 DECEMBER 2005

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 differences between accounting and tax rules. The impact of all timing differences between accounting and taxable income is recognised as a deferred tax liability or asset. This is the comprehensive basis for the calculation of deferred tax under the liability method. A deferred tax asset, or the effect of losses carried forward that exceeds the deferred tax liability, is recognised in the financial statements only where there is virtual certainty that the benefit of timing differences, or losses, will be utilised. GOODS AND SERVICES TAX (GST) The 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. The 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 specific transaction. The 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. The impairment loss is recognised in the Statement of Financial Performance.

26

NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

FOR YEAR ENDED 31 DECEMBER 2005

ACCOUNTS RECEIVABLE Accounts receivable are carried at estimated realisable value after providing against debts where collection is doubtful. STATEMENT OF CASH FLOWS The following are the definitions of the items used in the Statement of Cash Flows: Operating activities include all transactions and other events that are not investing or financing 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 definition of cash. Financing activities are those activities that result in changes in the size and composition of the capital structure. This includes both equity and debt not falling within the definition 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 figures where necessary have been restated to correspond with current year classifications. CHANGES IN ACCOUNTING POLICIES There were no material changes in accounting policies during the period.

27

NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 31 DECEMBER 2005

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 Other Income

-

-

1,432

696

274

468

274

198

18,139

16,015

19,500

16,390

2. Operating expenses Parent 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

1,467

1,316

2,148

1,748

General administration Directors’ fees

28

Group

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

NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

FOR YEAR ENDED 31 DECEMBER 2005

3. Cash and cash investments Parent Dec 2005 Cash at bank Bank deposits – at call Bank deposits – 30 day

Interest rates

Group

Maturities

Dec 2005 $000

Dec 2005 $000

6.95%

Call

718

1,546

-

Call

-

-

7.52%-7.60%

30 Days

18,100

18,100

18,818

19,646

Parent Dec 2004 Cash at bank Bank deposits – at call Bank deposits – 30 day

Group

Interest rates

Maturities

Dec 2004 $000

Dec 2004 $000

0%

Call

151

187

6.5%

Call

500

500

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 The Parent’s investment in subsidiaries comprises shares at cost. Subsidiaries comprise: Interest held by Group 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%

Name of entity

Principal activities

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

29

NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR YEAR ENDED 31 DECEMBER 2005

INVESTMENT IN ASSOCIATE Name of entity

Link Market Services Limited

Principal activities

Interest held by Group

Group carrying amount

Dec 2005 %

Dec 2004 %

Dec 2005 $000

Dec 2004 $000

50%

50%

3,179

3,255

Registrar

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/(deficit) 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

3,213

3,255

-

-

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

Shares at cost (including cost of acquisition) Carrying value:

30

NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

FOR YEAR ENDED 31 DECEMBER 2005

5. Receivables and Prepayments Parent

Group

Dec 2005 $000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

2,181

1,291

2,502

1,461

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

Trade receivables Prepayments

6. Accounts Payable and Other Current Liabilities Parent

Trade creditors Unearned income Employee entitlements Accrued expenses GST

Group

Dec 2005 $000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

335

661

364

708

2,711

2,453

2,711

2,453

221

155

223

155

1,111

905

1,388

1,004

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

555

230

325

1,282

63

1,219

6,900

4,447

2,453

Furniture & equipment Leasehold improvements

31

NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR YEAR ENDED 31 DECEMBER 2005

Dec 2004

Cost $000

Accumulated Depreciation $000

Book Value Dec 2004 $000

4,660

3,520

1,140

Furniture & equipment

250

177

73

Capital work in progress

114

-

114

5,024

3,697

1,327

Computer equipment

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

8. Goodwill Parent Dec 2005 $000

Group 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)

306

527

808

1,055

Balance at end of period

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. The Participant Rules contain provision for a Fidelity Guarantee Fund (Fund) on the same terms as existed before their commencement. The 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. These provisions reflect 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 suffered loss as a consequence of the Access Brokerage Limited failure in accordance with the terms of the Participant Rules. The 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. 32

NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

FOR YEAR ENDED 31 DECEMBER 2005

11. Taxation Parent Income Tax

Group

Dec 2005 $000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

7,454

6,848

7,267

5,528

35

79

65

79

-

-

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)

-

-

-

(68)

-

(68)

-

17

-

17

-

1,985

2,286

2,380

1,851

2,021

2,329

2,457

1,894

Operating surplus before tax Permanent differences: Non-deductible expenditure Equity accounted earnings of associate

Foreign tax credits Prior year under/(over) provision Income tax recognised in Statement of Financial Performance Comprising: Current tax Deferred tax

(36)

(43)

(77)

(43)

1,985

2,286

2,380

1,851

361

318

361

318

57

-

98

-

Deferred tax Balance at beginning of period Current year charge Transfer from tax expense

(21)

43

(21)

43

Balance at end of period

397

361

438

361

3,943

1,688

3,943

1,688

Imputation Credit account Balance at beginning of period Income tax paid Imputation credits attached to dividends paid Balance at end of period

2,571

2,255

2,571

2,255

(2,444)

-

(2,444)

-

4,070

3,943

4,070

3,943

33

NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR YEAR ENDED 31 DECEMBER 2005

12. Financial Instruments FAIR VALUE The fair value of the financial instruments is considered to be approximately equivalent to the value as reflected in the Statement of Financial Position. CREDIT RISK The maximum credit risk associated with the financial instruments held by NZX is considered to be the value reflected in the Statement of Financial Position. The risk of non-recovery of these amounts is considered to be minimal. NZX does not require collateral or other security to support financial 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 affect cash flows and the market value of fixed 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

665

290

Capital fit 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

Up to 1 year Lease of premises

34

NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

FOR YEAR ENDED 31 DECEMBER 2005

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, financial assistance was provided to the Chief Executive Officer, 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 financial assistance to the Chief Executive Officer and Director of the Company, Mark Weldon. The financial 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”). The terms of the Scheme, and the proposed financial 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. The directors of NZX authorised NZX to give financial 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 qualified under the NZX CEO Share Scheme and Mr Weldon repaid $1,140,426 to NZX, reducing his financial assistance to $992,007. The directors of NZX authorised NZX to give financial assistance to some NZX employees in February 2005 to assist them in the acquisition of NZX ordinary shares under the NZX Executive Share Plan. The total financial 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 offer comprising a 1:2 renounceable rights issue of 3,290,000 shares at $1.50 and an offer to the public of $10,000,000 of shares at the final 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. The remaining 34,500 shares are held in trust by the nominee company. In July 2005, 380,565 Share Scheme Shares qualified under the NZX CEO Share Scheme. These shares were transferred out of the nominee company to Mr Weldon and reclassified 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.

35

NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR YEAR ENDED 31 DECEMBER 2005

Movement in Share Capital

Parent

Group

Dec 2005 $000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

16,733

16,733

14,601

14,601

1,780

-

1,780

-

Executive Share Scheme Shares

(1,141)

-

(1,141)

-

Shares held by Subsidiary Company

-

-

1,141

-

17,372

16,733

16,381

14,601

Dec 2005 $000

Dec 2004 $000

Dec 2005 $000

Dec 2004 $000

15,922

11,360

15,037

11,360

5,469

4,562

4,887

3,677

Balance at beginning of period Share issue during the period Ordinary Shares

Balance at end of period

Movement in Retained Earnings

Balance at beginning of period Surplus for the period

Parent

Group

Dividend payment

(5,398)

-

(5,398)

-

Balance at end of period

15,993

15,922

14,526

15,037

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

17. Contingent Liabilities There are no Contingent Liabilities at 31 December 2005 (Dec 2004: nil).

18. Segmented Reporting The company and its subsidiaries operate within the financial markets industry. All significant operations take place in New Zealand.

36

NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

FOR YEAR ENDED 31 DECEMBER 2005

19. Earnings per Share Group

Earnings per share (cents per share)

Dec 2005 $000

Dec 2004 $000

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 differences between existing NZ GAAP and NZIFRS as they impact on NZX.

21. Significant Events after Balance Date There were no significant announcements or events after balance date.

37

Auditors’ Report to the shareholders of New Zealand Exchange Limited

PricewaterhouseCoopers 113-119 The Terrace PO Box 243 Wellington New Zealand Telephone +64 4 462 7000 Facsimile +64 4 462 7001

We have audited the financial statements on pages 20 to 37. The financial statements provide information about the past financial performance and cash flows of the Company and Group for the year ended 31 December 2005 and their financial position as at that date. This information is stated in accordance with the accounting policies set out on pages 25 to 27. Directors’ Responsibilities The Company’s Directors are responsible for the preparation and presentation of the financial statements which give a true and fair view of the financial position of the Company and Group as at 31 December 2005 and their financial performance and cash flows for the year ended on that date. Auditors’ Responsibilities We are responsible for expressing an independent opinion on the financial statements presented by the Directors and reporting our opinion to you. Basis of Opinion An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in the financial statements. It also includes assessing: (a) the significant estimates and judgements made by the Directors in the preparation of the financial 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 sufficient evidence to give reasonable assurance that the financial 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 financial 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. Unqualified 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 financial 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 financial position of the Company and Group as at 31 December 2005 and their financial performance and cash flows for the year ended on that date. Our audit was completed on 21 February 2006 and our unqualified opinion is expressed as at that date.

38

NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT Chartered Accountants

Wellington

STATUTORY INFORMATION FOR YEAR ENDED 31 DECEMBER 2005

1. Business Operations There have been no changes in the business undertakings of the company, subsidiaries and associate during the year.

2. Interests Register The Group is required to maintain an Interests Register in which particulars of certain transactions and matters involving the directors must be recorded. The following matters were recorded in the Interests Register in 2005.

3. Directors’ Interests The directors have declared interests in the following entities: Director S C Allen

A W Harmos

N Paviour - Smith

N Williams

Interest

Entity

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

Innoflow Technologies Limited

Partner

Harmos Horton Lusk

Director

Westfield New Zealand Group

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

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

39

STATUTORY INFORMATION CONTINUED

Director

H van der Heyden

M R Weldon

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

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

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 There 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 The directors holding office during the year are listed on the following page. The total amount of the remuneration and other benefits received by each director during the year, and responsibility held, is listed next to their names.

40

NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

FOR YEAR ENDED 31 DECEMBER 2005

Directors

Remuneration

S C Allen

$87,500

Special Responsibility Chairman Chairman Remuneration Committee Member Audit Committee

A W Harmos

$43,750

N Paviour-Smith

$46,250

N Williams

$44,500

Chairman Audit Committee Deputy Chairman Member Audit Committee Member Remuneration Committee

H van der Heyden

1

M R Weldon H R L Morrison

2

T E C Saunders3

$16,667

Member Remuneration Committee

$851,000

Chief Executive Officer

$25,000 $25,250

1

The 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. The policies do not specify the premium for individuals. This 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 office as directors of the subsidiary company, Smartshares Limited at the end of the financial 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. The remuneration of employees acting as directors of subsidiaries is disclosed in the relevant banding of remuneration set out under Employee Remuneration.

41

STATUTORY INFORMATION CONTINUED

8. Employee Remuneration During the year a number of employees or former employees (excluding directors) received remuneration and other benefits, including non cash benefits and NZX shares in accordance with the NZX Executive Share Plan, in their capacity as employees of the company. The 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. The first exercise date of options issued under the Plan is July 2006. NZX has to meet certain criteria to enable these options to be exercised. The value of the options has not been included as part of the employee remuneration.

42

NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

FOR YEAR ENDED 31 DECEMBER 2005

9. Director Transaction in Securities of the Parent Company Director

Date

No. of securities acquired/ (disposed)

Securities held Non-Beneficial as at 31 Dec 2005

Securities held Beneficial 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 M R Weldon

0 19 Sep 2005

1

31,805

703,913

10. Auditors The 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

43

SECURITY HOLDER INFORMATION FOR YEAR ENDED 31 DECEMBER 2005

1. Top 20 Security Holders The 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

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

Custodial Services Limited

227,614

1.73

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

85,883

0.65

6,722,819

51.16

Custodial Services Limited

44

%

1,018,146

NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

FOR YEAR ENDED 31 DECEMBER 2005

2. Spread of Ordinary Shareholders as at 31 January 2006 Size of Holding

Shareholders Number

1 to 1,000

Shares

%

Number

%

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

Domicile of Holders

18

0.74

7,324,878

55.76

2,443

100.00

13,137,569

100.00

Shareholders

Shares

Number

%

Number

%

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

New Zealand

3. Substantial Security Holders The following information is given pursuant to section 26 of the Securities Markets Act 1988. According to the file 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. The 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

45

SECURITY HOLDER INFORMATION CONTINUED FOR YEAR ENDED 31 DECEMBER 2005

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. Those 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 Offer. 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 financial 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 financial assistance given for the purposes of the CEO Share Scheme from the requirement that any such acquisition, redemption or financial assistance to be made or given within 12 months (for acquisition) or six months (for redemption or financial 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. Those Share Scheme Shares issued pursuant to the CEO Share Scheme that have not qualified 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.

46

NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

DIRECTORY

Registered Office

Auditors

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

PricewaterhouseCoopers 113-119 The Terrace WELLINGTON

Board of Directors

Investor Enquiries +64 9 375 5998 Fax +64 9 375 5990 [email protected] www.linkmarketservices.com

Simon Allen Nigel Williams Neil Paviour-Smith Henry van der Heyden Mark Weldon

Share Registrar Link Market Services Limited PO Box 91976 AUCKLAND 1030

The directors can be contacted at NZX’s registered office.

47