Nzx Annual Report 2006

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NEW ZEALAND EXCHANGE LIMITED ANNUAL REPORT

Issued 1 March 2007

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 9. Board of Directors 19. Financials 39. Statutory Information 48. Directory

ANNUAL MEETING AND FINANCIAL CALENDAR

Annual Meeting The Annual Meeting of shareholders of NZX will be held at NZX Centre, Level 2, 11 Cable Street, Wellington, New Zealand on Friday 30 March 2007, commencing at 4.30pm. Full details, including the business to be dealt with, are contained in the Notice of Meeting included with this report.

Financial Calendar 31 December 2006

2006 Financial Year end

8 February 2007

Preliminary Full Year Financial Results issued

1 March 2007

2006 Annual Report issued

4.30pm, 28 March 2007

Latest time for receipt of proxies for Annual Meeting

4.30pm, 30 March 2007

Annual Meeting - Record and payment date for dividend advised

July 2007

Preliminary Half Year Announcement issued

September 2007

2007 Half Year Report issued

31 December 2007

2007 Financial Year end

CHAIRMAN’S REPORT

“Profits grew and investors smiled” said one headline on the penultimate day of 2006, referring to the performance of the New Zealand share market over the year. “Good times set to slow down” said another, the following day. See-sawing sentiment has always been a feature of New Zealand markets. In previous years such shifts in sentiment would have had an immediate effect on the NZX share price. But in 2006 our shareholders (and the markets at large) came to realise that, whilst NZX is of the market, it is not the market alone. NZX is at a significant point in its New Zealand market development agenda. Where 2005 saw the company concentrate on building operating leverage (with revenue growth beginning to outstrip expense), strengthening cashflow (with the resulting capital and dividend policy announcement), and delivering a resilient performance across core business, 2006 also saw a very different NZX. Ongoing improved financial performance, thanks to strict expense management and judicious investment in growth, formed the backdrop for sound acquisitions in rural data and managed funds research capability, and a significant competitive trade reporting partnership across the Tasman. To drive and develop these initiatives, NZX has attracted and retained experienced people in the intensely competitive market for international talent – all of whom believe in the core role of capital markets in national economic strength. There will be plenty for them to do in 2007! And our companies? We acknowledge their choice to be part of our markets as a means to fund their own growth. We advocate staunchly and consistently on their behalf. We congratulate them on their contribution to an outstanding New Zealand markets performance in 2006, and we anticipate serving more of them in 2007.

Simon Allen, Chairman 1 March 2007

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CHIEF EXECUTIVE’S REPORT

NZX is about infrastructure NZX has now been listed for three and a half years. Over that time our total return to shareholders has been 246%, or 42% compounded annually. What has driven this? The 2003/2004 period was very much about a robust foundation under the core exchange franchise. If, at the end of 2004, our building was comprised of solid foundations and was three levels high, over 2005/2006, value creation in the core businesses and business extensions have added many more levels. We are now heading into our third phase: taking the building to its maximum height by both creating new value in New Zealand and growing internationally. To achieve this we need to continue to achieve against five critical criteria:

1. Annual financial results In 2006 a strong performance across the NZX Group resulted in revenue growth outstripping expense growth by a ratio of 2:1. The standout performers were the information businesses (comprising core market data and new businesses such as NZX Agrifax), while listing and trading revenues finished the year well with very strong fourth quarters. In 2007 and beyond, providing an attractive environment for new companies to come to market remains a critical focus area for NZX. We must ensure that our customer service is outstanding, that the cost of capital and exposure gained for our New Zealand companies remain equal to, or better than, anything offered by any overseas exchange, and that participation continues to grow. With a recent Goldman Sachs JBWere analyst report stating that “30% of the 80% capital appreciation (on NZX over the last 3.5 years) is due to a lower risk premium, and with the valuations for NZX listed companies well above the global mean, the conditions for new companies to list are strong across the board”. With increased listings, trading will grow and our data will become yet more valuable. The appetite for New Zealand market data is a clear signal that information is this century’s currency – and there is no shortage of players keen to acquire this information. Acting in concert, these factors will result in improved scalability and margin growth over 2007 and beyond. Similarly, in 2007 we expect LINK Market Services (50% owned) and Smartshares to contribute meaningfully in terms of free cash flow to NZX.

2. Future value created In 2006 the two key areas of focus for creating future value were “bolt-on” M&A, and the announcement of the Australian ECN. Bolt-on acquisitions in 2006 included Agri-Fax – a rural data business, FundSource – a funds management information business, and Tortis Ozzy

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NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

for the Smartshares franchise. Each of these businesses fits neatly into our operational strengths and business focus, but provides revenue diversification with strong growth prospects outside the markets business. The big news in 2006 was the announcement of our ECN in Australia. This business is currently going through the Australian regulatory approvals process and we have the right ownership structure. Our partners – Macquarie, Citigroup, CommSec, Goldman Sachs JBWere and Merrill Lynch – are a very substantial part of overall liquidity in Australia. Working with them has been both positive and energising. We expect this initiative to demonstrate that, when it comes to competing in Australia, Kiwi companies can. In 2007 and beyond, the ECN is critical to NZX. It takes our ability to operate and supervise markets to another jurisdiction, bound up in a massively scaleable business model (i.e., execution only). There are many opportunities for ECNs beyond Australia. To this end, our five broker partners are perfect. The same is true of listed companies, which have invested significantly in the LCA (Listed Companies Association) and are adding great value to the market.

3. Market Operations and the market environment In 2006 NZX concentrated a great deal of energy in this area. I want to acknowledge the significant contribution made by market participants in this vital space. Their own investments in technology, systems, product creation and compliance are delivering credibility and safety to New Zealand investors. Specific thanks to the SIA (Securities Industry Association) for their significant work over 2006. Brokers deserve the strong year they have had and their profitability is key for future market development. We are positive, for example, that NZX brokers are now looking to invest time and energy in supporting the emerging tech sector in New Zealand. Similarly, the LCA has really stepped up to the plate, and is contributing very positively to both the listed and legislative environment. Finally, 2006 marked the Securities Commission inaugural report on NZX’s market supervision capabilities. The result was positive. We are continuing to invest in the co-regulatory model, sharing information and resources with the Securities Commission on a regular basis, and are very positive about this relationship going forward. In 2007 and beyond, at a macro level, the policy environment is delivering some promising results for New Zealand’s capital markets. The imminent introduction of KiwiSaver in particular, along with the PIE regime, will have a positive impact in this year and in future.

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CHIEF EXECUTIVE’S REPORT CONTINUED

4. Capital management In 2006 our focus was the capital return to shareholders of a tax effective $16 million, a stock split to add liquidity, and the introduction of a long-term dividend policy focused at the 60%+ level. These were successfully executed and added value for shareholders. In 2007 our focus is to reduce our cost of capital, secure long-term sources of cheaper funding and engage in improved treasury and tax management.

5. Team In 2006 our overall team composition, and individual quality, achieved its highest level yet by a significant margin. This reflects an organisation that, in the people sense, is now “built” rather than “developing”. Key hires into the CFO, strategy and IT areas have taken our execution ability up a great notch, and mean that, adding to the now significant experience in the leadership team, we can manage effectively multiple complex workstreams to completion on time, cost and quality. In 2007 and beyond, we would expect this team to really deliver results. The quality of the core team that will manage market supervision, market development, and the data and fund businesses, is matched by an execution focus on new areas such as the ECN, carbon and other new markets, and continued focus on the international arena.

Mark Weldon, Chief Executive Officer 1 March 2007

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NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

FINANCIAL REVIEW

A. NZX GROUP RESULT AND HIGHLIGHTS The NZX Group financial results for the 2006 year are very strong as summarised in the table below: $M

2006

2005

CHANGE

Operating Revenue

25.0

19.5

28%

Operating Expenses

14.1

12.2

16%

EBITDA

10.5

6.6

61%

6.4

4.9

31%

NPAT

The business has changed. NZX’s business financial performance shows resilience. In terms of scale, the fourth quarter of 2006 represented a turning point for NZX as operating revenues grew to almost $8.6 million. This compares with $5.3 million from Q4 2005. We believe that the step up from $5.3 million to ~$8.6 million per quarter is a sustainable base from which NZX can continue to grow. HIGHLIGHTS DURING THE YEAR HAVE INCLUDED: Electronic Communications Network (ECN) NZX owns 50% of the Australian ECN, with Citigroup, CommSec, Goldman Sachs JBWere, Macquarie and Merrill Lynch owning 10% each. Information technology and data workstreams are on track, the Australian Market Licence application was lodged with the Australian Securities and Investment Commission (ASIC) on 31 January 2007, and a CEO, Greg Yanco, has been appointed. This platform will give NZX an international footprint through a scale growth opportunity that leverages against NZX’s core infrastructure and competencies. Smartshares Strong growth in funds under management to ~$500 million, with EBITDA moving from near break-even to $543,000. Data A significantly stepped-up data business has been developed. Enhanced sales execution for core market data products has resulted in a significantly higher annuity revenue stream (e.g., $2.5 million in Q4 vs. $1.1 million in Q4 2005). This group has also changed in terms of overall profile, with Agri-Fax and FundSource (acquired in Q2 and Q3 respectively) performing well, augmenting now positive EBITDA business lines in i-Search and the Index business.

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FINANCIAL REVIEW CONTINUED

B. BUSINESS LINE COMMENTARY (I) NZX MARKETS BUSINESS Revenues grew 27% year on year to $23 million. EBITDA at $10.2 million was 52% ahead of the prior year. Operating expenses rose to $12.4 million or 16% more than 2005. This largely reflects investments in people to establish and manage the ECN’s operations. The composition of NZX Markets revenue for the 2005 and 2006 years is set out in the graphs below: COMB6G@:IHG:K:CJ:7N86I:
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Of particular note is the growing importance of market information as a revenue contributor to the NZX Markets business. Year on year market information revenues at $6.1 million are 82% ahead of the $3.4 million booked in 2005. Comparable Q4 figures show a $1.36 million increase in revenue as against the same quarter 2005. Included in this is a contribution of $241,000 of additional EBITDA from FundSource and Agri-Fax. Initial and secondary listings revenues of $3.00 million were 43% ahead of the $2.1 million booked in 2005. Revenue from initial and secondary listings remains an important and recurring component of the NZX Markets business revenue stream as illustrated in the table below: $M

2005

2004

5.1

4.5

3.8

Initial

0.5

1.0

1.2

Secondary

2.5

1.1

0.8

Total Listing Fees Listing fees as a % of NZX Markets revenue

6

2006

Annual

NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

8.1

6.6

5.8

35.2%

36.5%

36.0%

Trading, Clearing and Settlement revenues of $4.7 million were 2% down at the prior year and reflect more difficult trading conditions between July and October, where daily trading volumes were negatively impacted by a number of issues, in particular the Feltex matter which impacted sentiment negatively. Trading volumes recovered during the last quarter. Also of note within NZX Markets revenues is the growth in NZX services income to $914,000 from last year’s $274,000. NZX is extending its core infrastructure for the ECN investment in Australia. During the last quarter of 2006, NZX charged the ECN for services provided during the establishment phase. Post establishment, NZX will continue to provide market operations and market supervision under a services agreement. As noted the NZX Markets operating expense base has grown year on year to be $12.4 million in 2006. NZX has deliberately increased its core capability in order to secure future growth. The operating costs include the costs associated with acquired revenue streams (FundSource and Agri-Fax), and also feasibility and ongoing costs in relation to the Australian ECN. In particular, NZX’s investment in the ECN has resulted in a need for programme and project management skills beyond that previously required. (II) SUBSIDIARIES AND ASSOCIATES

Smartshares Limited Smartshares is New Zealand’s leading passive fund manager and now has five equitybased products. Smartshares has, at the time of writing, over $500 million in funds under management (FUM). In Q4, Smartshares was ranked third amongst New Zealand fund managers in terms of funds inflow. The growth in Smartshares FUM is reflected in strong revenue growth of 63% vs. last year for a total revenue number of $2.3 million. Operating costs at $1.8 million have grown by 15% year on year. The operating margin leverage has resulted in a 531% year on year improvement in EBITDA, to $543,000. Smartshares has now reached scale and going forward will be an increasingly significant contributor to the NZX Group EBITDA.

The Australian ECN During 2006 NZX announced plans to launch an ECN in the Australian market, as a 50% member of a consortium that includes five of the largest broking houses in Australasia. The ECN will provide a reporting system for internal crossings. The start-up phase involves developing the hardware and software platform for the ECN, and securing regulatory approval. Progress on all fronts is very pleasing and the ECN is expected to contribute revenues in the second half of 2007. The ECN’s operating expenditure to 31 December 2006 totalled $NZ738,000. 7

FINANCIAL REVIEW CONTINUED

LINK Market Services Limited LINK Market Services is a 50% held, and equity accounted, associate company with LINK Market Services in Australia. LINK is now growing market share. In 2006 LINK’s revenues were $3.1 million and EBITDA was $424,000. Whilst market conditions have impacted LINK during 2006, the business is now cashflow positive and the performance in the last quarter of 2006 was very favourable. NZX expects LINK to begin to return cash to its investors during the second half of 2007.

C. CAPITAL MANAGEMENT AND POLICY During the year NZX Group operating free cash flows were $6.6 million, up by 22.2% or $1.2 million on the 2006 year. The table below highlights the ongoing growth in operating cash flows. As NZX’s business continues to grow in breadth and scale, so too do operating cash flows. NZX is now well placed to continue to invest and grow its business from organically sourced revenue streams. Additionally the scale and resilience of NZX’s core underlying cash flow allows confidence in NZX’s ability to service external borrowings, should that requirement arise. NZX intends to invest further in future growth and will finance that growth on the most efficient basis possible.

$000s Operating Cash Flow Growth Year on Year % Increase

2006

2005

2004

$6,604

$5,403

$4,575

22.2%

18.1%

72%

In August 2006 NZX made a tax-effective capital return of $16.2 million to shareholders. Accordingly, cash (or cash equivalents) as at 31 December 2006 were at $1.9 million, down from $19.6 million at 31 December 2005. The dividend for 2006 will be 60% of group NPAT. NZX will pay a dividend of $0.16 per share, fully imputed, for the year ended 31 December 2006. The dividend payment will occur in the second quarter of 2007. NZX is currently assessing the implementation of a Dividend Reinvestment Plan (DRP). The exact timing of the 2006 dividend payment will be announced, with details of any DRP, by the Chairman of the Board of Directors at NZX’s Annual Meeting on 30 March 2007.

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NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

BOARD OF DIRECTORS

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

NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

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BOARD OF DIRECTORS

Simon Christopher Allen – CHAIRMAN BSc, BCom, FCSAP 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 in New Zealand (now ABN AMRO) in 1988. ABN AMRO group is a registered bank in New Zealand and provides products and services to government, corporates 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, Corporate and Commercial Banking for both ANZ and National Bank in New Zealand. In this role he is responsible for the Bank’s business customers, wholesale and investment banking activities. 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 held a number of other listed company directorships. He is a director of the Westfield New Zealand group and Elevation Capital Management Limited.

Neil Paviour-Smith BCA, CA, ACIS, FCFIP Neil is Managing Director of Forsyth Barr Limited, a nationwide share broking and investment management firm, and a director of various related companies. Neil has 18 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.

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NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

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 largescale manufacturing and international exporting and the financial, regulatory, trade and customer influences on them. He is a Director of 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.

BOARD COMMITTEES

The Remuneration Committee comprises Simon Allen (Chair), Nigel Wiliams and Henry van der Heyden

The Audit Committee

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. Mark is also a director of Smartshares 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 J.D.C. (Doctor in Jurisprudence) and a Diploma in International Law.

comprises Neil Paviour-Smith (Chair), Nigel Williams and Simon Allen

Mark joined leading New York law firm Skadden, Arps, Slate, 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 banking and general corporate strategy. Mark is a member of the University of Auckland Business School Advisory Board.

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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 3.3.1A, 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 and the NZSX Listing Rules, 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 agendas 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 key executive managers are invited to attend and participate in appropriate sessions of Board meetings. The Board holds regular scheduled meetings and also holds ad hoc meetings to consider time sensitive or specific issues (including via teleconference).

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NEW ZEALAND EXCHANGE LIMITED 2006 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 members of the audit committee are Simon Allen, Neil Paviour-Smith (Chairman) and Nigel Williams. 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. 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 members of the remuneration committee are Simon Allen (Chairman), Nigel Williams and Henry van der Heyden. 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. 2006 NZX DIRECTORS’ ATTENDANCE RECORD Director Simon Allen Andrew Harmos Neil Paviour-Smith

NZX Board/Committees 10/12 6/6 11/12

Mark Weldon

11/12

Nigel Williams

10/12

Henry van der Heyden

7/8

Note: Records are shown in relation to the total number of meetings that a Director is required to attend. This may be less in some instances because of shorter tenure on the Board or less involvement in committees.

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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 2006 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 modelled 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.

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NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

2

0

0

6

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

15

STATEMENT OF FINANCIAL PERFORMANCE FOR YEAR ENDED 31 DECEMBER 2006

Parent Note

2006 $000

2005 $000

2006 $000

2005 $000

Operating revenue

1

22,341

18,139

25,026

19,500

Operating expenses

2

12,027

10,685

14,123

12,172

10,314

7,454

10,903

7,328

(59)

63

(59)

63

418

704

418

704

9,955

6,687

10,544

6,561

771

751

791

751

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

9

EBITDA Depreciation

7

Amortisation

8

85

129

242

156

EBIT

9,099

5,807

9,511

5,654

Interest income

1,114

1,647

1,117

1,647

Share of losses of associates

4

Surplus before tax Tax expense Net Surplus after tax

16

Group

NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

10

-

-

446

34

10,213

7,454

10,182

7,267

3,520

1,985

3,779

2,380

6,693

5,469

6,403

4,887

STATEMENT OF MOVEMENTS IN SHAREHOLDERS’ FUNDS FOR YEAR ENDED 31 DECEMBER 2006

Parent Note

Group

2006 $000

2005 $000

2006 $000

2005 $000

Net Surplus after tax

6,693

5,469

6,403

4,887

Total recognised revenue & expenditure

6,693

5,469

6,403

4,887

Issue of Share Capital Capital repayment Dividend payment CEO Share Scheme Release of Treasury Shares held by Subsidiary Company Movement in Shareholders’ funds for the period

13

2,609

1,780

2,609

1,780

(16,271)

-

(16,271)

-

(3,505)

(5,398)

(3,505)

(5,398)

(469)

(1,141)

(469)

(1,141)

-

-

469

1,141

(10,943)

710

(10,764)

1,269

Shareholders’ funds at beginning of period

33,365

32,655

30,907

29,638

Shareholders’ funds at end of period

22,422

33,365

20,143

30,907

17

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2006

Parent Note

Group

2006 $000

2005 $000

2006 $000

2005 $000

3

1,233

718

1,893

1,546

Investment bonds

4

3,638

1,999

3,638

1,999

Cash investments

3

-

18,100

-

18,100

Receivables & prepayments

5

ASSETS Current assets: Cash at bank

6,400

2,911

7,520

3,416

11,271

23,728

13,051

25,061

13

1,356

1,146

833

154

7

2,334

2,453

2,446

2,453

Investments

4

12,988

9,793

6,251

6,759

Deferred tax

10

507

397

495

438

Non current assets: Advances Fixed assets

Goodwill

8

304

306

2,932

808

Intangibles

8

590

-

1,579

-

18,079

14,095

14,536

10,612

29,350

37,823

27,587

35,673

6,746

4,612

7,187

4,920

Total assets

LIABILITIES AND SHAREHOLDERS’ FUNDS Accounts payable and other current liabilities

6

Provision for taxation

10

182

(154)

257

(154)

6,928

4,458

7,444

4,766

Share capital

14

3,243

17,372

2,721

16,381

Retained earnings

14

19,179

15,993

17,422

14,526

Total shareholders’ funds

22,422

33,365

20,143

30,907

Total liabilities & shareholders’ funds

29,350

37,823

27,587

35,673

These financial statements were authorised for release on 7 February 2007.

S C Allen Chairman

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N Paviour-Smith Director

NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

M R Weldon Chief Executive Officer

STATEMENT OF CASH FLOWS FOR YEAR ENDED 31 DECEMBER 2006

Parent

Group

2006 $000

2005 $000

2006 $000

2005 $000

19,632

21,551

22,038

22,612

CASH FLOWS FROM OPERATING ACTIVITIES Cash was provided from: Cash received from customers and others Net GST paid Interest received

(229)

(901)

(231)

(901)

1,130

1,563

1,133

1,773

20,533

22,213

22,940

23,484

10,615

13,531

12,912

15,510

3,294

2,571

3,424

2,571

13,909

16,102

16,336

18,081

6,624

6,111

6,604

5,403

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 other assets Decrease in bank deposits

955

-

485

-

20,100

1,831

19,654

1,831

21,055

1,831

20,139

1,831

652

1,876

784

1,876

Cash was applied to: Purchase of fixed assets Increase in other assets

937

268

4,209

268

Increase in investments

6,776

1,458

3,073

(42)

Net cash flows from investing activities

8,365

3,602

8,066

2,102

12,690

(1,771)

12,073

(271)

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

977

1,625

1,446

1,625

977

1,625

1,446

1,625

16,271

-

16,271

-

Cash was applied to: Capital repayment Dividend payment

3,505

5,398

3,505

5,398

19,776

5,398

19,776

5,398

(18,799)

(3,773)

(18,330)

(3,773)

Net increase in cash held

515

567

347

1,359

Opening cash balance

718

151

1,546

187

Cash at end of period

1,233

718

1,893

1,546

Net cash flows from financing activities

19

STATEMENT OF CASH FLOWS CONTINUED FOR YEAR ENDED 31 DECEMBER 2006

Parent

Group

2006 $000

2005 $000

2006 $000

2005 $000

6,693

5,469

6,403

4,887

Depreciation

771

751

791

751

Amortisation

85

129

242

156

Goodwill impairment

264

360

264

360

Unrealised (gain)/loss on investment bonds

(59)

63

(59)

63

RECONCILIATION OF SURPLUS FOR THE PERIOD TO NET CASH FLOWS FROM OPERATING ACTIVITIES Surplus for the period

Add non cash items:

Share of losses of associates

(Increase)/decrease in accounts receivable

-

446

34

6,772

8,087

6,251

(3,490)

(410)

(4,104)

(1,233)

(Increase)/decrease in deferred tax

(110)

(36)

(57)

(77)

Increase/(decrease) in accounts payable

2,134

335

2,267

497

336

(550)

411

(35)

6,624

6,111

6,604

5,403

Increase/(decrease) in provision for tax Net cash flows from operating activities

20

7,754

NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

STATEMENT OF ACCOUNTING POLICIES FOR YEAR ENDED 31 DECEMBER 2006

ENTITIES REPORTING The financial statements presented for the ‘Parent’ are for New Zealand Exchange Limited (“NZX”) as a stand-alone entity. The consolidated financial statements for the ‘Group’ are for the economic entity comprising NZX, its subsidiaries and associates. 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’s generally accepted accounting practice. The significant accounting policies that affect the measurement of financial performance, financial position and cash flows are set out below. GROUP FINANCIAL STATEMENTS The consolidated financial statements are prepared by combining the financial statements of all the entities that comprise the consolidated entity, being NZX (the “Company”) and its subsidiaries. A list of subsidiaries appears in Note 4 to the financial statements. Consistent accounting policies are employed in the preparation and presentation of the consolidated financial statements. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. On acquisition, the assets and liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. In preparing the consolidated financial statements, all intercompany balances, revenue and expenses arising from transactions between either the parent company and its subsidiary entities or two subsidiary entities are eliminated in full. The consolidated financial statements include the information and results of each subsidiary from the date on which the company obtains control and until such time as the company ceases to control such subsidiary. Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Group’s share of its associates’ post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Where the accounting policies of associates differ from the Group, adjustments to ensure consistency with the policies adopted by the Group are made.

21

STATEMENT OF ACCOUNTING POLICIES CONTINUED FOR YEAR ENDED 31 DECEMBER 2006

REVENUE RECOGNITION Rendering of services Revenue from a transaction to provide services is recognised by reference to the stage of completion of the transaction at the balance sheet date. Interest revenue Interest revenue is recognised on a time proportionate (as earned) basis that takes into account the effective yield on the financial asset. Foreign currency transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. FIXED ASSETS AND DEPRECIATION Property, plant, leasehold improvements and equipment are stated at cost less accumulated depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition of the item. Depreciation is provided on property, plant and equipment on a straight line basis so as to write off the cost or other revalued amount of each asset over its expected useful life to its estimated residual value. Leasehold improvements are depreciated over the period of the lease or estimated useful life, whichever is the shorter, using the straight line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each annual reporting period. The following estimated useful lives are used in the calculation of depreciation: Computer equipment

33.3%

Furniture and 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.

22

NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

FOR YEAR ENDED 31 DECEMBER 2006

GOODS AND SERVICES TAX (GST) Revenues, expenses, assets and liabilities are recognised net of the amount of goods and services tax (GST), except for receivables and payables which are recognised inclusive of GST. 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 of the parent, less any impairment if required. 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, representing the excess of the cost of acquisition over the fair value of the identifiable assets and liabilities acquired, is recognised as an asset. Amounts recognised as goodwill are amortised on a straight line basis over twenty years or management’s estimate of the useful life if lower. INTANGIBLE ASSETS Acquired intangible assets are recognised in the financial statements at the assessed fair value at the date of acquisition. They are subsequently amortised over management’s estimate of their useful life on a straight line basis. IMPAIRMENT Directors assess the carrying value of each asset on at least an annual basis, or where there are indications of impairment. 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. 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: (1) Operating activities include all transactions and other events that are not investing or financing activities. (2) Investing activities are those activities relating to the acquisition, holding and disposal of fixed assets and of investments. Investments can include securities not falling within the definition of cash. (3) 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. (4) Cash is considered to be cash on hand and current accounts in banks, net of bank overdrafts. 23

STATEMENT OF ACCOUNTING POLICIES CONTINUED FOR YEAR ENDED 31 DECEMBER 2006

NON RECURRING EXPENDITURE The Group separately identifies non-repeating and one-off business expenses that are not ordinarily incurred. 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. The presentation of share of losses of associates has been moved to below the EBITDA line in accordance with NZ GAAP. All comparative figures relating to the number of shares have been restated to reflect the capital reconstruction on 21 July 2006 (see Note 14 for further details). CHANGES IN ACCOUNTING POLICIES There were no changes in accounting policies during the period.

24

NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 31 DECEMBER 2006

1. Operating Revenue Parent

Group

2006 $000

2005 $000

2006 $000

2005 $000

Listing fees

8,105

6,618

8,049

6,547

Participant fees

1,413

1,313

1,413

1,313

Trading, clearing & settlement

4,710

4,814

4,710

4,814

Market information

5,479

3,367

6,083

3,367

Regulatory

1,720

1,753

1,720

1,753

Funds management fees NZX services income

-

-

2,331

1,432

914

274

720

274

22,341

18,139

25,026

19,500

2. Operating Expenses Parent

Group

2006 $000

2005 $000

2006 $000

2005 $000

Employee & related costs

7,119

6,250

7,916

6,743

Information technology

1,771

1,824

1,778

1,824

Legal

575

475

603

514

Marketing

215

211

370

421

1,891

1,467

2,920

2,148

299

295

311

302

58

50

99

90

Assurance services paid to auditors

24

12

51

29

Other auditors’ services

30

14

30

14

General administration Directors’ fees Audit fees

Bad debts written off Increase in provisions for doubtful debts

-

54

-

54

45

33

45

33

12,027

10,685

14,123

12,172

25

NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR YEAR ENDED 31 DECEMBER 2006

3. Cash and Cash Investments Interest rates

Cash at bank Bank deposits

Maturities

Parent

6.95%

Call

7.52%-7.60%

30 Days

Group

2006 $000

2005 $000

2006 $000

2005 $000

1,233

718

1,893

1,546

-

18,100

-

18,100

1,233

18,818

1,893

19,646

4. Other Investments Parent

Group

2006 $000

2005 $000

2006 $000

2005 $000

Investment in associates

6,926

3,213

6,251

3,179

Investment in subsidiaries

6,062

3,000

-

-

Investment bonds - current

3,638

1,999

3,638

1,999

-

3,580

-

3,580

16,626

11,792

9,889

8,758

Investment bonds - non current

INVESTMENT IN SUBSIDIARIES Investments in subsidiaries comprise shares at cost. Name of entity

Principal activities

Interest held by Parent

Agri-Fax Limited

Data Sales

FundSource Limited

Data & Research

100%

0%

Smartshares Limited

Funds Management

100%

100%

Mandela Investments Limited

Holding Company

100%

0%

Tane Nominees Limited

Nominee Company

100%

100%

NZX Executive Share Plan Nominees Limited

Nominee Company

100%

100%

NZ Fox Limited

Holding Company

100%

100%

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

26

NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

2006

2005

100%

0%

FOR YEAR ENDED 31 DECEMBER 2006

Agri-Fax Limited was acquired on 1 April 2006 for a cash consideration of $1,200,000. This amount may increase if certain revenue targets are met. The group has accrued $390,000 with respect to the revenue targets that are currently expected to be met. FundSource was acquired on 30 September 2006 for consideration of $908,953. The components purchased on acquisition are: Asset

Agri-Fax Limited

FundSource Limited

$000

$000

Fixed assets

30

98

Brand name

1,170

512

390

310

-

(11)

1,590

909

Goodwill Employee provisions Total

Mandela Investments Limited is a holding company that holds the 50% share NZX has in A.C.N. 121 659 658 (“Australia NewCo”). Mandela Investments Limited was incorporated on 5 September 2006. No acquisitions were made in 2005. INVESTMENT IN ASSOCIATES Name of entity

Principal activities

Interest held by Group

Group carrying amount

2006

2005

2006 $000

2005 $000

Australia NewCo

Operates an ECN (Electronic Communications Network) for executing and reporting transactions.

50%

0%

1,388

-

LINK Market Services Limited

Registrar

50%

50%

4,863

3,179

NZX owns 50% of Australia NewCo. The other shareholders are companies controlled by Citigroup, CommSec, Goldman Sachs JBWere, Macquarie Bank and Merrill Lynch. The entity was incorporated on 8 September 2006, in Australia, and has a balance date of 31 December. LINK Market Services Limited is jointly owned by NZX and LINK Market Services Limited Australia (formerly ASX Perpetual Registrars Limited). It was incorporated on 15 December 2004 in New Zealand and has a balance date of 31 December.

27

NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR YEAR ENDED 31 DECEMBER 2006

Share of Associates’ Results

Share of deficit before tax Share of tax credit/(expense) Share of net deficit

Australia NewCo

LINK Market Services Limited

2006 $000

2005 $000

2006 $000

2005 $000

(290)

-

(379)

(2)

121

-

102

(32)

(169)

-

(277)

(34)

5. Receivables and Prepayments Parent

Trade receivables Intercompany receivable Prepayments Accrued interest Sundry debtors and accrued income

Group

2006 $000

2005 $000

2006 $000

2005 $000

4,041

2,181

4,826

2,502

-

70

-

-

319

287

391

329

75

92

75

92

1,965

281

2,228

493

6,400

2,911

7,520

3,416

2005 $000

2006 $000

6. Accounts Payable and Other Current Liabilities Parent 2006 $000 Trade creditors Unearned income

2005 $000

109

335

128

364

3,339

2,711

3,524

2,711

Intercompany payable

97

-

-

-

Employee entitlements

394

221

426

223

2,570

1,111

2,822

1,388

Sundry payables and accrued expenses GST

28

Group

NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

237

234

287

234

6,746

4,612

7,187

4,920

FOR YEAR ENDED 31 DECEMBER 2006

7. Fixed Assets 2006 - Parent

Computer equipment Furniture & equipment Leasehold improvements Capital work in progress

2005 - Parent

Computer equipment Furniture & equipment Capital work in progress

2006 - Group

Computer equipment Furniture & equipment Leasehold improvements Capital work in progress

Cost

Current depreciation $000

Book value

$000

Accumulated depreciation $000

5,187

4,711

557

476

$000

599

315

85

284

1,292

192

129

1,100

474

-

-

474

7,552

5,218

771

2,334

Cost

Current depreciation $000

Book value

$000

Accumulated depreciation $000

5,063

4,154

635

909

555

230

53

325

$000

1,282

63

63

1,219

6,900

4,447

751

2,453

Cost

Current depreciation $000

Book value

$000

Accumulated depreciation $000

5,260

4,729

575

531

649

317

87

332

1,301

192

129

1,109

$000

474

-

-

474

7,684

5,238

791

2,446

Fixed assets for Parent and Group were the same for the year ended 31 December 2005.

29

NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR YEAR ENDED 31 DECEMBER 2006

8. Goodwill and Intangible Assets Parent 2006 $000 Opening cost of goodwill Impairment of goodwill (see Note 9) Goodwill arising on acquisition

Group 2005 $000

2006 $000

2005 $000

435

582

963

1,056

(435)

(415)

(435)

(415)

310

268

2,473

268

310

435

3,001

909

(129)

(55)

(87)

-

Amortisation expense for the year

(48)

(129)

(153)

(156)

Impairment of goodwill (see Note 9)

171

55

171

55

(6)

(129)

(69)

(101)

304

306

2,932

808

Closing cost of goodwill

Opening accumulated amortisation

Closing accumulated amortisation

Balance per Statement of Financial Position

Included in the Group acquisition of goodwill for 2006 is an amount of $1,738,233 in respect of the purchase of the management rights of the Smart OZZY fund. Intangible assets acquired in 2006 are being amortised over their useful lives. The amortisation charge recorded in the Statement of Financial Performance was $37,384 for the Parent and $88,807 for Group.

9. Non-Recurring Items Non-recurring items are expenses that are not ordinary and are one-off in nature. For the year ending 31 December 2006 the only non-recurring item was the write off of the Sydney Futures Exchange (SFE) contract of $263,601 (2005: $360,000) and the contracted future maintenance fees in relation to this contract of $154,599. For the year ending 31 December 2005 nonrecurring items also included expenditure incurred in investigating the default of Access Brokerage Limited and preparation for the NZX Discipline hearing for Access Brokerage Limited of $344,000.

30

NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

FOR YEAR ENDED 31 DECEMBER 2006

10. Taxation Income Tax

Parent

Group

2006 $000

2005 $000

2006 $000

2005 $000

10,213

7,454

10,182

7,267

529

35

621

65

-

-

655

34

10,742

7,489

11,458

7,366

3,545

2,471

3,781

2,431

Loss offset for 2005 & 2006 year

(16)

(435)

-

-

Foreign investor tax credits

(48)

(68)

(47)

(68)

39

17

45

17

3,520

1,985

3,779

2,380

3,630

2,021

3,836

2,457

Operating surplus before tax Permanent differences: Non-deductible expenditure Equity accounted earnings of associate Surplus subject to tax Tax at 33%

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

(110)

(36)

(57)

(77)

3,520

1,985

3,779

2,380

Deferred tax Balance at beginning of the period

397

361

438

361

Current year charge

(55)

57

(102)

98

Prior period adjustment

165

(21)

159

(21)

Balance at end of the period

507

397

495

438

Balance at beginning of period

4,070

3,943

4,070

3,943

Income tax paid

3,294

2,571

3,424

2,571

(1,534)

(2,444)

(1,534)

(2,444)

5,830

4,070

5,960

4,070

Imputation Credit account

Imputation credits attached to dividends paid Balance at end of period

31

NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR YEAR ENDED 31 DECEMBER 2006

11. 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. FOREIGN CURRENCY RISK The Group incurs foreign currency risk as a result of sales and purchases that are denominated in a currency other than the respective Group entity’s functional currency. The currencies giving rise to currency risk in which the Group primarily deals are the Australian Dollar, US Dollar, GBP and the Euro. NZX monitors foreign exchange risk on an ongoing basis and takes action as appropriate. As at 31 December 2006 outstanding foreign exchange risk associated with items recorded on the Statement of Financial Position is not considered significant.

12. Commitments Lease of premises 2006

2005

$000

$000

Up to 1 year

665

665

1 – 2 years

665

665

2 – 5 years

1,995

1,995

> 5 years

2,328

2,993

NZX has entered a contract with Trayport Limited for services relating to establishing a software platform committing to an obligation in total of $3,000,000 of capital expenditure over a five-year period.

32

NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

FOR YEAR ENDED 31 DECEMBER 2006

13. Related Party Transactions Related Parties

Year

Sales to related parties $000

Purchases from related parties $000

Amounts owed by related parties $000

Amounts owed to related parties $000

New Zealand Exchange Limited

2006

1,537

103

2,305

581

New Zealand Exchange Limited

2005

375

49

1,243

9

Smartshares Limited

2006

-

187

-

481

Smartshares Limited

2005

-

84

-

70

Agri-Fax Limited

2006

-

-

480

-

FundSource Limited

2006

11

-

98

-

Tane Nominees Limited

2006

-

-

-

523

Tane Nominees Limited

2005

-

-

-

992

2006

103

239

3

311

LINK Market Services (NZ) Limited

2005

49

291

9

181

Australia NewCo

2006

-

1,122

-

990

Parent

Subsidiaries

Associates LINK Market Services (NZ) Limited

Sales to and purchases from related parties are made at normal market prices. Outstanding balances at the year end are unsecured, interest free and settlement occurs in cash. There have been no guarantees provided or received for any related parties’ receivables or payables. No amounts owed by related parties have been written off or forgiven during the period. Transactions between Group companies including associates mainly comprise management services, registry services and charges for fund management data. Included in the carrying amount of Australia NewCo in the financial statements is $112,662 of costs that were incurred by NZX in developing the AML and platform that were capitalised by NewCo. In 2003, financial assistance was provided to the Chief Executive Officer and Director, 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 Mark Weldon. The financial assistance was in connection to the acquisition of 634,275 Share Scheme Shares in NZX, to be held by a nominee company (“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 Share Scheme 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. On 19 July 2006 a further tranche of 126,855 shares qualified and following repayment of $469,363.50 were 33

NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR YEAR ENDED 31 DECEMBER 2006

transferred from the Nominee to Mr Weldon. As at July 2006 a total of 507,420 Share Scheme shares have qualified under the Scheme and Mr Weldon has repaid $1,609,790 to NZX, reducing his financial assistance to $522,643. The Share Scheme shares were subject to the same changes as ordinary shares. NZX Executive Share Plan shares are offered to selected employees at the market price of the shares on the date of issuance. The Directors of NZX authorised NZX to give financial assistance to some NZX employees in December 2006 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 in 2006 is $1,178,328 (2005: $319,205). At 31 December 2006, NZX employees had repaid $344,841 (2005: $164,998). The balance outstanding is $833,487 (2005: $154,207).

14. Share Capital All shares were subject to a court-approved capital reconstruction of NZX share capital which took effect on 21 July 2006. Under the capital reconstruction there was a mandatory share cancellation of 1 in 8 shares held by each shareholder with a payment to each shareholder of $9.69 for each share cancelled. This was immediately followed by a two-for-one share split. All holders on the NZX register at 21 July 2006 were subject to the capital reconstruction. As at 31 December 2006 there were 23,512,777 (2005: 22,990,746) ordinary non-redeemable and fully paid up shares on issue. Each share confers on the holder the right to one vote on a poll at a meeting of the Company, the right to an equal share in the dividends authorised by the Board and the right to an equal share in the distribution of the surplus assets of the Company. CEO SHARE SCHEME SHARES In July 2006, 126,855 Share Scheme Shares qualified under the Scheme. As noted above, these shares were transferred from the Nominee company to Mr Weldon and reclassified as ordinary shares. NZX STAFF OPTIONS In July and August 2006 all NZX staff options were either exercised or cancelled. These options were not listed. EMPLOYEE SHARE CAPITAL MOVEMENTS Date of issue

Number of shares issued in that year

Price per share issued in that year ($)

Number of shares transferred out of nominee company to NZX employees

December 2006

208,576

6.798

142,758

December 2005

152,513

3.971

64,750

December 2004

125,125

5.109

-

Shares were transferred out in accordance with the terms of the NZX Executive Share Plan. As at 31 December 2006 278,706 shares were held under the Executive Share Plan making up 1% of total shares.

34

NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

FOR YEAR ENDED 31 DECEMBER 2006

15. Distribution to Shareholders A fully imputed special dividend of 25 cents per share was paid in April 2006 before the capital reconstruction detailed in Note 14.

16. Contingent Liabilities On 6 September 2005 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 NZX Participant Rules. The provision held in the Statement of Financial Position at 31 December 2006 is nil (2005: nil) as this contingent liability is: a.

Viewed as highly unlikely - an assessment by NZX and its legal advisers is that it is highly improbable that there will be any successful claim against NZX particularly given the claims have been struck off by the High Court as showing no case to answer. This finding is now the subject of an appeal.

b.

The assurance from NZX insurers being granted that they will meet any cost for this matter after the excess of $100,000, which was paid in 2005.

NZX has entered an agreement with Greta Valley Holdings Limited, the vendor of Agri-Fax Limited, that commits NZX to pay up to $950,000 if the revenue targets for the year ended 31 March 2009 are met.

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

18. Earnings and Net Tangible Assets per Share Group 2006

2005

Undiluted earnings per share (cents per share)

27.49

21.60

Net tangible assets per share (cents per share)

99.07

154.12

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. Net tangible assets per share are calculated by dividing total assets less intangibles and goodwill by the weighted average number of ordinary shares on issue during the period.

35

NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR YEAR ENDED 31 DECEMBER 2006

19. New Zealand International Financial Reporting Standards Under the New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) NZX Limited will produce its first NZ IFRS financial statements for the year ending 31 December 2007. NZX has undertaken a detailed analysis of the impact of NZ IFRS on the financial statements to manage the conversion effectively. Since the opening balance is 1 January 2006 NZX is able to quantify the impact the new standards will have as at 31 December 2005. The actual impact of adopting NZ IFRS may vary from the information presented below and that variation could be material. Parent Adjustments

Share capital $000

Retained earnings 2005 and prior $000

Retained earnings 2006 $000

Assets $000

Liabilities $000

As reported under NZ GAAP

(3,243)

(12,486)

(6,693)

29,350

(6,928)

(A) CEO share scheme

(1,003)

920

83

-

-

(B) Employee sick leave provision

-

31

43

-

(74)

(C) Deferred taxation adjustment

-

(10)

(14)

24

-

(4,246)

(11,545)

(6,581)

29,374

(7,002)

Adjustments

Share capital $000

Retained earnings 2005 and Prior $000

Retained earnings 2006 $000

Assets $000

Liabilities $000

As reported under NZ GAAP

(2,721)

(11,019)

(6,403)

27,587

(7,444)

(A) CEO share scheme

(1,003)

920

83

-

-

-

31

43

-

(74)

In accordance with NZ IFRS

Group

(B) Employee sick leave provision (C) Deferred taxation adjustment

-

(10)

(14)

24

-

(D) Amortisation on indefinite life intangibles and goodwill

-

(26)

(242)

268

-

(3,724)

(10,104)

(6,533)

27,879

(7,518)

In accordance with NZ IFRS

36

NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

FOR YEAR ENDED 31 DECEMBER 2006

(A) RECORD CEO SHARE SCHEME NZX has elected to retrospectively apply NZ IFRS 2 to all employee share schemes. The only scheme that falls under the scope of NZ IFRS 2 is the CEO Share Scheme which has been classified as an equity settled scheme in accordance with the requirements of the standard. The fair value of the Scheme was independently valued by Deloitte for the purpose of reliance at $1,029,149 at its grant date. The standard requires that each tranche of this amount be recognised over the vesting period of the individual tranche. The adjustment detailed above recognises the portion of this fair value that has been charged to the income statement in previous years. (B) EMPLOYEE SICK LEAVE PROVISION In line with the requirements of NZ IAS 19 a provision has been made for any employees with non-vesting accumulated sick leave. (C) DEFERRED TAXATION Under IFRS deferred taxation is provided in full using the liability method on temporary differences between the tax bases of assets and the carrying amounts in the financial statements rather than the comprehensive method detailed in the tax accounting policy. (D) REVERSE AMORTISATION OF INDEFINITE LIFE INTANGIBLES AND GOODWILL Management rights to the three Smartshares funds that have been acquired are considered to be indefinite life intangibles under NZ IAS 38. The above entry reverses accumulated amortisation on these assets. They will be tested for impairment at least annually in accordance with the impairment accounting policy. In addition the amortisation of goodwill in 2006 has been reversed.

20. Significant Events after Balance Date On 7 February 2007 the Board approved a $0.16 per share fully imputed dividend.

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 16 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 2006 and their financial position as at that date. This information is stated in accordance with the accounting policies set out on pages 21 to 24.

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 2006 and their financial performance 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 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 16 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 2006 and their financial performance and cash flows for the year ended on that date.

Our audit was completed on 8 February 2007 and our unqualified opinion is expressed as at that date.

38 Chartered NEWAccountants ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

Wellington

STATUTORY INFORMATION FOR YEAR ENDED 31 DECEMBER 2006

1. Business Operations There have been no changes in the business undertakings of the Company, subsidiaries and associates during the year. However, the Company has acquired two additional business units (FundSource Limited and Agri-Fax Limited - both fully owned subsidiaries of NZX) and NZX’s fully owned subsidiary Smartshares Limited acquired the Tortis-Ozzy fund from Tower Limited - now renamed the Smart Ozzy fund.

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. No matters were recorded in the Interests Register in 2006.

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 New Zealand Limited

Director

ABN AMRO Group Companies in New Zealand

Director

ABN AMRO Craigs Limited

Director

Xylem Investments Limited

Director

NZX Executive Share Plan Nominees Limited

Chairman

Innoflow Technologies Limited

Partner

Harmos Horton Lusk

Director

Westfield New Zealand Group

Director

Elevation Capital Management Limited

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

NZX Executive Share Plan Nominees Limited

Director

Airlie Investments Limited

Director

Alos Holdings Limited

Director

Amberley Investments

Director

ANZ Capital NZ Limited

Director

ANZ Securities (NZ) Limited

Director

ANZMAC Securities (NZ) Nominees Limited

Director

Arawata Capital Limited CONTINUED OVER

39

STATUTORY INFORMATION CONTINUED FOR YEAR ENDED 31 DECEMBER 2006

Director N Williams

H van der Heyden

M R Weldon

40

Interest

Entity

Director

Arawata Trust Company

Director

Arawata Finance Limited

Director

Arawata Holdings Limited

Director

Arawata Securities Limited

Director

Arawata Funding Limited

Director

BHI Limited

Director

CBC Finance Limited (Alternate Director)

Director

Control Nominees Limited

Director

Cortland Finance Limited

Director

Culver Finance Limited

Chairman

City Art Gallery Foundation

Director

Direct Broking Limited

Director

Direct Nominees Limited

Director

Endeavour Finance Limited

Director

Endeavour Securities Limited

Director

Harcourt Corporation Limited

Director

Harcourt Investments Limited

Director

Interchange & Settlement Limited

Director

NBNZ Finance Limited

Director

Samson Funding Limited

Director

Sefton Finance Limited

Director

Trillium Holdings Limited

Director

Tui Endeavour Limited

Director

Tui Securities 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

NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

FOR YEAR ENDED 31 DECEMBER 2006

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 below. 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. Directors

Remuneration

S C Allen

$100,000

Special Responsibility Chairman and Independent Director

A W Harmos

$50,000

Independent Director

N Paviour-Smith

$50,000

Independent Director

N Williams

$50,000

Independent Director

H van der Heyden

$50,000

Independent Director

M R Weldon

$875,000

CEO

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 willful breach of duty or an improper use of inside information or position to gain advantage.

41

STATUTORY INFORMATION CONTINUED FOR YEAR ENDED 31 DECEMBER 2006

7. Subsidiary Companies Directors Smartshares Limited

Agri-Fax Limited

Mr Mark Weldon

Mr Mark Weldon

Mr Geoff rey Brown

Ms Rachael Cross

Mr Don Trow Mr Don Trow was paid Director fees of $12,500 in relation to this Directorship.

FundSource Limited

Mr Stephen Armstrong Mr Columba Cryan

Tane Nominees Limited

Ms Elaine Campbell NZX Executive Share Plan Nominees Limited

Mr Simon Allen

NZ FOX Limited

Mr Mark Weldon Ms Elaine Campbell

Mr Neil Paviour-Smith Mandela Investments Limited

Mr Mark Weldon Mr Stephen Armstrong

The remuneration of employees acting as Directors of subsidiaries is disclosed in the relevant banding of remuneration set out under Employee Remuneration.

42

NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

FOR YEAR ENDED 31 DECEMBER 2006

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 which exceeded $100,000 per annum were as follows: Remuneration Ranges

Number of Employee(s)

100,000 – 109,999

1

110,000 – 119,999

3

130,000 – 139,999

2

140,000 – 149,999

2

160,000 – 169,999

3

170,000 – 179,999

1

210,000 – 219,999

1

230,000 – 239,999

1

310,000 – 319,999

1

320,000 – 329,999

1

540,000 – 549,999

1

9. Director Transaction in Securities of the Parent Company Director

1

Date

No. of securities acquired/ (disposed)

Securities held NonBeneficial as at 31 December 2006

Securities held Beneficial as at 31 December 2006

S C Allen

88,958

A W Harmos

36,458

N Paviour-Smith

45,427

N Williams

17,500

H van der Heyden

-

M R Weldon

1

1,231,848

1,009,852 shares and 221,996 Share Scheme shares.

43

STATUTORY INFORMATION CONTINUED FOR YEAR ENDED 31 DECEMBER 2006

10. Auditors The auditor of the parent company and Group is PricewaterhouseCoopers. PricewaterhouseCoopers provide audit and other services for which they are remunerated. Parent

44

Group

$000

$000

Audit services

58

99

Assurance services

24

51

Other services

30

30

NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

SECURITY HOLDER INFORMATION FOR YEAR ENDED 31 DECEMBER 2006

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 December 2006. Shares Held

%

Forbar Custodians Limited

1,634,696

6.95

TEA Custodians Limited

1,591,484

6.77

ASB Nominees Limited

1,009,852

4.29

Custodial Services Limited

827,680

3.52

New Zealand Superannuation Fund Nominees Limited

814,950

3.47

Accident Compensation Corporation

692,947

2.95

Peter Hanbury Masfen & Joanna Alison Masfen

671,078

2.85

Nigel Babbage & Philippa Babbage

654,812

2.78

Premier Nominees Limited – ING Wholesale Equity Selection

564,890

2.40

Ithaca (Custodians) Limited

543,374

2.31

Norwich Union Life Insurance (NZ) Limited

527,144

2.24

TEA Custodians Limited

524,982

2.23

David Mitchell Odlin

371,750

1.58

Custodial Services Limited

365,275

1.55

Leveraged Equities Finance Limited

338,279

1.44

ASB Nominees Limited

313,590

1.33

Premier Nominees Limited – Armstrong Jones NZ Share Fund

211,672

0.90

NZ Guardian Trust Investment Nominees Limited

199,636

0.85

National Nominees New Zealand Limited

194,534

0.83

RGH Holdings Limited

166,250

0.71

12,218,875

51.95

45

SECURITY HOLDER INFORMATION CONTINUED FOR YEAR ENDED 31 DECEMBER 2006

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

Shareholders Number

1 to 1,000

Shares %

Number

%

893

37.58

611,992

2.60

1,070

45.03

2,499,061

10.63

200

8.42

1,390,783

5.92

10,001 to 20,000

94

3.96

1,425,304

6.06

20,001 to 30,000

29

1.22

744,704

3.17

30,001 to 40,000

36

1.52

1,254,432

5.34

40,001 to 50,000

9

0.38

408,290

1.74

45

1.89

15,178,211

64.55

2,376

100.00

23,512,777

100.00

1,001 to 5,000 5,001 to 10,000

> 50,001

Domicile of Holders

Shareholders Number

New Zealand

Shares %

Number

%

2,329

98.02

23,165,437

98.52

Australia

29

1.22

208,544

0.89

Other

18

0.76

138,796

0.59

2,376

100.00

23,512,777

100.00

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 December 2006. The total number of voting securities on issue as at 31 December 2006 was 23,512,777, comprising 23,290,781 ordinary shares and 221,996 Share Scheme Shares. Relevant Interest Fisher Funds Management Limited ING NZ Limited M R Weldon

46

NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

%

1,225,617

9.91

783,527

6.18

1,231,848

5.30

FOR YEAR ENDED 31 DECEMBER 2006

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 2006. 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 Scheme. A waiver from the application of Listing Rule 7.6.6 to exempt any share acquisitions or redemptions by NZX, and the provision of financial assistance given for the purposes of the CEO Scheme from the requirement that any such acquisition, redemption or financial assistance to be made or given within 12 months (for acquisition).

5. Securities Issued by NZX NZX’s ordinary shares (including those Share Scheme shares that converted to ordinary shares in July 2006) are quoted on the NZSX 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.

47

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 Andrew Harmos Neil Paviour-Smith Henry van der Heyden Mark Weldon The Directors can be contacted at NZX’s registered office.

48

NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT

Share Registrar LINK Market Services Limited PO Box 91976 AUCKLAND 1030

NOTES

49

NOTES

50

NEW ZEALAND EXCHANGE LIMITED 2006 ANNUAL REPORT