Nzx Annual Report 2007

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NEW ZEALAND EXCHANGE LIMITED ANNUAL REPORT

Issued 11 March 2008

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 4. Performance Summary and Outlook 15. Board of Directors 20. Financials 62. Statutory Information 72. 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 Thursday 10 April 2008, commencing at 4.00pm. Full details, including the business to be dealt with, are contained in the Notice of Meeting.

Financial Calendar 31 December 2007

2007 Financial Year end

15 February 2008

Preliminary Full Year Financial Results issued

11 March 2008

2007 Annual Report issued

4.00pm, 8 April 2008

Latest time for receipt of proxies for Annual Meeting

4.00pm, 10 April 2008

Annual Meeting – Record and payment date for dividend advised

July 2008

Preliminary Half Year Announcement issued

September 2008

2008 Half Year Report issued

31 December 2008

2008 Financial Year end

CHAIRMAN’S REPORT

There has been some very hard work going on behind the scenes in 2007 to create an optimal environment for the ongoing development of New Zealand’s capital markets. NZX has been

working closely with both the New Zealand and Australian governments to contribute to legislative change that will drive forward some key innovations for NZX in both markets.

Here in New Zealand we have been working with the Ministry of Economic Development to facilitate an active derivatives market for this country. Currently investors can trade only cash

products on NZX markets. The 2008 priority for NZX is the upgrade of our clearing and settlement

system, which will enable us to offer a broader range of equity, debt and derivative products including commodity derivatives and carbon units. This will also align us with international best practice for clearing and settlement for all products traded on NZX markets.

In preparation for the launch of AXE ECN in Australia we have been working with the Australian Securities and Investment Commission (ASIC). ASIC released two Consultation Papers in 2007, both of which supported a positive regulatory landscape for market participants, and a market

landscape where competition drives value. AXE ECN will provide value in pricing, innovation and technology for market participants. NZX is proud to be integral to that offering.

2007 was a year of doing the necessary and invisible work behind the scenes. The next chapter will be about execution. These exciting market developments - coupled with sound and sensible regulatory

and fast, scalable and leading technological infrastructure, spanning both domestic and international territory - will deliver benefits to NZX stakeholders.

The immediate future is thus one of providing a better trading environment for market participants and listed companies, and offering a more sophisticated market with a broader range of investment

options for New Zealand investors, expanding NZX group’s activities beyond traditional activities and in doing so, continuing to generate value for our NZX shareholders.

We are pleased to report these initiatives while at the same time achieving a very positive financial performance.

Simon Allen, Chairman 11 March 2008

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CHIEF EXECUTIVE’S REPORT

A pivotal point in our evolution NZX’s strategy recognises that in a global context that is fast, complex and uncertain, the only approach to strategy that can consistently add value over time is flexibility around a core set of strategic criteria. While a fixed focus on a couple of set tenets may maximise value in any given period, inevitably that period will run out, and failure to be flexible can have catastrophic results. NZX will not fail to be flexible and adapt. NZX is at a highly defined, and pivotal, point in its evolution. As you will have read and heard in previous communications from me, Phase I - from 2002 to 2004 - was aimed at fixing the franchise: getting the house in order so we could meet the challenges of a new era of visibility and accountability. Overlapping that was Phase II, from about 2003 to 2006. This was dedicated to maximising the value of the core franchise, and strengthening its long-term viability and resiliency. Phase III commenced in 2007, and we’re already seeing its impacts in 2008. The predominant focus of Phase III continues to be seeding real and valuable options in major growth areas such as derivatives, the Australian market (specifically with AXE ECN) and carbon, amongst others. Over Phase III, as these options generate positive cash flows, NZX’s cost and capex lines will show some growth ahead of revenue recognition. Phase IV, which begins now, will run simultaneously with the latter part of Phase III, and persist for the next three to four years. The key feature of this phase will be realising the positive value of those options. The result will be an NZX that displays the following characteristics: • • •

A strong domestic position and resilience in the growth franchise, with real upside from

derivatives and liquidity growth

Emerging international business exposure in a couple of global niches in which we can be distinctive, and which we can scale beyond New Zealand or any one market

A successful strategic investment portfolio, which has both strengthened the financial position

and the core business of NZX.

One of the factors in the resilience of NZX’s business is our debt/hybrid market. It provides both counter-cyclical cover to the listing businesses, and provides a great facility for NZX Market Participants to provide quality products to their customers. Underwriting and distributing debt and hybrid products is important to the financial health of NZX Market Participants - which matters to NZX and to the long-term health of the markets more broadly. Beginning with this report, we will deliver a detailed insight into the subsidiaries and strategic investments beyond the core NZX Markets business. This will ensure that all our stakeholders have a clear picture of how NZX’s strategy, combining essential stability with critical flexibility, will continue to present genuine options for growth into the future.

Mark Weldon, Chief Executive Officer 11 March 2008 2

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

NZX conducted a survey of market analysts in 2007. They told us they wanted to see a stronger focus on future outlook, and more detail on subsidiaries and strategic investments, in our financial releases. Accordingly, NZX will produce a detailed report at Full and Half Year result periods that comprises four sections: I. NZX Group: 2007 Performance Summary II. NZX Group: 2008 Outlook III. NZX Group: Key Operating Metrics IV. NZX Group: Statement of Financial Performance 2007

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I. NZX Group: 2007 Performance Summary

Operating revenue: $31.45 million versus $25.03 million (excluding changes in fair value of financial assets) in 2006, an increase of 26%. Operating expenses: $16.71 million versus $14.23 million (excluding one-off items) in 2006, an increase of 17%. EBITDA: $14.74 million versus $10.44 million in 2006, an increase of 41%. EBITDA margin: 47% versus 42% in 2006, an increase of 12%. NPAT: $8.71 million versus $6.50 million in 2006, an increase of 34%. NPAT margin: 27.7% versus 26% in 2006, an increase of 6.5%. Fully diluted earnings per share: 36.17c per share versus 27.91c per share in 2006, an increase of 30%. EBITDA for the NZX Group was up 41% in 2007. This is evidence of the resilience and strength of our business in a year where market conditions were characterised by uncertainty and volatility. The financial results continued the trend of previous years with revenues growing faster than costs, and both earnings and margins improving significantly. Key contributions came from the data and listings areas, with a particularly strong showing by secondary capital raisings. Also worth noting are the improved contributions from Smartshares Limited (SS) and a much improved year from LINK Market Services Limited (LINK). AXE ECN (AXE) experienced delays in regulatory approvals, which NZX is confident will be resolved early in 2008. NZX expects to see increased earnings contributions to the Group result from all the above-named subsidiaries. Overall operating expenses increased 17% to $16.71 million in 2007. The majority of this increase was in relation to employee costs associated with businesses purchased in the second half of 2006 and 2007. NZX also opted to make the maximum 4% employer KiwiSaver contribution from the 1 July 2007 KiwiSaver launch date.

NZX Markets Business: 2007 Performance Total NZX Markets operating revenue grew to $28.55 million, from $23.00 million in 2006, an increase of 24%. The NZX market information business generated $10.54 million in revenue, an increase of 72% on 2006. Key drivers were continued growth in demand for NZX data with the number of real time terminals worldwide at the end of 2007 up 20% on 2006, and revenue growth from acquired businesses Company Research Centre (formerly IRG Data), NZX Agrifax, FundSource and NZX NewsRoom. These new businesses together provide a full suite of New Zealand business data offerings. Listings revenue grew to $9.10 million, a 12% increase on 2006. There was also a significant level of secondary capital raised in 2007 with existing issuers raising capital for growth and acquisitions. Trading, clearing and settlement revenue was up 3% on 2006 at $4.85 million.

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NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

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NZX Subsidiaries and Strategic Investments: 2007 Performance Smartshares EBITDA reached $673,000, a 24% increase on 2006. LINK delivered an EBITDA result of $985,000 versus $325,000 in 2006. LINK also began to return capital to NZX, redeeming preference shares in 2007. AXE has worked effectively with ASIC on gaining regulatory approvals, which we confidently expect in 2008. AXE also announced that it will move quickly to launch a full trading facility in addition to the reporting facility. A key event in 2007 was the announcement of the formation of the TZ1 Carbon Market.

NZX Capital Management NZX’s current dividend policy is to pay a dividend of up to 60% of NPAT. Continuing this policy, NZX will pay out 60% of NPAT for the 2007 year, giving a total distribution of $5.2 million, or 21 cents per share, fully imputed. The NZX Board has also resolved that if the 10-day volume weighted average price (VWAP) of the NZX share price is below $8.50 immediately prior to the NZX Annual Meeting on 10 April 2008, the dividend reinvestment plan will be suspended, and dividends for all shareholders will be paid in cash. If the 10-day VWAP is $8.50 or above, the dividend reinvestment plan will remain available. In this circumstance, shares issued under this programme will be at the 10-day VWAP. In line with this policy, the NZX Board will make its final capital management announcement in respect of the dividend distribution at the Annual Meeting. NZX’s capital management policy is to fund infrastructure investment, organic growth and bolt-on acquisitions from retained earnings. Any larger investments or acquisitions will likely be funded from existing cash reserves, and thereafter by debt funding. The NZX Group currently has no borrowings. NZX anticipates that opportunities may arise which require larger investment amounts. For opportunities with the right returns profile, NZX is likely to obtain debt funding. Debt funding will only be undertaken where it reduces the weighted average cost of capital (WACC) from its current equity-only basis.

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II. NZX Group: 2008 Outlook

Strategy The NZX Group has two dominant areas of strategic focus for 2008. First, infrastructure and market development. Central to this is implementation of a Central Counterparty (CCP), a Central Securities Depository (CSD) and an upgraded Clearing and Settlement infrastructure. This will benefit our broker customers by enabling them to scale their own businesses better and to manage risk more simply, and will enable the development of a strong, New Zealand-based derivatives market with a wide range of products traded including equity derivatives and commodities. A sharpened focus on specific aspects of the listing and liquidity areas is also a priority. Improvements to liquidity through market microstructure, new products, greater use of Direct Market Access (DMA) and continued work with technology companies on listing will predominate. Second, further developing international niche businesses that leverage our skills and knowledge. NZX’s focus is on creating opportunities in products and jurisdictions with higher growth characteristics than our domestic business. AXE ECN (AXE) and TZ1 are key components, but NZX expects these to be augmented by additional international investment in 2008. NZX will, as previously, continue to assess and, as appropriate, execute manageable “bolt-on” acquisitions at sensible prices in the data area.

Financial Performance The strategy executed by NZX over the past four years has built increased financial resilience to short-term changes in market performance, listings and liquidity. Accordingly, while there remains uncertainty for 2008, NZX is confident of continuing to deliver improved financial results at Group EBITDA and NPAT levels. Until this point, the NZX business has been relatively simple, with the focus very much on EBITDA. Going forward, however, NZX’s subsidiaries and investments will become increasingly important. Accordingly, we will report on their performance and outlook in greater detail from this point forward.

Team Our approach to organisation is driven by the need to be expert at three things: running a strong and resilient market, innovating and executing projects. All our recruitment, development, incentive and other talent programmes are driven by the need for the wider NZX team to be expert in these three activities.

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NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

NZX Markets Business: Future Outlook Strategy NZX group priorities – aimed at infrastructure, derivatives and liquidity improvements – are directly centered in this area. The new Trayport trading system implemented in 2007, combined with an upgraded Clearing and Settlement system in 2008, will increase the range of products able to be traded on NZX markets. The new Clearing and Settlement system will enable a range of derivative products - equities, commodities and carbon - to be traded and cleared at a low marginal cost to customers. Equity derivatives and commodities are the focus. The performance focus for liquidity is to improve the underlying liquidity of NZX markets at every level of listed product. Microstructure initiatives (e.g. market makers and DMA) are critical. These major technology upgrades, and the product opportunities they enable, are expected to have a positive impact on overall market liquidity. The 2008 performance target in liquidity is to see average daily trade numbers increase 10% from the current level of 2,500.

Financial Of the business lines most influenced by local market share price performance (i.e. bull vs. bear), listings has the greatest sensitivity. Bull or stable markets result in strong listing growth; bear markets do not. While the market information business is not exposed to market performance, it has some exposure to global financial institution headcount changes, where significant headcount cuts could impact terminal numbers.

NZX Subsidiaries and Strategic Investments: Detailed Performance and Future Outlook Strategic Criteria NZX’s domestic subsidiaries and investments Smartshares, LINK and Appello align with NZX’s strategic investment criteria of deepening and improving the quality of the overall New Zealand capital markets. For NZX to make international investments, these must extend market infrastructure or expertise into high growth niche areas, increasing our scalability and growth outlook. NZX spends significant time evaluating the strategy of each potential business investment. NZX’s approach to managing its positions in subsidiaries and investments is similar to that of a listed investment company. For non 100%-controlled subsidiary companies, NZX manages its exposure through boards and governance, rather than through directly managing the businesses themselves.

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Business Overview

Future Outlook

Smartshares is a wholly-owned subsidiary of NZX. As at 31

Over each of the last four years, Smartshares’ main

December 2007, Smartshares had $652 million in Funds

focus has been on acquiring new funds, launching

Under Management. Smartshares manages five listed,

new funds, or adding product features such as direct

exchange traded funds (ETFs) all of which are registered as

deposit. For 2008 the focus is purely on improving

Portfolio Investment Entities (PIEs). Smartshares also has

Smartshares’ profitability through managing fund

its own KiwiSaver scheme, Smartkiwi. Smartshares funds

expenses downward, growing units in the existing

focus on the most tax efficient investment geographies for

Smartshares funds and adding revenue lines such as

New Zealanders.

those arising from the introduction of stock lending.

Strategic Attributes

Smartshares expects to deliver significant productivity

Smartshares, New Zealand’s largest passive funds

reasonable reliance on market performance, any risks to

provider, provides a low-cost investment option for

this area should be balanced by new units created and the

retail investors. For the “entry level” investor segment,

initiation of stock lending activities. Upside to the financial

Smartshares provides diversified investment options

year would come from winning wholesale mandates from

where investors may not have wealth to create a diversified

institutions that have experienced underperformance

portfolio themselves, thus allowing an easy “first step” into the equity markets. As ETFs are good lenders of stock, Smartshares intends to lend its stock to help develop the

and cost improvements in 2008. While revenue has

relative to the market during the recent market volatility.

Operating Metrics 2007

(currently nascent) short side of the NZX markets. This should result in liquidity growth in the overall NZX markets.

% Change Funds Under Management

$652 million

30%

Financial Attributes

Number of Retail Unit Holders

15,011

2%

Smartshares has a scalable business model. Smartshares

Financial Highlights 2007

have very low redemption risk, as when investors exit their Smartshares position, they sell on market rather than

Operating Revenue

$3.10 million

Operating Expenses

$2.42 million 35%

2007 Financial Results

Operating EBITDA

$673,000

24%

Revenue growth for Smartshares in 2007 was up 33%.

Operating EBITDA Margin

22%

23%

NPAT

$442,00

27%

NPAT Margin

14%

15%

redeeming units. This provides significant financial stability.

Expenditure in 2007 was up 35%, driven by costs associated with the introduction of the PIE regime and our Smartkiwi KiwiSaver products. Absent these one-off costs, expenditure growth would have been 24%, and NPAT would have risen by 65%.

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% Change*

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

33%

* Margin numbers (Operating EBITDA, NPAT) are shown as actual levels rather than % change.

Business Overview

2007 Financial Results

LINK Market Services Limited (“LINK”) is a 50:50 joint

LINK experienced strong revenue growth of 38% in 2007.

venture company between NZX and Link Market Services

This resulted in a $985,000 EBITDA result, up from less

Australia (owned by Pacific Equity Partners). LINK provides

than $325,000 in 2006. In 2007 LINK returned $700,000

a full range of registry services for both listed and unlisted

in Redeemable Preference Shares to its two shareholders

issuers. LINK now has approximately 30% of the New

and made an NPAT profit for the first time.

Zealand registry business by number of issuers. In 2007 LINK captured approximately 40% of IPOs by number.

Strategic Attributes

Future Outlook The focus for 2008 is purely on execution of the core business model. LINK’s last three years have all had

LINK provides another means for NZX to benefit from

a development focus (core system, wholesale debt

growth in the IPO and secondary issuance market. NZX

functionality, a business service centre, and upgrades in

also invested in LINK to bring real competition and

electronic communications for issuers). In 2008 the focus

innovation to the registry market. LINK has succeeded

is on growing profitability.

in raising significantly the level of technology and service

In 2008 LINK is expected to return over $1 million in

provided to issuers in the New Zealand market, and

Redeemable Preference Shares to its shareholders,

improving the overall New Zealand capital markets. As

driven by improved EBITDA and NPAT results. LINK has

this increases the overall competitiveness and value of a

some sensitivity to the IPO market, so the actual EBITDA

listing, it aligns well with NZX’s long-term goals.

outcome could range from slightly to materially improved.

Financial Attributes

Operating Metrics 2007

LINK provides high quality, reliable revenue as issuers

% Change

tend to remain for a significant period of time with their

Number of Holders

320,000

7%

registry provider.

Total Number of Issuers

144

11%

As LINK’s core registry systems are electronic, LINK

IPOs Won

40%

0%

exhibits good scalability. LINK is currently at the level where margins will now improve with revenue growth.

Financial Highlights 2007

LINK also provides some cyclical protection for NZX. In



particular, there is little difference in the registry business

Operating Revenue

$4.151 million 38%

Operating Expenses

$3.166 million 18%

negative for the NZX Markets businesses, LINK receives

Operating EBITDA

$985,000

additional capital markets work, providing some hedge

Operating EBITDA Margin

24%

NPAT

$26,000

between a debt and an equity IPO. LINK also receives capital markets work in takeovers. While takeovers are

from such events.

% Change*

203% 11% 105%

* Margin numbers (Operating EBITDA, NPAT) are shown as actual levels rather than % change. 9

The Australian ECN

Business Overview

Financial Attributes

AXE ECN (“AXE”) in Australia is a joint venture between

AXE is a very scalable business. The two main revenue

NZX and five major broking firms (Citigroup, Goldman

lines will come from trading and the sale of market data,

Sachs, Commonwealth Securities, Merrill Lynch and

both provided by the core trading system. Staffing should

Macquarie). AXE crossings platform is expected to start

remain reasonably static with liquidity growth.

trading in the first half of 2008. We confidently expect full

NZX will receive a fixed cost for the provision of market

trading to commence in the September quarter of 2008.

Strategic Attributes AXE gives NZX access to the scale of the Australian capital market. NZX has earned its spot on the AXE ownership group by its ability to extend its world-class (in terms of speed and scalability) trading system, and its skills at running both regulated markets and an exchange business. This also allows NZX to provide world class infrastructure across two markets, rather than one. NZX believes that, in the medium-term, the New Zealand and Australian capital markets will function more and more as one market. In this event, the NZX system will be the only trading system providing common Australasian access via standardised FIX 4.4 interface, world-class speed of execution (a platform measured with confidence as being faster than the Australian incumbent), high scalability, high trans-Tasman bandwidth, and knowledge of both regulatory environments. As the markets converge, this platform will be valuable in bringing new liquidity to NZX (i.e., brokers will already be connected to the platform), and providing real options for further NZX business in Australia.

operations and market surveillance services. This will ensure that AXE remains current with global trends and regulatory requirements, and provides a fair commercial return to NZX.

2007 Financial Results The timing of the Australian election delayed AXE’s launch in 2007. The near-term focus for AXE is thus securing an Australian Market Licence (AML) to enable Phase I of the business to be operational by May 2008. During 2007 AXE generated revenues of AUD$189,000, incurred total expenses of AUD$1.475 million, and has recognised a future tax benefit in relation to these of AUD$383,000, resulting in an after-tax loss of AUD$903,000 for 2007. The total future tax benefit recognised on the balance sheet as at December 2007 is AUD$608,000. It is expected that AXE will derive taxable income in the future to utilise this benefit. While it awaits approval of its AML application, AXE has attracted significant interest within the Australian financial service sector. The need for competition in this area prompted Australian brokers, institutional investors and industry groups to make positive submissions to the local regulator. The AXE crossings platform is due to start trading in the first half of 2008, with full trading commencing in the September quarter.

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NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

Future Outlook The AXE business will launch in two phases in 2008. First, AXE will offer a trade-reporting facility (similar to BOAT in Europe). Second, AXE will launch a full electronic order book and matching engine to trade ASX listed securities, developing a full continuous auction model to complement the crossings platform. Full trading is expected to commence in the September quarter of 2008. Both the AXE Board and NZX are positive about the 2008 financial and strategic prospects for the business. The risks to AXE centre around potential stalling by ASX in providing timely access to its vertically integrated CHESS Clearing and Settlement infrastructure. The prospect of volatile markets in Australia is not negative for AXE. One of AXE’s key competitive advantages is pricing, which will become even more important if broker profits are squeezed, and attention switches to costs. AXE’s business model – based on providing a technological advantage to clients, a best-execution orientation, and customer-focused pricing – is expected to generate significant interest and market share.

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Business Overview In December 2007, NZX announced both the establishment of TZ1 as a separate company, with initial

Together this provides TZ1 with a cost-effective, fixed operating cost structure – with other expense purely focused on growth outcomes.

funding from NZX, and a very strong executive team.

The three key business areas are carbon registry, voluntary

TZ1’s ambitions are global, while retaining a strong New

carbon trading (largely spot), and trading in compliance

Zealand identity and focus.

units (e.g., NZUs and CERs) in both spot and futures

Carbon is emerging as a significant globally traded

markets. As with any other market, volume will result in

commodity: greenhouse gas emission permits and credits

scalability of returns. As transacting carbon involves the

were traded for 40.4 billion in 2007, an increase of 80%

creation of a new set of products and a broader range

on the previous year.

of participants, a reasonable lead time to launch and

TZ1 will launch its emissions trading platform in 2008,

profitability is expected.

following the passage of both carbon trading and Clearing

There are three broad possible outcomes for the TZ1

House legislation, which together support trading of carbon

business. First, TZ1 establishes a strong global market

on an exchange in New Zealand.

position, with particular strength in the Asia-Pacific time

Strategic Attributes

zone, and is very successful as a stand-alone business. Second, TZ1 establishes a competitive domestic

The New Zealand Emissions Trading Scheme (NZETS),

Australasian market platform whereby shareholders are

announced by government in Q4 2007, provides a key

rewarded with a moderate return on investment, and

competitive advantage for New Zealand. As the only

the business realises capital value for its shareholders

domestic emissions trading scheme outside Europe,

by combining with complementary business. Third, the

and the only all-sectors and all-gases Kyoto-linked

business does not reach anticipated scale and is excluded

scheme in the world, the NZETS will help create a

from any subsequent consolidation.

market for supply and demand of globally fungible (interchangeable) Kyoto credits. NZX’s knowledge and networks established in this area over the past 18 months, together with its infrastructure and skills, enables TZ1 to seize an early-mover advantage in this fast-growing global market. For NZX, TZ1 provides an opportunity to extend its existing infrastructure (trading, clearing, settlement and data distribution channels) into a growing global market at an early stage.

2007 Financial Results There were no separately reported 2007 revenues or costs for TZ1. All development and set-up costs (employees, legal etc.) are included in NZX’s operating expenses for 2007.

Future Outlook The TZ1 team has two key areas of focus for 2008.

Financial Attributes TZ1 is a start-up, and very scalable, business. The business model involves a market infrastructure platform with a fixed cost base. NZX will provide TZ1 with corporate and market operating services for a fixed annual fee. 12

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

First, determining its strategy with respect to offshore relationships, cornerstone investors, capital-raising, strategic acquisitions and other business initiatives. Second, successful launch of its trading platform.

Business Overview

2007 Financial Results

Appello Services Limited is a start-up fund

NZX acquired 30% of Appello in November 2007. This

management services business which provides a

business is in the start-up phase and, as expected,

set of fully electronic administrative and compliance

is currently making a loss as no significant revenues

services for New Zealand fund managers. Appello was

have been delivered. To date Appello has incurred total

established in response to the increasingly complex

expenses of $75,000 and has recognised a future tax

technology needs of fund managers (including those

benefit in relation to these costs of $25,000, resulting

created by the PIE tax regime).

in an after-tax loss of $50,000 for 2007. The future tax benefit has been recognised as Appello will derive taxable

Strategic Attributes The Appello business model addresses a gap in the current funds management business by providing a fully

income in the future to utilise this benefit.

Future Outlook

electronic, scalable system capable of managing multiple

The focus for 2008 is to (i) establish its operating

asset classes. The potential customer base is increasing

platform, and (ii) secure an anchor customer for the

due to new product opportunities as a consequence

Appello solution. It is expected that customers managing a

of the PIE regime, and the expected flow of money into

total of $1 billion Funds Under Management will be on the

managed funds.

Appello platform by end of 2008.

Appello increases NZX’s exposure to the funds

Appello’s infrastructure has been proven through a proof-

management industry, which is attractive because of PIE

of-concept customer, who has already been secured.

and KiwiSaver. There are no integration costs to NZX in this business, but real value delivered because of NZX’s involvement – including knowledge gained through LINK. The board and CEO of Appello have proven expertise in the sector.

Financial Attributes A fixed cost base and a heavily automated business will drive significant scalability as multiple customers are served off the same technology and networks. Equally, once a fund manager changes (or selects for the first time) its registry and administrative solution, the customer is generally committed to the product for the long term, as it becomes an essential part of their operations and switching costs are high.

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III. NZX Group: Key Operating Metrics

NZX Markets Business – Operating Metrics

AXE ECN – Operating Metrics

Total of number of trades

Market share

Average daily trades

Number of shares

Total value traded

Value traded

Average daily value traded Total number of NZX listed issuers Number of data terminals Total capital raised (primary and secondary)

TZ1 Carbon Market – Operating Metrics Registry customers Voluntary market trades Compliance market trades (spot)

Smartshares – Operating Metrics

Compliance market trades (forward)

Total Funds under Management (retail and wholesale)

Open interest

Number of retail unit holders

LINK Market Services – Operating Metrics Number of holders Number of issuers IPOs won

Note: NZX Operating Metrics - Full Year 2007 are available on the NZX website at the following link: http://www.nzx.com/aboutus/news/press/metrics_dec07

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NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

Appello Services – Operating Metrics Number of customers

BOARD OF DIRECTORS

Simon Christopher Allen – Chairman BSc, BCom, FCSAP Simon is Chief Executive of ABN AMRO in New Zealand and has 24 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 NZ.

Nigel Williams – DEPUTY Chairman BCom Nigel Williams 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 has 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 sharebroking and investment management firm, and a director of various related companies. Neil has extensive experience in the NZ securities industry including several years in equity funds management and research roles. Neil is a director of Global Equity Market Securities Limited and listed company 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.

15

BOARD OF DIRECTORS CONTINUED

Henry William 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 16 years, as both a director and chairman, and played a considerable role in the industry rationalisation that led to Fonterra’s establishment. He has extensive experience in the disciplines of large-scale manufacturing and international exporting and the financial, regulatory, trade and customer influences on them. He is a Director of Independent Egg Producers (IEP) and King St Advertising, and Elevation Capital Management Limited. He is also a Trustee of Asia : New Zealand and a member of Rabobank ANZ Food & Agribusiness Advisory Board.

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 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 Juris Doctorate and a Diploma in International Law. Mark joined leading New York law firm Skadden, Arps, Slate, Meagher & Flom as an attorney. Mark went on to work at the New York office of McKinsey & Company, where he specialised in stock exchanges, asset management and wholesale banking.

16

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

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

CORPORATE GOVERNANCE

BEST PRACTICE 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 (Board) who are elected by shareholders to direct and control NZX’s activities.

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 COMPOSITION The Board currently comprises six Directors of whom five are non-Executive Directors and also Independent as defined in Rule 3.3.1B. 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 Rules, one third of the Directors are required to retire by rotation and may offer themselves for re-election by shareholders each year. NZX also accepts nominations for Directors in accordance with the Rules. The Board holds regular scheduled meetings. An agenda and papers must be circulated at least five business days before each meeting to allow Directors sufficient time to prepare. The Board also holds ad hoc meetings to consider time sensitive or specific issues (including via teleconference). The Board has access to executive management and key executive managers are invited to attend and participate in appropriate sessions of Board meetings.

COMMITTEES The Board has two standing committees: an Audit Committee and a Remuneration Committee.

17

CORPORATE GOVERNANCE CONTINUED

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 external auditor and the internal finance and audit team, 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, practices and performance of NZX as they relate to the Directors including any committees that Directors may serve on, and also the remuneration and performance 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.

2007 NZX DIRECTORS’ ATTENDANCE RECORD Director Simon Allen Andrew Harmos

NZX Board/Committees 16/16 6/6

Neil Paviour-Smith

10/10

Mark Weldon

10/10

Nigel Williams

16/16

Henry van der Heyden

12/12

- Please note the 16 meetings comprised 6 Board meetings, 4 Audit Committee meetings and 6 Remuneration Committee meetings held in 2007. - Mark Weldon is not a member of either of the committees but may attend meetings as an invited attendee.

18

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

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 2007 financial year Directors sought independent professional advice where necessary and appropriate.

INSURANCE AND INDEMNIFICATION NZX provides indemnity insurance cover to Directors and executive employees. This is explained further on page 65.

SHARE TRADING The company has adopted a formal NZX Securities Trading Policy to address insider trading requirements under the Securities Markets Act 1988 (as amended by the Securities Markets Amendment Act 2006). The NZX Securities Trading Policy is modelled on the Listed Companies Association Securities Trading Policy and Guidelines and administered by the NZX Securities Trading Committee that consists of the Corporate Counsel, the Head of Market Products, the Head of Market Supervision and the Chairman of the Board. The NZX Securities Trading Policy (“Policy”) restricts trading in a number of ways including: • Prohibiting trading in NZX’s securities during ‘black-out’ periods set out in the Policy. These occur where quarterly financial results have not yet been released to the market. • If a Director, officer or employee of NZX wishes to trade NZX securities outside of a blackout period, that person must first apply, and obtain, consent from the NZX Securities Trading Committee or its delegated representatives. 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.

19

IV. NZX Group: Statement of Financial Performance 2007

Directors’ Responsibility Statement The Directors are responsible for the preparation, in accordance with New Zealand law and generally accepted accounting practice, of financial statements which give a true and fair view of the financial position of the New Zealand Exchange Limited and its subsidiaries (“NZX Group”) as at 31 December 2007 and the results of their operations and cash flows for the year ended 31 December 2007. The Directors consider that the financial statements of NZX Group have been prepared using accounting policies appropriate to NZX Group’s circumstances, consistently applied and supported by reasonable and prudent judgments and estimates, and that all applicable New Zealand Equivalents to International Financial Reporting Standards have been followed. The Directors are pleased to present the financial statements of NZX Group for the year ended 31 December 2007. The financial statements were authorised for issue for and on behalf of the Directors on 14 February 2008.

S C Allen Chairman

20

N Paviour-Smith Director

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

M R Weldon Chief Executive Officer

INCOME STATEMENT FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

Group

Parent

Note

2007 $000

2006 $000

2007 $000

2006 $000

Revenue

2

31,450

25,085

27,128

22,400

Employee and related expenses

2

(9,846)

(8,025)

(8,525)

(7,220)

Other expenses

(6,862)

(6,625)

(4,789)

(5,326)

Profit before interest, income tax, depreciation and amortisation

14,742

10,435

13,814

9,854

Depreciation and amortisation expense

2

(1,052)

(897)

(874)

(813)

Net Interest

2

287

1,117

262

1,114

Share of losses of associates accounted for using the equity method

7

(562)

(384)

-

-

Profit before income tax expense

2

13,415

10,271

13,202

10,155

Income tax expense

3

(4,701)

(3,771)

(4,384)

(3,514)

8,714

6,500

8,818

6,641

Profit for the period attributable to shareholders Earnings per share Diluted

16

36.17c

27.91c

Undiluted

16

36.33c

28.32c

127.4c

98.7c

Net tangible assets per share

Notes to the financial statements are included on pages 25 to 60.

21

STATEMENT OF RECOGNISED INCOME AND EXPENSE FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007 Group

Profit for the period Foreign currency translation differences Total recognised income and expense for the year attributable to shareholders

Notes to the financial statements are included on pages 25 to 60.

22

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

Parent

2007 $000

2006 $000

2007 $000

2006 $000

8,714

6,500

8,818

6,641

(37)

-

-

-

8,677

6,500

8,818

6,641

BALANCE SHEET AS AT 31 DECEMBER 2007

Group

Parent

Note

2007 $000

2006 $000

2007 $000

2006 $000

23(a)

12,976

5,531

10,772

4,871

6

6,159

7,520

3,976

6,400

533

499

3,863

1,022

-

-

514

(97)

854

(257)

786

(182)

20,522

13,293

19,911

12,014

7

6,557

6,371

7,775

6,926

20

-

-

10,312

6,372

Property, plant and equipment

8

3,483

2,222

3,456

2,133

Deferred tax assets

3

204

516

247

526

Goodwill

9

1,520

714

-

-

-

334

-

334

8,355

4,183

4,126

828

20,119

14,340

25,916

17,119

40,641

27,633

45,827

29,133

Current assets Cash and cash equivalents Receivables and prepayments Other financial assets Intercompany receivable Current tax receivable/(payable)

3

Total current assets Non-current assets Investments accounted for using the equity method Investments in subsidiaries

Other financial assets Other intangible assets

10

Total non-current assets Total assets Current liabilities Trade payables

11

6,696

3,237

7,201

2,916

Other liabilities

12

5,007

4,015

4,695

3,790

11,703

7,252

11,896

6,706

Total liabilities

11,703

7,252

11,896

6,706

Net assets

28,938

20,381

33,931

22,427

Total current liabilities

Equity Share capital

13

4,419

3,724

7,747

4,246

Retained earnings

14

24,556

16,657

26,184

18,181

Foreign currency translation reserve

13

(37)

-

-

-

28,938

20,381

33,931

22,427

Total equity attributable to shareholders

Notes to the financial statements are included on pages 25 to 60.

23

CASH FLOW STATEMENT FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

Group

Note

Parent

2007 $000

2006 $000

2007 $000

2006 $000

33,600

22,038

30,263

19,632

363

1,133

331

1,130

(15,308)

(13,143)

(12,400)

(10,844)

3

(5,500)

(3,424)

(5,073)

(3,294)

23(b)

13,155

6,604

13,121

6,624

Cash flows from operating activities Receipts from customers Interest received Payments to suppliers and employees Income tax paid Net cash provided by operating activities Cash flows from investing activities

 

Payment for property, plant and equipment

(1,653)

(784)

(1,627)

(652)

Payment for other assets

(1,547)

(3,724)

(1,345)

18

Payment for investments

(2,689)

120

(4,427)

(3,137)

Net cash (used in)/provided by investing activities

(5,889)

(4,388)

(7,399)

(3,771)

Cash flows from financing activities

 

Proceeds from issues of shares Capital repaid Dividends paid

14

Net cash (used in)/provided by financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year

23(a)

Notes to the financial statements are included on pages 25 to 60.

24

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

1,148

1,446

1,148

977

(154)

(16,271)

(154)

(16,271)

(815)

(3,505)

(815)

(3,505)

179

(18,330)

179

(18,799)

7,445

(16,114)

5,901

(15,946)

5,531

21,645

4,871

20,817

12,976

5,531

10,772

4,871

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

1. Summary of Accounting Policies Statement of compliance New Zealand Exchange Limited (“NZX” or “Parent”) is New Zealand’s only Registered Exchange. NZX’s business principally comprises the listing of securities; operating the infrastructure on which those securities are traded, cleared and settled; supervising the markets upon which these activities occur; and disseminating the information provided to the market by listed issuers and trade related information to the global markets; NZX operates high quality markets that are fair, orderly and transparent. NZX is a for-profit listed public company incorporated in New Zealand, and registered under the Companies Act 1993. The full year consolidated financial statements of NZX as at and for the twelve months ended 31 December 2007 comprise NZX and its subsidiaries (the “Group”) and the Group’s interest in associates. NZX is a reporting entity for the purposes of the Financial Reporting Act 1993 and its financial statements comply with that Act. The financial statements have been prepared in accordance with Generally Accepted Accounting Practice in New Zealand (”NZ GAAP”). They comply with New Zealand equivalents to International Financial Reporting Standards (“NZ IFRS”) and other applicable financial reporting standards as appropriate for profit-orientated entities. Compliance with the NZ IFRS ensures that the Parent and Group financial statements comply with International Financial Reporting Standards (“IFRS”).

Basis of preparation All monetary values are NZD unless otherwise stated. The financial statements have been prepared on the basis of historical cost, except for available-for-sale financial assets which are stated at fair value. The method used to measure fair value is discussed in note 1 H. Cost is based on the fair value of the consideration given in exchange for assets. Accounting policies are selected and applied in a manner which ensures that the resulting financial information satisfies the concepts of relevance and reliability, thereby ensuring that the substance of the underlying transactions or other events is reported. The Group changed its accounting policies on 1 January 2007 to comply with NZ IFRS. The transition to NZ IFRS is accounted for in accordance with NZ IFRS-1: First-time Adoption of New Zealand Equivalents to International Financial Reporting Standards, with 1 January 2006 as the date of transition. An explanation of how the transition from superseded policies to NZ IFRS has affected the Parent and Group balance sheet, income statement and cash flows is set out in note 26.

Principles of consolidation The Group financial statements are prepared by combining the financial statements of all the entities that comprise the Group, being NZX and its subsidiaries as defined in NZ IAS-27: Consolidated and Separate Financial Statements.

25

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

1. Summary of Accounting Policies CONTINUED A list of subsidiaries appears in note 20 to the financial statements. Consistent accounting policies are employed in the preparation and presentation of the Group financial statements. On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. In determining the fair value of assets acquired, NZX assesses identifiable intangible assets including brands, intellectual property, software, and any other identifiable intangible assets using recognised valuation methodologies and with reference to suitably qualified experts. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. If, after reassessment, the fair values of the identifiable net assets acquired exceed the cost of acquisition, the deficiency is credited to the income statement in the period of acquisition. The Group financial statements include the information and results of each subsidiary from the date on which the NZX obtains control and until such time as NZX ceases to control such subsidiary. In preparing the Group financial statements, all intercompany balances and transactions, and unrealised profits arising within the Group are eliminated in full. The accounting policies set out below have been applied in preparing the financial statements for the year ended 31 December 2007, the comparative information presented in these financial statements for the year ended 31 December 2006, and in the preparation of the opening NZ IFRS balance sheet at 1 January 2006 being the Group entity’s date of transition. The accounting policies have been applied consistently by Group entities. 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. Where the accounting policies of associates differ from the Group, adjustments to ensure consistency with the policies adopted by the Group are made.

Significant Accounting Policies The following significant accounting policies have been adopted in the preparation and presentation of the financial statements: A. 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 basis that takes into account the effective yield on the financial asset. 26

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

B. Significant Estimates Policy

The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are disclosed, where applicable, in the relevant notes to the financial statements. These are estimates that require management’s most difficult, subjective or complex judgements. The notes include details of the nature and carrying amount of the affected assets and liabilities at the balance sheet date. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. C. Foreign Currency transaction and balances

Foreign currency transactions are translated into the functional currency (NZD) 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 balance date exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Exchange differences arising from the translation of the carrying value of the net investment in the Group’s foreign associates are recognised in the foreign currency translation reserve. D. Property, plant and equipment

Plant and equipment, 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. Depreciation is recognised in the income statement and is calculated on a straight line basis so as to write off the net cost 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

3 - 5 years

Furniture and equipment

10 years

Leasehold improvements

5 years

E. Employee Benefits

Provision is made for benefits accruing to employees in respect of wages and salaries, annual leave, and sick leave when it is probable that settlement will be required and they are capable of being measured reliably. Provisions made in respect of employee benefits expected to be settled within 12 months, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. 27

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

1. Summary of Accounting Policies CONTINUED F. Income Tax Current Tax Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date. Current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable).

Deferred Tax Deferred tax is accounted for using the comprehensive balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items. In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of a business combination) which affects neither taxable income nor accounting profit. Furthermore, a deferred tax liability is not recognised in relation to taxable temporary differences arising from goodwill. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, and associates except where the Group entity is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with these investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group entity expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the NZX Group intends to settle its current tax assets and liabilities on a net basis.

Current and deferred tax for the period Current and deferred tax is recognised as an expense or income in the income statement, except when it relates to items credited or debited directly to equity, in which case the deferred tax is also recognised directly in equity, or where it arises from the initial accounting for a business combination, in which case it is taken into account in the determination of goodwill or excess.

28

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

G. Goods and services tax

Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except for receivables and payables which are recognised inclusive of GST. H. Financial assets

Investments are recognised and derecognised on trade date where purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, net of transaction costs.

Financial assets at fair value through profit or loss The Group entity from time to time classifies certain shares and bonds as financial assets. Any gains or losses recognised in revaluing these assets to fair value are recognised in the profit or loss statement. These financial assets are classified as current assets and are stated at fair value.

Available-for-sale financial assets Other investments in shares are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measure at fair value and changes therein, other than impairment losses are recognised directly in equity. When an investment is derecognised, the cumulative gain or loss previously recognised in equity is transferred to profit or loss. The fair value of the shares is their quoted bid price at the Balance Sheet date, if that is available.

Loans and receivables Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as ‘loans and receivables’. Loans and receivables are measured at amortised cost using the effective interest method less impairment. Interest is recognised by applying the effective interest rate. I. Goodwill

Goodwill, representing the excess of the cost of acquisition over the fair value of the identifiable assets, liabilities and contingent liabilities acquired, is recognised as an asset and not amortised, but tested for impairment annually and whenever there is an indication that the goodwill may be impaired. Any impairment is recognised immediately in the income statement and is not subsequently reversed. Refer to note 1 K. J. Intangible assets

Intangible assets comprise software applications and brand IP rights. The Group separately identifies its intangible assets into two categories; those with indefinite lives and those with finite lives. Intangible assets with indefinite lives are not amortised but are subject to impairment tests annually. The classification of indefinite life intangibles is also reviewed by the Group annually. All software has finite useful lives and is recorded at cost less accumulated amortisation and impairment. Software is amortised on a straight line basis over its estimated useful life of 3 to 5 years.

29

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

1. Summary of Accounting Policies CONTINUED K. Impairment of assets

At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Goodwill, intangible assets not yet available for use and intangible assets with indefinite useful lives are tested for impairment annually and whenever there is an indication that the asset may be impaired. Any impairment of goodwill is not subsequently reversed. Financial assets, other than those at fair value through profit or loss, are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that as a result of one or more events that occurred after the initial recognition of the financial assets the estimated future cash flows of the investment have been impacted. For financial assets carried at amortised cost, the amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables where the carrying amount is reduced through the use of a doubtful debts provision account. When a trade receivable is uncollectible, it is written off against the doubtful debts allowance account. Changes in the carrying amount of the provision account are recognised in the income statement. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised in the income statement immediately, unless the relevant asset is carried at fair value, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses other than for goodwill, the carrying amount of the asset (cashgenerating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised in the income statement immediately, unless the relevant asset is carried at fair value, in which case the reversal of the impairment loss is treated as a revaluation increase. L. Payables

Trade payables and other accounts payable are recognised when the Group entity becomes obliged to make future payments resulting from the purchase of goods and services.

30

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

M. Share-based payments

The fair value of the amount payable to employees in respect of share scheme shares is recognised at grant date as equity with a corresponding receivable.  In the group these entries are eliminated as the shares are treated as treasury stock.  Over the vesting period the amount is recognised as an employee expense.  The amount recognised as an employee expense is adjusted to reflect the actual number of shares that will vest. The grant date fair value of options is recognised as an employee expense with a corresponding entry to equity, over the vesting period.  The amount recognised as an employee expense is adjusted to reflect the actual number of options that will vest. N. Segment reporting

The Group considers that there is only one reporting segment being the operation of a registered exchange and data business in New Zealand. O. Comparative amounts

Comparative figures where necessary have been restated to correspond to the current year classifications. Where NZ IFRS conversions have been made the prior year figures have followed the same accounting policy. All comparative figures relating to the number of shares have been restated to reflect the capital reconstruction on 21 July 2006. P. Earnings Per Share

The Group presents undiluted and diluted earnings per share (EPS) data for its ordinary shares. Undiluted EPS is determined by dividing the profit or loss attributable to ordinary shareholders of the company by the weighted daily average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of dilutive potential ordinary shares, which comprise of share based payments.

31

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

2. Profit from operations Group

Note

Parent

2007 $000

2006 $000

2007 $000

2006 $000

Revenue Revenue from the rendering of services: Listings

8,973

8,049

9,098

8,105

Participant fees

1,526

1,413

1,526

1,413

Trading, clearing & settlement

4,853

4,710

4,853

4,710 5,479

Market Information

10,471

6,083

9,120

Smartshares

3,096

2,331

-

-

NZX services income

2,534

2,440

2,534

2,634

(3)

59

(3)

59

31,450

25,085

27,128

22,400

279 8

745 372

254 8

742 372

287

1,117

262

1,114

(510) (542)

(474) (423)

(481) (393)

(469) (344)

(1,052)

(897)

(874)

(813)

Change in fair value of financial assets: Available-for-sale (transfer from equity) Interest Revenue: Bank deposits Bonds

Profit before income tax Profit before income tax has been arrived at after crediting/(charging) the following gains and losses: Depreciation of non-current assets Amortisation of non-current assets

8 10

Depreciation and amortisation expense

(61)

(13)

(60)

(13)

Employee expense: - post employment benefits

Net foreign exchange losses

(46)

(101)

(46)

(101)

- termination benefits - other employee benefits *

(17) (9,783)

(7,924)

(17) (8,462)

(7,119)

Employee and related expenses Remuneration paid to auditors Impairment of non current assets Operating lease rental expenses: Minimum lease payments

(9,846)

(8,025)

(8,525)

(7,220)

5

(94) -

(180) (264)

(55) -

(112) (264)

19

(665)

(665)

(665)

(665)

* Other employee benefits in 2007 include $276,107 in relation to the new CEO Share Scheme and $26,153 in relation to the previous CEO share scheme, $82,851 in 2006, (see Note 13 for more details). 32

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

3. Taxation Income tax recognised in profit or loss Group

Parent

2007 $000

2006 $000

2007 $000

2006 $000

4,685

3,633

4,401

3,426

Tax expense comprises: Current tax expense Adjustments recognised in the current year relating to current tax of prior years Deferred tax relating to the origination and reversal of temporary differences Total tax expense

3

45

3

39

13

93

(20)

49

4,701

3,771

4,384

3,514

The prima facie income tax expense on pre-tax accounting profit from operations reconciles to the income tax expense in the financial statements as follows: Group

Parent

2007 $000

2006 $000

2007 $000

2006 $000

13,415

10,271

13,202

10,155

4,427

3,389

4,357

3,351

Non-deductible expenses

46

188

43

187

Change in corporate tax rate

20

-

25

-

207

196

-

-

4,700

3,773

4,425

3,538

3

45

3

39

(2)

(47)

(2)

(47)

-

-

(42)

(16)

4,701

3,771

4,384

3,514

Profit from continuing operations Income tax calculated at 33%

Equity accounted earnings of associate

Under/(over) provision of income tax in previous years Foreign investor tax credits Loss offset for 2006 & 2007 years

The tax rate used in the above reconciliation is the corporate tax rate of 33% payable by New Zealand corporate entities on taxable profits under New Zealand tax law. There has been a change in the corporate tax rate from 33% to 30% from 1 January 2008. The deferred tax balance at 31 December 2007 is calculated using the new corporate tax rate, and the adjustment above shows the effect of the change in rate of deferred tax. 33

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

3. Taxation CONTINUED Current tax assets and liabilities Group

Balance at beginning of the year – (Liability)/Asset Current year charge Prior period adjustment Tax paid Loss offset from subsidiary Balance at end of the year – Asset/(Liability)

Parent

2007 $000

2006 $000

2007 $000

2006 $000

(257)

154

(182)

154

(4,685)

(3,632)

(4,443)

(3,442)

296

(203)

296

(204)

5,500

3,424

5,073

3,294

-

-

42

16

854

(257)

786

(182)

Deferred tax Group

Parent

2007 $000

2006 $000

2007 $000

2006 $000

Balance at beginning of the year

516

451

526

410

Current year movement

(13)

(93)

20

(49)

Prior period adjustments

(299)

158

(299)

165

204

516

247

526

339

167

324

149

5

29

2

29

Property Plant and Equipment

(85)

337

(85)

338

Intangible assets

(61)

(27)

-

-

6

10

6

10

204

516

247

526

Balance at end of the year Deferred tax balance comprises: Employee entitlements Doubtful debts and impairment

Other

34

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

Imputation credit account Group

Parent

2007 $000

2006 $000

2007 $000

2006 $000

Balance at beginning of the year

5,960

4,070

5,830

4,070

Income tax paid

5,500

3,424

5,073

3,294

(380)

(1,534)

(380)

(1,534)

11,080

5,960

10,523

5,830

Imputation credits attached to dividends paid Balance at end of the year

4. Key management personnel compensation The compensation of the Chief Executive Officer and his direct reports, being the key management personnel of NZX, is set out below: Group

Parent

2007 $000

2006 $000

2007 $000

2006 $000

3,183

3,095

3,183

3,095

Post-employment benefits

46

101

46

101

Termination benefits

17

-

17

-

302

83

302

83

3,548

3,279

3,548

3,279

Short-term employee benefits

Share-based payment *

* Share based payments in 2007 include $276,107 in relation to the new CEO Share Scheme and $26,153 in relation to the previous CEO Share Scheme of, $82,851 in 2006, (see Note 13 for more details).

35

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

5. Remuneration of auditors Group

Audit of the financial statements Other audit related fees Non-audit services

Parent

2007 $000

2006 $000

2007 $000

2006 $000

89

99

55

58

5

-

-

-

-

81

-

54

94

180

55

112

The auditor of NZX Group is KPMG, effective 1 January 2007. Previously PricewaterhouseCoopers was the auditor. Other audit related fees in 2007 relates to the audit of the registry for Smartshares funds. Non-audit services in 2006 relates to attendance at AGM, IFRS transition workshops, and share option plan calculations.

6. Receivables and prepayments Group

Parent

2007 $000

2006 $000

2007 $000

2006 $000

3,934

4,947

3,302

4,162

(18)

(121)

(8)

(121)

3,916

4,826

3,294

4,041

177

391

96

319

Accrued interest

36

75

6

75

Accrued income

2,030

2,228

580

1,965

6,159

7,520

3,976

6,400

Trade receivables* Allowance for doubtful debts

Prepayments

*The average credit period on sales of services is 41 days. No interest is charged on overdue trade receivables.

36

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

Movement in allowance for doubtful debts Group

Parent

2007 $000

2006 $000

2007 $000

2006 $000

(121)

(76)

(121)

(76)

Amounts written off during the year

62

-

62

-

Amounts recovered during the year

56

-

56

-

Decrease/(Increase) in allowance recognised in profit or loss

(15)

(45)

(5)

(45)

Balance at end of the year

(18)

(121)

(8)

(121)

Balance at beginning of the year

7. Investments accounted for using the equity method Name of entity

Country of Incorporation

Ownership interest (iii)

Group Carrying value of asset

2007 %

2006 %

2007 $000

2006 $000

Associates AXE ECN Pty Limited

Australia

50

50

1,317

1,388

LINK Market Services Limited

New Zealand

50

50

4,605

4,983

Appello Services Limited

New Zealand

30

-

635

-

6,557

6,371

664

213

Amount of goodwill in carrying value of equity accounted associates:

The reduction in the carrying value of Link Market Services includes the redemption by Link Market Services of $350,000 of redeemable preference shares in 2007.

37

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

7. Investments accounted for using the equity method CONTINUED Summarised financial information of associates Group

Total Assets Total Liabilities Net assets

2007 $000

2006 $000

13,489

13,628

1,165

1,377

12,324

12,251

Revenue

4,284

3,062

Net loss

(1,143)

(1,116)

Summarised financial information of associates not adjusted for the percentage ownership held by the Group.

8. Property, plant and equipment Group Computer equipment

Furniture and equipment

Lease-hold improvements

Capital work in progress

Total

$000

$000

$000

$000

$000

1,967

555

1,282

-

3,804

Gross carrying amount Balance at 1 January 2006

119

94

19

474

706

2,086

649

1,301

474

4,510

408

32

35

1,349

1,824

Additions Balance at 31 December 2006 Additions

-

(20)

(39)

-

(59)

2,494

661

1,297

1,823

6,275

1,521

230

63

-

1,814

258

87

129

-

474

1,779

317

192

-

2,288

294

87

129

-

510

Disposals Balance at 31 December 2007 Accumulated depreciation Balance at 1 January 2006 Depreciation expense Balance at 31 December 2006 Depreciation expense

(5)

(1)

-

-

(6)

2,068

403

321

-

2,792

As at 31 December 2006

307

332

1,109

474

2,222

As at 31 December 2007

426

258

976

1,823

 3,483

Disposals Balance at 31 December 2007 Net book value

38

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

Parent Computer equipment

Furniture and equipment

Lease-hold improvements

Capital work in progress

Total

$000

$000

$000

$000

$000

1,967

555

1,282

-

3,804

Gross carrying amount Balance at 1 January 2006 Additions Balance at 31 December 2006 Additions Balance at 31 December 2007

84

44

10

474

612

2,051

599

1,292

474

4,416

392

58

5

1,349

1,804

2,443

657

1,297

1,823

6,220

1,521

230

63

-

1,814

Accumulated depreciation Balance at 1 January 2006 Depreciation expense Balance at 31 December 2006

255

85

129

-

469

1,776

315

192

-

2,283

265

87

129

-

481

2,041

402

321

-

2,764

As at 31 December 2006

275

284

1,100

474

2,133

As at 31 December 2007

402

255 

976

1,823

3,456

Depreciation expense Balance at 31 December 2007 Net book value

39

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

9. Goodwill Group

Parent

2007 $000

2006 $000

2007 $000

2006 $000

Balance at beginning of the year

714

-

-

-

Goodwill on acquisition

806

714

-

-

1,520

714

-

-

714

-

-

-

1,520

714

-

-

Gross carrying amount

Balance at end of the year Net book value Balance at beginning of the year Balance at end of the year

The directors have tested the carrying value of goodwill and have assessed that no impairment charge is required. The basis for the testing was a comparison between the forecast EBITDA multiple and the EBITDA multiple on original acquisition, in each case the forecast EBITDA multiple was in excess of the original used in the purchase decision.

40

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

10. Other intangible assets Group

Parent

2007 $000

2006 $000

2007 $000

2006 $000

7,197

4,474

3,763

3,946

946

3,497

-

627

3,776

76

3,699

40

(13)

(850)

(13)

(850)

11,906

7,197

7,449

3,763

3,014

3,177

2,935

3,177

542

423

393

344

(5)

-

(5)

-

-

(586)

-

(586)

Balance at end of the year

3,551

3,014

3,323

2,935

Net book value

8,355

4,183

4,126

828

Other intangibles – definite life

2,936

1,212

2,040

201

Other intangibles – indefinite life

5,419

2,971

2,086

627

Net book value

8,355

4,183

4,126

828

Gross carrying amount Balance at beginning of the year Additions – acquisitions Additions - other Disposals Balance at end of the year Accumulated amortisation and impairment Balance at beginning of the year Amortisation expense Disposals Reversals of impairment losses charged to profit

Comprising of:

Amortisation expense is included in the line item ‘depreciation and amortisation expense’ in the income statement. When testing the indefinite life intangibles for impairment a comparison between the forecast EBITDA multiple and the EBITDA multiple on original acquisition was made. In each case the forecast EBITDA multiple was in excess of the original used in the purchase decision and on this basis it was determined that no impairment charge is required.

41

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

11. Current trade payables Group

Trade payables Goods and services tax payable Accrued expenses

Parent

2007 $000

2006 $000

2007 $000

2006 $000

1,159

128

640

109

241

287

213

237

5,296

2,822

6,348

2,570

6,696

3,237

7,201

2,916

12. Other liabilities Group

Employee benefits Unearned income

Parent

2007 $000

2006 $000

2007 $000

2006 $000

407

491

355

451

4,600

3,524

4,340

3,339

5,007

4,015

4,695

3,790

13. Share capital and reserves Group

­­Share capital

42

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

Parent

2007 $000

2006 $000

2007 $000

2006 $000

4,419

3,724

7,747

4,246

4,419

3,724

7,747

4,246

Group

Parent

2007 Number of shares 000

2006 Number of shares 000

2007 Number of shares 000

2006 Number of shares 000

23,513

22,990

23,513

22,990

Issues of shares – CEO Share Scheme

222

222

572

222

Issue of ordinary shares – Distribution Plan

319

-

319

-

Issue of ordinary shares – Employee Share Plan

208

153

208

153

-

148

-

148

24,262

23,513

24,612

23,513

Balance at beginning of the year

-

-

222

444

Vested during the period

-

-

(222)

(222)

Balance at end of the year

-

-

-

222

Balance at end of the year

24,262

23,513

24,612

23,735

Fully paid ordinary shares Balance at beginning of the year

Share option exercised Balance at end of the year Fully paid CEO shares (2003 – 2007)

All issued shares are fully paid and have no par value, all shares carry one vote per share and carry the right to dividends. The convertible shares and shares issued under the CEO Share Scheme are treated as treasury stock and are eliminated at a group level. As at 31 December 2007 there were 24,612,245 ordinary shares issued and fully paid (2006: 23,512,777). All ordinary shares rank equally with one vote attached to each fully paid ordinary share.

Foreign Currency Translation Reserve Group

Balance at beginning of the year Total recognised income and expense Balance at end of the year

Parent

2007 $000

2006 $000

2007 $000

2006 $000

-

-

-

-

(37)

-

-

-

(37)

-

-

-

CONTINUED OVER

43

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

13. Share capital and reserves CONTINUED Executive share plan and CEO share scheme Current CEO Share Scheme (2007) Following the cessation of the previous Scheme, a new CEO Share Scheme (“New Scheme”) was introduced. The New Scheme was approved by NZX shareholders at a special meeting held on 6 September 2007. The New Scheme is a two-part equity-based long-term incentive (LTI) scheme with a three and a half year duration, extendable to a four and a half year duration at Board discretion, with a start date of 4 June 2007 and expiry date of 31 December 2010 (or 31 December 2011 if extended). The two parts to the New Scheme are: a Standard LTI; and an Out-performance LTI.

Standard LTI The Standard LTI consists of 222,276 shares (173,780 shares for 3.5 year duration, and a further 48,496 shares if the Board extends the duration to 4.5 years). These were issued to the CEO, Mr Weldon, in December 2007 at an issue price of $10.31 (the VWAP for the 20 days to 3 June 2007, being the expiry date of the previous scheme). These shares are held by the Nominee on behalf of Mr Weldon until such time as they vest, or are redeemed by NZX if vesting criteria are not met. The vesting criteria for these Standard LTI shares is a compound 15% earnings per share growth over the period, with a start date for assessment of EPS growth of 1 January 2008, and that Mr Weldon remains in the employment of NZX over the vesting period. Assessment is based upon EPS at the end of 2007 which was 36.17 cps. If vesting criteria are met for the full 4.5 years Mr Weldon will receive a bonus equivalent to $2,291,666 being the $10.31 issue price of the relevant shares. NZX has extended financial assistance to Mr Weldon in the form of an interest free loan of $2,291,666 to fund the acquisition of these Standard LTI Shares. Although the Standard LTI Share Scheme shares were issued at $10.31, IFRS 2 requires recognition of the shares for reporting purposes to be measured at the grant date (grant date is when approval for the New Scheme was obtained) being 6 September 2007. At this date the 20 day VWAP was $9.76. Accordingly the total value that will be recognised in the income statement if vesting criteria are met is $2,169,414. At 31 December 2007 the Board of NZX determined that $276,107 be recognised in the income statement as an employee expense in respect of this scheme.

Out-performance LTI (OPLTI) The OPLTI consists of 127,381 shares (102,381 shares for 3.5 year duration, and a further 25,000 shares if the board extends the duration to 4.5 years). These were issued to Mr Weldon in December 2007 at an exercise price of $10.31 (the VWAP for the 20 days to 3 June 2007). These shares are held by the Nominee on behalf of Mr Weldon until such time as they vest, or are redeemed by NZX if vesting criteria are not met. The vesting criteria for these OPLTI shares is a compound 22.5% EPS growth over the period, with a start date for assessment of EPS growth of 1 January 2008 and that Mr Weldon remains in the employment of NZX over the vesting period. Assessment is based upon EPS at the end of 2007 which was 36.17 cps. NZX 44

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

has extended financial assistance to Mr Weldon in the form of an interest free loan of $1,313,298 to fund the acquisition of these OPLTI Shares. There is no bonus paid to Mr Weldon in relation to the OPLTI so this part of the New Scheme is treated as an option scheme for accounting purposes. These options were valued by Deloitte, using the Black Scholes valuation model, at $2.51 and $2.96 per share for the period to December 2010 and December 2011 respectively. The Black Scholes valuation assumed a risk free interest rate based on Government bonds for the relevant periods, dividend yield was assumed to be nil, and expected volatility of 25%. The expected volatility was estimated by assessing the long run volatility for New Zealand shares (assessed as 20%) and adjusting for NZX’s relative volatility since listing. Accordingly the total value that will be recognised in the income statement if vesting criteria are met is $330,976. At 31 December 2007 the Board of NZX determined that there is no need to recognise any expense at this time.

Previous CEO Share Scheme (2003 – 2007) This scheme ceased on June 3 2007. The history of the scheme and the 2007 activity prior to the termination of the scheme is detailed below. In 2003, as part of the NZX CEO Share Scheme (“Scheme”) financial assistance was provided to the CEO, Mr Weldon. The financial assistance was in connection to the acquisition by a nominee company (“Nominee”) of 634,275 shares (“Scheme Shares”) in NZX, to be held by the Nominee on behalf of Mr Weldon in accordance with the terms of the Scheme. A disclosure document was provided to all shareholders on 15 September 2003 setting out details of the proposal and was approved by members of NZX’s predecessor, the New Zealand Stock Exchange, at the time of demutualisation. The proposal was also fully described in the NZX Prospectus and Investment Statement registered on 3 June 2003. The directors of NZX authorised NZX to provide financial assistance to Mr Weldon to fund the acquisition of the Scheme Shares, by way of a loan of $2,132,433 (the aggregate issue prices of the 634,275 ordinary shares to be issued under the Scheme). As at July 2006 a total of 507,420 Share Scheme shares had qualified under the scheme and Mr Weldon had repaid $1,609,790 to NZX, reducing his financial assistance to $522,643. The remaining 126,855 shares were subject to the court-approved capital reconstruction of all NZX shares that occurred in July 2006. Under the reconstruction there was a mandatory share cancellation of 1 in 8 shares held, followed immediately by a two-for-one share split. This resulted in 221,996 Scheme Shares at December 2006 (with the loan / financial assistance still being $522,643). In December 2006 NZX introduced a Distribution Plan. Under the Plan shareholders had the option of receiving: one bonus share for every 60.73 shares held at a strike price of $9.72; or a dividend payment of $0.16 fully imputed per share. Mr Weldon opted to receive the bonus shares which resulted in an additional 3,656 Scheme Shares being issued on 31 May 2007, bringing the total Scheme Shares to 225,652. On 3 June 2007 this last tranche of shares qualified and, following the repayment of $522,643, were transferred from the Nominee to Mr Weldon. At this point the Scheme ceased.

Employee Share Plan 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 to assist them in the acquisition of NZX ordinary shares under the NZX Executive Share Plan. The aggregate financial assistance provided under the NZX Executive Share Plan at December 2006 was $833,487. As at December 2007 NZX employees had repaid $575,884, and there has been no additional financial assistance provided during the period. The balance of the financial assistance provided to employees under the NZX Executive Share Plan at December 2007 is $257,603. 45

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

13. Share capital and reserves CONTINUED Employee Share Capital Movements 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 2007

-

-

202,918

December 2006

208,576

6.798

142,758

December 2005

152,513

3.971

64,750

December 2004

125,125

5.109

-

Date of issue

Shares were transferred out in accordance with the terms of the NZX Executive Share Plan. As at 31 December 2007 75,788 shares were held under the Executive Share Plan making up 0.3% of total shares.

14. Retained earnings Group

Balance at beginning of the year Net profit attributable to shareholders Cash dividends paid Balance at end of the year

46

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

Parent

2007 $000

2006 $000

2007 $000

2006 $000

16,657

13,664

18,181

15,047

8,714

6,500

8,818

6,641

(815)

(3,507)

(815)

(3,507)

24,556

16,657

26,184

18,181

15. Dividends 2007

2006

Cents per share

Total $000

Cents per share

Total $000

16.0c

815

25.0c

3,507

Recognised amounts Fully paid ordinary shares

In December 2006 NZX gave shareholders their dividend in the form of one bonus share for every 60.73 shares held at a strike price of $9.72 or a cash dividend payment of $0.16 fully imputed per share. A total of 85 holders with a combined shareholding of 4,611,444 shares opted for a dividend payment, and the remaining shareholders with a combined shareholding of 19,429,148 shares opted for the bonus shares. The total distribution for 2007 was $3,917,807.

16. Earnings per share Group

2007 000

2006 000

Diluted earnings per share (cents per share)

36.17c

27.91c

Undiluted earnings per share (cents per share)

36.33c

28.32c

Diluted earnings per share The earnings and weighted average number of ordinary shares used in the calculation of diluted earnings per share are as follows: Group

2007 000

2006 000

Earnings

$8,714

$6,500

Weighted average number of ordinary shares for the purpose of earnings per share

24,089

23,291

Diluted earnings per share (cents per share)

36.17c

27.91c

47

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

16. Earnings per share CONTINUED Undiluted earnings per share The earnings and weighted average number of ordinary shares used in the calculation of undiluted earnings per share are as follows: Group

2007 000

2006 000

Earnings

$8,714

$6,500

Weighted average number of ordinary shares for the purpose of earnings per share

23,988

22,951

Undiluted earnings per share (cents per share)

36.33c

28.32c

When calculating the weighted daily average number of undiluted ordinary shares an adjustment has been made for Standard LTI shares issued under the CEO Share Scheme. The weighted daily average number of diluted ordinary shares has not been adjusted for OPLTI shares issued under the CEO Share Scheme as these are considered anti-dilutive for the period.

17. Commitments for expenditure Capital expenditure commitments Group

Trayport Limited contract

The Group has no exposure to capital commitments of Associates.

48

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

Parent

2007 $000

2006 $000

2007 $000

2006 $000

1,300

3,000

1,300

3,000

Lease commitments Finance lease liabilities and non-cancellable operating lease commitments are disclosed in note 19 to the financial statements.

18. Contingent liabilities On 6 September 2005 Access Brokerage Limited was put into liquidation. There is no provision held in the Balance Sheet at 31 December 2007 (Dec 2006: nil). A contingent liability of $9,555,297 plus interest and costs has arisen from legal proceedings against NZX brought by Access Brokerage Limited for $4,310,594 plus interest and costs (in Liquidation), and Bank of New Zealand Limited for $5,244,703 plus interest and costs. NZX has received assurance that the insurer will meet all cost for this matter after the policy excess of $100,000, which was paid in 2005. The contingent liability arises in the event that the insurer does not meet any costs that may arise. NZX has entered into a sales and purchase agreement with Greta Valley Holdings Limited, the vendor of Agri-Fax Limited, that includes an earn out provision whereby NZX pays up to $375,000 in excess of the amount already provided for in the financial statements if revenue targets for the year ended 31 March 2009 are met. NZX does not expect these elevated earnings revenue targets to be met.

19. Leasing Operating leases The rental lease for NZX’s premises commenced on the 1 September 2005 and has a final expiry date of 28 February 2015, subject to the right of renewal on 1 September 2008. There is no contingent rent payable. Group

Parent

2007 $000

2006 $000

2007 $000

2006 $000

Up to 1 year

665

665

665

665

1 – 2 years

665

665

665

665

2 – 5 years

1,995

1,995

1,995

1,995

> 5 years

1,663

2,328

1,663

2,328

4,988

5,653

4,988

5,653

49

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

20. Subsidiaries Name of entity

Country of Incorporation

Ownership interest and voting rights 2007 %

2006 %

Agri-Fax Limited

New Zealand

100

100

FundSource Limited

New Zealand

100

100

Smartshares Limited

New Zealand

100

100

NZX Newsroom Limited

New Zealand

100

-

TZ1 Limited

New Zealand

100

-

Mandela Investments Limited

New Zealand

100

100

NZX Executive Share Plan Nominees Limited

New Zealand

100

100

NZ Fox Limited

New Zealand

100

100

Tane Nominees Limited

New Zealand

100

100

21. Acquisition of businesses and investments

Name business

Proportion of shares acquired (%)

Principal activity

Date of acquisition

Cost of acquisition $000

2007 NZX Newsroom Limited

Data Sales

31 May 2007

30

Funds Management Services

30 November 2007

650

FundSource Limited

100

Data & Research

30 September 2006

920

Agri-Fax Limited

100

Data Sales

1 April 2006

Appello Services Limited

100

1,181

2006

2,166

On May 31 the Group acquired NZX Newsroom Limited for $1,181,000. The company compiles and delivers news to customers that is tailored to the customer’s requirements.

50

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

NZX Newsroom Limited Fair Value on acquisition $000

Appello Services Limited Fair value on acquisition $000

Cash

-

199

Fixed assets

4

-

Intangibles

946

-

Goodwill

231

451

1,181

650

Asset

Total

There was no fair value adjustment on the book value for NZX Newsroom Limited or Appello Services Limited. Goodwill is included in the carrying value of the associates. NZX has increased goodwill and the acquisition value of Agri-Fax Limited by $575,000 to reflect the earnout provision, based on revenue targets, in the sales and purchase agreement entered with Greta Valley Holdings Limited.

51

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

22. Related party disclosures Related parties Related party categories (i) Equity interests in related parties Equity interests in subsidiaries Details of the percentage of ordinary shares held in subsidiaries are disclosed in note 21 to the financial statements. Equity interests in associates Details of interests in associates are disclosed in note 7 to the financial statements.

(ii) Transactions with related parties Transactions involving the parent entity Amounts receivable from and payable to related parties at balance date are disclosed below. Sales to related parties

Purchases from related parties

Amounts owed by related parties

Amounts owed to related parties

2007 $000

2007 $000

2007 $000

2007 $000

1,825

86

4,186

232

Smartshares Limited

-

307

-

715

Agri-Fax Limited

-

-

229

-

13

-

2

53

NZX Newsroom Limited

-

-

-

13

Tane Nominees Limited

-

-

-

3,329

192

118

25

22

-

1,519

-

78

Related Parties

Parent New Zealand Exchange Limited Subsidiaries

FundSource Limited

Associates LINK Market Services Limited AXE ECN Pty Limited

52

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

Sales to related parties

Purchases from related parties

Amounts owed by related parties

Amounts owed to related parties

2006 $000

2006 $000

2006 $000

2006 $000

1,537

103

2,305

581

Smartshares Limited

-

187

-

481

Agri-Fax Limited

-

-

480

-

11

-

98

-

-

-

-

523

103

239

3

311

-

1,122

-

990

Related Parties

Parent New Zealand Exchange Limited Subsidiaries

FundSource Limited Tane Nominees Limited Associates LINK Market Services Limited AXE ECN Pty Limited

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 2007, Smartshares Limited had an intercompany debt with NZX of $676,595 (2006: $480,845). No amounts owed by related parties have been written off or forgiven during the period.

53

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

23. Notes to the cash flow statement A. Reconciliation of cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents includes cash on hand and in banks and investments in money market instruments, net of outstanding overdrafts. Cash and cash equivalents at the end of the financial year as shown in the cash flow statement is reconciled to the related items in the balance sheet as follows: Group Interest rates

Maturities

Parent

2007 $000

2006 $000

2007 $000

2006 $000

Cash at bank

7.75% - 8.05%

Call

6,976

1,893

4,772

1,233

Bank deposits

8.75% - 8.87%

30 Days

6,000

3,638

6,000

3,638

12,976

5,531

10,772

4,871

B. Reconciliation of profit for the period to net cash flows from operating activities Group

Note Profit after tax for the period Loss/(gain) on revaluation of fair value through profit or loss financial assets Share of associates’ profit (less dividends)

2

Depreciation and amortisation of non-current assets

2

Loss on disposal of fixed assets

Impairment of non-current assets

2007 $000

2006 $000

2007 $000

2006 $000

8,714

6,500

8,818

6,641

3

(59)

3

(59)

562

384

-

-

1,052

897

874

813

59

-

-

-

10,390

7,722

9,695

7,395

-

264

-

264

(1,111)

411

(968)

336

312

(65)

279

(116)

1,361

(4,104)

2,424

(3,490)

10,952

4,228

11,430

4,389

4,451

2,636

5,190

2,495

Current provisions

15,403

6,864

16,620

6,884

Non-operating payables

(1,027)

-

(1,027)

-

Non-operating provisions

(1,221)

(260)

(2,472)

(260)

Other non-operating liabilities

(2,248)

(260)

(3,499)

(260)

Net cash from operating activities

13,155

6,604

13,121

6,624

(Increase)/decrease in current tax balances Decrease/(increase) in deferred tax balances Decrease/(increase) in current receivables

Increase in current payables

54

Parent

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

24. Financial instruments The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The Board of NZX reviews the capital structure on a semi-annual basis. As a part of this review the Board considers the cost of capital and the risks associated with each class of capital. Based on recommendations of the Board the Group will balance its overall capital structure through the payment of dividends, new share issues and share buy-backs as well as the issue of new debt or the redemption of existing debt. Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 1 H to the financial statements.

Financial risk management objectives The Group’s activities expose it to a variety of financial risks: market risk, credit risk and liquidity risk.

Foreign currency risk management The Group undertakes certain transactions denominated in foreign currencies, hence exposure to exchange rate fluctuations arise. The foreign currencies in which transactions are primarily denominated are USD (market information sales and IT infrastructure purchases), and AUD (market information sales and IT operating costs). With the shareholding in the AXE ECN in Australia there is translation exposure to AUD for investments. Exchange rate exposures are managed within approved policy parameters.

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 currently does not use any derivative products to manage interest rate risk.

Credit risk The maximum credit risk associated with the financial instruments held by NZX is considered to be the value reflected in the Balance Sheet. 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-.

Liquidity risk management The Group entity manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.

55

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

25. Segmented reporting NZX has elected to early adopt NZ IFRS 8: Operating Segments, NZX has determined that there is only one segment being operation of the registered exchange and data business.

26. Impacts of the adoption of New Zealand equivalents to International Financial Reporting Standards







The Group entity changed its accounting policies on 1 January 2007 to comply with NZ IFRS. The transition to NZ IFRS is accounted for in accordance with NZ IFRS-1: First-time Adoption of New Zealand Equivalents to International Financial Reporting Standards, with 1 January 2006 as the date of transition. An explanation of how the transition from superseded policies to NZ IFRS has affected NZX and NZX Group’s financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the tables.

56

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

Effect of NZ IFRS on the Balance Sheet as at 1 January 2006 Group

Parent

Super-seded policies*

Effect of transition to NZ IFRS

NZ IFRS

Super-seded policies*

Effect of transition to NZ IFRS

NZ IFRS

$000

$000

$000

$000

$000

$000

21,645

-

21,645

20,817

-

20,817

3,416

-

3,416

2,841

-

2,841

-

-

-

70

-

70

25,061

-

25,061

23,728

-

23,728

Current assets Cash and cash equivalents Receivables and prepayments Intercompany receivables Total current assets Non-current assets Advances

154

-

154

1,146

-

1,146

Investments accounted for using the equity method

3,179

58

3,237

3,213

-

3,213

Other financial assets

3,580

-

3,580

6,580

-

6,580

Property, plant and equipment

2,453

(463)

1,990

2,453

(463)

1,990

Deferred tax assets

438

13

451

397

13

410

Goodwill

808

(808)

-

306

(306)

-

-

1,297

1,297

-

769

769

Total non-current assets

10,612

97

10,709

14,095

13

14,108

Total assets

35,673

97

35,770

37,823

13

37,836

4,920

39

4,959

4,612

39

4,651

Other intangible assets

Current liabilities Trade and other payables Current tax payable

(154)

-

(154)

(154)

-

(154)

Total current liabilities

4,766

39

4,805

4,458

39

4,497

Total liabilities

4,766

39

4,805

4,458

39

4,497

30,907

58

30,965

33,365

(26)

33,339

Net assets Equity Share capital

16,381

920

17,301

17,372

920

18,292

Retained earnings

14,526

(862)

13,664

15,993

(946)

15,047

30,907

58

30,965

33,365

(26)

33,339

Total equity attributable to shareholders

* Reported financial position for the financial year ended 31 December 2005.

57

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

26. Impacts of the adoption of New Zealand equivalents to International Financial Reporting Standards CONTINUED



Effect of NZ IFRS on the Income Statement for the financial year ended 31 December 2006 Group Super-seded policies*







Parent

Effect of transition to

NZ IFRS

NZ IFRS

Super-seded policies*

Effect of transition to

NZ IFRS

NZ IFRS

$000

$000

$000

$000

$000

$000

25,026

1,176

26,202

22,341

1,173

23,514

Other income (including interest)

1,176

(1,176)

-

1,173

(1,173)

-

Share of profits of associates accounted for using the equity method

(446)

62

(384)

-

-

-

Employee benefit expense

(7,916)

(109)

(8,025)

(7,119)

(101)

(7,220)

Depreciation and amortisation expense

(1,033)

136

(897)

(856)

43

(813)

Other expenses

(6,625)

-

(6,625)

(5,326)

-

(5,326)

Profit before income tax expense

10,182

89

10,271

10,213

(58)

10,155

Income tax expense

(3,779)

8

(3,771)

(3,520)

6

(3,514)

6,403

97

6,500

6,693

(52)

6,641

Revenue

Profit attributable to shareholders

* Reported financial performance for the year ended 31 December 2006.

58



NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

Effect of NZ IFRS on the Balance Sheet as at 31 December 2006 Group

Parent

Super-seded policies*

Effect of transition to NZ IFRS

NZ IFRS

Super-seded policies*

Effect of transition to NZ IFRS

NZ IFRS

$000

$000

$000

$000

$000

$000

Cash and cash equivalents

5,531

-

5,531

4,871

-

4,871

Receivables and prepayments

7,520

-

7,520

6,400

-

6,400

Current assets

Other financial assets Total current assets Non-current assets Investments accounted for using the equity method Investments in subsidiaries Other financial assets Property, plant and equipment Deferred tax assets

-

499

499

-

1,022

1,022

13,051

499

13,550

11,271

1,022

12,293

6,251

120

6,371

6,926

-

6,926

-

-

-

6,062

310

6,372

833

(499)

334

1,356

(1,022)

334

2,446

(224)

2,222

2,334

(201)

2,133

495

21

516

507

19

526

2,932

(2,218)

714

304

(304)

-

Other intangible assets

1,579

2,604

4,183

590

238

828

Total non-current assets

14,536

(196)

14,340

18,079

(960)

17,119

27,587

303

27,890

29,350

62

29,412

3,237

-

3,237

2,916

-

2,916

-

-

-

97

-

97

3,950

65

4,015

3,733

57

3,790

257

-

257

182

-

182

7,444

65

7,509

6,928

57

6,985

Goodwill

Total assets Current liabilities Trade and other payables Intercompany payable Provisions Current tax payable Total current liabilities Total liabilities Net assets

7,444

65

7,509

6,928

57

6,985

20,143

238

20,381

22,422

5

22,427

2,721

1,003

3,724

3,243

1,003

4,246

17,422

(765)

16,657

19,179

(998)

18,181

20,143

238

20,381

22,422

5

22,427

Equity Share capital Retained earnings Total equity attributable to shareholders

* Reported position for the financial year ended 31 December 2006.

59

NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

26. Impacts of the adoption of New Zealand equivalents to International Financial Reporting Standards CONTINUED





Effect of NZ IFRS on the cash flow statement for the financial year ended 31 December 2006 There are no material differences between the cash flow statement presented under NZ IFRS and the cash flow statement presented under the superseded policies.

Notes to the reconciliations of income and equity 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 adjustment detailed above recognises the portion of this fair value that has been charged to the income statement in previous years.

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.

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.

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.

60

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

Audit report To the shareholders of New Zealand Exchange Limited We have audited the financial statements on pages 21 to 60. The financial statements provide information about the past financial performance and financial position of the company and group as at 31 December 2007. This information is stated in accordance with the accounting policies set out on pages 25 to 31.

Directors’ responsibilities The Directors are responsible for the preparation of financial statements which give a true and fair view of the financial position of the company and group as at 31 December 2007 and the results of their operations and cash flows for the year ended on that date.

Auditors’ responsibilities It is our responsibility to express an independent opinion on the financial statements presented by the Directors and report 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:  the significant estimates and judgements made by the Directors in the preparation of the financial statements;  whether the accounting policies are appropriate to the company’s and group’s circumstances, consistently applied and adequately disclosed. We conducted our audit in accordance with New Zealand Auditing Standards. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to obtain 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. Other than in our capacity as auditors we have no relationship with or interests in the company.

Unqualified opinion We have obtained all the information and explanations we have required. In our opinion:  proper accounting records have been kept by the company as far as appears from our examination of those records;  the financial statements on pages 21 to 60: – comply with New Zealand generally accepted accounting practice; – give a true and fair view of the financial position of the company and group as at 31 December 2007 and the results of their operations and cash flows for the year ended on that date. Our audit was completed on 14 February 2008 and our unqualified opinion is expressed as at that date.

Wellington

STATUTORY INFORMATION FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

1. Business operations There have been no changes in the core business undertakings of the Company, subsidiaries and associates during the year. However, the Company has invested in several additional businesses: the data business assets of Investment Research Group Limited – this now operates as a division of the Company known as the ‘Company Research Centre (CRC);

Newsroom Limited – a fully owned subsidiary of NZX which monitors news and provides archive services; and a 30% shareholding in Appello Services Limited - a funds management services business. Additionally the Company has: Established TZ1 Limited, to provide a market infrastructure for carbon markets which began operating as a separate business unit of NZX from 21 December 2007; and

Begun work on the new clearing and settlement infrastructure platform which will provide a Central Counterparty and a Central Securities Depository.

2. Interests register The Company 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 2007.

62

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

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

ANZ Capital NZ 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

Arawata Holdings Limited

Director

Arawata Securities Limited

Director

Arawata Funding Limited

63

STATUTORY INFORMATION CONTINUED FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

Director

H van der Heyden

M R Weldon

64

Interest

Entity

Director

AUT Business School Advisory Board

Director

BHI Limited

Director

Control Nominees Limited

Director

Cortland Finance Limited

Director

Culver Finance Limited

Chairman

City Art Gallery Foundation

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

Rural Growth Fund 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

Elevation Capital Management Limited

Director

Independent Egg Producers Co-Op Limited

Trustee

Asia : NZ Foundation

Member

Rabobank ANZ Food & Agribusiness Advisory Board

Chairman

Link Market Services Limited

Director

Smartshares Limited

Director

Agri-Fax Limited

Director

NZ Fox Limited

Chairman

AXE ECN Pty Limited

Chairman

TZ1 Limited

Director

MXF Nominees Limited

Director

Mandela Investments Limited

Member

University of Auckland School of Business Advisory Board

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

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

Special Responsibility

S C Allen

$100,000

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

$899,375 (1)

CEO

6. Indemnification and insurance of Directors and Officers During the year, the Company paid insurance premiums in respect of Directors’ and Officers’ 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 Officer unless the conduct involves a willful breach of duty or an improper use of inside information or position to gain advantage. Note: During 2007, Mr Weldon received options under the old CEO Share Scheme. These options were valued by Deloitte as having a cost in 2007 of $26,153.

(1)

65

STATUTORY INFORMATION CONTINUED FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

7. Subsidiary companies Directors Smartshares Limited

NZX Agri-Fax Limited

Mr Mark Weldon

Mr Mark Weldon

Mr Geoffrey Brown

Ms Rachael Cross

Mr Don Trow

Fund Source Limited

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

Tane Nominees Limited Ms Elaine Campbell

NZX Executive Share Plan Nominees Limited Mr Simon Allen Mr Neil Paviour-Smith

AXE ECN Pty Limited Mr Mark Weldon (Chair)

Mr Columba Cryan

NZ FOX Limited Mr Mark Weldon Ms Elaine Campbell

TZ1 Limited Mr Mark Weldon

NZX Newsroom Limited Mr Columba Cryan

Ms Elaine Campbell

MXF Nominees Limited

Mr Malcolm Sinclair

Ms Elaine Campbell

Mr Dan Ritchie

Mandela Investments Limited

Mr Roy Laidlaw Mr David Hancock Mr Simon Rothery

LINK Market Services (NZ) Limited Mr Mark Weldon (Chair) Mr Saki Hannah Mr John Hawkins

Mr Mark Weldon

Appello Services Limited Ms Elaine Campbell Mr Timothy Jones Mr Jason McCracken Mr Craig Stobo

Mr John McMurtrie

The remuneration of employees acting as Directors of subsidiaries is disclosed in the relevant banding of remuneration set out under Employee Remuneration. 66

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

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

Employee

$110,000 – 119,999

3

$120,000 – 129,999

2

$140,000 – 149,999

1

$150,000 – 159,999

2

$160,000 – 169,999

2

$170,000 – 179,999

2

$270,000 – 279,999

2

$340,000 – 349,999

1

$360,000 – 369,999

1

$470,000 – 479,999

1

9. Director Transactions in Securities of the Parent Company

Director

Date

No. of securities acquired/ (disposed)

Securities held NonBeneficial as at 31 December 2007

Securities held Beneficial as at 31 December 2007

S C Allen

88,958

A W Harmos

37,059

N Paviour-Smith

46,174

N Williams

17,789

H van der Heyden M R Weldon 2

1,601,789

2

1,252,132 shares and 349,657 CEO Share Scheme Shares

67

STATUTORY INFORMATION CONTINUED FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

10. Auditors The auditor of the parent company and group is KPMG. They provide audit and other services for which they are remunerated. Parent $000 Audit of the financial statements Other audit related fees

68

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

Group $000 55

89

-

5

SECURITY HOLDER INFORMATION FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

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 2007. Shares Held

%

NZ Central Securities Depository Limited

7,518,926

30.55

Forbar Custodians Limited

1,266,636

5.15

ASB Nominees Limited

1,252,132

5.09

Custodial Services Limited

987,978

4.01

Peter Hanbury Masfen & Joanna Alison Masfen

682,128

2.77

Nigel Babbage & Philippa Babbage

665,594

2.7

David Mitchell Odlin

505,000

2.05

Custodial Services Limited

372,960

1.52

Tane Nominees Limited

349,657

1.42

Leveraged Equities Finance Limited

278, 078

1.13

Michael Walter Daniel & Nigel Geoffrey Burton & Michael Murray Benjamin

195,000

0.79

FNZ Custodians Limited

141,178

0.57

Forbar Custodians Limited

132,455

0.54

Somerset Smith Partners Limited

128,963

0.52

Custodial Services Limited

110,630

0.45

Custodial Services Limited

104,965

0.43

Michael Walter Daniel & Elizabeth Beatty Benjamin & Michael Murray Benjamin

100,000

0.41

ASB Nominees Limited

98,826

0.4

Forbar Custodians Limited

92,951

0.38

NZX Executive Share Plan Nominees Limited

91,287

0.37

15,075,344

61.25

Total

69

SECURITY HOLDER INFORMATION CONTINUED FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2007

12. Spread of ordinary shareholders as at 31 December 2007

Size of Holding

1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 20,000 20,001 to 30,000 30,001 to 40,000 40,001 to 50,000 > 50,001

Domicile of Holders

New Zealand Australia Other

Shareholders Number

Shares %

Number

962 1,074 199 101 27 35 10 42

39.27 43.84 8.12 4.12 1.10 1.43 0.41 1.71

2,450

100.00

600,777 2,463,900 1,392,795 1,426,331 655,893 1,203,247 457,531

2.44 10.01 5.66 5.80 2.66 4.89 1.86 66.68 100.00

Shareholders Number

%

Shares %

Number

%

2,396 32 22

97.80 1.31 0.990

24,307,978 169,425 134,842

98.76 0.69 0.55

2,450

100.00

24,612,245

100.00

13. 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 security holders in the Company as at 31 December 2007. The total number of voting securities on issue as at 31 December 2007 was 24,612,245, comprising 24,262,588 ordinary shares and 349,657 CEO Share Scheme Shares. Relevant Interest

70

%

Fisher Funds Management Limited

2,373,540

9.64

M R Weldon

1,601,789

6.51

ING NZ Ltd

1,514,849

6.20

Forsyth Barr Custodians Limited

1,266,636

5.15

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

14. Waivers from the Listing Rules Various waivers were set out in the Prospectus and Investment Statement dated 3 June 2003. These waivers related to the previous CEO share scheme in effect until June 2007. These 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 CEO Scheme.

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).

The following waiver was granted in 2007 following shareholder approval of the new CEO Share Scheme at the NZX Special Meeting in September 2007: A waiver from the application of Listing Rule 7.6.6A to exempt the financial assistance given for the purposes of the new CEO Scheme from the requirement that it be given within 12 months of the passing of the resolution to implement the new CEO Scheme.

15. Securities issued by NZX NZX’s ordinary shares (including the remaining shares under the previous CEO Share Scheme Shares that converted to ordinary shares in July 2007) are quoted on the NZSX Market. Those Share Scheme Shares issued pursuant to the new CEO Share Scheme (approved by shareholders at the Special Meeting on 6 September 2007) have not qualified and are not quoted on any market and will not do so until such time as they qualify.

71

DIRECTORY

Registered Office

Auditors

New Zealand Exchange Limited Level 2 NZX Centre 11 Cable Street PO Box 2959 WELLINGTON Tel: +64 4 472 7599 [email protected] www.nzx.com

KPMG 10 Customhouse Quay WELLINGTON Tel: +64 4 816 4500 Fax: +64 4 816 4600

Board of Directors 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.

72

NEW ZEALAND EXCHANGE LIMITED 2007 ANNUAL REPORT

Share Registrar LINK Market Services Limited PO Box 91976 AUCKLAND 1030 Investor Enquiries +64 9 375 5998 Fax +64 9 375 5990 [email protected] www.linkmarketservices.com

NOTES

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