2 0 0 5

NEW ZEALAND EXCHANGE LIMITED ANNUAL REPORT

IMAGES: NZX CENTRE
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NEW ZEALAND EXCHANGE LIMITED ANNUAL REPORT
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Issued 31 March 2006

Contents

1 . C h a i r m a n ’s R e p o r t

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

5. Financial Review

11. Board of Directors

19. Financials

39. Statutory Information

47. Directory
AGM AND FINANCIAL CALENDAR

Annual Meeting
Annual Meeting of shareholders of NZX will be held at The Icon Room, Level 2, Te Papa
Cable Street, Wellington, New Zealand on Thursday 8 June 2006, commencing at 3.30pm.
Full details, including the business to be dealt with, are contained in the Notice of Meeting
which will be sent to shareholders on or around 22 May 2006.

Financial Calendar
31 December 2005 2005 Financial Year end

17 February 2006 Preliminary Full Year Financial Results issued

March 2006 2005 Annual Report issued

17 March 2006 Record date for dividend payment

7 April 2006 Dividend payment

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

3.30pm, 8 June 2006 Annual Meeting

July 2006 Preliminary Half Year Announcement issued

September 2006 2006 Half Year Report issued

31 December 2006 2006 Financial Year end

CHAIRMAN’S REPORT

2005 has been a strong year for NZX. While the headlines have largely been written about a
national economic downturn, NZX has developed the independent and sustainable revenue
streams that have contributed to an excellent result.
As we stated at the time of our 2005 half-year results, it is incumbent upon NZX, as a key
player in New Zealand’s capital markets, to deliver a high standard of transparency to our
shareholders and to the wider markets. To give that clarity and transparency, we have grouped
this commentary around four key result themes.
Resilience: The majority of the 23% increase in operating EBITDA can be attributed to
consistent, reliable and sustainable revenue streams. NZX is now largely independent of short
term market sentiment. While we no longer rely heavily on new listings and index performance,
new listings are of course a vital component of a healthy capital market and we welcome all our
stakeholders playing a part in educating various business sectors in the benefits of listing and
encouraging new businesses to access the capital markets.
Operating leverage: NZX’s business is operating to scale. Our revenue is growing faster
then our expenditure and this is proven by a 19% revenue growth and an increase of 46% in
EBITDA.
Subsidiary businesses: Smartshares and Link have reached break even points in scale and,
going forward, will contribute positively to the NZX Group cashflow.
Strong cashflow: The sound operating EBITDA result reiterates sustainability and allows us to
have flexibility in our capital and dividend policy.
Together these form a picture of a business that is built to withstand – and thrive in – any
climatic conditions.
In addition, we have made a significant announcement regarding the NZX capital policy.
NZX’s new dividend policy is based on a payout ratio of around 60% of NPAT. The dividend
for the 2005 financial year will be $.25 per share, fully imputed. NZX will also distribute
approximately $16.2 million to shareholders by way of a return of its entire store of available
subscribed capital pro-rata to all shareholders.
This signals an exciting new step along NZX’s evolutionary path, and also serves as an
acknowledgement of the critical role played by our shareholders in our success.
NZX will continue to aggressively pursue growth and even after this significant return of capital,
will maintain significant capacity to fund growth. Given NZX’s strong track record since listing
two and a half years ago, NZX is in a position to take advantage of numerous financing options,
including raising debt, should this prove attractive.
On behalf of the Board and the team at NZX, I offer my congratulations and thanks to our
shareholders for the ongoing confidence we share in the future of New Zealand’s capital markets.

Simon Allen, Chairman

30 March 2006
1
 CHIEF EXECUTIVE’S REPORT

NZX is about infrastructure

Infrastructure. It’s invariably expensive, often invisible and inevitably taken for granted, but
economies and civilisations would not survive without it.
NZX is about infrastructure. NZX builds, maintains and constantly improves the infrastructure
of New Zealand’s capital markets. It’s a job we’re proud to do.
Healthy capital markets ensure New Zealand’s competitiveness for global
Healthy capital markets ensure investment flows. They encourage a strong savings culture amongst New
Zealanders. They lead to efficient, low cost delivery of investment products.
New Zealand’s competitiveness And they support a competitive environment for investment services.
for global investment flows.
In past years capital markets infrastructure in New Zealand suffered
They encourage a strong savings neglect. Its associated assets were stripped, leaving an emaciated frame in
culture amongst New Zealanders. slightly shabby clothing.

They lead to efficient, low cost NZX could care less about the clothes, but we care intensely about the
health of the body underneath. That body is our infrastructure, and it’s
delivery of investment products.
critical for the sustainability and competitiveness of New Zealand’s
financial markets and the plethora of associated industries.
The four key components of capital market infrastructure are:
Trust and confidence
Technology and systems
Business processes and standards
Regulation and policy.

NZX has been investing diligently right across the spectrum, and will continue to do so, building
real muscle into New Zealand’s capital markets.
For investors in NZX, muscle-building means certainty about our strategy and exposure to solid
long term growth. For investors in New Zealand and in NZX listed securities, it means easy
access to a range of sound choices, and all the information they need to make the best savings and
investment decisions. For listed companies, it means local and international access to investors
who have increasing confidence in the quality of New Zealand investments. It also means
accurate and predictable pricing for their stock available, real time, around the world. And for
the New Zealand economy, it means our entrepreneurial export, manufacturing, agricultural,
technology and, increasingly, energy and infrastructure sectors have access to capital via an
investment-hungry universe: capital that is essential to grow, to forge new markets, to develop
new capabilities, to employ more people and, ultimately, to reinvest for further growth.

2 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

NZX in 2005 – muscle moves markets
Trading activity, measured by average daily value traded, increased 16%. The average
annual increase over the last two years has been 18%.
Automated trading strategies, through the use of DMA, have increased the average daily
new or amended orders in our market by 82%.
Our market supervision team handled 135 rulings and waivers and in each case met their
delivery commitments. In the last three years the effectiveness of this team has increased
dramatically.
Two of New Zealand’s four major banks have become distribution and underwriting
sponsors, signaling the value delivered by NZX infrastructure in supporting efficient
distribution of investment grade credit products.
NZX co-led a group of market stakeholders to initiate a change to the tax treatment of
stock lending transactions, which means market participants can prepare for a new level of
transactional activity.
The listing of Vector set an important precedent for public ownership of important utility
and infrastructure assets. The successful float leaves the Trustees of Auckland Energy
Consumer Trust in control of 75% of voting shares while providing New Zealand investors
an investment opportunity. We are confident more will follow this path.
NZX has also matured as a company. Since I joined in 2002, we have grown our team to 65
people from a base of 30. We have strong and passionate team dedicated living and working to
our core values: Brave, Vital, Team, Results, Accountable, Leader and Advancing
New Zealand.

NZX in 2006
This year NZX is building more muscle and stamina into our markets, delivering greater
value to shareholders, to our wider stakeholder community and, ultimately, to the New
Zealand economy.

Muscle is the economic value delivered by NZX…

… reflected in:

The number of new companies and new sectors represented on our markets.
Continued growth in secondary capital raisings.
Ongoing growth in trading volumes, more and more of which will be facilitated by DMA
and new trading strategies.
Stimulated growth in demand for information about our markets both domestically and,
increasingly, offshore.

3
 CHIEF EXECUTIVE’S REPORT CONTINUED

Stamina is the network value sustained by NZX…

…reflected in:

Growing numbers of investors, in New Zealand and offshore, being supported by a highly
skilled and information-rich professional community.
Listed companies being increasingly partnered by that same community.
Increasing reach throughout New Zealand capital markets via the attraction of new
participants and provision of services that extend beyond core equity markets.
An evolving market supervision framework that builds confidence and trust in our
markets.
A broadening range of products.
More points of entry for new investors and more leverage for sophisticated investors.
Speedy, reliable and appropriately costed services to all users.
At the same time we are identifying and examining options for future
growth within the framework of New Zealand’s capital markets
Smartshares and LINK have, in infrastructure.
addition to delivering solid financial
Our major investments to date - Smartshares and Link Market Services
performance, given our team a - have, in addition to delivering solid financial performance, given our
much better understanding of team a much better understanding of the challenges posed by markets
infrastructure in its current state. This knowledge and experience
the challenges posed by markets
leaves us well placed to make informed investment decisions, both
infrastructure in its current state. within, and external to, our current business in future.
We believe there is still enormous potential to invest in and shape the
muscle of New Zealand’s capital markets infrastructure that will yield
major benefits for all participants, including banks, custodians, brokers, financial planners,
investment managers and, most importantly, New Zealand investors.
We have confidence in the long term future of our country. Equally, we know our future will
demand even more markets muscle. NZX is geared to build that muscle through investing in
our people, in market trust and confidence, and in bringing creative solutions to New Zealand’s
capital market challenges.

Mark Weldon
Chief Executive Officer
30 March 2006

4 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

 2 0 0 5
NEW ZEALAND EXCHANGE LIMITED FINANCIAL REVIEW

5
FINANCIAL REVIEW

I. OVERALL RESULTS
Strong financial results in 2005 reflect the significant progress made in transforming
NZX’s core business and success with key investments. Just two and half years since
listing, NZX has established a resilient business model that generates a more stable
and dependable revenue. The introduction of a dividend policy and the announcement
of the intention to return $16.2 million of available subscribed capital is a signal, both
of confidence in NZX’s business model and that all available forms of financing will be
considered to fund further growth.

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6 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

II. FINANCIAL PERFORMANCE BY BUSINESS UNIT

NZX BUSINESS UNITS STATEMENT OF FINANCIAL PERFORMANCE

NZX MARKETS SMARTSHARES LINK*

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

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

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

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

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

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

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

Source: NZX Data

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

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

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

NZX MARKETS BUSINESS

NZX’s Markets delivered a particularly strong result. Our core revenue lines of listings,
transactions, and market information increased by 13%, 14%, and 21% respectively. Total
revenue reached $18.1 million, a 13% increase versus 2004. Meanwhile, operating expenses
reached $10.7 million, a 9% increase versus 2004. The overall result was a 15% increase in
EBITDA and reflects the operating leverage of this business.

Listing fees received from issuers of equity and debt securities for the services provided by
NZX’s market infrastructure totalled $6.6 million, a 13% increase versus 2004. Services
to issuers include the provision of trading facilities, collection and dissemination of market
announcements, the global dissemination of pricing information, and the facilitation of
settlement. While NZX expects medium to long term prospects for major capital raisings
to be strong, shorter term fluctuations in this activity will not seriously impair NZX financial
performance. NZX has established stable levels of revenue despite an actual decrease in
initial listings or IPO activity. In 2005 revenue received from initial listing fees decreased by
$221,000, or 18% versus 2004.

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

18% versus 2004.

7
FINANCIAL REVIEW CONTINUED

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There was an average of 2,587 transactions for $126 million in value per day on NZX’s
markets in 2005. Compared to 2004, average daily transactions were 5% higher and
average daily value was 16% higher. Activity was particularly strong early in the year, but
cooled down during the second half of 2005. Transaction revenue, however, increased
to $4.8 million, a 14% increase versus 2004.

In addition to facilitating the matching of bids and offers, NZX infrastructure also
facilitates fully electronic delivery versus payment settlement of transactions between
market participants, and also the legal title transfer of securities from participants to
their clients.

NZX has made significant investments in the transactions area over the past two
years and expects transaction numbers increase as a result. An open interface to
our trading engine facilitating Direct Market Access (DMA) was introduced for the first
time in the August 2004. Since that time DMA has played a key role in facilitating new
types of automated trading and pricing activity in our market. It also supports product
development efforts by our participants including the introduction of warrants, CFD’s
and options.

8 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

In addition to technical infrastructure, NZX has worked hard to support a change in
tax law that will enable stock lending activity. This regulatory infrastructure change is
expected to take effect by mid 2006 and is expected to open our market to additional
levels of trading activity and liquidity.

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

infrastructure in New Zealand to ensure low cost, efficient, and standard methods
of trading, clearing and settlement are available to our participants. We expect this
investment to drive further increases in trading activity on our markets.

TRANSACTIONS - NUMBER TRANSACTIONS - VALUE ($M)

FY CHANGE FY CHANGE

NZSX 614,766 4% NZSX 29,630 16%

NZDX 26,829 -2% NZDX 1,952 2%

NZAX 7,635 26% NZAX 58 67%

Total 649,230 4% Total 31,640 15%

Daily Average 2,587 5% Daily Average 126 16%

Source: NZX Operating Metrics, Full Year 2005

Market information revenues are the other major component of our NZX Markets
business revenue. Like listings, this stable revenue is sourced from a large number of
customers both within and outside Australasia. There are more than 7,500 individual
consumers of NZX real time information around the world. Market Information revenue
reached $3.4 million, an increase of 21% versus 2004. This increase has been driven
by a pricing change in July 2005, but also reflects an increase in underlying demand for
our real time pricing and news information.

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

increased by only 9% in 2005. Total expenditure for the Markets business was $10.7
million; over half of that expenditure covered staff and related costs. Total staff in the
Markets business has remained constant at around 60 throughout the year.

SUBISIDIARIES AND ASSOCIATES

NZX Group has made significant investments outside its core Markets business. In
2004 NZX increased the size and scope of its passive funds management business
and launched Smartshares. Near the end of 2004 NZX also announced a joint venture
in the registry business, Link Market Services. These two businesses are both
performing to expectations and have broken through initial scale thresholds to ensure
future profitability and operating leverage.

9
FINANCIAL REVIEW CONTINUED

smartshares SMARTSHARES

Smartshares is New Zealand’s leading passive funds manager with four equity based
products. Smartshares manages $195 million in retail funds and also manages over
$100 million of wholesale funds. Smartshares recently received the mandate to run
a passively–managed New Zealand equity sector of the New Zealand Superannuation
Fund (NZSF).

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

2004. This increase is evidence of the growth during 2004 from one fund to four
funds. Importantly, Smartshares has a scalable and efficient operational model that
will produce increasing profitability as the business grows. Key product enhancements
such as the Smartshares savings plan and direct purchase are new additions and
enhance the ability to collect additional funds. Smartshares is a 100% owned subsidiary
of NZX Group; its result has been consolidated.

LINK MARKET SERVICES

Link Market Services (LINK) is the second largest share registry services provider in
New Zealand with over 100 clients. LINK was founded in 2004 as a 50/50 joint
venture with Link Market Services Australia. In addition to attracting new clients, LINK
in 2005 acquired BK Registries, and generated $3.1 million in revenue and an EBITDA
of $616,000.

LINK completed a busy year in 2005 with the introduction of a new registry system to
the New Zealand market. During this transition LINK extended its client base and now
serves five of the top NZX 50 companies, including three trans-Tasman issuers.

LINK’s contribution to the NZX Group result is equity accounted and reflects the impact
of depreciation and amortisation expenses.

III. CASHFLOW AND CAPITAL EXPENDITURE

NZX Group’s cash (or cash equivalent) balance was $25.1 million at 31 December 2005
and has remained very consistent at year end over the last three years. During this same
period, NZX has undergone a significant corporate transformation, made significant
capital investment, and paid a special dividend of $0.40 per share ($5.4 million) in
May 2005. NZX’s stable cash balance demonstrates the quality and dependability of
NZX cashflow during a period in which NZX has carried no debt. Importantly, this track
record of performance enables NZX Group to take advantage of capital market financing
options that were not available to it in 2003.

10 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

Capital expenditure within the Markets business, and the NZX Group, totalled $1.9
million in 2005. The majority of this expenditure was driven by a relocation of
premises within Wellington in July 2005. NZX’s new home at NZX Centre (11 Cable
Street, Wellington) provides an improved working environment and suitable venue for
demonstrating leadership within New Zealand’s capital markets. The vast majority of
the remaining capital expenditure covered the replacement of major computer hardware
supporting transaction settlement.

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Major capital expenditure prior to 2005 has included the following items:
Link Market Services - $3.3 million.
Smartshares Funds purchases - $500,000.
Trading engine enhancements, including DMA - $500,000.
SFE agreement to list NZFOX products.

In addition to these capital investments, NZX has also incurred significant non recurring
expenditure to grow the Smartshares business. The launch of funds in 2004 generated
non-recurring expenditure of $1.0 million. Additionally, the collapse of Access Brokerage
in 2004 has generated $838,000 of non-recurring expenditure in 2004 and 2005.
Normal capital expenditure, excluding acquisitions or major development activities, is
generally expected to be less than $500,000 per year.

IV. CAPITAL AND DIVIDEND POLICY

In conjunction with the announcement of its full year result on 17 February 2006, NZX
announced a dividend policy of approximately 60% of NPAT and a return of capital
totaling $16.2 million. The dividend announced for the 2005 financial year was $.25
per share and its payment date is 7 April.

Going forward, NZX will aggressively pursue growth, and will finance that growth through
the most efficient means possible.

11
BOARD OF DIRECTORS

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

12 NEW EXCHANGE
NEW ZEALAND ZEALAND EXCHANGE LIMITED
LIMITED 2005 2005REPORT
ANNUAL ANNUAL REPORT
BOARD OF DIRECTORS

Simon Christopher Allen – CHAIRMAN BSc, BCom, FSCAP

Simon is Chief Executive of ABN AMRO in New Zealand and has 23 years’ experience in the
New Zealand and Australian capital markets.
Simon established BZW (now ABN AMRO) in 1988. ABN AMRO group is a registered bank
in New Zealand and provides products and services to Government, corporate and investors.
Simon is also a director of several ABN AMRO group companies including 50% owned ABN
AMRO Craigs Limited.
Simon has involvement in the New Zealand Business & Parliament Trust (Trustee), St. Cuthbert’s
College Trust Board (Director) and is a Fellow of the Institute of Finance Professionals.

Nigel Williams – DEPUTY CHAIRMAN BCom

Nigel has over 20 years’ experience in both New Zealand and overseas capital markets,
including his current role as Managing Director, Institutional Markets for the combined ANZ
New Zealand Limited and National Bank New Zealand Limited. He has held various senior
management roles within the National Bank of New Zealand Limited, including Treasurer, and
is currently a member of the Bank‘s principal governance committees. Nigel is also a director
of Interchange and Settlement Limited.
Nigel graduated from the University of Otago with a Bachelor of Commerce in Marketing,
Accounting and Finance and has also attended advanced management training at the University
of Michigan, USA and Oxford University, England.

Andrew William Harmos LLB (Hons), BCom

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

Neil Paviour-Smith BCA, CA, ACIS, FCFIP

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

13
 O

B
Neil is an NZX Advisor, a Fellow and past Chairman of the Institute of Finance Professionals V
NZ, a member of the Institute of Chartered Accountants of NZ, the Institute of Directors, BOARD COMMITTEES
the Institute of Chartered Secretaries NZ, and the CFA Society of NZ. L
The Remuneration
L
Henry van der Heyden BEng (Agr) Hons Committee comprises
Henry was appointed to the NZX Board on 6 September 2005. He became Chairman Simon Allen (Chair), A
of Fonterra Co-operative Group in September 2002 and is a founding director of the
Nigel Wiliams and R
co-operative, which is New Zealand’s largest company operating in over 100 countries
internationally. He has contributed to industry governance for 13 years, as both a director Henry van der Heyden V
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- A
scale manufacturing and international exporting and the financial, regulatory, trade and The Audit Committee
customer influences on them. He is a director of Innovation Waikato Limited, Independent
A
comprises
Egg Producers (IEP) and King St Advertising, and serves on Waikato University’s School of N
Management Advisory Board. He is also a Trustee of Asia:New Zealand. Neil Paviour-Smith

(Chair), Nigel Williams V

Mark Rhys Weldon – CHIEF EXECUTIVE BA BCom, MEcon (First Class Hons), Doc Jur, Dip and Simon Allen V
Int’l Law (Hons)

Mark is the Chief Executive of NZX, and works closely with management to implement T
the Board’s strategies. Mark is also a director of NZX Funds Management Limited and
A
Chairman of Link Market Services Limited.
Mark graduated from Auckland University with a Masters degree in Economics (First V
Class Honours), a Bachelor of Commerce and a Bachelor of Arts. Mark then studied at
the Columbia University School of Law in New York, graduating in 1997 with a Doctorate V
in Jurisprudence and a Diploma in International Law.
L
Mark joined leading New York law firm Skadden, Arps, Slade, Meagher & Flom as an
attorney. While there, he worked extensively in securities law and on mergers and A
acquisitions. Mark went on to work at the New York office of McKinsey & Company. He
specialised in stock exchanges, asset management and wholesale banking (investment R
and commercial), and general corporate strategy. Mark is a member of the NZX Business
B
Advisory Board and the New Zealand Olympic Committee.
V

14
V
NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

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VITAL ACCOUNTABLE LEADER TEAM ADVANCING NEW ZEALAND RESULTS VITAL ACCOUNTABLE
15

LEADER RESULTS ADVANCING NEW ZEALAND RESULTS VALUES BRAVE VITAL LEADER
CORPORATE GOVERNANCE

NZX is committed to ensuring it employs best practice governance structures and principles
in keeping with Appendix 16 of the NZSX Listing Rules (Rules) and the Corporate Governance
Principles and Guidelines published by the Securities Commission.

NZX believes good governance starts at the top with the Board of Directors (the Board) who
are elected by shareholders to direct and control NZX’s activities.

OPERATION OF THE BOARD

The Board is responsible for the overall direction and strategy of NZX. It selects the Chief
Executive and delegates the day to day operation of NZX’s business to the Chief Executive. The
Chief Executive implements policies and strategies set by the Board and is responsible to it.

The Board has established a Code of Ethics that provides a set of principles for Directors to
apply in their conduct and work for NZX. The principles include managing conflicts of interest,
the required skills of Directors, trading in NZX’s shares, and maintaining confidentiality of
information received in their capacity as Directors of NZX.

BOARD OF DIRECTORS

The Board currently comprises six Directors of whom five are non-Executive Directors. In
accordance with Rule 3.3.1B, the Board has determined that five of the six Directors are
Independent as defined in the Rules. The Independent Directors are Simon Allen (Chairman),
Nigel Williams (Deputy Chairman), Andrew Harmos, Neil Paviour-Smith and Henry van der
Heyden. Mark Weldon, the Chief Executive, is the only non-Independent Executive Director on
the Board.

In accordance with the constitution, one third of the Directors are required to retire by rotation
and offer themselves for re-election by shareholders each year.

Meetings of the Board are scheduled in advance. Meeting agenda and papers must be
circulated at least five business days before each meeting to allow Directors sufficient time
to prepare.

The Board has access to executive management and from time to time, key executive managers
are invited to attend and participate in meetings of the Board. Annually, each executive manager
must present a business plan for their area of responsibility to the Board for approval.

The Board holds regular scheduled meetings (every six weeks) and also holds ad hoc meetings
to consider time sensitive or specific issues. During the 2005 financial year, the Board met
(including via teleconference) 12 times.

H R L Morrison announced his retirement as a director of NZX at the meeting on 9 June 2005.
T E C Saunders announced his retirement as a director of NZX at the meeting on 9 June 2005.
The Board appointed H van der Heyden a director of NZX in September 2005
16 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT
COMMITTEES

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

AUDIT COMMITTEE

The audit committee operates under a charter, which sets out its role in assisting the Board
with corporate financial matters. It may only comprise Independent Directors and at least one
member of the audit committee must have expertise in accounting.

The audit committee has a clear line of communication with the independent and internal
auditor, and it may, at its discretion, meet with the independent auditor without company
management being present.

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

REMUNERATION COMMITTEE

The remuneration committee operates under a charter that sets out its role. It assists the
Board in reviewing the remuneration policies and practices of NZX as they relate to the
Directors including any committees that Directors may serve on, and the remuneration of the
Chief Executive.

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

committee met three times in the 2005 financial year.

NOMINATIONS

Given the size of the Board, there is no nominations and succession committee. Rather, the
full Board is involved in the Director nomination process.

2005 NZX DIRECTORS’ ATTENDANCE RECORD

Director NZX Board Audit Remuneration

Committee Committee
Simon Allen 12/12 3/4 3/3
Lloyd Morrison 8/9
Andrew Harmos 12/12
Neil Paviour-Smith 12/12 4/4 3/3
Tim Saunders 5/7 3/3
Mark Weldon 12/12
Nigel Williams 12/12 2/2 3/3
Henry van der Heyden 4/4 1/1

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

17
CORPORATE GOVERNANCE CONTINUED

DISCLOSURE

NZX has internal procedures in place to ensure that key financial and material information
is communicated to the market in a clear and timely manner. In addition to its disclosure
obligations under the Rules, NZX has adopted a quarterly reporting regime and produces
operating metrics monthly. This additional information provides transparency and assists
the market in evaluating NZX’s performance. NZX also maintains a website which provides
contact points for the public and is continuously updated with information regarding NZX and
its releases.

RISK MANAGEMENT

The Board is responsible for ensuring that key business and financial risks are identified and
appropriate controls and procedures are in place to effectively manage those risks. Directors
may seek independent professional advice to assist with their responsibilities. During the
2005 financial year Directors sought independent professional advice where necessary.

INSURANCE AND INDEMNIFICATION

NZX provides indemnity insurance cover to Directors and executive employees. This is explained
further on page 41.

SHARE TRADING

The company has adopted a formal NZX Securities Trading Policy to address insider trading
requirements under the Securities Markets Act 1988. The NZX Securities Trading Policy is
modeled on the Insider Trading (Approved Procedure for Company Officers) Notice 1996
(the Notice) and administered by the NZX Securities Trading Committee that consists of the
Corporate Counsel and Chairman of the Board. The NZX Securities Trading Policy restricts
trading in the financial year by prohibiting trading in NZX’s securities during ‘black-out’ periods
set out in the Notice.

If a Director or officer wishes to trade NZX securities in a ‘trading window’, that person must
first apply, and obtain, consent from the NZX Securities Trading Committee.

Because of the nature of NZX’s business, any employee who wishes to buy or sell any security
listed on NZX’s markets must follow the NZX Securities Trading Policy and apply to NZX for
consent to trade. This policy is reinforced through individual Employment Agreements.

18 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

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

19
STATEMENT OF FINANCIAL PERFORMANCE

FOR YEAR ENDED 31 DECEMBER 2005

Parent Group
Note Dec 2005 Dec 2004 Dec 2005 Dec 2004
$000 $000 $000 $000
Operating revenue 1 18,139 16,015 19,500 16,390
Equity accounted earnings of associate (LINK) - - (34) -
Operating expenses 2 10,685 9,818 12,172 10,469
Operating EBITDA 7,454 6,197 7,294 5,921
Unrealised gain/(loss) on investment bonds (63) 92 (63) 92
Non-recurring income/(expenditure) 10 (704) (494) (704) (1,538)
EBITDA 6,687 5,795 6,527 4,475
Interest expense/(income) (1,647) (1,661) (1,647) (1,661)
Depreciation 2 751 553 751 553
Amortisation 8 129 55 156 55
Surplus before tax 7,454 6,848 7,267 5,528
Tax expense 11 1,985 2,286 2,380 1,851
Net Surplus after tax 5,469 4,562 4,887 3,677

20 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

 STATEMENT OF MOVEMENTS IN SHAREHOLDERS’ FUNDS

FOR YEAR ENDED 31 DECEMBER 2005

Parent Group
Dec 2005 Dec 2004 Dec 2005 Dec 2004
$000 $000 $000 $000
Net Surplus after tax 5,469 4,562 4,887 3,677
Total recognised revenue & expenditure 5,469 4,562 4,887 3,677
Issue of Share Capital 1,780 - 1,780 -
Dividend payment (5,398) - (5,398) -
CEO Share Scheme Shares (1,141) - (1,141) -
Shares held in Subsidiary Company - - 1,141 -
Movement in Shareholders’ funds for the period 710 4,562 1,269 3,677
Shareholders’ funds at beginning of period 32,655 28,093 29,638 25,961
Shareholders’ funds at end of period 33,365 32,655 30,907 29,638

21
STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2005

Parent Group
Note Dec 2005 Dec 2004 Dec 2005 Dec 2004
$000 $000 $000 $000
ASSETS
Current assets:
Cash at bank 718 151 1,546 187
Cash investments 3 18,100 19,931 18,100 19,931
Receivables & prepayments 5 2,911 2,501 3,416 2,183
21,729 22,583 23,062 22,301
Non current assets:
Advances 14 1,146 2,132 154 -
Fixed assets 7 2,453 1,327 2,453 1,327
Investments 4 11,792 10,398 8,758 8,898
Deferred tax 11 397 361 438 361
15,788 14,218 11,803 10,586
Goodwill 8 306 527 808 1,055
Total assets 37,823 37,328 35,673 33,942
LIABILITIES AND SHAREHOLDERS’ FUNDS
Accounts payable and other current liabilities 6 4,612 4,277 4,920 4,423
Provision for taxation 11 (154) 396 (154) (119)
4,458 4,673 4,766 4,304

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

Retained earnings 15 15,993 15,922 14,526 15,037
Total Shareholders’ funds 33,365 32,655 30,907 29,638
Total liabilities & shareholders’ funds 37,823 37,328 35,673 33,942

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

S C Allen N Paviour-Smith M R Weldon

Chairman Director Chief Executive Officer

22 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

 STATEMENT OF CASH FLOWS

FOR YEAR ENDED 31 DECEMBER 2005

Parent Group
Dec 2005 Dec 2004 Dec 2005 Dec 2004
$000 $000 $000 $000
CASH FLOWS FROM OPERATING ACTIVITIES
Cash was provided from:
Cash received from customers and others 21,551 18,249 22,612 18,951
Net GST received/(paid) (901) (934) (901) (934)
Interest received 1,563 1,577 1,773 1,698
22,213 18,892 23,484 19,715
Cash was applied to:
Cash paid to suppliers and employees 13,531 11,063 15,510 12,885
Taxation paid 2,571 2,255 2,571 2,255
16,102 13,318 18,081 15,140
Net cash flows from operating activities 6,111 5,574 5,403 4,575
CASH FLOWS FROM INVESTING ACTIVITIES
Cash was provided from:
Decrease in bank deposits 1,831 5,848 1,831 5,848
1,831 5,848 1,831 5,848
Cash was applied to:
Purchase of fixed assets 1,876 1,073 1,876 1,073
Increase in other assets 268 - 268 -
Increase in investments 1,458 10,306 (42) 9,335
3,602 11,379 2,102 10,408
Net cash flows from investing activities (1,771) (5,531) (271) (4,560)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash was provided from:
Proceeds from issue of shares 1,625 - 1,625 -
1,625 - 1,625 -
Cash was applied to:
Dividend payment 5,398 - 5,398 -
5,398 - 5,398 -
Net cash flows from financing activities (3,773) - (3,773) -
Net increase in cash held 567 43 1,359 15
Opening cash balance 151 108 187 172
Cash at end of period 718 151 1,546 187

23
STATEMENT OF CASH FLOWS

FOR YEAR ENDED 31 DECEMBER 2005

Parent Group
Dec 2005 Dec 2004 Dec 2005 Dec 2004
$000 $000 $000 $000
RECONCILIATION OF SURPLUS FOR THE PERIOD TO 5,469 4,562 4,887 3,677
NET CASH FLOWS FROM OPERATING ACTIVITIES

Surplus for the period

Add non cash items:
Depreciation 751 553 751 553
Amortisation 129 55 156 55
Goodwill impairment 360 - 360 -
Unrealised (gain)/loss on investment bonds 63 (92) 63 (92)
Equity accounted earnings of associate (LINK) - - 34 -
6,772 5,078 6,251 4,193

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

Decrease/(increase) in deferred tax (36) (43) (77) (43)
Increase/(decrease) in accounts payable 335 1,148 497 1,295
Increase/(decrease) in provision for tax (550) 74 (35) (441)
Increase/(decrease) in Fidelity Fund - (446) - (446)
Net cash flows from operating activities 6,111 5,574 5,403 4,575

24 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

 STATEMENT OF ACCOUNTING POLICIES

FOR YEAR ENDED 31 DECEMBER 2005

ENTITIES REPORTING
The financial statements presented for the “Parent” comprise New Zealand Exchange Limited (“NZX”). The consolidated
financial statements for the “Group” are for the economic entity comprising NZX, its subsidiaries and associate.

STATUTORY BASE
NZX is a company registered under the Companies Act 1993 and is an issuer in terms of the Securities Act 1978. These
financial statements are presented in compliance with the Financial Reporting Act 1993 and the Companies Act 1993.

MEASUREMENT BASE
The financial statements have been prepared on the basis of historical cost with the exception of certain items for which specific
accounting policies are identified.

ACCOUNTING POLICIES
The financial statements are prepared in accordance with New Zealand generally accepted accounting practice. The accounting
policies that materially affect the measurement of financial performance, financial position and cash flows are set out below.

GROUP FINANCIAL STATEMENTS

Subsidiaries are those entities controlled, directly or indirectly, by the Parent. The Group financial statements consolidate the
financial statements of NZX and its subsidiaries using the purchase method.
Associates are entities in which the Group has significant influence, but not control, over the operating and financial policies.
The Group financial statements include the Group’s share of the net surplus of associates on an equity accounted basis.
All material transactions between Parent and subsidiaries are eliminated on consolidation. Shares in NZX held by subsidiary
companies are shown as a deduction from share capital.

REVENUE RECOGNITION
Income earned in the normal course of business is recognised at the time the service is provided. When revenue is received in
advance it is amortised evenly over the period the service will be provided.
Interest income is accounted for as earned.

FIXED ASSETS AND DEPRECIATION

All fixed assets are initially recorded at cost and include the cost of acquisition along with the value of other directly
attributable costs which have been incurred in bringing the asset to the location and condition necessary for their intended
use. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately
to its recoverable amount.

25
STATEMENT OF ACCOUNTING POLICIES CONTINUED

FOR YEAR ENDED 31 DECEMBER 2005

Fixed assets have been depreciated on a straight line basis so as to expense the cost of the assets over their useful lives as follows:
Computer equipment: 33.3%
Furniture & equipment: 20%
Leasehold improvements: 10%

SHARE ISSUE COSTS

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

TAXATION
Tax expense is based on accounting surpluses, adjusted for the permanent differences between accounting and tax rules.
The impact of all timing differences between accounting and taxable income is recognised as a deferred tax liability or asset. This
is the comprehensive basis for the calculation of deferred tax under the liability method.
A deferred tax asset, or the effect of losses carried forward that exceeds the deferred tax liability, is recognised in the financial
statements only where there is virtual certainty that the benefit of timing differences, or losses, will be utilised.

GOODS AND SERVICES TAX (GST)

The Statement of Financial Performance and Statement of Cash Flows have been prepared so that all components are stated
exclusive of GST. All items in the Statement of Financial Position are stated net of GST, with the exception of receivables and
payables, which include GST invoiced.

FINANCIAL INSTRUMENTS
Financial instruments carried in the Statement of Financial Position include cash and bank balances, investments, accounts
receivable and accounts payable. The particular recognition methods adopted are disclosed in the individual policy statements
associated with each item.

INVESTMENTS
Investments in subsidiaries and associates are stated at cost in the Statement of Financial Position.
Investment Bonds are stated at market value and any resultant gain or loss is recognised in the Statement of Financial
Performance. All other investments are stated at the lower of cost or net realisable value.

GOODWILL
Goodwill is reviewed as it relates to each specific transaction. The amount recognised as Goodwill will be amortised on a
straight line basis over the shorter of its estimated useful life or 20 years.

IMPAIRMENT
Annually, the directors assess the carrying value of each asset. Where the estimated recoverable amount of the asset is less than
its carrying amount, the asset is written down. The impairment loss is recognised in the Statement of Financial Performance.

26 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

 FOR YEAR ENDED 31 DECEMBER 2005

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

STATEMENT OF CASH FLOWS

The following are the definitions of the items used in the Statement of Cash Flows:
Operating activities include all transactions and other events that are not investing or financing activities.
Investing activities are those activities relating to the acquisition, holding and disposal of property, furniture and equipment
and of investments. Investments can include securities not falling within the definition of cash.
Financing activities are those activities that result in changes in the size and composition of the capital structure. This
includes both equity and debt not falling within the definition of cash.
Cash is considered to be cash on hand and current accounts in banks, net of bank overdrafts.

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

COMPARATIVES
Comparative figures where necessary have been restated to correspond with current year classifications.

CHANGES IN ACCOUNTING POLICIES

There were no material changes in accounting policies during the period.

27
NOTES TO THE FINANCIAL STATEMENTS

FOR YEAR ENDED 31 DECEMBER 2005

1. Operating revenue
Parent Group
Dec 2005 Dec 2004 Dec 2005 Dec 2004
$000 $000 $000 $000
Listings 6,618 5,835 6,547 5,784
Participant fees 1,313 1,067 1,313 1,067
Trading, clearing & settlement 4,814 4,239 4,814 4,239
Market information 3,367 2,780 3,367 2,780
Regulatory 1,753 1,626 1,753 1,626
Smartshares Limited - - 1,432 696
Other Income 274 468 274 198
18,139 16,015 19,500 16,390

2. Operating expenses
Parent Group
Dec 2005 Dec 2004 Dec 2005 Dec 2004
$000 $000 $000 $000
Employee & related costs 6,250 5,567 6,743 5,650
Information technology 1,824 1,619 1,824 1,619
Legal 475 435 514 531
Marketing 211 382 421 382
General administration 1,467 1,316 2,148 1,748
Directors’ fees 295 290 302 300
Audit fees 50 48 90 78
Other auditors’ services 26 151 43 151
Doubtful Debts 87 10 87 10
10,685 9,818 12,172 10,469

Depreciation – computer equipment 635 535 635 535

Depreciation – furniture & equipment 53 18 53 18
Depreciation – leasehold improvements 63 - 63 -
751 553 751 553

28 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

 FOR YEAR ENDED 31 DECEMBER 2005

3. Cash and cash investments

Parent Group
Dec 2005 Interest rates Maturities Dec 2005 Dec 2005
$000 $000
Cash at bank 6.95% Call 718 1,546
Bank deposits – at call - Call - -
Bank deposits – 30 day 7.52%-7.60% 30 Days 18,100 18,100
18,818 19,646

Parent Group
Dec 2004 Interest rates Maturities Dec 2004 Dec 2004
$000 $000
Cash at bank 0% Call 151 187
Bank deposits – at call 6.5% Call 500 500
Bank deposits – 30 day 6.62%-6.67% 30 Days 19,431 19,431
20,082 20,118

4. Other investments
Parent Group
Dec 2005 Dec 2004 Dec 2005 Dec 2004
$000 $000 $000 $000
Investment in associate 3,213 3,255 3,179 3,255
Investment in subsidiaries 3,000 1,500 - -
Investment bonds 5,579 5,643 5,579 5,643
11,792 10,398 8,758 8,898

INVESTMENT IN SUBSIDIARIES
The Parent’s investment in subsidiaries comprises shares at cost. Subsidiaries comprise:

Interest held by Group

Name of entity Principal activities Dec 2005 Dec 2004
Smartshares Limited Funds Management 100% 100%
Tane Nominees Limited Nominee Company 100% 100%
NZX Executive Share Plan Nominees Limited Nominee Company 100% 0%

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

29
NOTES TO THE FINANCIAL STATEMENTS CONTINUED

FOR YEAR ENDED 31 DECEMBER 2005

INVESTMENT IN ASSOCIATE

Name of entity Principal activities Interest held by Group Group carrying amount
Dec 2005 Dec 2004 Dec 2005 Dec 2004
% % $000 $000
Link Market Services Limited Registrar 50% 50% 3,179 3,255

Link Market Services Limited is jointly owned by NZX and Link Market Services Limited Australia (formerly ASX Perpetual
Registrars Limited). It is incorporated in New Zealand and has a balance date of 31 December.
Link Market Services Limited was incorporated on 15 December 2004.

Results of Associate
Dec 2005 Dec 2004
$000 $000
Share of operating revenue 1,559 -
Share of operating expenses 1,250 -
Share of EBITDA 309 -
Share of depreciation & amortisation 264 -
Share of Interest expense 47 -
Share of surplus/(deficit) before tax (2) -
Share of tax expense (32) -
Share of total recognised revenue and expenditure (34) -

Interest in Associate Parent Group

Dec 2005 Dec 2004 Dec 2005 Dec 2004
$000 $000 $000 $000
Shares at cost (including cost of acquisition) 3,213 3,255 - -
Carrying value:
Balance at beginning of year - - 3,255 -
Reduction in the cost of acquisition - - (42) -
Associate acquisition during the year - - - 3,255
Share of total recognised revenue and expenditure - - (34) -
Balance at end of year - - 3,179 3,255

30 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

 FOR YEAR ENDED 31 DECEMBER 2005

5. Receivables and Prepayments

Parent Group
Dec 2005 Dec 2004 Dec 2005 Dec 2004
$000 $000 $000 $000
Trade receivables 2,181 1,291 2,502 1,461
Prepayments 287 378 329 415
Intercompany receivable 70 543 - -
Accrued interest 92 98 92 98
Accrued income 281 191 493 209
2,911 2,501 3,416 2,183

6. Accounts Payable and Other Current Liabilities

Parent Group
Dec 2005 Dec 2004 Dec 2005 Dec 2004
$000 $000 $000 $000
Trade creditors 335 661 364 708
Unearned income 2,711 2,453 2,711 2,453
Employee entitlements 221 155 223 155
Accrued expenses 1,111 905 1,388 1,004
GST 234 103 234 103
4,612 4,277 4,920 4,423

7. Fixed Assets

Dec 2005 Cost Accumulated Book Value

$000 Depreciation Dec 2005
$000 $000
Computer equipment 5,063 4,154 909
Furniture & equipment 555 230 325
Leasehold improvements 1,282 63 1,219
6,900 4,447 2,453

31
NOTES TO THE FINANCIAL STATEMENTS CONTINUED

FOR YEAR ENDED 31 DECEMBER 2005

Dec 2004 Cost Accumulated Book Value

$000 Depreciation Dec 2004
$000 $000
Computer equipment 4,660 3,520 1,140
Furniture & equipment 250 177 73
Capital work in progress 114 - 114
5,024 3,697 1,327
Fixed assets for both the Parent and the Group are the same.

8. Goodwill

Parent Group
Dec 2005 Dec 2004 Dec 2005 Dec 2004
$000 $000 $000 $000
Balance at beginning of period 527 - 1,055 -
Goodwill arising on acquisition 268 582 268 1,110
Impairment (360) - (360) -
Amortisation (129) (55) (156) (55)
Balance at end of period 306 527 808 1,055

9. New Zealand Exchange Limited Fidelity Guarantee Fund

On 3 May 2004 the NZX Participant Rules (the Participant Rules) came into force, replacing the NZX Business Rules 2003.
The Participant Rules contain provision for a Fidelity Guarantee Fund (Fund) on the same terms as existed before their
commencement. The relevant sections of the NZX Participant Rules are 8.11 – 8.14.
Under the Participant Rules, the liability of the Fund for any one particular failure remains limited to $500,000 or such greater
amount as may be determined from time to time by NZX. Furthermore the maximum amount payable to any one claimant in
respect of a failure is limited to $20,000 or such greater amount as NZX may determine in that particular case. These provisions
reflect the position pre-demutualisation under the NZX Business Rules 2003.
On 6 September 2004 Access Brokerage Limited was put into liquidation. NZX applied the Fidelity Guarantee Fund to
investors who suffered loss as a consequence of the Access Brokerage Limited failure in accordance with the terms of the
Participant Rules. The provision held in the Statement of Financial Position at 31 December 2005 is nil (2004: nil).

10. Non-recurring Items

Non-recurring items reported include expenditure incurred in investigating the default of Access Brokerage Limited and
preparation for the NZX Discipline hearing for Access Brokerage Limited of $344,000, and the impairment to goodwill from
the Sydney Futures Exchange (SFE) contract of $360,000. At December 2004 non-recurring items included $494,000 related
to the default of Access Brokerage Limited, $621,000 related to Smartshares marketing expenditure for the launch of new funds
and IPO Brokerage Fees of $423,000 for the launch of new funds.

32 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

 FOR YEAR ENDED 31 DECEMBER 2005

11. Taxation

Parent Group
Income Tax Dec 2005 Dec 2004 Dec 2005 Dec 2004
$000 $000 $000 $000
Operating surplus before tax 7,454 6,848 7,267 5,528
Permanent differences:
Non-deductible expenditure 35 79 65 79
Equity accounted earnings of associate - - 34 -
Surplus subject to tax 7,489 6,927 7,366 5,607
Tax at 33% 2,471 2,286 2,431 1,851
Loss offset for 2004 & 2005 year (435) - - -
Foreign tax credits (68) - (68) -
Prior year under/(over) provision 17 - 17 -
Income tax recognised in Statement of Financial Performance 1,985 2,286 2,380 1,851
Comprising:
Current tax 2,021 2,329 2,457 1,894
Deferred tax (36) (43) (77) (43)
1,985 2,286 2,380 1,851
Deferred tax
Balance at beginning of period 361 318 361 318
Current year charge 57 - 98 -
Transfer from tax expense (21) 43 (21) 43
Balance at end of period 397 361 438 361
Imputation Credit account
Balance at beginning of period 3,943 1,688 3,943 1,688
Income tax paid 2,571 2,255 2,571 2,255
Imputation credits attached to dividends paid (2,444) - (2,444) -
Balance at end of period 4,070 3,943 4,070 3,943

33
NOTES TO THE FINANCIAL STATEMENTS CONTINUED

FOR YEAR ENDED 31 DECEMBER 2005

12. Financial Instruments

FAIR VALUE
The fair value of the financial instruments is considered to be approximately equivalent to the value as reflected in the Statement
of Financial Position.

CREDIT RISK
The maximum credit risk associated with the financial instruments held by NZX is considered to be the value reflected in the
Statement of Financial Position. The risk of non-recovery of these amounts is considered to be minimal.
NZX does not require collateral or other security to support financial instruments with credit risk.
Concentrations of credit risk arise where NZX is exposed to the risk that a party may fail to discharge an obligation in the
normal course of business. NZX Treasury policy is to limit the exposure to counterparties to $10 million for registered banks
and to $3 million for other institutions with a minimum credit rating of A-.

INTEREST RATE RISK

NZX is exposed to interest rate risk in that future interest rate movements will affect cash flows and the market value of fixed
interest and other investment assets. NZX does not use any derivative products to manage interest rate risk.

13. Commitments

Dec 2005 Dec 2004

$000 $000
Up to 1 year
Lease of premises 665 290
Capital fit out of new premises - 1,486
SFE Trading Infrastructure - 275
1 – 2 years 665 496
2 – 5 years 1,995 1,488
> 5 years 2,993 2,687

34 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

 FOR YEAR ENDED 31 DECEMBER 2005

14. Related Party Transactions

During the period, NZX’s subsidiary Smartshares Limited managed the NZX MidCap Index Fund (MIDZ), NZX Australian
MidCap Index Fund (MOZY), NZX 10 Fund (TENZ) and NZX 50 Portfolio Index Fund (FONZ). At 31 December,
Smartshares Limited had an intercompany debt with NZX of $70,000 (Dec 2004: $543,000).
NZX had a related party receivable from its associate, Link Market Services Limited, of $181,000 at 31 December 2005 (Dec
2004: nil).
No amounts owed by related parties have been written off or forgiven during the period.
In 2003, financial assistance was provided to the Chief Executive Officer, Mark Weldon. A disclosure document was provided
to all shareholders on 15 September 2003 setting out details of a proposal by the Company to give financial assistance to
the Chief Executive Officer and Director of the Company, Mark Weldon. The financial assistance was in connection to the
acquisition by a nominee company (“Nominee”) of 634,275 Share Scheme Shares in NZX, to be held by the Nominee on behalf
of Mr Weldon in accordance with the terms of the NZX CEO Share Scheme (“Scheme”).
The terms of the Scheme, and the proposed financial assistance, were approved by members of the Company’s predecessor, the
New Zealand Stock Exchange, at the time of demutualisation, and were fully described in the NZX Prospectus and Investment
Statement registered on 3 June 2003.
The directors of NZX authorised NZX to give financial assistance to Mr Weldon to fund the acquisition of the Shares, by way
of a loan of $2,132,433, which is the aggregate of the issue prices for the 634,275 ordinary shares to be issued under the Scheme.
In July 2005, 380,565 Share Scheme Shares qualified under the NZX CEO Share Scheme and Mr Weldon repaid $1,140,426
to NZX, reducing his financial assistance to $992,007.
The directors of NZX authorised NZX to give financial assistance to some NZX employees in February 2005 to assist them
in the acquisition of NZX ordinary shares under the NZX Executive Share Plan. The total financial assistance provided under
the NZX Executive Share Plan was $319,205. At 31 December 2005, NZX employees had repaid $164,998; the balance
outstanding is $154,207.

15. Share Capital

On 1 January 2003 there were 3,310,000 shares on issue which were split 1:1 on 30 May 2003. In June 2003 there was a
combined offer comprising a 1:2 renounceable rights issue of 3,290,000 shares at $1.50 and an offer to the public of $10,000,000
of shares at the final price of $3.60. As at 31 December 2005 there were 13,137,569 ordinary shares issued and fully paid (Dec
2004: 12,685,504). All ordinary shares rank equally with one vote attached to each fully paid ordinary share.
In February 2005, NZX issued 71,500 ordinary shares to NZX Executive Share Plan Nominees Limited at $8.94 (Dec 2004:
nil). During 2005, 37,000 shares were transferred out of the nominee company to NZX employees in accordance with the
terms of the NZX Executive Share Plan. The remaining 34,500 shares are held in trust by the nominee company.
In July 2005, 380,565 Share Scheme Shares qualified under the NZX CEO Share Scheme. These shares were transferred out
of the nominee company to Mr Weldon and reclassified as ordinary shares.
In December 2003 186,410 options to acquire ordinary shares were issued to staff under the NZX Executive Share Option
Plan. A portion of these options have lapsed; there are 131,310 remaining on issue which have an exercise date in July 2006.

35
NOTES TO THE FINANCIAL STATEMENTS CONTINUED

FOR YEAR ENDED 31 DECEMBER 2005

Movement in Share Capital Parent Group

Dec 2005 Dec 2004 Dec 2005 Dec 2004
$000 $000 $000 $000
Balance at beginning of period 16,733 16,733 14,601 14,601
Share issue during the period
Ordinary Shares 1,780 - 1,780 -
Executive Share Scheme Shares (1,141) - (1,141) -
Shares held by Subsidiary Company - - 1,141 -
Balance at end of period 17,372 16,733 16,381 14,601

Movement in Retained Earnings Parent Group

Dec 2005 Dec 2004 Dec 2005 Dec 2004
$000 $000 $000 $000
Balance at beginning of period 15,922 11,360 15,037 11,360
Surplus for the period 5,469 4,562 4,887 3,677
Dividend payment (5,398) - (5,398) -
Balance at end of period 15,993 15,922 14,526 15,037

16. Distribution to Shareholders

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

17. Contingent Liabilities

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

18. Segmented Reporting

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

36 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

 FOR YEAR ENDED 31 DECEMBER 2005

19. Earnings per Share

Group
Dec 2005 Dec 2004
$000 $000
Earnings per share (cents per share) 37.77 28.99
Earnings per share are calculated by dividing the operating surplus attributable to shareholders by the weighted average number
of ordinary shares on issue during the period.

20. New Zealand International Financial Reporting Standards

In December 2002 the New Zealand Accounting Standards Review Board announced that the New Zealand equivalents to
International Financial Reporting Standards (IFRS) will apply to all New Zealand entities for the periods commencing on or
after 1 January 2007 with the opportunity to early adopt by up to two years. NZX intends to adopt NZIFRS for the year ended
31 December 2007.
NZX has a project to identify the differences between existing NZ GAAP and NZIFRS as they impact on NZX.

21. Significant Events after Balance Date

There were no significant announcements or events after balance date.

37
 PricewaterhouseCoopers
113-119 The Terrace
PO Box 243
Wellington
New Zealand
Auditors’ Report Telephone +64 4 462 7000
to the shareholders of New Zealand Exchange Limited Facsimile +64 4 462 7001

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

Directors’ Responsibilities
The Company’s Directors are responsible for the preparation and presentation of the financial statements
which give a true and fair view of the financial position of the Company and Group as at 31 December 2005
and their financial performance and cash flows for the year ended on that date.

Auditors’ Responsibilities
We are responsible for expressing an independent opinion on the financial statements presented by the
Directors and reporting our opinion to you.

Basis of Opinion
An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in the
financial statements. It also includes assessing:
(a) the significant estimates and judgements made by the Directors in the preparation of the financial
statements; and
(b) whether the accounting policies are appropriate to the circumstances of the Company and Group,
consistently applied and adequately disclosed.

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

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

Unqualified Opinion

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

In our opinion:
(a) proper accounting records have been kept by the Company as far as appears from our examination of
those records; and
(b) the financial statements on pages 20 to 37:
(i) comply with generally accepted accounting practice in New Zealand; and
(ii) give a true and fair view of the financial position of the Company and Group as at 31 December
2005 and their financial performance and cash flows for the year ended on that date.

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

38
Chartered Accountants
NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT Wellington
STATUTORY INFORMATION

FOR YEAR ENDED 31 DECEMBER 2005

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

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

3. Directors’ Interests
The directors have declared interests in the following entities:

Director Interest Entity

S C Allen Director ABN AMRO Craigs Limited
Director ABN AMRO New Zealand Limited
Director ABN AMRO Group Companies in New Zealand
Director Xylem Investments Limited
Director Big Bonds NZ Limited
Chairman Innoflow Technologies Limited
A W Harmos Partner Harmos Horton Lusk
Director Westfield New Zealand Group
N Paviour - Smith Director Forsyth Barr Group Limited and Associated Companies
Director Forsyth Barr Limited
Director Leveraged Equities Finance Limited
Director Global Equity Market Securities Limited
Director Global Corporate Credit Limited
N Williams Director Interchange & Settlement Limited
Director ANZ Securities (NZ) Limited
Director ANZMAC Securities (NZ) Nominees Limited
Director Arawata Capital Limited
Director Arawata Trust Company
Director Arawata Finance Limited
Director Samson Funding Limited
Director Norway Funds Limited
Director Bage Investments Limited

39
STATUTORY INFORMATION CONTINUED

Director Interest Entity

Director Endeavour Equities Limited
Director Endeavour Finance Limited
Director Endeavour Securities Limited
Director Tui Endeavour Limited
Director Tui Securities Limited
Director Trillium Holdings Limited
Director Alos Holdings Limited
H van der Heyden Director Fonterra Co-operative Group Limited
Director King St Advertising
Director Innovation Waikato Limited
Director Independent Egg Producers Co-Op Limited
Trustee Asia : NZ Foundation
Member University of Waikato Business Management School Advisory Board
M R Weldon Chairman Link Market Services Limited
Director Smartshares Limited
Member New Zealand Olympic Committee
Member University of Auckland School of Business Advisory Board

4. Information used by Directors

There were no notices from directors of the company requesting to disclose or use company information received in their
capacity as directors which would not otherwise have been available to them.

5. Directors holding Office and their Remuneration

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

40 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

 FOR YEAR ENDED 31 DECEMBER 2005

Directors Remuneration Special Responsibility

S C Allen $87,500 Chairman
Chairman Remuneration Committee
Member Audit Committee
A W Harmos $43,750
N Paviour-Smith $46,250 Chairman Audit Committee
N Williams $44,500 Deputy Chairman
Member Audit Committee
Member Remuneration Committee
1
H van der Heyden $16,667 Member Remuneration Committee
M R Weldon $851,000 Chief Executive Officer
2
H R L Morrison $25,000
T E C Saunders3 $25,250
1
The Board appointed H van der Heyden a Director of NZX in September 2005
2
H R L Morrison announced his retirement as a Director of NZX at the Annual Meeting in June 2005
3
T E C Saunders announced his retirement as a Director of NZX at the Annual Meeting in June 2005.

6. Indemnification and Insurer of Executive and Director

During the year, the company paid insurance premiums in respect of directors’ and executive employees’ liability insurance. The
policies do not specify the premium for individuals.
This insurance provides cover against costs and expenses involved in defending legal actions and any resulting payments arising
from a liability to persons (other than the company or a related body corporate) incurred in their position as director or executive
employee unless the conduct involves a wilful breach of duty or an improper use of inside information or position to gain
advantage.

7. Subsidiary Companies Directors

Mr Mark Weldon, Mr Geoff rey Brown and Mr Don Trow held office as directors of the subsidiary company, Smartshares
Limited at the end of the financial year. Mr Don Trow was paid director fees of $12,500 in relation to this directorship. Ms
Elaine Campbell is the sole director of Tane Nominees Limited. Mr Simon Allen and Mr Neil Paviour-Smith are the directors
of NZX Executive Share Plan Nominees Limited. The remuneration of employees acting as directors of subsidiaries is disclosed
in the relevant banding of remuneration set out under Employee Remuneration.

41
STATUTORY INFORMATION CONTINUED

8. Employee Remuneration
During the year a number of employees or former employees (excluding directors) received remuneration and other benefits,
including non cash benefits and NZX shares in accordance with the NZX Executive Share Plan, in their capacity as employees
of the company. The value of those exceeding $100,000 per annum were as follows:

Remuneration Ranges Employee

100,000 – 109,999 5
110,000 – 119,999 2
120,000 – 129,999 1
130,000 – 139,999 -
140,000 – 149,999 -
150,000 – 159,999 -
160,000 – 169,999 2
170,000 – 179,999 1
180,000 – 189,999 -
190,000 – 199,999 -
200,000 – 209,999 1
210,000 – 219,999 -
220,000 – 229,999 -
230,000 – 239,999 -
240,000 – 249,999 -
250,000 – 259,999 -
260,000 – 269,999 -
270,000 – 279,999 1
280,000 – 289,999 2
290,000 – 299,999 -

As stated in Note 15 to the Financial Statements, as at 31 December 2005 there were 131,310 options to acquire ordinary shares
issued to staff under the terms of the NZX Executive Share Option Plan. The first exercise date of options issued under the
Plan is July 2006. NZX has to meet certain criteria to enable these options to be exercised. The value of the options has not
been included as part of the employee remuneration.

42 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

 FOR YEAR ENDED 31 DECEMBER 2005

9. Director Transaction in Securities of the Parent Company

Director Date No. of securities Securities held Securities held

acquired/ Non-Beneficial as Beneficial as at
(disposed) at 31 Dec 2005 31 Dec 2005
S C Allen 50,833
A W Harmos 20,833
N Paviour-Smith 25,958
N Williams 10,000
H van der Heyden 0
1
M R Weldon 19 Sep 2005 31,805 703,913

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

Parent Group
$000’s $000’s
Audit services 50 90
Taxation services 14 14
Other services 12 29

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

43
SECURITY HOLDER INFORMATION

FOR YEAR ENDED 31 DECEMBER 2005

1. Top 20 Security Holders

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

Shares Held %
Probatus Investments Limited 1,018,146 7.75
TEA Custodians Limited 769,706 5.86
New Zealand Superannuation 464,314 3.53
Premier Nominees Limited 410,629 3.13
Accident Compensation 405,413 3.09
Peter H Masfen 383,473 2.92
Nigel Babbage 374,178 2.85
Custodial Services Limited 372,423 2.83
Asteron Life Limited 315,333 2.40
Ithaca (Custodians) Limited 310,500 2.36
ASB Nominees Limited 300,000 2.28
TEA Custodians Limited 279,770 2.13
Leveraged Equities Finance 255,550 1.95
Custodial Services Limited 227,614 1.73
David M Odlin 172,000 1.31
ASB Nominees Limited 169,984 1.29
Lola Nominees Limited 150,203 1.14
NZ Guardian Trust Investment 132,558 1.01
Westpac Banking Corporation 125,142 0.95
Custodial Services Limited 85,883 0.65
6,722,819 51.16

44 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

 FOR YEAR ENDED 31 DECEMBER 2005

2. Spread of Ordinary Shareholders as at 31 January 2006

Size of Holding Shareholders Shares

Number % Number %
1 to 1,000 1,439 58.90 815,986 6.21
1,001 to 5,000 777 31.81 1,753,371 13.35
5,001 to 10,000 101 4.13 842,346 6.41
10,001 to 20,000 62 2.54 1,025,263 7.80
20,001 to 30,000 35 1.43 953,663 7.26
30,001 to 40,000 8 0.33 277,062 2.11
40,001 to 50,000 3 0.12 145,000 1.10
> 50,000 18 0.74 7,324,878 55.76
2,443 100.00 13,137,569 100.00

Domicile of Holders Shareholders Shares

Number % Number %
New Zealand 2,403 98.36 12,585,479 95.80
Australia 23 0.94 93,713 0.71
Other 17 0.70 458,377 3.49
2,443 100.00 13,137,569 100.00

3. Substantial Security Holders

The following information is given pursuant to section 26 of the Securities Markets Act 1988. According to the file kept by
the Company under section 25 of the Securities Markets Act 1988 the following were substantial holders in the Company as at
31 January 2006. The total number of voting securities on issue as at 31 January 2006 was 13,509,089, comprising 13,137,569
ordinary shares, 253,710 Share Scheme Shares and 117,810 options to acquire ordinary shares.

Relevant %
Interest
Fisher Funds Management Limited 1,225,617 9.07
Probatus Investments Limited Bare Trustee and Nominee for Forsyth Barr Exchange 1,018,146 7.53
Holdings Limited
ING NZ Limited 783,527 5.79
M R Weldon 703,913 5.21

45
SECURITY HOLDER INFORMATION CONTINUED

FOR YEAR ENDED 31 DECEMBER 2005

4. Waivers from the Listing Rules

Of all waivers set out in the Prospectus and Investment Statement dated 3 June 2003 only those relating to the CEO Share
Scheme remain applicable as at 31 December 2005. Those applicable waivers are:
A waiver from the application of Listing Rule 7.3.1(a) to allow NZX to issue shares where under the terms of the CEO
Scheme, it is obliged or entitled to do so, and to allow NZX to issue shares under the Offer.
A waiver from the application of Listing Rule 7.6.1 to allow NZX to purchase its own shares where, under the terms of the
CEO Scheme it is obliged or entitled to do so.
A waiver from the application of Listing Rule 7.6.3 to allow NZX to redeem its own shares where, under the terms of the
CEO Scheme, it is obliged to do so.
A waiver from Listing Rule 7.6.5 to allow NZX or a wholly owned subsidiary to provide financial assistance to Mr Weldon
for the purposes of implementing the CEO Share Scheme.
A waiver from the application of Listing Rule 7.6.6 to exempt and share acquisitions or redemptions by NZX, and the
provision of financial assistance given for the purposes of the CEO Share Scheme from the requirement that any such
acquisition, redemption or financial assistance to be made or given within 12 months (for acquisition) or six months (for
redemption or financial assistance).

5. Securities Issued by NZX

NZX’s ordinary shares (including those Share Scheme Shares that converted to ordinary shares in July 2005) are quoted on
the NZSX Market. NZX’s options, issued pursuant to the Executive Share Option Plan, are not quoted on any market. Those
Share Scheme Shares issued pursuant to the CEO Share Scheme that have not qualified for conversion to ordinary shares are
not quoted on any market and will not do so until such time as they qualify and are converted into ordinary shares of NZX.

46 NEW ZEALAND EXCHANGE LIMITED 2005 ANNUAL REPORT

 DIRECTORY

Registered Office Auditors

New Zealand Exchange Limited PricewaterhouseCoopers
NZX Centre 113-119 The Terrace
Level 2 WELLINGTON
11 Cable Street
PO Box 2959 Share Registrar
WELLINGTON
Tel: +64 4 472 7599 Link Market Services Limited
info@nzx.com PO Box 91976
www.nzx.com AUCKLAND 1030

Investor Enquiries +64 9 375 5998

Board of Directors Fax +64 9 375 5990
Simon Allen lmsenquiries@linkmarketservices.com
Nigel Williams www.linkmarketservices.com
Neil Paviour-Smith
Henry van der Heyden
Mark Weldon

The directors can be contacted at NZX’s

registered office.

47