Mortgage Choice Limited Annual Report 2006

Plain-text annual report

M o r t g a g e C h o i c e A n n u a l R e p o r t 2 0 0 6 A N N U A L R E P O R T 2 0 0 6 C H A I R M A N ’ S R E P O R T 1 C O N T E N T S M A N A G I N G D I R E C T O R ’ S O V E R V I E W 2 - 3 F I N A N C I A L H I G H L I G H T S 4 R E V I E W O F O P E R AT I O N S 5 -7 S T R AT E G Y AT A G L A N C E 8 O U T L O O K 9 B O A R D O F D I R E C T O R S 1 0 S E N I O R M A N A G E M E N T 11 C O R P O R AT E G O V E R N A N C E N O T E 12 -1 6 F I N A N C I A L R E P O R T 17 D I R E C T O R S ’ R E P O R T 1 8 - 3 2 C H A I R M A N ’ S R E P O R T Despite challenging competitive market conditions nationally, I am delighted to report Mortgage Choice has achieved another strong year of growth. Our Franchise network and their commitment to satisfying customers’ needs, combined with our terrific staff, has been central to our success. The financial result for the year to 30 June 2006 was a net Franchise growth improved on the prior year, with net profit after tax (AGAAP) of $14.8 million, up 16% on the Franchise numbers increasing by 16 to 423 as at 30 June previous period. The Board has declared a second half fully 2006 up from 407 in the previous year. The current state franked dividend of 7.5 cents per share, bringing the total of the employment market, the competition for new ordinary dividend for the year to 12.5 cents per share. This Franchisees and a continuing and deliberate focus on quality represents a payout ratio of almost 100% for the year to candidates over quantity, continues to create a challenging 30 June 2006. In addition, at the interim results we were environment for recruitment. delighted to reward shareholders with a special dividend of 2.0 cents, bringing the total payout for the year to 14.5 cents fully franked. Since listing in August 2004, 24.3 cents in dividends has been paid. I am sure shareholders are pleased with this outcome. This business is built on a series of partnerships. A critical partnership is our Franchise network, a team of committed, entrepreneurial, independent businessmen and businesswomen who put enormous energy and time into meeting their customers’ needs and, as a result, grow their Earnings per share was 12.6 cents per share compared to own businesses. I have had the opportunity to meet many 10.9 cents per share in FY2005. Our housing loan approvals during the financial year to 30 June 2006 showed strong growth, totalling $10.6 billion up 15% on the previous year of $9.3 billion. Our loan book has grown to $25.7 billion at year’s end, 18% up on the previous year. The expected average life of loans has remained at 3.8 years. This is an outstanding result in a very competitive market. Broker / Franchise Growth �� Our growth in broker numbers has been pleasing with the total broker network increasing to 620 as at 30 June 2006, up from 574 in the previous year. At the same time our shop front numbers grew by 22 to 185 permanent outlets. This combined growth demonstrates that our existing Franchise owners are confident about the future and willing to invest in their businesses to accommodate further expansion. Franchisees over the past year and I am always blown away by their drive, energy and passion for their customers and their businesses. Our lender partners are also critical as they provide us with the products and services demanded by customers. Our overriding objective is to work in an empathetic and mutually beneficial relationship with our lenders. To our staff, my heartiest congratulations. Their commitment to supporting the Franchise network is unparalleled. Managing Director Paul Lahiff has led the team brilliantly through another challenging and successful year. As Australia’s leading mortgage broker, we enter a new financial year well positioned to compete and grow. The Directors believe that we can continue to exceed our stakeholders expectations next year and beyond. I look forward to continuing to work alongside a motivated team of high achieving Franchisees and their staff, successful lending partners and a talented management team and staff, and achieving even greater success for Mortgage Choice in future years. �� 1 �� M A N A G I N G D I R E C T O R ’ S O V E R V I E W The Australian appetite for housing continued unabated in the year under review. Notwithstanding the impact on the household budget of interest rate rises and rising fuel prices, Australians continue to aspire to own their own home. �� of the resources boom, while Victoria and South Australia Queensland have continued their robust growth off the back � � � � � � � � � � � � � � � � � T HE HOUSI NG FI N A N CE M A RK E T �� Throughout the year there was much written and discussed �� about the property market and the direction of housing �� finance. We took the view in our forecast for the financial �� year to 30 June 2006, that there would be a downturn in �� demand but not a crash. Based on current ABS data, the number of new loans written overall remains relatively consistent with past years. This is in spite of a flat housing market in New South Wales. By contrast, Western Australia and to a lesser extent have been steady performers. The chart below shows the trend in residential housing loan approvals over time, together with interest rates. There is a strong correlation between the lower interest rate band commencing in 1998 and the upward and sustained demand for residential housing finance. Housing Finance Market and Mortgage Interest Rates 1984 – 2006 �� 2 �� In May 2006, the Reserve Bank of Australia (RBA) increased These include: �� the cash rate to 5.75%. In the months leading up to this decision, there was a strong shift towards fixed rate loans, which represented around 30% of Mortgage Choice’s approvals. Consumers took the opportunity to lock in a rate in advance of the anticipated interest rate rise. Since that time the percentage slowly declined (but is still at historically high levels), which suggests consumers are either more confident about interest rates going forward or, have become more attuned to the realities of the market. �� ■ Mortgage Industry Association of Australia (MIAA) �� Awards Retail Mortgage Broker of the Year – 2006; ■ Australian Mortgage Awards Best Branding – 2005; ■ Australian Mortgage Awards Most Effective Internet � � ■ Australian Banking & Finance Magazine – Best Mortgage Presence – 2005; and � � Broker – 2005. � �� The above recognition was also complemented by one of �� A pleasing aspect of the current housing market is the �� our Franchise owners, Susan Mason from Mandurah, WA, �� increasing participation of First Home Buyers, which �� being the recipient of the MIAA Operator of Year 2006. �� averaged around 18% of all dwellings financed for the year The work undertaken to enhance our Franchise induction- to 30 June 2006. This compares with a level of 12.6% in training module, which now includes Certificate IV in Financial March 2004. Services (Finance & Mortgage Broking) – a minimum entry-level While housing finance commitments have continued to be education requirement for loans consultants – is testimony robust, system growth – the growth in outstanding “stock” to our commitment to the professional development of our of housing loans – continues to record steady growth of Franchise network, both new and existing. around 13% annualised. Although this is down from a peak It is pleasing to note that, Victorian Franchise owner, James of 21% in 2003, it still represents very healthy growth in the Glenwright on completing the Certificate IV course was mortgage market. recognised for achieving the top honour nationwide. Growth in Housing Credit (incl securitisations) June 2002 – June 2006. �� PA RT N ER SH I P S The relationship with our Franchise partners is of paramount importance. The principal vehicle through which high-level discussion takes place is through our democratically elected Franchise Advisory Council (FAC). The FAC continues to be � � � � � � � � � � � � � � � � � � � � highly effective and provides a valuable bridge between Franchisor and Franchisee. This important body meets throughout the year and also meets with the Board twice a year. Discussions also take place at our quarterly State Conferences, our National Conference and a range of other �� state based and regional meetings. REGU L AT I O N Mortgage Choice has a strong interest in any regulatory developments that protect consumers and increase consumer confidence in dealing with the mortgage broking sector. Accordingly, regulation of the mortgage broking industry remains a critical part of Mortgage Choice’s strategic agenda. In November 2004, the NSW Department of Fair Trading released a Discussion Paper on a proposal for National Uniform Regulation. As part of our continued push for greater consumer protection, Mortgage Choice lodged a comprehensive response. A regulatory impact statement was expected later in 2005. It is disappointing therefore, to find that the industry still awaits further developments. PERF O RM A N CE The year under review for Mortgage Choice has been very pleasing. The strength and reputation of our business model and the Franchise network have been recognised through a number of industry accolades. A pleasing validation of the success of the Franchise team is the continued high ratings customers give to our Franchise owners and their staff. A survey is conducted each month of 200 recent customers and in two very important areas of potential for repeat and referral business, Mortgage Choice consistently scores in the high 80 percentile and over. Indeed over the past 12 months, in these two key areas, we achieved an average rating of 92.8% for the potential for repeat business while 93.6% indicated they would refer family and friends. Naturally, the results we detail in the following pages require two further effective partnerships: the constant innovation and flexibility of our lender panel and the enthusiasm and dedication of our staff. Finally, I want to acknowledge the support of the Board throughout the past year. Their commitment to the vision and ideals of the Company have made a profound contribution to the success of the Company. In particular, Peter Ritchie, our Chairman, contributed his talent and experience at a range of functions for Franchisees and other business partners throughout the year. I look forward to driving the business to another successful year for its stakeholders in FY2007. 3 F I N A N C I A L H I G H L I G H T S All figures quoted are based on AGAAP unless otherwise Mortgage Choice Limited achieved a record net profit after stated. tax for the year ended 30 June 2006 of $14.8 million, up ■ Record net profit after tax $14.8 million, up 16% on 16% on the previous corresponding period. FY2005 $12.7 million. (AIFRS $17.9 million). Total revenue for the year to 30 June 2006 was $126.2 ■ Total revenue $126.2 million, up 14% on previous period (AIFRS $142.1 million). ■ Earnings per share 12.6 cents per share compared to 10.9 cents per share in FY2004. (AIFRS 15.2 cents per share). ■ Dividend 7.5 cents per share brings FY2006 total to 14.5 cents per share including a special dividend of 2.0 cents. ■ Trailing commission of $63 million up as % of total commission income to 51.2% for FY2006 compared with 50.17% in FY2005. million, including total commission income of $123.1 million. This included $60.1 million derived from new mortgage origination, up 13.0% on the previous year. Trailing commission income increased to $63.0 million, now 51.2% of total commission income. The average size of loans written by Mortgage Choice brokers has continued to increase, and now stands at $248,800 higher than the ABS average of $221,100 (June 2006). This reflects the strength of the Mortgage Choice broker network especially in the eastern states of Australia ■ Mortgage Choice handled $10.6 billion in housing loan where property prices are higher. approvals during FY2006 and continues to achieve industry high productivity levels per broker. ■ Loan book now stands at $25.7 billion, 18% up on Net assets at 30 June 2006 were $9.3 million (AGAAP) compared to $9.8 million at 30 June 2005. The balance sheet is underpinned by $8.4 million in cash on hand FY2005, this compares to system growth of 13% (2005 – $11.5 million). Cash flow from operating activities during the year was $12.8 million compared to $13.8 million in the previous year. year on year. ■ Total broker growth strong, increasing to 620 as at 30 June 2006, up from 574 in the previous corresponding period. ■ Franchise growth was higher than the previous corresponding period with Franchise numbers increasing to 423 as at 30 June 2006, up from 407 in the previous year. ■ A total of 64.5% of commission revenues was paid to Franchise owners compared to 62.0% for the previous period. ■ Over the past 12 months, an average of 92.8% of customers indicated a willingness to conduct repeat business while an average of 93.6% indicated they would refer family and friends to Mortgage Choice.* *Source – Mortgage Choice 2006 Customer Satisfaction Survey. 4 R E V I E W O F O P E R AT I O N S CO MPE T I T I V E A DVA N TAGE Mortgage Choice believes that the combination of the A CO MPL E X M A RK E T PL ACE M A DE E A S Y fundamental components of its business model provide it Mortgage Choice assists customers in the selection of with significant competitive advantages over other brokers in a mortgage from a complex range of products from its the marketplace: ■ high quality service: Mortgage Choice continually aims to provide a high level of support to its Franchisees, in marketing, technology, training/professional development, legal and compliance; ■ franchise business model: Mortgage Choice operates through a national network of Franchisees. The relationship between the Franchisees and the Company is underpinned by the Franchisees being incentivised to grow their business whilst valuing the services and policies provided by the Company; ■ brand: Mortgage Choice is recognised as a leading consumer brand and has been built upon a proposition of being transparent in its dealings with, and an advocate for, the customer; ■ no product of its own: Unlike some of its competitors, Mortgage Choice does not distribute its own products, instead choosing to treat all lenders and products equally; ■ strength of lender relationships: Mortgage Choice generates significant volume and quality of loans for lenders and this places it in a strong position to shape key operational relationships with lenders; and ■ economies of scale: Mortgage Choice’s business model is scaleable, allowing it to grow its originations and loan book without growing its cost base at the same rate, thus giving Mortgage Choice financial strength and stability. lender panel by identifying the most suitable loan, based on an individual’s particular needs. Customers are provided a choice across a broad range of over 330 housing loan products offered by a panel of 27 of Australia’s leading lenders, representing each major category of lender. Mortgage Choice brokers use the Company’s proprietary software system to compare the customer’s financial situation and loan requirements with the products offered by the lender panel. The system generates a list showing which lenders would approve the customer’s application according to details given. Based upon the customer’s circumstances, the broker then uses the system, together with their own experience and expertise, to analyse features of loan products in order to identify those most suitable for the customer. Completed loan application forms are submitted and followed up by the broker on the customer’s behalf, thereby saving the customer time and the associated administrative burden. These services are provided at no direct cost to the customer. ‘THE FRANCHISE ADVISORY COUNCIL CONTINUES TO BE HIGHLY EFFECTIVE AND PROVIDES A VALUABLE BRIDGE BETWEEN FRANCHISEE AND FRANCHISOR’ 5 EL ECT RO N I C LO DGEMEN T FR A N CH ISE O PER AT I O NS Electronic lodgement allows faster turnaround time for loan Mortgage Choice licenses the use of the Mortgage Choice applications by taking data input direct from the broker to brand and business systems to its Franchise network. the lender’s underwriting system. Accredited loan consultants (mortgage brokers) comprise Mortgage Choice submitted its first loans electronically in Franchisees and their loan consultants. May 2004. In FY2006, $3.8 billion in new loans were lodged The relationship between Mortgage Choice and its electronically. This represents a significant increase on the Franchisees is governed by a Franchise Agreement and an previous year when $1.0 billion in new loans were lodged. Operations Manual that sets out the Company’s policies and To date, 13 lenders are participating. With an expected procedures, including minimum performance standards. We increase in participating lenders over the next 12 months, it abide by the Franchising Code of Conduct. is anticipated there will again be an appreciable increase in the volumes submitted through this platform. Franchisees may grow their businesses by acquiring other Franchises. Franchisees who own more than one Franchise Significantly reduced approval times are already being are called Multiple Franchise Owners (MFOs). experienced, and the end beneficiary of this improved service is the consumer. In addition, our lender partners benefit from cost savings and increased efficiency while our Franchisees benefit from improved productivity. L EN DER PA RT N ER S Mortgage Choice recognises the importance of developing and nurturing the relationships between broker and lender. Dedicated specialist staff oversee the operational relationship between the Company and its Franchisees and the lender panel. This team provides lenders with structured access to the Franchise network and promotes operational effectiveness by working with lender partners to improve service and processing efficiencies. The panel includes Australia’s leading lenders, providing a cross-section of products and lender types that Mortgage Choice considers to be a representative spread of available, quality housing loans. Mortgage Choice believes the benefits enjoyed by lenders from dealing with credible brokers such as Mortgage Choice include: Mortgage Choice restricts the number of Franchisees it recruits in each geographic region under its broker resource model, which segments the market into postcode defined marketing areas. This model analyses the number of households and the residential lending market size (based on Census data) in each postcode, and allocates Franchises based on target market share in each area. Mortgage Choice Franchisees come from a variety of backgrounds and the Company believes that sales ability, inter-personal skills, commitment, energy and aspiration are often more important than previous industry experience. L E A RN I NG A N D DE V ELO PMEN T Mortgage Choice is committed to delivering the most knowledgeable, competent and ethical mortgage brokers in the industry, by providing a continuous and powerful learning and development program that is respected by lenders, competitors and professional associations. The learning program involves the delivery of skills, knowledge ■ volume: Brokers provide incremental mortgage business and tools to enable the network to be the best they can be that would not necessarily be generated through the at what they do. lender’s branch or other networks; On joining Mortgage Choice, all Franchisees undertake ■ cost flexibility: By outsourcing an element of their comprehensive training (accredited by the MIAA) which origination business, lenders attract new business on a now includes Certificate IV in Financial Services (Finance & Mortgage Broking), lender accreditation and an in-the- field mentoring program that is formally conducted on a Franchise to Franchise basis. Once the initial training is completed, brokers receive regular updates and support from the state office infrastructure and at conferences. A new e-Learning platform was introduced during the year for the provision of ongoing mortgage origination, sales and office productivity training for Franchisees and their staff. variable cost basis; ■ education: Aided by specialist skills and product knowledge, brokers educate consumers on the full range of mortgage products offered by lenders on the Company’s panel; ■ geographic expansion: Brokers have facilitated low cost geographic expansion for lenders into areas where branch networks are less extensive or do not exist; ■ profitability: By originating mortgages of a higher average loan size and potentially of a longer loan life, broker sourced business can be as or more profitable than business sourced through the branch or other networks; and ■ efficiency: A broker’s familiarity and experience with each lender’s process can increase the efficiency of the lodgement and settlement process. 6 FR A N CH ISEE SU PP ORT SERV I CES Mortgage Choice works closely with its Franchisees in growing their businesses through assistance in lead generation, training, brand and marketing support, field support, regulatory compliance, information systems and other ongoing support services. These services are provided by group office staff located in Sydney (e.g. lender panel negotiations and payment reconciliations) and state offices that also provide a number of local administrative support processes. Mortgage Choice aims to continually improve the support, resources and training offered to the Franchise network to make their businesses as efficient as possible. Mortgage Choice is committed to creating a strong culture of compliance within the entire business. Legal and regulatory compliance is a key operational issue and is an essential part of sound corporate governance. The primary source of compliance training for Mortgage Choice is e-comply, which is a web based, self-paced question and answer modular program. BR A N DI NG, M A RK E T I NG A N D PRO MOT I O N Over a number of years, Mortgage Choice has created a trusted and recognisable brand through its marketing activities and a long-term brand strategy built upon Mortgage Choice’s consumer advocacy. Mortgage Choice’s marketing activities incorporate two elements: ■ National, state, and regional marketing, managed by group office; and ■ Local marketing activities, managed by Franchisees. Group office engages in national and statewide marketing that generates leads through the Mortgage Choice Customer Service Centre, and aims to build a trustworthy brand that may be leveraged by Franchisees in their local area marketing. Customer Service Centre leads are distributed by group office to the Franchise network on an equitable basis by marketing area. Mortgage Choice struck an alliance with the Real Estate Institute of Australia (REIA), with their quarterly report being rebadged as Mortgage Choice Real Estate Market Facts Report. Given the positioning of the REIA as a highly respected source of real estate expertise and analysis, the alignment with the Mortgage Choice brand is strong. It is envisaged that the alliance will be further leveraged over the coming years through public relations and specific lead generation activities. Creating tools that assist Franchisees to build a healthy referral network remains a key area, with more additions for the referral marketing handbook planned for the coming year as National campaigns are developed regularly and full well as extensions to the program, such as referral rewards. marketing support is provided to all Franchisees. This is complemented by a well planned, proactive public relations I N F ORM AT I O N T ECH N O LOGY strategy designed to build and maintain a positive profile Mortgage Choice has leveraged 14 years experience in for Mortgage Choice by articulating Company and industry the Australian market to develop proprietary software understanding to consumers through media coverage on to assist in matching our customer’s needs to the most every level from local to national outlets. suitable product from our panel of lenders. This software allows our Franchisees to market to their prospects, capture customer information and preferences, qualify potential loan applicants, submit home loan applications to panel lenders and reconcile payment of commissions. Mortgage Choice recently implemented its third-generation Mortgage Discovery™ system to accommodate changes to our Franchisee’s evolved business structures, deliver improved customer relationship management capability and provide a platform for continued business growth. ‘MORTGAGE CHOICE RECOGNISES THE IMPORTANCE OF DEVELOPING AND NURTURING THE RELATIONSHIPS BETWEEN BROKER AND LENDER’ 7 S T R AT E G Y AT A G L A N C E During the year Mortgage Choice conducted a review of strategy. The business subsequently reaffirmed its focus on organic growth. The strategic platform for the business going forward will therefore be the following: S T RO NG M A RK E T I NG ME A NS: ■ effort and substantial incremental investment in differentiated branding; and ■ maintaining current activity to maintain business leads even in unsettled market conditions. RECRU I T MEN T ME A NS: ■ increase the total number of Franchisees and loan consultants; and Over the last 12 months, the strong growth in the number of retail premises has continued. Franchisees are choosing, where appropriate, to relocate their offices or opening new shop-fronts, kiosks or heavily branded offices in high street retail strips and shopping centres. The retail network grew by 22 to 185 permanent outlets in the year to 30 June 2006. The ongoing growth in the retail footprint is being driven by Franchisees who see the move into retail as a profitable growth strategy for their business. Locating Mortgage Choice outlets close to other complementary businesses and ■ continuously strive to improve the quality of new recruits. increasing the presence in local communities continues to L EN DER PA RT N ER SH I P ME A NS: ■ maintaining high quality loan submissions and bring new and repeat customers to Mortgage Choice. The benefits to customers from a larger retail footprint, of greater channel choice and strengthening the Mortgage professionalism in all aspects of the relationship and, Choice brand, will ensure the growth in the number of retail being recognised for it. premises continues. EFFI CI EN CY ME A NS: ■ boosting current network productivity, not just network size; ■ deploying our staff where we get best value from them; ■ seamless project implementation and execution; and ■ a listening partnership. SHO P GROW T H ME A NS: ■ create a supportive infrastructure to facilitate franchise retail growth where appropriate; ■ ‘best practice’ development; and ■ access to quality information. 8 O U T L O O K Mortgage Choice operates as a residential mortgage specialist and this has facilitated consistent growth via a focused approach and a refinement of expertise. Mortgage Choice intends to remain focused on the administration, and a preference by lenders to deal with a residential mortgage broking market. The Company believes smaller number of larger, high quality broker organisations. that, given the relative immaturity of the broking sector, the The Company will be alert to acquisition opportunities given overall size of the housing finance market and the attraction this environment, but will review any opportunity cautiously of the broking proposition to consumers, there remains and prudently. strong potential for brokers as a whole to increase their Clearly however, the major focus of the business is on share of mortgage origination and for Mortgage Choice to organic growth. increase its market share within the broking sector. Mortgage Choice believes this focus on its core competency SU MM A RY represents a low risk, high potential growth strategy. Mortgage Choice is confident that it is well placed to achieve Incremental revenues from ‘add on’ products such as Insurance and Commercial Property Lending should allow Mortgage Choice to benefit from economies of scale, as profitable growth in the coming year. Tight expense control, improved broker recruitment and the ability to scale up the business with minimal additional cost will continue to be growth in these product areas can be largely managed with important going forward. the existing Mortgage Choice infrastructure and resources. Mortgage Choice expects some consolidation to occur in the mortgage broking industry. A number of factors could potentially act as catalysts, including a stricter regulatory environment, economies of scale in marketing, support and 9 B O A R D O F D I R E C T O R S PE T ER RI TCH I E N O N - E X ECU T I V E CH A I R M A N Cha ir ma n of N o minat i o n a n d R e mun e rat i o n Co mmi t te e s BCo m, F CPA , AO Peter is Deputy Chairman of Seven Network and University of NSW Foundation, and Chairman of Reverse Corp Limited. Peter previously served as Managing Director of McDonald’s Australia from 1974 to 1995 and as its Chairman from 1995 to 2001. Peter was a Director of Westpac Banking Corporation from 1993 to 2002 and Solution 6 Holdings from 2000 to 2002. Age 64. PAU L L A H I FF M A N AG I N G D I R EC TO R BS c Ag r, FA I M Paul has over 25 years experience in the financial services industry. This includes roles as Managing Director of Permanent Trustee Limited from 1999 to 2002 and Heritage Building Society, as well as senior executive roles with Westpac Banking Corporation (in Sydney and London) and the credit union sector. Paul joined Mortgage Choice as Chief Executive Officer in August 2003 and was appointed Managing Director in May 2004. He is responsible for managing Company operations to ensure continued growth and development of the business. Age 53. PE T ER H IGGI NS N O N - E X ECU T I V E D I R EC TO R M e m b e r of Au d i t Co mmi t te e Peter is co-founder of Mortgage Choice. He is also a Director of a technology company – Power & Data Corporation Pty Ltd. Having been successfully self-employed for over 20 years, Peter has been involved in a number of companies in a diverse range of industries covering manufacturing, technology, leasing, property and finance. Age 46. RO DN E Y H IGGI NS N O N - E X ECU T I V E D I R EC TO R M e m b e r of N o minat i o n a n d R e mun e rat i o n Co mmi t te e s Rodney is co-founder of Mortgage Choice. Rodney has a background in residential and commercial property, sales, leasing and has been a Director of companies involved in manufacturing, wholesaling, importing, retailing and finance. Age 51. DEBO R A H R A L S TO N N O N - E X ECU T I V E D I R EC TO R M e m b e r of Au d i t Co mmi t te e P h D, F F in, FA I M , F CPA Deborah is Professor and Pro Vice Chancellor of the Division of Business Law and Information Sciences at the University of Canberra. Deborah was formerly Director of the Centre for Australian Financial Institutions at the University of Southern Queensland and a former Director of Heritage Building Society. Age 53. S T E V E J ERM Y N N O N - E X ECU T I V E D I R EC TO R Cha ir ma n of Au d i t Co mm i t te e F CPA Steve joined McDonald’s Australia Ltd in 1984 and was appointed Vice President in 1986. Steve joined the Board of Directors in 1986 and was appointed Executive Vice President in 1993. In June 1999, Steve was appointed Deputy Managing Director. Steve has been involved in all aspects of the development of the McDonald’s restaurant business in Australia and brings with him significant experience in the development of new business and franchising. He retired from McDonald’s Australia in 2005 but remains a Director. Steve is also a Director of Reverse Corp Limited. Age 57. 10 S E N I O R M A N A G E M E N T Profiles of senior management other than Paul Lahiff are set This area has major responsibilities in the management, out below: TO N Y CROSSL E Y CH I E F O P ER AT I N G O F F I CER Tony has over 15 years experience in senior financial roles within the financial services industry, including 10 years development and support of the Mortgage Choice Franchise system. Brent has a Bachelor of Applied Science from the University of Western Sydney. WA RREN O’ROU RK E N AT I O N A L CO R P O R AT E A F FA I R S M A N AG ER in the international insurance and reinsurance industries, Warren holds a Marketing Degree from the University of and, from early 2000, three years as CFO and then CEO Technology, Sydney. Warren has over 20 years experience of Mortgage Choice. After a period as CFO of Macquarie in financial services and corporate social responsibility in Bank’s Securitised Lending Division, where he had marketing and communications, covering both corporate responsibility for management of funding, financial and risk and consulting roles. Warren joined Mortgage Choice as management activities of its Australian and US mortgage Group Manager, Marketing and Communications in March operations, Tony returned to Mortgage Choice in early 1999. In August 2002, Warren was appointed National 2005. Tony is responsible for effective working relationships Corporate Affairs Manager and is responsible for corporate between Mortgage Choice and its Franchisees as well as affairs, public relations, communications and media issues. operations, sales and lender relationships. A DA M FR A SER CH I E F F I N A N CI A L O F F I CER Adam holds an Economics Degree from the University of Nottingham and is a qualified accountant, with over 14 years experience in various accounting, corporate finance and private LY N N E W YAT T N AT I O N A L M A R K E T I N G M A N AG ER Lynne has over 15 years experience in marketing financial services, including experience in providing marketing support services to a franchise network. Lynne joined Mortgage Choice in May 2006 and is responsible for brand, equity roles in the UK and Australia. His role involves directing development of advertising messages, media placement and and controlling the financial activities of the organisation as strategic marketing programs, as well as delivering a range well as providing financial assessments and information to of sales support tools. ensure planning and budgeting activities meets corporate goals. Adam joined Mortgage Choice in March 2003. DEBR A PL AY ER N AT I O N A L L E N D I N G M A N AG ER M A RK N E W TO N CH I E F I N F O R M AT I O N O F F I CER Debra has over 20 years experience in the finance sector. As National Lending Manager, she is responsible for the Mark has over 19 years experience in information development and communication of lender strategy, technology, including 13 years in senior management co-ordination of lender interaction with the Franchise positions. Mark joined Mortgage Choice in May 2000. As network and monitoring of industry trends. Debra joined Chief Information Officer, Mark is responsible for IT strategy, Mortgage Choice in July 2004. She holds a Graduate Diploma applications development and infrastructure management. in Finance and Bank Management, is a Fellow of Finsia and He is also Chairman of the Franchise Advisory Council. Mark Fellow and Councillor for the Institute of Financial Services. holds a Diploma in Computer Programming Technology and a Business Management Certificate from the Australian Institute of Management. M I CH A EL W RI T ER N AT I O N A L H U M A N R E S O U R CE S M A N AG ER DAV I D HOSK I NS CO M PA N Y S ECR E TA RY Formerly National Manager Leadership and Talent Development with Deloitte and having worked previously at AMP Bank, Aussie Home Loans and Westpac, Michael’s David commenced with Mortgage Choice in June 2000. He experience covers line management positions as well as has a Bachelor of Commerce from the University of NSW and organisational development activity. Michael is responsible is a CPA and a member of Chartered Secretaries Australia, for planning, development and implementation of the from which he has a Graduate Diploma in Corporate Franchisor’s HR practices, ensuring policies and procedures Management. David has had over 20 years experience in are effective and complied with. a variety of accounting and company secretarial functions primarily in the finance and insurance industries. As Company Secretary, David is responsible for implementing and monitoring corporate governance practices, compliance and corporate standards, administrating Board and Shareholder matters, and co-ordinating legal counsel. BREN T M cDO N A L D G R O U P F R A N CH I S E O P ER AT I O N S M A N AG ER M A I T L A N D BA RDW EL L N AT I O N A L B U S I N E S S D E V E LO P M E N T M A N AG ER Maitland holds an MBA from the Australian Graduate School of Management and a Bachelor of Economics from the University of Queensland. Following five years in strategic and operations roles in Telstra’s Consumer and Marketing division, he joined Mortgage Choice in 2004 with the responsibility of developing a retail strategy and managing the growth of the Brent has over 20 years experience in franchising and small business management. He joined Mortgage Choice in Mortgage Choice retail footprint. With retail disciplines now embedded in core operations, Maitland now has responsibility November 1998 and is responsible for Franchise Operations. for driving a number of key strategic projects. 11 C O R P O R A T E G O V E R N A N C E N O T E Mortgage Choice has in place corporate governance practices to ensure the Company is effectively directed and managed, risks are monitored and assessed, and appropriate disclosures are made. A description of the Company’s main corporate governance practices is set out below. The Company considers that it substantially complies with the ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations, with the following exception: ■ compliance with the requirement that the Board comprise a majority of independent non-executive Directors. T HE BOA RD The Board comprises Mortgage Choice’s Managing Director, two non-executive Directors and three independent non-executive Directors including the Chairman, Peter Ritchie. Steve Jermyn and Deborah Ralston were appointed as non-executive Directors in the period to the Company’s listing on the ASX. These individuals bring a long history of public company, operational and franchising experience with them and assist in overseeing the corporate governance of Mortgage Choice. Details of the Directors’ experience, expertise, qualifications, term of office and independent status are set out in the Directors’ report under the heading ‘Board of Directors’ on page 10. Responsibility for day-to-day management and administration of the Company is delegated by the Board to the Managing Director and the executive team. The Board operates in accordance with the broad principles set out in its charter which is available in the Shareholder Centre section of the Company’s website at www.mortgagechoice.com.au. Board size, composition and independence The Charter states that: ■ there must be a minimum of five Directors and a maximum of seven Directors. ■ the Board must comprise: – a majority of independent non-executive Directors; – Directors with an appropriate range of skills, experience and expertise; – Directors who can understand and competently deal with current and emerging business issues; and – Directors who can effectively review and challenge the performance of management and exercise independent judgment. ■ the nomination committee is responsible for recommending candidates for appointment to the Board. ■ each Director is appointed by a formal letter of appointment setting out the key terms and conditions of their appointment to ensure that each Director clearly understands the Company’s expectations of him or her. The Board is not presently comprised of a majority of independent non-executive Directors. At this time the view of the Board is that the present skills and experience of the Directors has provided an operationally effective Board without the expense of an additional Director. However, the Board will continue to give consideration to increasing the number of Directors to seven by the appointment of an additional non-executive Director if it is considered that the skills and experience brought by the individual supplement those of the existing Board. Role and responsibilities The Board acts on behalf of Shareholders and is accountable to Shareholders for the overall direction, management and corporate governance of the Company. The Board is responsible for: ■ overseeing the Company, including its control and accountability systems; ■ appointing and removing the Managing Director; ■ monitoring the performance of the Managing Director; ■ monitoring senior management’s implementation of strategy, and ensuring appropriate resources are available; ■ reporting to Shareholders; ■ providing strategic advice to management; ■ approving management’s corporate strategy and performance objectives; ■ determining and financing dividend payments; ■ approving and monitoring the progress of major capital expenditure, capital management, acquisitions and divestitures; 12 ■ approving and monitoring financial and other reporting; ■ reviewing and ratifying systems of risk management, internal compliance and control, and legal compliance to ensure appropriate compliance frameworks and controls are in place; ■ reviewing and overseeing the implementation of the Company’s corporate code of conduct and code of conduct for Directors and senior executives; ■ approving charters of Board committees; ■ monitoring and ensuring compliance with legal and regulatory requirements and ethical standards and policies; and ■ monitoring and ensuring compliance with best practice corporate governance requirements. Directors’ independence The Board Charter sets out specific principles in relation to Directors’ independence. These state that an independent non-executive Director is one who is independent of management and: ■ is not a substantial shareholder of the Company or an officer of, or otherwise associated directly with, a substantial shareholder of the Company; ■ within the last three years has not been employed in an executive capacity by the Company or another group member, or been a Director after ceasing to hold any such employment; ■ within the last three years has not been a principal of a material professional adviser or a material consultant to the Company or another group member, or an employee materially associated with the service provided; ■ is not a material supplier or customer of the Company or other group member, or an officer of or otherwise associated directly or indirectly with a material supplier or customer; ■ has no material contractual relationship with the Company or another group member other than as a Director of the Company; ■ has not served on the Board for a period which could, or could reasonably be perceived to, materially interfere with the Director’s ability to act in the best interests of the Company; and ■ is free from any interest in any business or other relationship which could, or could reasonably be perceived to, materially interfere with the Director’s ability to act in the best interests of the Company. All Directors are required to complete an independence questionnaire. Independent professional advice Board committees and individual Directors may seek independent external professional advice for the purposes of proper performance of their duties. Performance assessment The performance of the Board, the Directors and key executives is reviewed annually. The nomination committee is responsible for reviewing: ■ the Board’s role; ■ the processes of the Board and Board committees; ■ the Board’s performance; and ■ each Director’s performance before the Director stands for re-election. The process for performance evaluation of the Board, its committees and individual Directors, and key executives has been adopted by the Board and is available in the Shareholder Centre section of the Company’s website at www.mortgagechoice.com.au. A review of the Board was conducted by the Chairman of the nomination committee in concert with the Company Secretary during the financial year ended 30 June 2006. 13 Corporate governance continued BOA RD COMM I T T EES Mortgage Choice has three Board committees comprising the remuneration committee, the audit committee and the nomination committee. These committees serve to support the functions of the Board and will make recommendations to Directors on issues relating to their area of responsibility. The remuneration committee The remuneration committee is responsible for determining and reviewing compensation arrangements for the Directors and senior management team. The remuneration committee comprises Peter Ritchie and Rodney Higgins. The objective of the remuneration committee is to help the Board achieve its objective of ensuring the Company: ■ has coherent remuneration policies and practices to attract and retain executives and Directors who will create value for Shareholders; ■ observes those remuneration policies and practices; and ■ fairly and responsibly rewards executives and other employees having regard to the performance of the Company, the performance of the executive or employee and the general and specific remuneration environment. Non-executive Directors are not entitled to retirement benefits with the exception of statutory superannuation. The remuneration committee charter is available in the Shareholder Centre section of the Company’s website at www.mortgagechoice.com.au. The audit committee The audit committee provides advice and assistance to the Board in fulfilling the Board’s responsibilities relating to: ■ financial reporting; ■ the application of accounting policies; ■ business policies and practices; ■ legal and regulatory compliance; and ■ internal risk control and management systems. The audit committee comprises Steve Jermyn (Chairman), Peter Higgins and Deborah Ralston. The objective of the audit committee is to: ■ maintain and improve the quality, credibility and objectivity of the financial accountability process; and ■ provide a forum for communication between the Board and senior financial and compliance management. The audit committee charter is available in the Shareholder Centre section of the Company’s website at www.mortgagechoice.com.au. The nomination committee The objective of the nomination committee is to help the Board achieve its objective of ensuring the Company has a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties. The nomination committee is responsible for evaluating the Board’s performance. The nomination committee comprises Peter Ritchie and Rodney Higgins. The nomination committee charter is available in the Shareholder Centre section of the Company’s website at www.mortgagechoice.com.au. CO DES O F CO N DUCT The Company has adopted a corporate code of conduct setting out its legal and other obligations to all legitimate stakeholders including Shareholders, Franchisees, employees, customers and the community. The Company has also adopted a code of conduct for Directors and senior executives setting out required standards of behaviour, for the benefit of all Shareholders. The purpose of this code of conduct is to: ■ articulate the high standards of honesty, integrity, ethical and law-abiding behaviour expected of Directors and senior executives; ■ encourage the observance of those standards to protect and promote the interests of Shareholders and other stakeholders (including Franchisees, employees, customers, suppliers and creditors); ■ guide Directors and senior executives as to the practices thought necessary to maintain confidence in the Company’s integrity; and 14 ■ set out the responsibility and accountability of Directors and senior executives to report and investigate any reported violations of this code or unethical or unlawful behaviour. The Company requires that its Directors and senior executives adhere to a share trading policy that restricts the purchase and sale of Company securities to three six-week periods following the release of the half-yearly and annual financial results to the market, and the Annual General Meeting. Copies of the Corporate Code of Conduct, the Code of Conduct for Directors and Senior Executives and the Share Trading Policy are available on the Mortgage Choice website. CORP OR AT E REP ORT I NG The Managing Director and Chief Financial Officer have made the following certifications to the Board: ■ that the Company’s financial reports are complete and present a true and fair view, in all material respects, of the financial condition and operational results of the Company and are in accordance with relevant accounting standards; and ■ that the above statement is founded on a sound system of risk management and internal compliance and control and which implements the policies adopted by the Board and that the Company’s risk management and internal compliance and control is operating efficiently and effectively in all material respects. CO N T I N UOUS DISCLOSURE The Company has adopted a market disclosure protocol. The objective of this protocol is to: ■ ensure the Company immediately discloses all price-sensitive information to ASX in accordance with the ASX Listing Rules and the Corporations Act 2001 (Cth); ■ ensure officers and employees are aware of the Company’s continuous disclosure obligations; and ■ establish procedures for: – the collection of all potentially price-sensitive information; – assessing if information must be disclosed to ASX under the ASX Listing Rules or the Corporations Act 2001 (Cth); – releasing to ASX information determined to be price-sensitive information and to require disclosure; and – responding to any queries from ASX (particularly queries under Listing Rule 3.1B). The protocol is carried out through a market disclosure group comprised of management representatives. The market disclosure group is responsible for: ■ ensuring compliance with continuous disclosure obligations; ■ establishing a system to monitor compliance with continuous disclosure obligations and this protocol; ■ monitoring regulatory requirements so that this protocol continues to conform with those requirements; ■ monitoring movements in share price and share trading to identify circumstances where a false market may have emerged in company securities; and ■ making decisions about trading halts. All relevant information provided to ASX will be posted immediately on the Company’s website, www.mortgagechoice.com.au, in compliance with the continuous disclosure requirements of the Corporations Act 2001 (Cth) and ASX Listing Rules. COMMU N I CAT I O N TO SH A REHO L DER S The Board aims to ensure that Shareholders are informed of all major developments affecting the Company’s state of affairs. The Board will: ■ communicate effectively with Shareholders; ■ give Shareholders ready access to balanced and understandable information about the Company and its corporate goals; and ■ make it easy for Shareholders to participate in general meetings. Information is communicated to Shareholders through ASX announcements, the Company’s annual report, annual general meeting, half and full year results announcements and the Company’s website, www.mortgagechoice.com.au. The Board has adopted a communications strategy to facilitate and promote effective communication with Shareholders and encourage participation at general meetings. Arrangements the Company has to promote communication with Shareholders are set out in the Shareholder Centre section of the Company’s website at www.mortgagechoice.com.au. 15 Corporate governance continued E X T ERN A L AU DI TOR The Company has adopted procedures for the selection and appointment of the external auditor which are set out in the Shareholder Centre section of the Company’s website at www.mortgagechoice.com.au. The audit committee will regularly review the performance of the external auditor and consider any ongoing appointment. The external auditor should rotate the senior audit partner and the audit review partner every five years with suitable succession planning to ensure consistency. The external auditor should not place itself in a position where its objectivity may be impaired or where a reasonable person might conclude that its objectivity has been impaired. This requirement also applies to individual members of an audit team. The credibility and integrity of the financial reporting process is paramount. The Company has adopted guidelines on external auditor independence. These guidelines help to ensure a consistent approach to the appointment and review of external auditors. The Company will not give work to the external auditor likely to give rise to a ‘self review threat’ (as defined in Australian Professional Statement F1, Professional Independence, The Institute of Chartered Accountants in Australia and CPA Australia 2002). It is the policy of the external auditors to provide an annual declaration of their independence to the audit committee. The external auditor is requested to attend the annual general meeting of the Company. COMPL I A NCE A N D RISK M A N AGEMEN T The Company has adopted and endorsed a compliance policy. The policy is a commitment to: ■ promote a culture of compliance throughout the Company and Franchise network; ■ create an understanding of the relevant laws at all levels; ■ minimise the possibility of a contravention of the law and manage any legal risk; ■ enhance the Company’s corporate image and customer service; and ■ market, promote and sell the Company’s services in a way that is competitive, ethical, honest and fair, and in compliance with the law. The Company has developed and implemented a compliance program. The aim of the program is to promote a culture of compliance through a number of measures including staff and Franchise network training, compliance procedures, support systems and the appointment of staff responsible for compliance. The centrepiece of the program is a web based compliance education and evaluation tool. A self paced system, it covers the key legislative and regulatory obligations applicable to the business. Each major regulatory area (Trade Practices, Privacy, Equal Opportunity, Occupational Health and Safety, Technology, Franchising, Credit Code) is covered. All current staff have completed all modules and must do so a minimum of once per annum. New staff must complete the program within two months of commencing employment. The Board is required to complete all modules. The program is also being rolled out to the Franchise network. The Company expects its employees, Franchisees and representatives to actively support its compliance program. It is each employee, Franchisee and representative’s responsibility to make use of the training systems and support offered by Mortgage Choice. Non-compliance with the law or failure to comply with the compliance program will not be tolerated and could result in disciplinary action. In order to comply with the Australian standard for risk management, the Company has initiated a corporate risk management plan. In fundamental terms, this process involves: ■ analysing all aspects of the business to determine what operational risks are faced, either on a continuous or isolated basis; ■ having determined these risks, assessing each of them to allocate a rating based upon the likelihood of occurrence and consequence of occurrence; ■ determining what control measures are in place to eliminate or reduce the identified risk – this leads to allocating each risk a rating, all of which is recorded in a risk register; and ■ executive management then make decisions as to how each risk is to be handled i.e. avoided, managed, transferred or accepted. The Risk Register is a dynamic document that changes as business operations vary, resulting in new risks. 16 Mortgage Choice Limited. Financial report ACN 009 161 979. Financial report – 30 June 2006 Contents Directors’ report Income statements Balance Sheets Statements of changes in equity Cash flow statements 18-32 34 35 36 37 Notes to the financial statements 38-78 Directors’ declaration Independent audit report to members of Mortgage Choice Limited Shareholder information Directory 79 80-82 83-84 85-86 This financial report covers both Mortgage Choice Limited as an individual entity and the consolidated entity consisting of Mortgage Choice Limited and its controlled subsidiaries. The financial report is presented in the Australian currency. Mortgage Choice Limited is a company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Mortgage Choice Limited Level 7, 182 – 186 Blues Point Road North Sydney, NSW, 2060 A description of the nature of the Company’s operations and its principal activities is included in the Directors’ report which is not part of this financial report. The financial report was authorised for issue by the directors on 23 August 2006. The Company has the power to amend and reissue the financial report. Through the use of the internet, we have ensured that our corporate reporting is timely, complete, and available globally at minimum cost to the Company. All financial reports and other information are available at our Shareholders’ Centre on the Mortgage Choice website: www.mortgagechoice.com.au 17 D I R E C T O R S ’ R E P O R T Your Directors present their report on the consolidated entity consisting of Mortgage Choice Limited and the entities it controlled at the end of, or during, the year ended 30 June 2006, referred to hereafter as “Mortgage Choice”, “the Mortgage Choice Group” or “the Group”. 1. DI RECTOR S The following persons were Directors of Mortgage Choice Limited during the whole of the financial year and up to the date of this report: P D Ritchie P A Lahiff P G Higgins R G Higgins S C Jermyn D E Ralston 2. PRI NCI PA L ACT I V I T I ES During the year the principal continuing activity of the Mortgage Choice group was mortgage broking. This activity involves: ■ the provision of assistance in determining the borrowing capacities of intending residential mortgage borrowers; ■ the assessment, at the request of those borrowers, of a wide range of home loan products; and ■ the submission of loan applications on behalf of intending borrowers. 3. DI V I DEN DS Dividends paid or payable to members during the financial year were as follows: A final ordinary dividend of $7.056 million (6.0 cents per fully paid share) was declared out of profits of the Company for the year ended 30 June 2005 on 24 August 2005 and paid on 19 September 2005. An interim ordinary dividend of $5.880 million (5.0 cents per fully paid share) was declared out of profits of the Company for the half-year ended 31 December 2005 and paid on 21 March 2006. A special dividend of $2.352 million (2.0 cents per fully paid share) was declared out of the retained profits of the Company as at 31 December 2005 and paid on 21 March 2006. A final ordinary dividend of $8.819 million (7.5 cents per fully paid share) was declared out of profits of the Company for the year ended 30 June 2006 on 23 August 2006 to be paid on 18 September 2006. 4. RE V I E W O F OPER AT I O NS Information on the operations and financial position of the group and its business strategies and prospects is set out in the review of operations and activities on pages 5-7 of this annual report. 5. SIGN I FI CA N T CH A NGES I N T HE S TAT E O F A FFA I R S Except for the matters disclosed in the Operating Results and Review of Operations section of this annual report there have been no significant changes in the state of affairs of the consolidated entity. 6. M AT T ER S SU BSEQU EN T TO T HE EN D O F T HE FI N A N CI A L Y E A R Except for the matters disclosed in the Review of Operations section of this annual report or set out below, no other matter or circumstance has arisen since 30 June 2006 that has significantly affected, or may significantly affect: (a) the consolidated entity’s operations in future financial years; or (b) the results of those operations in future financial years; or (c) the consolidated entity’s state of affairs in future financial years. 7. L I K ELY DE V ELOPMEN T S A N D E X PECT ED RESU LT S O F OPER AT I O NS Information on likely developments in the operations of the consolidated entity and the expected results of operations have not been included in this report because the Directors believe it would be likely to result in unreasonable prejudice to the consolidated entity. 18 8. EN V I RO N MEN TA L REGU L AT I O N The consolidated entity is not subject to any significant environmental regulation under a law of the Commonwealth or of a State or Territory in respect of its activities. 9. I N F ORM AT I O N O N DI RECTOR S Details of the Directors of the Company in office during or since the end of the financial year, and each Director’s qualifications, age, experience and special responsibilities are included on page 10 of this annual report. Director Peter Ritchie Paul Lahiff Peter Higgins Rodney Higgins Steve Jermyn Deborah Ralston Particulars of Directors’ interests in shares and options 350,125 ordinary shares 100,000 ordinary shares Conditional entitlement to 180,300 ordinary shares under PSP * 747,300 options over ordinary shares granted under EPOP ** 8,436,534 ordinary shares 19,991,583 ordinary shares 4,000,000 ordinary shares 50,000 ordinary shares *PSP – Performance Share Plan as detailed in the remuneration report. ** EPOP – Executive Performance Option Plan as detailed in the remuneration report. 10. COMPA N Y SECRE TA RY Details of the Secretary of the Company in office during or since the end of the financial year, and the Secretary’s qualifications, experience and special responsibilities are included on page 11 of this annual report. 11. MEE T I NGS O F DI RECTOR S The numbers of meetings of the Company’s Board of Directors and of each Board committee held during the year ended 30 June 2006, and the numbers of meetings attended by each Director were: Peter Ritchie Peter Higgins Rodney Higgins Paul Lahiff Steve Jermyn Deborah Ralston Peter Ritchie Peter Higgins Rodney Higgins Steve Jermyn Deborah Ralston Full meetings of Directors Number of meetings held Number of meetings attended 12 12 12 12 12 12 12 10 11 12 12 11 Committee Meetings Audit Committee Remuneration Committee Number of meetings held Number of meetings attended Number of meetings held Number of meetings attended n/a 3 n/a 3 3 n/a 2 n/a 3 3 3 n/a 3 n/a n/a 3 n/a 3 n/a n/a No nomination committee meetings were held during the year ended 30 June 2006. 19 Directors’ report continued 12. RE T I REMEN T, EL ECT I O N A N D CO N T I N UAT I O N I N O FFI CE O F DI RECTOR S In accordance with the Constitution, Peter Ritchie retires by rotation and, being eligible, offers himself for re-election. In order to achieve an even spread of retiring Directors at future Annual General Meetings, Steve Jermyn will resign as a director effective at the conclusion of the Annual General Meeting and, in accordance with the Constitution, has been nominated for re-election. 13. REMU N ER AT I O N REP ORT The remuneration report is set out under the following main headings: A B C D E Principles used to determine the nature and amount of remuneration Details of remuneration Service agreements Share-based compensation Additional information. The information provided under headings A-D includes remuneration disclosures that are required under Accounting Standard AASB 124 Related Party Disclosures. These disclosures have been transferred from the financial report and have been audited. The disclosures in Section E are additional disclosures required by the Corporations Act 2001 (Cth) and the Corporations Regulations 2001 which have not been audited. A Principles used to determine the nature and amount of remuneration (audited) The objective of the Company’s executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with achievement of strategic objectives and the creation of value for Shareholders, and conforms with market best practice for delivery of reward. The Board ensures that executive reward satisfies the following key criteria for good governance practices: ■ competitiveness and reasonableness; ■ acceptability to shareholders; ■ performance linkage / alignment of executive compensation; ■ transparency; and ■ capital management. In consultation with external remuneration consultants, the Company has structured an executive remuneration framework that is market competitive and complimentary to the reward strategy of the organisation. Alignment to Shareholders’ interests means: ■ has economic profit as a core component of plan design; ■ focuses on sustained growth in share price; and ■ attracts and retains high calibre executives. Alignment to program participants’ interests means: ■ rewards capability and experience; ■ reflects competitive reward for contribution to growth in Shareholder value; ■ provides a clear structure for earning rewards; and ■ provides recognition for contribution. The framework provides a mix of fixed and variable pay, and a blend of short and long-term incentives. As executives gain seniority with the Group, the balance of this mix shifts to a higher proportion of “at risk” rewards. 20 Non-executive Directors Fees and payments to non-executive Directors reflect the demands which are made on, and the responsibilities of, the Directors. Non-executive Directors’ fees and payments are reviewed annually by the Board. The Board has also sought independent research material to ensure non-executive Directors’ fees and payments, including those of the Chairman, are appropriate and in line with the market. The Chairman’s fees are determined independently to the fees of non-executive Directors based on comparative roles in the external market. Non-executive Directors do not receive share options. Non-executive Directors may opt each year to receive a percentage of their remuneration in Mortgage Choice Limited shares pursuant to the Employee Share Purchase Plan. Directors’ fees The base remuneration for the year ended 30 June 2006 was determined on 17 May 2005 and is based on the recommendations of independent remuneration consultants. Directors do not receive additional remuneration for representation on board committees. Shareholders in a General Meeting on 5 April 2004 agreed to initially set the maximum aggregate remuneration of the Board (excluding the Managing Director and any executive Director) at $750,000. Retirement allowances for Directors Non-executive Directors do not receive retirement allowances. Superannuation contributions in accordance with relevant superannuation guarantee legislation is paid on non-executive Directors’ remuneration. Executive pay The executive pay and reward framework has four components: ■ base pay and benefits; ■ short-term performance incentives; ■ long-term incentives through participation in executive and employee share plans; and ■ other remuneration such as superannuation. The combination of these comprises the executive’s total remuneration. The Company introduced long-term equity-linked performance incentives specifically for executives during the year ending 30 June 2005 at the time of the listing of the Company on the Australian Stock Exchange. Base pay Base pay is structured as a total employment cost package which may be delivered as a mix of cash and prescribed non- financial benefits at the executives’ discretion. Executives are offered a competitive base pay that comprises the fixed component of pay and rewards. External remuneration consultants provide analysis and advice to ensure base pay is set to reflect the market for a comparable role. Base pay for senior executives is reviewed annually to ensure the executive’s pay is competitive with the market. An executive’s pay is also reviewed on promotion. There are no guaranteed base pay increases in any senior executives’ contracts. Benefits Executives do not receive any benefits in addition to the remuneration identified in this remuneration report. Retirement benefits Retirement benefits are delivered under the Mortgage Choice Employees’ Superannuation Fund. This Fund is an accumulation fund and provides benefits based on contributions made to the fund during the period of service. Other retirement benefits may be provided directly by the Company if approved by Shareholders. 21 Directors’ report continued Short-term incentives Should the Company achieve a pre-determined profit target set by the Board then a pool of short-term incentive (STI) is available for executives for allocation during the annual review. Cash incentives (bonuses) are payable in cash following the signing of the Financial Report each year. Using a profit target ensures variable reward is only available when value has been created for Shareholders and when profit is consistent with the business plan. Each executive has a target STI opportunity depending on the accountabilities of the role and impact on the organisation or business unit performance. For senior executives the normal maximum STI target bonus opportunity is 30.0% of total base salary. However, from time to time for special projects and circumstances, bonuses outside of this structure are provided. Each year, the remuneration committee considers the appropriate targets and key performance indicators (KPIs) to link the STI plan and the level of payout if targets are met. This includes setting any maximum payout under the STI plan, and minimum levels of performance to trigger payment of STI. For the year ended 30 June 2006, the KPIs linked to short term incentive plans were based on group, individual business and personal objectives. The KPIs required performance in achieving specific profit objectives as well as other key, non- financial measures linked to drivers of performance in the current and future reporting periods. The short-term bonus payments may be adjusted up or down in line with under or over achievement against the target performance levels. This is at the discretion of the remuneration committee. The STI target annual payment is reviewed annually. B Details of remuneration (audited) Amounts of remuneration Details of the remuneration of the Directors and the key management personnel (as defined in AASB 124 Related Party Disclosures) are set out in the following tables. The key management personnel of Mortgage Choice Limited and of the Group are the Directors of Mortgage Choice Limited (see section 9: Information on directors) and those executives that report directly to the Managing Director. This includes the 5 group executives who received the highest remuneration for the year ended 30 June 2006. The executives are: ■ A D Crossley – Chief Operating Officer (3/10/2005 – 30/6/2006) Chief Financial Officer (1/7/2005 – 3/10/2005) ■ A J Fraser – Chief Financial Officer (3/10/2005 – 30/6/2006) Corporate Finance & Strategy (1/7/2005 – 3/10/2005) ■ M C Newton – Chief Information Officer ■ D M Hoskins – Company Secretary ■ W J O’Rourke – National Manager Corporate Affairs ■ M N Writer – Human Resources Manager (19/9/05 – 30/6/06) ■ L A Wyatt – National Marketing Manager (15/5/2006 – 30/6/2006) ■ D B Bayes – Chief Operating Officer (1/7/2005 – 30/9/2005) ■ I C Pepper – National Marketing Manager (1/7/2005 – 19/5/2006) The cash bonuses detailed on the following page were dependent on the satisfaction of performance conditions as set out in the section headed Short-term incentives above. The options and shares do not vest unless performance hurdles are achieved, based on total Shareholder return, over a three-year period as set out in the section headed Share-based compensation on page 25-28. No other elements of remuneration are directly related to performance. 22 Short-term benefits Post-employment Equity Cash salary and fees $ Cash bonus $ Non- monetary benefits $ Super- annuation $ Retirement benefits $ Rights & Options $ Total $ Key management personnel of Mortgage Choice Limited 2006 Name Non-executive Directors P D Ritchie Chairman P G Higgins R G Higgins S C Jermyn D E Ralston 1,000 55,000 55,000 55,000 55,000 – – – – – – 99,000 9,000 – – – – 4,950 4,950 4,950 4,950 99,000 28,800 Sub-total non-executive Directors 221,000 Executive Directors P A Lahiff Managing Director Other key management personnel A D Crossley A J Fraser M C Newton D M Hoskins W J O’Rourke M N Writer (From 19/9/05 to 30/6/06) L A Wyatt (From 15/5/06 to 30/6/06) D S Bayes (From 1/7/05 to 30/9/05) I C Pepper (From 1/7/05 to 19/5/06) 475,000 203,625 4,360 61,076 235,500 194,422 216,906 194,764 162,867 94,977 22,000 23,698 32,000 60,967 45,362 33,936 – – – – – 5,853 23,328 20,378 25,009 21,910 10,611 18,686 4,102 18,704 – 1,980 50,914 33,367 1,080 4,095 163,223 20,992 3,094 15,638 Total 2,031,573 453,947 128,100 239,604 – – – – – – – – – – – – – – – – – – – – – – – – 109,000 59,950 59,950 59,950 59,950 348,800 80,230 824,291 24,492 307,018 13,326 260,126 21,538 324,420 12,352 280,241 11,222 237,322 3,443 121,226 – 23,980 (8,839)* 80,617 – 202,947 157,764 3,010,988 * In accordance with AASB 124, the amount relates to the reversal of share based payment expense due to the forfeiture of share rights and options. 23 Short-term benefits Post-employment Equity Cash salary and fees $ Cash bonus $ Non- monetary benefits $ Super- annuation $ Retirement benefits $ Rights & Options $ Total $ Directors’ report continued 2005 Name Non-executive Directors P D Ritchie Chairman P G Higgins R G Higgins S C Jermyn D E Ralston – 63,144 70,602 50,213 50,213 – – – – – – 110,430 9,939 11,807 4,398 – – 5,683 6,354 4,519 4,519 126,635 31,014 Sub-total non-executive Directors 234,172 Executive Directors P A Lahiff Managing director Other key management personnel A D Crossley A J Fraser M C Newton D M Hoskins I C Pepper C P Canty (from 1/7/04 to 31/12/04) D S Bayes (from 4/1/05 to 30/6/05) P V Borg (from 6/9/04 to 18/2/05) E G Macgregor (from 1/7/04 to 24/9/04) 443,029 88,767 6,668 48,737 79,636 155,000 198,384 – 53,667 50,322 – – – 182,360 40,000 164,091 32,049 2,115 2,959 7,167 18,780 22,384 20,012 17,653 125,409 116,666 12,099 20,858 89,523 99,006 – – 2,063 8,057 1,320 8,285 66,080 54,212 440 11,762 Total 1,836,690 435,683 154,298 214,709 C Service agreements (audited) – – – – – – – – – – – – – – – – – – – – – – – 120,369 80,634 81,354 54,732 54,732 391,821 48,206 635,407 4,840 91,643 2,362 229,809 13,738 284,828 6,846 251,333 6,159 222,911 – 275,032 8,839 108,482 – – 108,611 132,494 90,990 2,732,371 Remuneration and other terms of employment for the Managing Director and other key management personnel are set out in their respective letters of employment. The employment letters do not prescribe the duration of employment for executives. The periods of notice required to terminate employment are set out below: ■ the employment of Messrs Lahiff, Crossley, Fraser, Newton and Hoskins is terminable by either the Company or the executive giving three month’s notice; and ■ the employment of Messrs O’Rourke and Writer and Ms Wyatt is terminable by either the Company or the executive giving four week’s notice. Except as set out below, no provision is made for termination payments other than amounts paid in respect of notice of termination: ■ Messrs Crossley, Fraser, Newton and Hoskins will receive a non-competition termination benefit equal to 6 months base salary where departure is for any reason other than misconduct; and ■ Mr Lahiff’s employment terms provide that in the event of the sale of the Company’s business or corporate restructure, subject to certain conditions relating to length of service, Mr Lahiff will become entitled to a severance payment equivalent to 12 months base salary, less any amounts paid in respect of notice of termination under the terms of his employment. 24 D Share-based compensation (audited) Executive Performance Option Plan (EPOP) The Executive Performance Option Plan may be offered on an annual basis to a limited number of the most senior executives within the Company. The issue of options has been confined to the Managing Director and the Company’s three most senior executives, being the Chief Financial Officer, Chief Operating Officer and Chief Information Officer. Participation in the EPOP provides one component of the market-based long-term incentive available to the selected executives within their aggregate remuneration package. Under the terms of the EPOP, options (each over one share) are granted to senior executives identified by the Board. Any options offered and granted to the executives have an exercise price based on the market value of the Company’s shares at the time of offer. Market value will be the trade-weighted average price of the Company’s shares over the one-week period immediately preceding the date of offer. The options offered to executives under the EPOP are subject to performance conditions set by the Board. Offers have a three-year performance period. In relation to options offered during the year ended 30 June 2006, the performance requirement will be based on the total Shareholder Return (TSR) of the Company compared to the TSRs of a comparator group of companies. TSR is the percentage increase in the Company’s share price plus reinvested dividends, expressed as a percentage of the initial investment, and reflects the increase in value delivered to Shareholders over the period. The Company’s TSR will be compared to the TSRs of companies in a comparator group comprised of selected S & P ASX Top 300 companies, being entities of broadly similar size to that of Mortgage Choice, but excluding mining and resource companies and property trust companies or trusts, over the performance period. The comparator companies were drawn from a group within an approximate range of 40% to 200% of the market capitalisation of Mortgage Choice at the time of listing. The companies comprising the comparator group are iiNET Limited, Invocare Limited, Clough Limited, Programmed Maintenance Services Limited, Rebel Sport Limited, Sunland Group Limited, Globe International Limited, Psivida Limited, Village Life Limited, Capral Aluminium Limited, Brazin Limited, Peptech Limited, AAV Limited, Hpal Limited, SDI Limited, Gribbles Group Limited (The), ERG Limited, Schaffer Corporation Limited, Nylex Limited, Silex Systems Limited, Volante Group Limited, Technology One Limited, SAI Global Limited, Henry Walker Eltin Group Limited, Cellestis Limited, Villa World Limited, Boom Logistics Limited, Sirtex Medical Limited, Vision Systems Limited, Collection House Limited, Maxitrans Industries Limited, Keycorp Limited, Symex Holdings Limited, Virotec International Limited, SMS Management & Technology Limited, UXC Limited, Norwood Abbey Limited, Institute Of Drug Technology Australia Limited, Macmahon Holdings Limited, Tempo Services Limited, Agenix Limited, Unitract Limited, Genetic Technologies Limited, Atlas Group Holdings Limited, Circadian Technologies Limited, Peppercorn Investment Fund, , Primelife Corporation Limited, Kresta Holdings Limited, Coffey International Limited, Orbital Engine Corporation Limited, Citect Corporation Limited and Multimedia Limited. If any of the companies in the comparator group ceases to exist in its current form for any reason other than its liquidation, or if the Board determines in its discretion that a company should no longer be in the comparator group because of an anomaly, distortion or other event that is not directly related to the financial performance of that company, that company will cease to form part of the comparator group. Options will not become exercisable unless Mortgage Choice’s TSR is above the 50th percentile of the comparator group at the end of the performance period. Above the 50th percentile, options will vest and become exercisable in accordance with a vesting scale. The vesting scale is as follows: Company Performance (TSR Percentile Ranking) Percentage of offered Options allocated At or below the 50th percentile At the 51st percentile 75th percentile or above 0% 52% 100% Between the 51st percentile and 75th percentiles, an additional 2.0% of options will vest for every percentile increase in TSR ranking. The rules of the EPOP permit the Company to issue new shares or to purchase shares on-market for the purposes of satisfying the exercise of options. 25 Directors’ report continued Any options which do not become exercisable following the application of the performance condition and vesting scale will lapse. An option that has become exercisable but is not exercised will lapse on the earlier of: ■ 10 years after the date of offer; ■ three months, or such other period determined by the Board, after the participant ceases employment for a reason other than a ‘qualifying reason’ (i.e. death, total and permanent disability, redundancy, or any other reason determined by the Board); and ■ 12 months, or such other period determined by the Board, after the participant ceases employment for a ‘qualifying reason’. Where a participant ceases to be employed by the Company other than because of a ‘qualifying reason’, any options that have not become exercisable will lapse. However, if there is cessation of employment due to a ‘qualifying reason’, the Board may determine that some or all of the options may vest. In the event of a change of control of the Company, all options will vest. If the Board determines that a participant has acted fraudulently or dishonestly, has committed an act of harassment or discrimination, is in serious breach of any duty to Mortgage Choice, or, in the Board’s reasonable opinion, has brought Mortgage Choice into serious disrepute, any options held by the participant will lapse. The terms and conditions of each grant of options affecting remuneration are as follows: Grant Date Expiry Date Exercise Price 10 August 2004 10 August 2014 24 February 2005 24 February 2015 2 September 2005 2 September 2015 $1.05 $1.08 $1.43 Value per option at grant date Date exercisable $0.32 From 11 August 2007 to 10 August 2014 $0.32 From 25 February 2008 to 24 February 2015 $0.28 From 2 September 2008 to 2 September 2015 Details of options over ordinary shares in the Company provided as remuneration to each Director and key management personnel of Mortgage Choice Limited are set out below. When exercisable, each option is convertible into one ordinary share of Mortgage Choice Limited. Further information on the options is set out in note 32 to the financial statements. Name Directors of Mortgage Choice Limited P A Lahiff Other key management personnel A D Crossley A J Fraser M C Newton D S Bayes* Number of options granted during the year Number of options vested during the year 2006 2005 2006 2005 424,100 323,200 128,600 81,800 71,400 - 108,900 92,200 - 126,000 - - - - - - - - - - * Entitlement to options has been forfeited as part of termination of employment. The assessed fair value at grant date of options granted to individuals is allocated equally over the period from grant date to vesting date, and the amount is included in the remuneration tables above. Fair values at grant date are independently determined using a Monte Carlo simulation model utilising a Black-Scholes option pricing model framework that takes into account the exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. The model inputs for options granted during the year ended 30 June 2006 included: (a) options are granted for no consideration, each tranche vests and is exercisable after three anniversaries of the date of grant; (b) exercise price: $1.43; (c) grant date: 2 September 2005; (d) expiry date: 2 September 2015; (e) share price at grant date: $1.43; (f) expected price volatility of the company’s shares: 30.0%; (g) expected dividend yield: 6.0%; and (h) risk-free interest rate: 5.0%. 26 Shares provided on exercise of remuneration options No shares were issued as a result of the exercise of remuneration options during the year ended 30 June 2006 (2005 – nil). Performance Share Plan (PSP) The PSP permits eligible senior managers identified by the Board to be offered conditional entitlements to shares. The shares allocated to those employees are subject to the achievement of performance requirements specified by the Board. The PSP is designed to provide the long-term incentive component of remuneration for senior managers, in line with the Company’s overall reward strategy, which aims to attract, motivate and retain high-performing managers. Participation in the PSP is offered on an annual basis. Eligible senior managers are offered shares to a value determined by reference to the Company’s reward policy and market practice with regard to long-term incentive arrangements provided by peer organisations. The actual number of shares allocated to participants depends on Mortgage Choice’s performance against the performance criteria. Any conditional entitlements that participants do not become entitled to at the end of the performance period (i.e. as the performance condition has not been met in full), will lapse. The performance requirements and vesting scale applicable to the offers under the PSP during the year ended 30 June 2006 are identical to those specified for the initial offer under the Executive Performance Option Plan. The rules of the PSP permit the Company to issue new shares or to purchase shares on-market if the performance requirements are satisfied at the end of the three-year performance period. Participants will not be required to pay for any shares that may be allocated to them under the PSP. Until the shares are released from the PSP, they will remain subject to the PSP rules and to the ‘holding lock’ applied pursuant to those rules, and the participant will be restricted in his or her ability to deal in those shares. Shares will not be released from the PSP and will remain subject to a holding lock until a Notice of Withdrawal, that has been approved by the Board, is lodged with the Plan Administrator in respect of them. Once a Notice of Withdrawal is accepted, the Plan Administrator will release the holding lock in respect of the shares which are the subject of that Notice. A Notice of Withdrawal may be lodged by a participant following the earlier of: ■ 1 July in the year (being a period commencing 1 July and ending 30 June) that is 10 years after the year in which the offer is made and is accepted by the participant; ■ the participant ceasing to be an employee of the Company; ■ a ‘capital event’ (generally, a successful takeover offer or scheme of arrangement relating to the Company) occurring; or ■ the date upon which the Board gives its written consent to the lodgement of a Notice of Withdrawal by the participant. While shares remain subject to the PSP rules, participants will, in general, enjoy the rights attaching to those shares (such as voting or dividend rights etc). These rights are not available to participants prior to the performance requirements being met. Where a participant ceases to be employed by Mortgage Choice prior to the end of the performance period, other than because of a ‘qualifying reason’ (i.e. death, total and permanent disability, redundancy, and any other reason determined by the Board), any conditional entitlements to receive shares will lapse. However, in the event of a change in control of the Company or if there is cessation of employment due to a ‘qualifying reason’, the Board may determine that some or all of the shares may be allocated to the participant. If the Board determines that a participant has acted fraudulently or dishonestly, has committed an act of harassment or discrimination, is in serious breach of any duty to Mortgage Choice, or, in the Board’s reasonable opinion, has brought Mortgage Choice into serious disrepute, any shares to which the participant may have become entitled at the end of the performance period, and any shares held by the participant under the PSP are forfeited by the participant. The terms and conditions of each offer of performance shares affecting remuneration in this or future reporting periods are as follows: Offer Date 10 August 2004 6 September 2004 4 January 2005 24 February 2005 2 September 2005 Value per performance share at offer date Vesting Date $1.05 $1.05 $0.91 $1.08 $1.43 10 August 2007 6 September 2007 4 January 2008 24 February 2008 2 September 2008 Details of performance shares in the Company provided as remuneration to each Director and key management personnel of Mortgage Choice Limited are set out below. Further information on the options is set out in note 32 to the financial statements. 27 Directors’ report continued Name Directors of Mortgage Choice Limited P A Lahiff Other key management personnel A D Crossley A J Fraser M C Newton D M Hoskins W J O’Rourke M N Writer D S Bayes* I C Pepper* P V Borg* Number of performance shares rights granted during the year Number of performance shares issued during the year 2006 2005 2006 2005 83,300 97,000 25,300 14,000 21,400 26,200 23,800 14,200 - 23,600 - 24,500 24,700 27,600 33,900 30,800 - 37,807 30,500 31,200 - - - - - - - - - - - - - - - - - - - - * Entitlement to shares has been forfeited as part of termination of employment. The assessed fair value at grant date of share rights granted to individuals is allocated equally over the period from grant date to vesting date, and the amount is included in the remuneration tables above. Fair values at grant date are independently determined using a Monte Carlo simulation model utilising a Black-Scholes option pricing model framework that takes into account the term of the rights, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the rights, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the share rights. The model inputs for performance shares granted during the year ended 30 June 2006 included: (a) share rights are granted for no consideration, each tranche vests and is exercisable after three anniversaries of the date of grant; (b) grant date: 2 September 2005; (c) expiry date: 2 September 2015; (d) share price at grant date: $1.43; (e) expected price volatility of the company’s shares: 30%; (f) expected dividend yield: 6%; and (g) risk-free interest rate: 5%. Shares provided on vesting of performance share entitlements No shares were issued as a result of the vesting of performance share entitlements during the year ended 30 June 2006 (2005 – nil). E Additional information – unaudited Principles used to determine the nature and amount of remuneration: relationship between remuneration and company performance The overall level of executive reward takes into account the performance of the Group over a number of years, with greater emphasis given to the current year. Details of remuneration: cash bonuses, share rights and options For each cash bonus and grant of share rights and options in the tables on pages 23-24 and 26-28, the percentage of the available grant that was paid, or that vested, in the financial year, and the percentage that was forfeited because the person did not meet the service and performance criteria is set out below. The share rights and options vest over three years, providing vesting conditions are met. No share rights or options will vest if the conditions are not satisfied, hence the minimum value of the share rights and options yet to vest is nil. The maximum value of the share rights and options yet to vest has been determined assuming the share price on the date the share rights and options are exercised will not exceed $4.06 for the share rights and options issued in 10 August 2004, $4.36 for those issued on 4 January 2005, $4.41 for those issued on 24 February 2005 and $4.73 for those issued on 2 September 2005. 28 Cash bonus Share rights and options Name P A Lahiff A D Crossley A J Fraser M C Newton D M Hoskins W J O’Rourke M N Writer D S Bayes I C Pepper P V Borg E M Macgregor Paid % 100 100 100 100 100 100 100 100 100 - 100 Forfeited % Year granted Vested % Forfeited % Financial years in which rights and options may vest Minimum total value of grant yet to vest $ Maximum total value of grant yet to vest $ - - - - - - - - - 100 - 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2005 2006 2005 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 100 100 100 100 - 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2008 2009 2008 - Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil - 1,366,652 1,793,539 380,439 544,049 107,692 301,840 389,578 460,592 137,634 123,926 125,048 112,574 - 67,166 - - - - - Share based compensation: Options Further details relating to options are set out below. Name P A Lahiff A D Crossley A J Fraser M C Newton A Remuneration consisting of options B Value at grant date $ C Value at exercise date $ D Value at lapse date $ E Total of columns B-D $ 5.2% 4.2% 1.7% 3.5% 118,748 36,008 19,992 30,492 – – – – – – – – 118,748 36,008 19,992 30,492 Share based compensation: Performance shares Further details relating to performance shares are set out below. Name P A Lahiff A D Crossley A J Fraser M C Newton D M Hoskins W J O’Rourke M N Writer A Remuneration consisting of performance shares B Value at offer date $ C Value at entitlement date $ D Value at lapse date $ E Total of columns B-D $ 4.5% 3.7% 3.4% 3.1% 4.4% 4.7% 2.8% 118,761 36,070 19,960 30,510 37,353 33,932 20,245 – – – – – – – – – – – – – – 118,761 36,070 19,960 30,510 37,353 33,932 20,245 A = The percentage of the value of remuneration consisting of options or performance shares, based on the value at grant date set out in column B. B = The value at grant date calculated in accordance with AASB 2 Share-based Payment of options granted during the year as part of remuneration. C = The value at exercise date of options that were granted as part of remuneration and were exercised during the year. D = The value at lapse date of options that were granted as part of remuneration and that lapsed during the year. 29 Directors’ report continued Share options and performance shares granted to directors and the most highly remunerated officers Options and performance share rights over unissued ordinary shares of Mortgage Choice Limited granted during or since the end of the financial year to the five most highly remunerated officers of the Company as part of their remuneration were as follows: Options Performance Shares Number Date Granted Number Date Offered Director P A Lahiff – Managing Director 424,100 2 September 2005 83,300 2 September 2005 Other Executives A D Crossley – Chief Operating Officer 128,600 2 September 2005 25,300 2 September 2005 A J Fraser – Chief Financial Officer 71,400 2 September 2005 14,000 2 September 2005 M C Newton – Chief Information Officer 108,900 2 September 2005 21,400 2 September 2005 D M Hoskins – Company Secretary W J O’Rourke – National Manager Corporate Affairs n/a n/a n/a n/a 26,200 2 September 2005 23,800 2 September 2005 The options were granted under the Executive Performance Option Plan and the performance shares were offered under the Performance Share Plan. Details of the options and performance shares granted to Directors and the five most highly remunerated officers of the Group can be found in section D of the remuneration report on page 25-28. No options or performance shares have been granted since the end of the year. Shares under option Unissued ordinary shares of Mortgage Choice Limited under option at the date of this report are as follows: Date options granted Expiry date Issue price of shares Number under option 10 August 2004 9 August 2014 24 February 2005 23 February 2015 2 September 2005 1 September 2015 $1.05 $1.08 $1.43 415,400 81,800 733,000 1,230,200 No option holder has any right under the options to participate in any other share issue of the Company or any other entity. 14. I NSUR A NCE O F O FFI CER S Insurance premiums were paid for the year ended 30 June 2006 in respect of Directors and Officers liability and legal expenses for Directors and Officers of the Company and all controlled entities. The insurance contract prohibits disclosure of the premium paid. The insurance premiums relate to: ■ costs and expenses incurred by relevant Directors and officers in defending any proceedings; and ■ other liabilities that may arise from their position, with the exception of conduct involving dishonesty, wrongful acts, or improper use of information or position to gain personal advantage. Since the end of the previous financial year, the Company has not indemnified or made a relevant agreement for indemnifying against a liability any person who is or has been an officer or auditor of the Company. 15. PROCEEDI NGS O N BEH A L F O F T HE COMPA N Y No person has applied to the Court under section 237 of the Corporations Act 2001 (Cth) for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under section 237 of the Corporations Act 2001 (Cth). 30 16. N O N -AU DI T SERV I CES The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the Company and/or the consolidated entity are important. Details of the amounts paid or payable to the auditor (PricewaterhouseCoopers) for audit and non-audit services provided during the year are set out below. The Board of Directors has considered the position and, in accordance with the advice received from the audit committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001 (Cth). The Directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 (Cth) as none of the services undermine the general principles relating to auditor independence as set out in Professional Statement F1, including reviewing or auditing the auditor’s own work, acting in a management or a decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risk and rewards. During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and non-related audit firms: Assurance services 1. Audit services PricewaterhouseCoopers Australian firm: Audit and review of financial reports and other audit work under the Corporations Act 2001 (Cth) Total remuneration for audit services 2. Other assurance services PricewaterhouseCoopers Australian firm: Due diligence services Other assurance services Total remuneration for other assurance services Total remuneration for assurance services Taxation services PricewaterhouseCoopers Australian firm: Tax compliance services, including review of company income tax returns Other tax services Total remuneration for taxation services Advisory services PricewaterhouseCoopers Australian firm: Initial Public Offering Services Total remuneration for advisory services Consolidated 2006 $ 2005 $ 228,350 228,350 122,000 122,000 – 7,000 7,000 235,350 40,401 16,000 56,401 178,401 18,800 15,283 34,083 110,330 10,475 120,805 – – 115,380 115,380 31 Directors’ report continued 17. AU DI TOR S’ I N DEPEN DENCE DECL A R AT I O N A copy of the auditors’ independence declaration as required under section 307C of the Corporations Act 2001 (Cth) is set out on page 33. 18. ROU N DI NG O F A MOU N T S The Company is of a kind referred to in Class Order 98/0100 issued by the Australian Securities & Investments Commission, relating to the “rounding off” of amounts in the Directors’ report. Amounts in the Directors’ report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. 19. AU DI TOR PricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act 2001 (Cth). This report is made in accordance with a resolution of the directors. Peter Ritchie Director Sydney 23 August 2006 32 33 I N C O M E S T A T E M E N T S For the year ended 30 June 2006 Revenue from continuing operations Other income Expenses from continuing operations Sales Technology Marketing Finance Corporate Finance costs Profit before income tax Income tax expense Net profit attributable to the members of Mortgage Choice Limited Earnings per share for profit from continuing operations attributable to the ordinary equity holders of the Company Basic earnings per share Diluted earnings per share Consolidated Parent entity Notes 2006 $’000 2005 $’000 2006 $’000 2005 $’000 141,070 108,788 141,070 108,788 982 1,713 982 1,713 5 6 7 (89,445) (73,831) (89,445) (73,831) (3,802) (3,824) (3,802) (6,813) (7,648) (6,813) (1,677) (1,836) (1,677) (3,824) (7,648) (1,836) (5,145) (5,220) (5,145) (5,220) (9,320) (2) (9,320) 25,850 18,140 25,850 8 (7,990) (5,610) (7,990) (2) 18,140 (5,610) 17,860 12,530 17,860 12,530 Cents Cents 31 31 15.2 15.0 10.7 10.7 The above income statements should be read in conjunction with the accompanying notes. 34 B A L A N C E S H E E T S As at 30 June 2006 ASSETS Current assets Cash and cash equivalents Trade and other receivables Total current assets Non-current assets Receivables Property, plant and equipment Deferred tax assets Intangible assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Current tax liabilities Provisions Total current liabilities Non-current liabilities Payables Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained profits Total equity Consolidated Parent entity Notes 2006 $’000 2005 $’000 2006 $’000 2005 $’000 9 10 11 12 13 14 8,393 11,462 8,393 11,462 52,677 61,070 9,793 52,677 9,793 21,255 61,070 21,255 101,823 – 101,823 1,192 1,197 2,075 1,462 1,206 1,472 1,192 1,197 2,075 106,287 4,140 106,287 – 1,462 1,206 1,472 4,140 167,357 25,395 167,357 25,395 15 36,265 11,585 36,265 11,585 16 17 18 19 2,368 517 3,121 530 2,368 517 3,121 530 39,150 15,236 39,150 15,236 64,210 16,357 185 80,752 232 64,210 - 16,357 144 376 185 80,752 232 - 144 376 119,902 15,612 119,902 15,612 47,455 9,783 47,455 9,783 20 21(a) 21(b) 203 343 46,909 47,455 203 91 9,489 9,783 203 343 46,909 47,455 203 91 9,489 9,783 The above balance sheets should be read in conjunction with the accompanying notes. 35 S T A T E M E N T S O F C H A N G E S I N E Q U I T Y For the year ended 30 June 2006 Consolidated Parent entity Notes 2006 $’000 2005 $’000 2006 $’000 2005 $’000 Total equity at the beginning of the financial year 9,783 6,862 9,783 6,862 Adjustment on adoption of AASB 132 and AASB 139, net of tax, to: Retained profits 33 34,847 - 34,847 - Restated total equity at the beginning of the financial year 44,630 6,862 44,630 6,862 Profit for the year 17,860 12,530 17,860 12,530 Transactions with equity holders in their capacity as equity holders: Increase in share capital – deferred tax on capital raising costs Employee share rights and options Capital reduction Contributions of equity, net of transaction costs Dividends provided for or paid 33 32 20 20 22 - 252 - - 122 91 (8,962) 7,530 - 252 - - 122 91 (8,962) 7,530 (15,287) (8,390) (15,287) (8,390) (15,035) (9,609) (15,035) (9,609) Total equity at the end of the financial year 47,455 9,783 47,455 9,783 The above statements of changes in equity should be read in conjunction with the accompanying notes. 36 C A S H F L O W S T A T E M E N T S For the year ended 30 June 2006 Cash flows from operating activities Receipts from customers (inclusive of goods and services tax) Payments to suppliers and employees (inclusive of goods and services tax) Interest received from trailing commissions Interest paid on trailing commissions Interest paid Income taxes paid Net cash inflow/(outflow) from operating activities Cash flows from investing activities Payments for plant and equipment Proceeds from sale of plant and equipment Payments for software and development costs Interest received from cash and deposits at call Net cash inflow/(outflow) from investing activities Cash flows from financing activities Proceeds from sale of shares Payment for capital reduction Dividends paid Net cash inflow/(outflow) from 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 year Consolidated Parent entity Notes 2006 $’000 2005 $’000 2006 $’000 2005 $’000 120,894 119,621 120,894 119,621 (106,729) 14,165 15,216 (9,320) - (7,311) 12,750 (102,080) 17,541 - - (2) (3,744) 13,795 (106,729) 14,165 15,216 (9,320) - (7,311) 12,750 (102,080) 17,541 - - (2) (3,744) 13,795 (332) 2 (883) 681 (532) - - (15,287) (15,287) (3,069) 11,462 8,393 (830) 12 (1,065) 588 (1,295) 7,531 (8,962) (10,806) (12,237) 263 11,199 11,462 (332) 2 (883) 681 (532) - - (15,287) (15,287) (3,069) 11,462 8,393 (830) 12 (1,065) 588 (1,295) 7,531 (8,962) (10,806) (12,237) 263 11,199 11,462 30 9 The above cash flow statements should be read in conjunction with the accompanying notes. 37 N O T E S T O T H E F I N A N C I A L S T A T E M E N T S N OT E 1 SU MM A RY O F SIGN I FI CA N T ACCOU N T I NG P O L I CI ES The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial report includes separate financial statements for Mortgage Choice Limited as an individual entity and the consolidated entity consisting of Mortgage Choice Limited and its subsidiaries. (a) Basis of preparation This general purpose financial report has been prepared in accordance with Australian equivalents to International Financial Reporting Standards (AIFRSs), other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001 (Cth). Compliance with International Financial Reporting Standards (IFRS) Australian Accounting Standards include AIFRS. Compliance with AIFRS ensures that the financial statements and notes of both the consolidated group and parent entity of Mortgage Choice Limited comply with IFRS except that it has elected to apply the relief provided in respect of certain disclosure requirements contained in AASB 132 Financial Instruments: Presentation and Disclosure. Application of AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards These financial statements are the first Mortgage Choice Limited financial statements to be prepared in accordance with AIFRS. AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards has been applied in preparing these financial statements. Financial statements of Mortgage Choice Limited until 30 June 2005 had been prepared in accordance with previous Australian Generally Accepted Accounting Principles (AGAAP). AGAAP differs in certain respects from AIFRS. When preparing Mortgage Choice Limited’s 2006 financial statements, management has amended certain accounting, valuation and consolidation methods applied in the AGAAP financial statements to comply with AIFRS. With the exception of financial instruments, the comparative figures in respect of 2005 were restated to reflect these adjustments. The Group has taken the exemption available under AASB 1 to only apply AASB 132 and AASB 139 Financial Instruments; Recognition and Measurement from 1 July 2005. Reconciliations and descriptions of the effect of transition from previous AGAAP to AIFRS on the Group’s equity and its net income are given in note 33. Historical cost convention These financial statements have been prepared under the historical cost convention, as modified by the revaluation of available for sale financial assets, financial assets and liabilities (including derivative instruments) at fair value through profit and loss, certain classes of property, plant and equipment and investment property. Critical accounting estimates The preparation of financial statements in conformity with AIFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 3. (b) Principles of consolidation Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Mortgage Choice Limited (‘’company’’ or ‘’parent entity’’) as at 30 June 2006 and the results of all subsidiaries for the year then ended. Mortgage Choice Limited and its subsidiaries together are referred to in this financial report as the Group or the consolidated entity. Subsidiaries are all those entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. 38 Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group (refer to note 1(g)). Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Investments in subsidiaries are accounted for at cost in the individual financial statements of Mortgage Choice Limited. (c) Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different to those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment and is subject to risks and returns that are different from those of segments operating in other economic environments. (d) Revenue recognition The consolidated entity provides loan origination services and receives origination commission on the settlement of a home loan. Additionally the lender will normally pay a trailing commission over the life of the loan. Revenue over the estimated life of loans written is recognised on the settlement of the loans. The consolidated entity also earns income from the sale of Franchises and Franchise services. Revenue from sale of services is recognised as follows: (i) Origination commissions Origination commissions are recognised as revenue on loan settlement. (ii) Trailing commissions The Company receives trailing commissions from lenders on loans they have settled that were originated by the Group and its Franchisees. The trailing commissions are received over the life of the loans based on loan book balance outstanding. The Company also makes trailing commission payments to Franchisees based on the loan book balance outstanding. On initial recognition, trailing commission revenue and receivables are recognised at fair value, being the expected future trailing commission receivables discounted to their net present value. In addition, an associated payable and expense to the Franchisees are also recognised, initially measured at fair value being the future trailing commission payable to Franchisees discounted to their net present value. Subsequent to initial recognition and measurement, both the trailing commission asset and trailing commission payable are measured at amortised cost. The carrying amount of the trail commission asset and trailing commission payable are adjusted to reflect actual and revised estimated cash flows by recalculating the carrying amount through computing the present value of estimated future cash flows at the original effective interest rate. The resulting adjustment is recognised as income or expense in the profit and loss account. (iii) Franchise fee income Franchise fee income is derived from the sale of franchises by the consolidated entity and comprises licence fees and contributions for training and franchise consumables. Licence fees are partially repayable should Franchisees terminate their Franchise agreement in accordance with a repayment schedule as defined in the agreement. Licence fee income is recognised over a four year period in accordance with this schedule. Contributions for training and consumables are recognised as revenue on receipt. Licence fees which remain repayable to Franchisees at balance sheet date are included in liabilities. (iv) Interest income Interest income is recognised on a time proportion basis using the effective interest method, see note 1(k). When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. (v) Other income Other income includes contributions from lenders towards conferences and workshops together with other non-operating revenues. These are recognised as income in the year the conference or workshop is held. 39 Mortgage Choice Limited Notes to the financial statements continued 30 June 2006 (e) Income tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the income tax rate adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. An exception is made for certain temporary differences arising from the initial recognition of an asset or a liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction that at the time of the transaction did not affect either accounting profit or taxable profit or loss. Deferred tax assets are recognised for deductible temporary differences only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. Tax consolidation legislation Mortgage Choice Limited and its wholly-owned Australian controlled entities are members of a consolidated group for income tax purposes. The head entity, Mortgage Choice Limited, and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand alone taxpayer in its own right. In addition to its own current and deferred tax amounts, Mortgage Choice Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. (f) Leases Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease’s inception at the lower of the fair value of the leased property and the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other long term payables. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases is depreciated over the shorter of the asset’s useful life and the lease term. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. 40 (g) Business combinations The purchase method of accounting is used to account for all business combinations, including business combinations involving entities or businesses under common control, regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange plus costs directly attributable to the acquisition. Where equity instruments are issued in an acquisition, the fair value of the instruments is their published market price as at the date of exchange unless, in rare circumstances, it can be demonstrated that the published price at the date of exchange is an unreliable indicator of fair value and that other evidence and valuation methods provide a more reliable measure of fair value. Transaction costs arising on the issue of equity instruments are recognised directly in equity. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the Group’s share of the fair value of the identifiable net assets of the subsidiary acquired, the difference is recognised directly in the income statement, but only after a reassessment of the identification and measurement of the net assets acquired. (h) Impairment of assets Assets subject to depreciation and amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. (i) Cash and cash equivalents For cash flow statement presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. (j) Trade receivables Trade receivables are recognised in accordance with the revenue recognition policy outlined in note 1(d). Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off. A provision for doubtful receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the income statement. 41 Mortgage Choice Limited Notes to the financial statements continued 30 June 2006 (k) Investments and other financial assets From 1 July 2004 to 30 June 2005 The Group has taken the exemption available under AASB 1 to apply AASB 132 and AASB 139 only from 1 July 2005. The Group has applied previous AGAAP to the comparative information on financial instruments within the scope of AASB 132 and AASB 139. Adjustments on transition date: 1 July 2005 The nature of the main adjustments to make this information comply with AASB 132 and AASB 139 are that, with the exception of held-to-maturity investments and loans and receivables which are measured at amortised cost (refer below), fair value is the measurement basis. Fair value is inclusive of transaction costs. Changes in fair value are either taken to the income statement or an equity reserve (refer below). At the date of transition (1 July 2005) changes to carrying amounts are taken to retained earnings or reserves. From 1 July 2005 The Group classifies its investments in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and, in the case of assets classified as held to maturity, re-evaluates this designation at each reporting date. Loans and receivables Loans and receivables are non derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of selling the receivable. They are included in current assets, except for those with maturities greater than 12 months after the balance sheet date which are classified as non-current assets. Loans and receivables are included in receivables in the balance sheet (notes 10 and 11). (l) Property, plant and equipment All property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Depreciation on other assets is calculated using the straight line method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives, as follows: Office equipment 5-10 years Computer equipment 3-4 years Furniture and fittings 10-15 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (note 1(h)). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. 42 (m) Intangible assets Software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives (three to five years). Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will probably generate future economic benefits exceeding costs beyond one year, are recognised as intangible assets. Computer software development costs recognised as assets are amortised over their estimated useful lives (not exceeding three years). (n) Trade and other payables These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial year and which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. (o) Borrowing costs Borrowing costs are recognised as expenses. (p) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as interest expense. 43 Mortgage Choice Limited Notes to the financial statements continued 30 June 2006 (q) Employee benefits (i) Wages and salaries and annual leave Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. (ii) Long service leave The liability for long service leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. (iii) Retirement benefit obligations Contributions to the defined contribution fund are recognised as an expense as they become payable. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. (iv) Share-based payments Share-based compensation benefits are provided to employees via the Mortgage Choice Executive Performance Option Plan and an employee share scheme. Further details are included in note 32 of the financial report. Shares options granted before 7 November 2002 and/or vested before 1 January 2005 No expense is recognised in respect of these options. The shares are recognised when the options are exercised and the proceeds received allocated to share capital. Shares options and share rights granted after 7 November 2002 and vested after 1 January 2005 The fair value of options granted under the Mortgage Choice Executive Performance Option Plan and share rights granted under the Mortgage Choice Performance Share Plan are recognised as an employee benefit expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the period during which the employees become unconditionally entitled to the options and share rights. The fair value at grant date is independently determined using a Monte Carlo simulation model utilising a Black-Scholes option pricing model framework that takes into account the exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. The fair value of the options and share rights granted excludes the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options and shares that are expected to become exercisable. At each balance sheet date, the entity revises its estimate of the number of options and share that are expected to become exercisable. The employee benefit expense recognised each period takes into account the most recent estimate. Upon the exercise of options, the balance of the share-based payments reserve relating to those options is transferred to share capital and the proceeds received, net of any directly attributable transaction costs, are credited to share capital. Upon the issue of performance shares, the balance of the share-based payments reserve relating to those options is transferred to share capital. (v) Profit-sharing and bonus plans The Group recognises a liability and an expense where contractually obliged or where there is a past practice that has created a constructive obligation. (vi) Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after balance sheet date are discounted to present value. 44 (r) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares or options, or for the acquisition of a business, are included in the cost of the acquisition as part of the purchase consideration. If the entity reacquires its own equity instruments, eg as the result of a share buy-back, those instruments are deducted from equity and the associated shares are cancelled. No gain or loss is recognised in the profit or loss and the consideration paid including any directly attributable incremental costs (net of income taxes) is recognised directly in equity. (s) Dividends Provision is made for the amount of any dividend declared, determined or publicly recommended by the Directors on or before the end of the financial year but not distributed at balance date. (t) Earnings per share (i) Basic earnings per share Basic earnings per share is determined by dividing net profit after income tax attributable to members of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year. (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. (u) Financial instrument transaction costs The Group has taken the exemption available under AASB 1 to apply AASB 132 and AASB 139 from 1 July 2005. The Group has applied previous Australian GAAP (AGAAP) in the comparative information on financial instruments within the scope of AASB 132 and AASB 139. Under previous AGAAP transaction costs were excluded from the amounts disclosed in the financial statements. Under AIFRS such costs are included in the carrying amounts. At the date of transition to AASB 132 and AASB 139 the adjustment to carrying amounts for the Group was immaterial. (v) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flow. (w) Rounding of amounts The Company is of a kind referred to in Class Order 98/0100, issued by the Australian Securities & Investments Commission, relating to the “rounding off” of amounts in the financial report. Amounts in the financial report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. 45 Mortgage Choice Limited Notes to the financial statements continued 30 June 2006 (x) New accounting standards and UIG interpretations Certain new accounting standards and UIG interpretations have been published that are not mandatory for 30 June 2006 reporting periods. The Group’s assessment of the impact of these new standards and interpretations is set out below. (i) UIG 4 Determining whether an Asset Contains a Lease UIG 4 is applicable to annual periods beginning on or after 1 January 2006. The Group has not elected to adopt UIG 4 early. It will apply UIG 4 in its 2007 financial statements and the UIG 4 transition provisions. The Group will therefore apply UIG 4 on the basis of facts and circumstances that existed as of 1 July 2006. Implementation of UIG 4 is not expected to change the accounting for any of the Group’s current arrangements. (ii) AASB 2005-9 Amendments to Australian Accounting Standards [AASB 4, AASB 1023, AASB 139 & AASB 132] AASB 2005-9 is applicable to annual reporting periods beginning on or after 1 January 2006. The amendments relate to the accounting for financial guarantee contracts. The Group has not elected to adopt the amendments early. It will apply the revised standards in its 30 June 2007 financial statements. Implementation of these AASB 2005-9 is not expected to have an impact on the 2007 financial statements AASB 7 Financial Instruments: Disclosures and AASB 2005-10 Amendments to Australian Accounting Standards [AASB 132, AASB 101, AASB 114, AASB 117, AASB 133, AASB 139, AASB 1, AASB 4, AASB 1023 & AASB 1038] AASB 7 and AASB 2005-10 are applicable to annual reporting periods beginning on or after 1 January 2007. The Group has not adopted the standards early. Application of the standards will not affect any of the amounts recognised in the financial statements, but will impact the type of information disclosed in relation to the Group’s financial instruments. N OT E 2 FI N A NCI A L RISK M A N AGEMEN T The Group has limited exposure to financial risks. The Group does not use derivative financial instruments such as foreign exchange contracts and interest rate swaps to hedge certain risk exposures. It does not operate internationally and is not exposed to either securities price risk or commodity price risk. The Group’s policies in relation to financial risks to which it has exposure are detailed below. (a) Credit risk Credit risk is limited to high credit quality financial institutions who are the members of the lender panel. The Group bears the risk of non-payment of future trailing commissions by lenders should they not maintain solvency (correspondingly, Mortgage Choice would not have to pay out any future trailing commissions to Franchisees in relation to such loans). In light of this, new panel entrants are subject to commercial due diligence by the Group’s management prior to their adoption on the lender panel. (b) Liquidity risk The Group maintains sufficient cash to pay its debts as and when they fall due. (c) Cash flow and fair value interest rate risk The Group invests in short-term commercial bills and has no significant interest bearing assets; therefore the Group’s income and operating cash flows are not materially exposed to changes in market interest rates. The Group does not have borrowings and therefore is not exposed to interest rate risk on borrowings. 46 N OT E 3 CRI T I CA L ACCOU N T I NG ES T I M AT ES A N D J U DGEMEN T S Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. (a) Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Trailing commissions The Company receives trailing commissions from lenders on settled loans over the life of the loan based on the loan book balance outstanding to which the group is entitled without having to perform further services. The Company also makes trailing commission payments to Franchisees based on the loan book balance outstanding. The fair value of trailing commissions receivable and the corresponding payable to Franchisees is determined by using the discounted cash flow valuation technique. These calculations require the use of assumptions. The key assumptions underlying the fair value calculations of trailing commissions receivable and the corresponding payable to Franchisees at balance date include the average loan life, discount rate and the percentage paid to Franchisees. These assumptions are determined by management with the assistance of external actuaries and are as follows: Average loan life Discount rate Percentage paid to Franchisees (10 year average) 2006 Between 3.0 and 3.5 years 12% 61% 2005 3.0 years 12% 61% Were the actual final loan life outcome to differ by +/- 10% from management’s estimates, the impact on the estimates would be: ■ an increase in net assets of $4.0 million (made up of increases in current assets of $0.8 million, non current assets of $14.5 million, current liabilities of $0.4 million, non-current liabilities of $9.2 million and deferred tax liabilities of $1.7 million) if favourable; or ■ a decrease in net assets of $3.4 million (made of of decreases in current assets of $0.3 million, non current assets of $13.0 million, current liabilities of $0.1 million, non-current liabilities of $8.3 million and deferred tax liabilities of $1.5 million if unfavourable. Management do not consider changes to the percentage paid to Franchisees to be reasonably possible. Changes to the discount rate are likely to occur as a result of changes to the interest rate. However, management do not consider this to have a material impact on the fair value calculation of trailing commissions receivable and the corresponding payable to Franchisees. (b) Critical judgements in applying the entity’s accounting policies Judgements that management has made in the process of applying the entity’s accounting policies are not expected to have a significant effect on the amounts recognised in the financial report. 47 Mortgage Choice Limited Notes to the financial statements continued 30 June 2006 N OT E 4 SEGMEN T I N F ORM AT I O N The Mortgage Choice group of companies operates predominantly in Australia and in one segment, the mortgage broking industry. N OT E 5 RE V EN U E Revenue from continuing operations Sales revenue Services Other revenue Interest (note (a)) Consolidated Parent entity 2006 $’000 2005 $’000 2006 $’000 2005 $’000 125,173 108,200 125,173 108,200 15,897 588 15,897 588 141,070 108,788 141,070 108,788 (a) Interest. Interest income includes the unwinding of the discount in relation to receipt of trailing commission as well as interest earned on deposits and loans, see note 11 (b). N OT E 6 OT HER I NCOME Conference sponsorships (note (a)) Settlement of legal claim (note (b)) Amortisation of software licence cost recovery (note (c)) Other Consolidated Parent entity 2006 $’000 2005 $’000 2006 $’000 2005 $’000 948 1,064 948 1,064 - 13 21 500 142 7 - 13 21 500 142 7 982 1,713 982 1,713 (a) Conference sponsorships. Lenders sponsor Mortgage Choice’s National conference, High Flyers’ conference, quarterly state conferences, training days and workshops. (b) Settlement of legal claim. In 2005 a settlement of $500,000 was received in relation to legal action taken by the Company against a supplier for non-performance of contractual obligations. (c) Amortisation of software licence cost recovery. The cost of software licences purchased for use by Franchisees is recovered from Franchisees. This cost recovery is amortised over three years, consistent with the amortisation of the corresponding intangible asset. 48 N OT E 7 E X PENSES Profit from ordinary activities before income tax includes the following specific expenses: Finance costs Interest and finance charges (note (a)) Net loss on disposal of property, plant and equipment Depreciation Plant and equipment Amortisation Leasehold improvements Computer software Other provisions Employee entitlements Rental expense relating to operating leases Defined contribution superannuation expense Consolidated Parent entity 2006 $’000 2005 $’000 2006 $’000 2005 $’000 9,320 73 2 12 9,320 73 2 12 264 271 264 271 263 280 28 839 895 163 366 58 767 843 263 280 28 839 895 163 366 58 767 843 (a) Interest and finance charges. Interest expense includes the unwinding of the discount in relation to payment of trailing commission to franchisees. 49 Mortgage Choice Limited Notes to the financial statements continued 30 June 2006 N OT E 8 I NCOME TA X (a) Income tax expense Current tax Deferred tax Under (over) provided in prior years Income tax expense is attributable to: Profit from continuing operations Deferred income tax (revenue) expense including income tax expense comprises: Consolidated Parent entity 2006 $’000 2005 $’000 2006 $’000 2005 $’000 6,567 1,431 (8) 5,664 (58) 4 6,567 1,431 (8) 5,664 (58) 4 7,990 5,610 7,990 5,610 7,990 7,990 5,610 5,610 7,990 7,990 5,610 5,610 (Increase)/decrease in deferred tax assets (note 13) (3,314) (58) (3,314) Increase/(decrease) in deferred tax liabilities (note 18) 4,745 1,431 - (58) 4,745 1,431 (58) - (58) (b) Numerical reconciliation of income tax expense to prima facie tax payable Profit from continuing operations before income tax expense 25,850 18,140 25,850 18,140 Income tax calculated @ 30% (2005 – 30%) 7,755 5,442 7,755 5,442 Consolidated Parent entity 2006 $’000 2005 $’000 2006 $’000 2005 $’000 Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Entertainment Share based payments Sundry items Under/(over) provision from prior years Income tax expense 167 76 – 127 27 10 167 76 – 127 27 10 7,998 5,606 7,998 5,606 (8) 4 (8) 4 7,990 5,610 7,990 5,610 No part of the deferred tax asset shown in above and in note 13 is attributable to tax losses. (c) Tax consolidation legislation Mortgage Choice and the wholly owned Australian controlled entities have implemented the tax consolidation legislation as of 1 July 2002. The accounting policy in relation to this legislation is set out in note 1(e). The wholly owned Australian controlled entities of Mortgage Choice are dormant and have been dormant since the date of implementation of the tax consolidation legislation. Consequently, no tax sharing agreement is in place as it is not considered necessary by the Directors. 50 N OT E 9 CURREN T A SSE T S – CA SH A N D CA SH EQU I VA L EN T S Cash at bank and on hand Deposits at call Deposits at call Consolidated Parent entity 2006 $’000 2005 $’000 2006 $’000 2005 $’000 270 8,123 8,393 302 11,160 11,462 270 8,123 8,393 302 11,160 11,462 The deposits are bearing interest rates between 5.63% and 5.88% (2005 – 5.38% and 5.56%). These deposits have an average maturity of 60 days. N OT E 10 CURREN T A SSE T S – T R A DE A N D OT HER RECEI VA BL ES Consolidated Parent entity 2006 $’000 11,121 40,885 285 125 261 2005 $’000 2006 $’000 2005 $’000 9,377 11,121 9,377 – 40,885 106 88 222 285 125 261 – 106 88 222 52,677 9,793 52,677 9,793 Trade receivables (1) Net present value of future trailing commissions receivable Franchisee receivables Other receivables Prepayments (1) Subject to a limited charge in favour of The Loan Book Security Trust (refer to note 15). (a) Net present value of future trailing commissions receivable Transition to AASB 132 and AASB 139 The Group has taken the exemption available under AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards to apply AASB 132 Financial Instruments: Disclosure and Presentation and AASB 139 Financial Instruments: Recognition and Measurement from 1 July 2005. At the date of transition to these standards at 1 July 2005, both the Group and the parent entity had a net present value of future trailing commissions receivable not included in current assets under AGAAP of $36,473,000. Refer to note 11 for the non current portion of these receivables. (b) Other receivables These amounts generally arise from transactions outside the usual operating activities of the consolidated entity. (c) Effective interest rates and credit risk Information concerning the effective interest rate and credit risk of both current and non-current receivables is set out in the non-current receivables note (note 11). (d) Fair values The carrying amounts of trade and other receivables at year end is a reasonable approximation of their fair values with the exception of the net present value of future trailing commissions receivable which are accounted for at amortised cost. 51 Mortgage Choice Limited Notes to the financial statements continued 30 June 2006 N OT E 11 N O N - CURREN T A SSE T S – RECEI VA BL ES Consolidated Parent entity 2006 $’000 2005 $’000 2006 $’000 2005 $’000 Net present value of future trailing commissions receivable 101,823 - 101,823 - Transition to AASB 132 and AASB 139 The Group has taken the exemption available under AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards to apply AASB 132 Financial Instruments: Disclosure and Presentation and AASB 139 Financial Instruments: Recognition and Measurement from 1 July 2005. At the date of transition to these standards at 1 July 2005, both the Group and the parent entity had a net present value of future trailing commissions receivable not included in non-current assets under AGAAP of $90,418,000. Refer to note 10 for the current portion of these receivables. (a) Interest rate risk The Group’s exposure to interest rate risk and the effective weighted average interest rate by maturity periods is set out in the following tables. Floating interest rate $’000 - - - - 2006 Trade receivables* Franchisee and other receivables Weighted average interest rate Fixed interest maturing in: 1 year or less $’000 Over 1 to 2 years $’000 Over 2 to 3 years $’000 Over 3 to 4 years $’000 Over 4 to 5 years $’000 Over 5 years $’000 Non- interest bearing $’000 Total $’000 40,885 30,116 21,710 15,624 11,316 23,057 11,121 153,829 64 - - - - - 346 410 40,949 30,116 21,710 15,624 11,316 23,057 11,467 154,239 11.99% 12.00% 12.00% 12.00% 12.00% 12.00% - * The fixed interest component of trade receivables is represented by future trailing commission discounted to present value using the risk free interest rate of 12%. (b) Credit risk There is no concentration of credit risk with respect to current and non-current receivables, as the Group’s debtors are the major lending institutions in Australia. Refer to note 2 for more information on the risk management policy of the Group. 52 N OT E 12 N O N - CURREN T A SSE T S – PROPERT Y, PL A N T A N D EQU I PMEN T At 1 July 2004 Cost Accumulated depreciation Net book amount Year ended 30 June 2005 Opening net book amount Additions Assets included in a disposal group classified as held for sale and other disposals Depreciation charge Closing net book amount At 30 June 2005 Cost Accumulated depreciation Net book amount Year ended 30 June 2006 Opening net book amount Additions Disposals Depreciation charge Closing net book amount At 30 June 2006 Cost Accumulated depreciation Net book amount Consolidated Parent entity Plant and Equipment $’000 Leasehold Improvements $’000 Total $’000 Plant and Equipment $’000 Leasehold Improvements $’000 Total $’000 2,855 (2,131) 724 724 267 (22) (271) 698 3,100 (2,402) 698 927 (563) 364 364 563 - (163) 764 1,490 (726) 764 3,782 (2,694) 1,088 2,855 (2,131) 724 1,088 830 (22) (434) 1,462 724 267 (22) (271) 698 4,590 3,100 (3,128) (2,402) 1,462 698 927 (563) 364 364 563 - (163) 764 1,490 (726) 764 3,782 (2,694) 1,088 1,088 830 (22) (434) 1,462 4,590 (3,128) 1,462 Consolidated Parent entity Plant and Equipment $’000 Leasehold Improvements $’000 Total $’000 Plant and Equipment $’000 Leasehold Improvements $’000 Total $’000 698 197 (57) (264) 574 3,031 (2,457) 574 764 135 (18) (263) 618 1,504 (886) 618 1,462 332 (75) (527) 1,192 698 197 (57) (264) 574 4,535 3,031 (3,343) (2,457) 1,192 574 764 135 (18) (263) 618 1,504 (886) 618 1,462 332 (75) (527) 1,192 4,535 (3,343) 1,192 53 Mortgage Choice Limited Notes to the financial statements continued 30 June 2006 N OT E 13 N O N - CURREN T A SSE T S – DEFERRED TA X A SSE T S The balance comprises temporary differences attributable to: Amounts recognised in profit or loss Employee benefits Provision for legal costs Depreciation and amortisation Accrued expenses NPV of future trailing commissions payable Less amortisation of future trailing commissions payable Amounts recognised directly in equity Consolidated Parent entity 2006 $’000 2005 $’000 2006 $’000 2005 $’000 647 - 325 147 10,815 (7,492) 617 28 286 169 - - 647 - 325 147 10,815 (7,492) 617 28 286 169 - - 4,442 1,100 4,442 1,100 NPVof future trailing commissions payable at 1 July 2005 23,132 - 23,132 Share issue expenses 78 106 Set-off of deferred tax assets pursuant to set-off provisions (note 18) 27,652 (26,455) - 106 78 27,652 - (26,455) - Net deferred tax assets Movements: Opening balance at 1 July Change on adoption of AASB 132 and AASB 139 (note 1) Credited/(charged) to the income statement (note 8) Credited/(charged) to equity Closing balance at 30 June Deferred tax assets to be recovered after more than 12 months Deferred tax assets to be recovered within 12 months 1,197 1,206 1,197 1,206 1,206 23,132 3,314 - 27,652 19,604 8,048 27,652 1,158 1,206 1,158 - 23,132 (58) 106 3,314 - - (58) 106 1,206 27,652 1,206 403 803 19,604 8,048 403 803 1,206 27,652 1,206 54 N OT E 14 N O N - CURREN T A SSE T S – I N TA NGI BL E A SSE T S At 1 July 2004 Cost Accumulated amortisation Net book amount Year ended 30 June 2005 Opening net book amount Additions Assets included in a disposal group classified as held for sale and other disposals Amortisation charge Closing net book amount At 30 June 2005 Cost Accumulated amortisation Net book amount Year ended 30 June 2006 Opening net book amount Additions Amortisation charge Closing net book amount At 30 June 2006 Cost Accumulated amortisation Net book amount *Capitalised computer software includes internally generated software development costs. Consolidated Parent entity Computer Software* $’000 Computer Software* $’000 1,827 (1,053) 774 774 1,065 (1) (366) 1,472 2,893 (1,421) 1,472 1,827 (1,053) 774 774 1,065 (1) (366) 1,472 2,893 (1,421) 1,472 Consolidated Parent entity Computer Software* $’000 Computer Software* $’000 1,472 883 (280) 2,075 3,776 (1,701) 2,075 1,472 883 (280) 2,075 3,776 (1,701) 2,075 55 Mortgage Choice Limited Notes to the financial statements continued 30 June 2006 N OT E 15 CURREN T L I A BI L I T I ES – T R A DE A N D OT HER PAYA BL ES Trade payables(1) Net present value of future trailing commissions payable Licence fees repayable Other payables Net present value of future trailing commissions payable Transition to AASB 132 and AASB 139 Consolidated Parent entity 2006 $’000 2005 $’000 2006 $’000 2005 $’000 8,454 24,174 400 3,237 7,948 - 372 3,265 8,454 24,174 400 3,237 7,948 - 372 3,265 36,265 11,585 36,265 11,585 The Group has taken the exemption available under AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards to apply AASB 132 Financial Instruments: Disclosure and Presentation and AASB 139 Financial Instruments: Recognition and Measurement from 1 July 2005. At the date of transition to these standards at 1 July 2005, both the Group and the parent entity had a net present value of future trailing commissions payable not included in current liabilities under AGAAP of $20,991,000. (1) Loan Book Security Trust The loan book bonus is a commission payable based on the outstanding balances of loans introduced by Mortgage Choice Franchisees. The Loan Book Security Scheme provides security for the loan book bonus payable to certain eligible Franchisees based on certain performance criteria. Mortgage Choice Limited has granted two charges in favour of a trustee company on behalf of the eligible Franchisees. At this time the trustee is a controlled entity of Mortgage Choice Limited. The first charge is over a specified percentage of the Company’s trailing commission income. The purpose of this charge is to be the first source of funds available to eligible Franchisees for the payment of loan book bonus payments in the event that administration or liquidation occurs. The charge will crystallise and can be enforced by eligible Franchisees in the event of liquidation or administration of Mortgage Choice Limited. As at 30 June 2006, the amount subject to charge resulting from applying the specified percentage to the trailing commission subsequently received by Mortgage Choice Limited is $2,528,625 (2005 - $2,040,764). This is included as part of the balance of trade creditors at 30 June 2006 and is subject to charge until disbursed to the eligible Franchisees. The amount subject to the charge will vary dependant on trailing commission received by Mortgage Choice Limited from time to time and Franchisee performance. The second charge is a floating charge over all of the assets of Mortgage Choice Limited. It is limited in the powers it allows the security trustee company to exercise prior to liquidation. Its primary purpose is to ensure that the loan book security structure need not be subject to the moratorium arising if an administrator were to be appointed to Mortgage Choice Limited. Only after liquidation does this charge confer comprehensive mortgagee powers on the security trustee. Fair values The carrying amounts of trade and other payables at year end is a reasonable approximation of their fair values with the exception of the net present value of future trailing commissions payable which are accounted for at amortised cost. N OT E 16 CURREN T L I A BI L I T I ES – PROV ISI O NS Employee entitlements –annual leave 517 530 517 530 Consolidated Parent entity 2006 $’000 2005 $’000 2006 $’000 2005 $’000 56 N OT E 17 N O N - CURREN T L I A BI L I T I ES – PAYA BL ES Net present value of future trailing commissions payable Licence fees repayable Net present value of future trailing commissions payable Transition to AASB 132 and AASB 139 Consolidated Parent entity 2006 $’000 2005 $’000 2006 $’000 2005 $’000 64,010 200 64,210 - 64,010 232 232 200 64,210 - 232 232 The Group has taken the exemption available under AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards to apply AASB 132 Financial Instruments: Disclosure and Presentation and AASB 139 Financial Instruments: Recognition and Measurement from 1 July 2005. At the date of transition to these standards at 1 July 2005, both the Group and the parent entity had a net present value of future trailing commissions payable not included in non-current liabilities under AGAAP of $56,119,000. N OT E 18 N O N - CURREN T L I A BI L I T I ES – DEFERRED TA X L I A BI L I T I ES The balance comprises temporary differences attributable to: Amounts recognised in profit or loss NPV of future trailing commissions receivable Less amortisation of trailing commissions receivable Amounts recognised directly in equity NPV of future trailing commissions receivable at 1 July 2005 Set-off of deferred tax assets pursuant to set-off provisions (note 13) Net deferred tax liabilities Movements: Opening balance at 1 July Change on adoption of AASB 132 and AASB 139 (note 1) Charged to the income statement (note 8) Closing balance at 30 June Deferred tax liabilities to be settled after more than 12 months Deferred tax liabilities to be settled within 12 months Consolidated Parent entity 2006 $’000 2005 $’000 2006 $’000 2005 $’000 17,767 (13,022) 4,745 38,067 42,812 (26,455) 16,357 - 38,067 4,745 42,812 30,547 12,265 42,812 17,767 (13,022) 4,745 38,067 42,812 (26,455) 16,357 - 38,067 4,745 42,812 30,547 12,265 42,812 - - - - - - - - - - - - - - - - - - - - - - - - - - N OT E 19 N O N - CURREN T L I A BI L I T I ES – PROV ISI O NS Employee entitlements – long service leave 185 144 185 144 Consolidated Parent entity 2006 $’000 2005 $’000 2006 $’000 2005 $’000 57 Mortgage Choice Limited Notes to the financial statements continued 30 June 2006 N OT E 20 CO N T RI BU T ED EQU I T Y (a) Share capital Parent entity Parent entity 2006 number ’000 2005 number ’000 2006 $’000 2005 $’000 Ordinary shares – fully paid 117,593 117,593 203 203 Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. (b) Movements in ordinary share capital: Date 1 July 2004 20 July 2004 27 July 2004 Details Opening balance Issue of shares upon exercise of options Issue of shares upon exercise of options 4 August 2004 Share issue for no consideration 6 August 2004 Capital reduction 9 August 2004 Offset, by share capital reduction, of accumulated losses Number of shares Transaction price $’000 109,830,000 1,098,300 1,098,300 74,667 $0.988 $0.988 - 8,293 1,085 1,085 - - - $0.08 (8,962) - (6,780) 10 August 2004 Initial Public Offering 5,491,500 $1.05 10 August 2004 Initial Public Offering –associated costs Deferred tax asset in relation to IPO costs 30 June 2006 Balance - - 117,592,767 - - 5,766 (406) 122 203 ■ During July 2004, 2,196,600 shares were issued for 98.8 cents each resulting from the exercise of options prior to transfer and allotment of shares under the Initial Public Offering. ■ A capital reduction of $8,962,000 was paid on 6 August 2004 by returning 8.0 cents per share in cash to the existing shareholders. ■ On 9 August 2004, an offset by share capital reduction, of accumulated losses of $6,780,000 against contributed equity, occurred three business days after the transfer and allotment of shares under the offer. ■ On 10 August 2004, issue of 5,491,500 ordinary shares to franchises, employees and other persons raising $5,360,000 (net of issue costs of $406,000) and listing of the Company on the ASX. (c) Employee share scheme Information relating to the employee share scheme, including details of shares issued under the scheme, are set out in note 32. (d) Options On 10 December 2001, 2,196,600 share options were issued to former non-executive Directors in accordance with shareholder approval. These share options were exercised on 20 July 2004 and 27 July 2004 at 98.8 cents per share. Information relating to the Mortgage Choice Executive Performance Option Plan, including details of options issued, exercised and lapsed during the financial year and options outstanding at the end of the financial year are set out in the Directors report – refer to section D of the Remuneration report on pages 25 to 28. 58 N OT E 21 RESERV ES A N D RE TA I N ED PRO FI T S (a) Reserves Share-based payments reserve 343 - 343 - Consolidated Parent entity 2006 $’000 2005 $’000 2006 $’000 2005 $’000 Movements: General reserve Balance 1 July Dividends provided for out of general reserve Balance 30 June Movements: Share-based payments reserve Balance 1 July Options and performance shares expensed Balance 30 June (b) Retained profits/(accumulated losses) Balance 1 July - - - 91 252 343 5,349 (5,349) - - 91 91 - - - 91 252 343 5,349 (5,349) - - 91 91 Consolidated Parent entity 2006 $’000 2005 $’000 2006 $’000 2005 $’000 9,489 (6,780) 9,489 (6,780) Offset, by share capital reduction, of accumulated losses - 6,780 - 6,780 Adjustment on adoption of AASB 132 and AASB 139, net of tax (note 33) 34,847 - 34,847 Net profit for period Dividends Balance 30 June (c) Nature and purpose of reserves Share-based payments reserve 17,860 12,530 17,860 (15,287) (3,041) (15,287) 46,909 9,489 46,909 - 12,530 (3,041) 9,489 The share-based payments reserve is used to recognise the fair value of options and performance shares granted but not vested. 59 Mortgage Choice Limited Notes to the financial statements continued 30 June 2006 N OT E 22 DI V I DEN DS (a) Ordinary shares Interim dividend declared out of the general reserve of 3.5 cents per fully paid share paid on 5 August 2004: Fully franked based on tax paid @ 30.0% 3.5 cents per share Interim dividend declared out of the general reserve and out of profits of the Company for the half-year ended 31 December 2004 of 3.8 cents per fully paid share paid on 29 April 2005: Fully franked based on tax paid @ 30.0% 3.8 cents per share From general reserve From profit Final dividend declared out of profits of the Company for the year ended 30 June 2005 of 6.0 cents per fully paid share paid on 19 September 2005: Fully franked based on tax paid @ 30.0% 6.0 cents per share Interim dividend declared out of profits of the Company for the half-year ended 31 December 2005 of 5.0 cents per fully paid share paid 21 March 2006: Fully franked based on tax paid @ 30.0% 5.0 cents per share Special dividend declared out of retained profits at 31 December 2005 of 2.0 cents per fully paid share paid 21 March 2006: Fully franked based on tax paid @ 30.0% 2.0 cents per share Parent entity 2006 $’000 2005 $’000 - - - 7,056 5,879 2,352 15,287 3,921 1,428 3,041 - - - 8,390 (b) Dividends not recognised at year end In addition to the above dividends, since year end the directors have recommended the payment of a final dividend of 7.5 cents per fully paid ordinary share, (2005 - 6.0 cents) fully franked based on tax paid at 30.0%. The aggregate amount of the proposed dividend expected to be paid on 18 September 2006 out of retained profits at 30 June 2006, but not recognised as a liability at year end, is 8,819 (c) Franked dividend The franked portions of the final dividends recommended after 30 June 2006 will be franked out of existing franking credits or out of franking credits arising from the payment of income tax in the year ending 30 June 2007. Franking credits available for subsequent financial years based on a tax rate of 30.0% Consolidated Parent entity 2006 $’000 2005 $’000 2006 $’000 2005 $’000 4,542 4,539 4,542 4,539 The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for: (a) franking credits that will arise from the payment of the amount of the provision for income tax; (b) franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; and (c) franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date. The consolidated amounts include franking credits that would be available to the parent entity if distributable profits of subsidiaries were paid as dividends. The impact on the franking account of the dividend recommended by the Directors since year end, but not recognised as a liability at year end, will be a reduction in the franking account of $3,788,000 (2005: $3,024,000). 60 N OT E 23 K E Y M A N AGEMEN T PER SO N N EL DISCLOSURES (a) Directors The following persons were directors of Mortgage Choice Limited during the financial year: (i) Chairman – non-executive P D Ritchie (ii) Executive Directors P A Lahiff, Managing Director (iii) Non-executive Directors P G Higgins R G Higgins S C Jermyn D E Ralston (b) Other key management personnel The following persons, all employees of Mortgage Choice Limited, also had authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, during the financial year: Name Position A D Crossley A J Fraser M C Newton D M Hoskins W J O’Rourke M N Writer L A Wyatt D B Bayes I C Pepper Chief Operating Officer (3/10/2005 – 30/6/2006) Chief Financial Officer (1/7/2005 – 3/10/2005) Chief Financial Officer (3/10/2005 – 30/6/2006) Corporate Finance & Strategy (1/7/2005 – 3/10/2005) Chief Information Officer Company Secretary National Manager Corporate Affairs Human Resources Manager (19/9/05 – 30/6/06) National Marketing Manager (15/5/2006 - 30/6/2006) Chief Operating Officer 1/7/2005 – 30/9/2005) National Marketing Manager (1/7/2005 - 19/5/2006) All of the above persons were also specified executives during the year ended 30 June 2005, except for M N Writer who commenced employment with the group on 19 September 2005 and L A Wyatt who commenced employment with the Group on 15 May 2006. (c) Key management personnel compensation Short-term employee benefits Post-employment benefits Share-based payments Consolidated Parent entity 2006 $ 2005 $ 2006 $ 2005 $ 2,613,620 2,426,671 2,613,620 2,426,671 239,604 214,709 239,604 214,709 157,764 90,990 157,764 90,990 3,010,988 2,732,371 3,010,988 2,732,371 The Company has taken advantage of the relief provided by Corporations Regulations CR2M.6.04 and has transferred the detailed remuneration disclosures to the Directors’ report. The relevant information can be found in sections A-C of the remuneration report on pages 20-24. 61 Mortgage Choice Limited Notes to the financial statements continued 30 June 2006 (d) Equity instrument disclosures relating to key management personnel (i) Options and performance shares provided as remuneration and shares issued on exercise of such options Details of options and performance shares provided as remuneration and shares issued on the exercise of such options, together with terms and conditions of the options, can be found in section D of the remuneration report on pages 25-28. (ii) Option holdings The numbers of options over ordinary shares in the Company held during the financial year by each Director of Mortgage Choice Limited and other key management personnel of the Group, including their personally related parties, are set out below. 2006 Name Directors of Mortgage Choice Limited Balance at the start of the year Granted during the year as compensation Exercised during the year Other changes during the year Balance at the end of the year Vested and exercisable at the end of the year P A Lahiff 323,200 424,100 Other key management personnel of the Group A D Crossley A J Fraser M C Newton D S Bayes 2005 Name Directors of Mortgage Choice Limited P A Lahiff Other key management personnel of the Group A D Crossley M C Newton D S Bayes 81,800 128,600 - 71,400 92,200 108,900 126,000 - Balance at the start of the year Granted during the year as compensation Exercised during the year - - - - 323,200 81,800 92,200 126,000 - - - - - - - - - - - - - (126,000) 747,300 210,400 71,400 201,100 - - - - - - Other changes during the year Balance at the end of the year Vested and exercisable at the end of the year - - - - 323,200 81,800 92,200 126,000 - - - - 62 (iii) Performance share rights The number of performance share rights held during the financial year by each Director of Mortgage Choice Limited and other key management personnel of the Group, including their personally related parties, are set out below. 2006 Name Directors of Mortgage Choice Limited Balance at the start of the year Granted during the year as compensation Exercised during the year Other changes during the year Balance at the end of the year Vested at the end of the year P A Lahiff 97,000 83,300 Other key management personnel of the Group A D Crossley A J Fraser M C Newton D M Hoskins W J O’Rourke M N Writer D S Bayes* I C Pepper* 24,500 24,700 27,600 33,900 30,800 - 37,807 30,500 25,300 14,000 21,400 26,200 23,800 14,200 - - * Entitlement to shares has been forfeited as part of termination of employment. 2005 Name Directors of Mortgage Choice Limited P A Lahiff Other key management personnel of the Group A D Crossley A J Fraser M C Newton D M Hoskins W J O’Rourke D S Bayes I C Pepper P V Borg* Balance at the start of the year Granted during the year as compensation Exercised during the year - - - - - - - - - 97,000 24,500 24,700 27,600 33,900 30,800 37,807 30,500 31,200 * Entitlement to shares has been forfeited as part of termination of employment. - - - - - - - - - - - - - - - - - - - - - - - - - (37,807) (30,500) 180,300 49,800 38,700 49,000 60,100 54,600 14,200 - - - - - - - - - - - Other changes during the year Balance at the end of the year Vested at the end of the year - - - - - - - - (31,200) 97,000 24,500 24,700 27,600 33,900 30,800 37,807 30,500 - - - - - - - - - - 63 Mortgage Choice Limited Notes to the financial statements continued 30 June 2006 (vi) Share holdings The number of shares in the Company held during the financial year by each Director of Mortgage Choice Limited and other key management personnel of the Group, including their personally related parties, are set out below. There were no shares granted during the reporting period as compensation. Balance at the start of the year Received during the year on the exercise of options Other changes during the year Balance at the end of the year 2006 Name Directors of Mortgage Choice Limited P D Ritchie P A Lahiff P G Higgins R G Higgins S C Jermyn D E Ralston Other key management personnel of the Group A D Crossley A Fraser M C Newton D M Hoskins W J O’Rourke M N Writer L A Wyatt D Bayes* I C Pepper* 297,297 100,000 25,286,534 26,841,583 2,000,000 50,000 - - - 50 1,500 - - - 11,000 *I C Pepper and D Bayes were not employees of the Group at 30 June 2006. 2005 Name Directors of Mortgage Choice Limited Balance at the start of the year Received during the year on the exercise of options P D Ritchie P A Lahiff P G Higgins R G Higgins S C Jermyn D E Ralston Other key management personnel of the Group A D Crossley A Fraser M C Newton D M Hoskins D Bayes I C Pepper C P Canty - - 36,959,950 38,515,000 - - - - - 50 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 52,828 - 350,125 100,000 (16,850,000) 8,436,534 (6,850,000) 19,991,583 2,000,000 4,000,000 50,000 50,000 - - - - - - - N/a N/a - - - 50 1,500 - - N/a N/a Other changes during the year Balance at the end of the year 297,297 100,000 297,297 100,000 (11,673,416) 25,286,534 (11,673,417) 26,841,583 2,000,000 2,000,000 50,000 50,000 - - - - - - - - 50 - 11,000 11,000 - - Shareholdings of Directors and other key management personnel of the Group include those that have been disclosed under representation made to them by the parties within the AASB 124 Related Party Disclosures. The Directors and other key management personnel have relied upon the representations made as they have no control or influence over the financial affairs of the personally related entities to substantiate the shareholdings declared. Where a personally related entity has declined to provide shareholding details, the shareholding of that personally related entity has been assumed to be nil. 64 N OT E 24 REMU N ER AT I O N O F AU DI TOR S During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and non-related audit firms: Assurance services 1. Audit services PricewaterhouseCoopers Australian firm: Audit and review of financial reports and other audit work under the Corporations Act 2001 (Cth) Total remuneration for audit services 2. Other assurance services PricewaterhouseCoopers Australian firm: Due diligence services Other assurance services Total remuneration for other assurance services Consolidated Parent 2006 $ 2005 $ 2006 $ 2005 $ 228,350 122,000 228,350 122,000 228,350 122,000 228,350 122,000 - 7,000 7,000 40,401 16,000 56,401 - 7,000 7,000 40,401 16,000 56,401 Total remuneration for assurance services 235,350 178,401 235,350 178,401 Taxation services PricewaterhouseCoopers Australian firm: Tax compliance services, including review of company income tax returns 18,800 110,330 18,800 110,330 Other tax services 15,283 10,475 15,283 10,475 Total remuneration for taxation services 34,083 120,805 34,083 120,805 Advisory services PricewaterhouseCoopers Australian firm: Initial Public Offering Services Total remuneration for advisory services N OT E 25 CO N T I NGENCI ES Contingent liabilities - - 115,380 115,380 - - 115,380 115,380 The parent entity and consolidated entity had contingent liabilities at 30 June 2006 in respect of: Guarantees Guarantees given in respect of: ■ premises leases $244,666 (2005: $330,857); and ■ Western Australia broker licences $50,000 (2005: $300,000). Contingent claims From time to time disputes occur between the Company and its Franchisees in the normal course of operation, a number of which may be unresolved at any point in time. At 30 June 2006 there were no disputes or claims in progress that are expected to have a material financial impact on the Company. No material losses are anticipated in respect of any of the above contingent liabilities. 65 Mortgage Choice Limited Notes to the financial statements continued 30 June 2006 N OT E 26 COMM I T MEN T S Operating leases Operating lease expenditure contracted for at the reporting date but not recognised as liabilities payable: Within one year Later than one year but not later than five years Consolidated Parent entity 2006 $’000 2005 $’000 2006 $’000 2005 $’000 623 807 1,430 701 1,451 2,152 623 807 1,430 701 1,451 2,152 Operating leases The Company leases various offices under non-cancellable operating leases expiring within one to eight years. The leases have varying terms, escalation clauses and renewal rights. On renewal, the terms of the leases are renegotiated. The Company also leases various office equipment under non-cancellable operating leases. N OT E 27 REL AT ED PA RT Y T R A NSACT I O NS (a) Parent entities The parent entity within the Group is Mortgage Choice Limited. (b) Subsidiaries Interests in subsidiaries are set out in note 28. (c) Key management personnel Disclosures relating to key management personnel are set out in note 23. There were no transactions between Mortgage Choice Limited and its subsidiaries during the years ended 30 June 2006 and 30 June 2005. N OT E 28 SU BSI DI A RI ES Name of entity Country of incorporation Class of Shares Equity holding 2006 % 2005 % Cost of parent entity’s investment 2006 $ 2005 $ Mortgage Choice (W.A.) Pty Limited Australia Ordinary MC Loan Book Security Pty Limited Australia Ordinary Choice Share Limited (deregistered 9/10/05) Finance Australia Pty Ltd (deregistered 14/8/05) MC Franchise System Pty Ltd (deregistered 14/8/05) FAC Pty Ltd (deregistered 21/8/05) Mortgage Choice Insurance Broker Pty Ltd (deregistered 21/8/05) Australia Ordinary Australia Ordinary Australia Ordinary Australia Ordinary Australia Ordinary 100 100 - - - - - 100 100 100 100 100 100 100 100 2 - - - - - 100 2 5 2 2 2 2 102 115 66 N OT E 29 E V EN T S OCCURRI NG A F T ER T HE BA L A NCE SHEE T DAT E Dividend payment A final ordinary dividend of $8,819,000 (7.5 cents per fully paid share) was declared out of profits of the Company for the year ended 30 June 2006 on 23 August 2006 and paid on 18 September 2006. The financial effects of the above transaction have not been brought to account at 30 June 2006. N OT E 30 RECO NCI L I AT I O N O F PRO FI T A F T ER I NCOME TA X TO N E T CA SH I N FLOW FROM OPER AT I NG ACT I V I T I ES Profit for the year Depreciation and amortisation Non-cash employee expense benefits – share-based payments Interest received from the trailing commissions Interest paid on the trailing commissions Interest received on cash and deposits at call Net loss on sale of non-current assets Change in operating assets and liabilities: Consolidated Parent entity 2006 $’000 2005 $’000 2006 $’000 2005 $’000 17,860 12,530 17,860 12,530 806 252 (15,216) 9,320 (681) 74 800 91 - - (588) 12 806 252 (15,216) 9,320 (681) 74 800 91 - - (588) 12 (Increase)/decrease in trade and other debtors (2,345) (1,282) (2,345) (1,282) Decrease/(increase) in deferred tax asset (Increase)/decrease in other operating assets Increase/(decrease) in trade creditors (Decrease)/increase in other operating liabilities (Decrease)/increase in provision for income taxes payable Increase/(decrease) in provision for deferred income tax Increase/(decrease) in other provisions 9 (255) 2,248 (32) (753) 1,422 41 74 1,001 (453) (213) 1,792 - 31 9 (255) 2,248 (32) (753) 1,422 41 74 1,001 (453) (213) 1,792 - 31 Net cash inflow from operating activities 12,750 13,795 12,750 13,795 67 Mortgage Choice Limited Notes to the financial statements continued 30 June 2006 N OT E 31 E A RN I NGS PER SH A RE Basic earnings per share Diluted earnings per share Earnings used in calculating earnings per share – profit from continuing operations Consolidated 2006 Cents 2005 Cents 15.2 15.0 $’000 17,860 10.7 10.7 $’000 12,530 2006 Number 2005 Number Weighted average number of shares used as the denominator Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share 117,592,767 116,848,597 Adjustments for calculation of diluted earnings per share: Rights and options Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 1,179,070 424,067 118,771,837 117,272,664 Information concerning the classification of securities (a) Options Options granted to employees under the Mortgage Choice Executive Performance Option Plan are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share. The options have not been included in the determination of basic earnings per share. Details relating to the options are set out in the remuneration report. (b) Rights Rights to shares issued to employees under the Mortgage Choice Performance Share Plan are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share. The rights have not been included in the determination of basic earnings per share. Details relating to the options are set out in the remuneration report. 68 N OT E 32 SH A RE- BA SED PAY MEN T S (a) Executive Performance Option Plan (EPOP) The Executive Performance Option Plan may be offered on an annual basis to a limited number of the most senior executives within the Company. The issue of options has been confined to the Managing Director and the Company’s three most senior executives, being the Chief Financial Officer, Chief Operating Officer and Chief Information Officer. Participation in the EPOP provides one component of the market-based long-term incentive available to the selected executives within their aggregate remuneration package. Under the terms of the EPOP, options (each over one share) are granted to senior executives identified by the Board. Any options offered and granted to the executives have an exercise price based on the market value of the Company’s shares at the time of offer. Market value will be the trade-weighted average price of the Company’s shares over the one-week period immediately preceding the date of offer. The options offered to executives under the EPOP are subject to performance conditions set by the Board. Offers have a three-year performance period. In relation to options offered during the year ended 30 June 2006, the performance requirement will be based on the total shareholder return (TSR) of the Company compared to the TSRs of a comparator group of companies. TSR is the percentage increase in the Company’s share price plus reinvested dividends, expressed as a percentage of the initial investment, and reflects the increase in value delivered to Shareholders over the period. The Company’s TSR will be compared to the TSRs of companies in a comparator group comprised of selected S & P ASX Top 300 companies, being entities of broadly similar size to that of Mortgage Choice, but excluding mining and resource companies and property trust companies or trusts, over the performance period. The comparator companies have been drawn from a group within an approximate range of 40% to 200% of the market capitalisation of Mortgage Choice at the time of listing. The companies comprising the comparator group are iiNET Limited, Invocare Limited, Clough Limited, Programmed Maintenance Services Limited, Rebel Sport Limited, Sunland Group Limited, Globe International Limited, Psivida Limited, Village Life Limited, Capral Aluminium Limited, Brazin Limited, Peptech Limited, AAV Limited, Hpal Limited, SDI Limited, Gribbles Group Limited (The), ERG Limited, Schaffer Corporation Limited, Nylex Limited, Silex Systems Limited, Volante Group Limited, Technology One Limited, SAI Global Limited, Henry Walker Eltin Group Limited, Cellestis Limited, Villa World Limited, Boom Logistics Limited, Sirtex Medical Limited, Vision Systems Limited, Collection House Limited, Maxitrans Industries Limited, Keycorp Limited, Symex Holdings Limited, Virotec International Limited, SMS Management & Technology Limited, UXC Limited, Norwood Abbey Limited, Institute Of Drug Technology Australia Limited, Macmahon Holdings Limited, Tempo Services Limited, Agenix Limited, Unitract Limited, Genetic Technologies Limited, Atlas Group Holdings Limited, Circadian Technologies Limited, Peppercorn Investment Fund, Primelife Corporation Limited, Kresta Holdings Limited, Coffey International Limited, Orbital Engine Corporation Limited, Citect Corporation Limited and Multimedia Limited. If any of the companies in the comparator group ceases to exist in its current form for any reason other than its liquidation, or if the Board determines in its discretion that a company should no longer be in the comparator group because of an anomaly, distortion or other event that is not directly related to the financial performance of that company, that company will cease to form part of the comparator group. Options will not become exercisable unless Mortgage Choice’s TSR is above the 50th percentile of the comparator group at the end of the performance period. Above the 50th percentile, options will vest and become exercisable in accordance with a vesting scale. The vesting scale is as follows: Company Performance (TSR Percentile Ranking) Percentage of offered options allocated At or below the 50th percentile At the 51st percentile 75th percentile or above 0% 52% 100% Between the 51st percentile and 75th percentiles, an additional 2.0% of options will vest for every percentile increase in TSR ranking. The rules of the EPOP permit the Company to issue new shares or to purchase shares on-market for the purposes of satisfying the exercise of options. 69 Mortgage Choice Limited Notes to the financial statements continued 30 June 2006 Any options which do not become exercisable following the application of the performance condition and vesting scale will lapse. An option that has become exercisable but is not exercised will lapse on the earlier of: ■ 10 years after the date of offer; ■ three months, or such other period determined by the Board, after the participant ceases employment for a reason other than a ‘qualifying reason’ (i.e. death, total and permanent disability, redundancy, and any other reason determined by the Board); and ■ 12 months, or such other period determined by the Board, after the participant ceases employment for a ‘qualifying reason’. Where a participant ceases to be employed by the Company other than because of a ‘qualifying reason’, any options that have not become exercisable will lapse. However, if there is cessation of employment due to a ‘qualifying reason’, the Board may determine that some or all of the options may vest. In the event of a change of control of the Company, all options will vest. If the Board determines that a participant has acted fraudulently or dishonestly, has committed an act of harassment or discrimination, is in serious breach of any duty to Mortgage Choice, or, in the Board’s reasonable opinion, has brought Mortgage Choice into serious disrepute, any options held by the participant will lapse. Details of options over ordinary shares in the Company provided as remuneration to each Director and key management personnel of Mortgage Choice Limited are set out below. When exercisable, each option is convertible into one ordinary share of Mortgage Choice Limited. Further information on the options is set out in the remuneration report. Set out below are summaries of options granted under the plan: Grant Date Expiry date Exercise price Balance at start of the year Granted during the year Exercised during the year Expired during the year Forfeited during the year Balance at end of the year Exercisable at end of the year Number Number Number Number Number Number Number Consolidated and parent entity – 2006 10 August 2004 4 January 2005 10 August 2014 4 January 2015 24 February 2005 24 February 2015 2 September 2005 2 September 2015 Total Weighted average exercise price Grant Date $1.05 415,400 $0.91 126,000 $1.08 81,800 - - - $1.43 - 733,000 623,200 733,000 $1.03 $1.43 - - - - - - - - - - - 415,400 (126,000) - - - 81,800 733,000 (126,000) 1,230,200 $0.91 $1.28 - - - - - - Expiry date Exercise price Balance at start of the year Granted during the year Exercised during the year Expired during the year Forfeited during the year Balance at end of the year Exercisable at end of the year Number Number Number Number Number Number Number Consolidated and parent entity – 2005 10 August 2004 4 January 2005 10 August 2014 4 January 2015 24 February 2005 24 February 2015 $1.05 $0.91 $1.08 Total Weighted average exercise price - - - - - 621,500 126,000 81,800 829,300 $1.03 - - - - - - - - - - (206,100) 415,400 - - 126,000 81,800 (206,100) 623,200 $1.05 $1.03 - - - - - The weighted average remaining contractual life of share options outstanding at the end of the period was 1.78 years (2005 - 2.26 years). The assessed fair value at grant date of options granted to individuals is allocated equally over the period from grant date to vesting date, and the amount is included in the remuneration tables on the previous page. Fair values at grant date are independently determined using a Monte Carlo simulation model utilising a Black-Scholes option pricing model framework that takes into account the exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the 70 non-tradeable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. The model inputs for options granted during the year ended 30 June 2006 included: (a) options are granted for no consideration, each tranche vests and is exercisable after three anniversaries of the date of grant; (b) exercise price: $1.43; (c) grant date: 2 September 2005; (d) expiry date: 2 September 2015; (e) share price at grant date: $1.43; (f) (g) (h) expected price volatility of the company’s shares: 30.0%; expected dividend yield: 6.0%; and risk-free interest rate: 5.0%. (b) Performance Share Plan (PSP) The PSP permits eligible senior managers identified by the Board to be offered conditional entitlements to shares. The shares allocated to those employees are subject to the achievement of performance requirements specified by the Board. The PSP is designed to provide the long-term incentive component of remuneration for senior managers, in line with the Company’s overall reward strategy, which aims to attract, motivate and retain high-performing managers. Participation in the PSP is offered on an annual basis. Eligible senior managers are offered shares to a value determined by reference to the Company’s reward policy and market practice with regard to long-term incentive arrangements provided by peer organisations. The actual number of shares allocated to participants depends on Mortgage Choice’s performance against the performance criteria. Any conditional entitlements that participants do not become entitled to at the end of the performance period (i.e. as the performance condition has not been met in full), will lapse. The performance requirements and vesting scale applicable to the offers under the PSP during the year ended 30 June 2006 are identical to those specified for the initial offer under the Executive Performance Option Plan. The rules of the PSP permit the Company to issue new shares or to purchase shares on-market if the performance requirements are satisfied at the end of the three-year performance period. Participants will not be required to pay for any shares that may be allocated to them under the PSP. Until the shares are released from the PSP, they will remain subject to the PSP rules and to the ‘holding lock’ applied pursuant to those rules, and the participant will be restricted in his or her ability to deal in those shares. Shares will not be released from the PSP and will remain subject to a holding lock until a Notice of Withdrawal, that has been approved by the Board, is lodged with the Plan Administrator in respect of them. Once a Notice of Withdrawal is accepted, the Plan Administrator will release the holding lock in respect of the shares which are the subject of that Notice. A Notice of Withdrawal may be lodged by a participant following the earlier of: ■ 1 July in the year (being a period commencing 1 July and ending 30 June) that is 10 years after the year in which the offer is made and is accepted by the participant; ■ the participant ceasing to be an employee of the Company; ■ a ‘capital event’ (generally, a successful takeover offer or scheme of arrangement relating to the Company) occurring; or ■ the date upon which the Board gives its written consent to the lodgement of a Notice of Withdrawal by the participant. While shares remain subject to the PSP rules, participants will, in general, enjoy the rights attaching to those Shares (such as voting or dividend rights etc). These rights are not available to participants prior to the performance requirements being met. Where a participant ceases to be employed by Mortgage Choice prior to the end of the performance period, other than because of a ‘qualifying reason’ (i.e. death, total and permanent disability, redundancy, and any other reason determined by the Board), any conditional entitlements to receive shares will lapse. However, in the event of a change in control of the Company or if there is cessation of employment due to a ‘qualifying reason’, the Board may determine that some or all of the shares may be allocated to the participant. If the Board determines that a participant has acted fraudulently or dishonestly, has committed an act of harassment or discrimination, is in serious breach of any duty to Mortgage Choice, or, in the Board’s reasonable opinion, has brought Mortgage Choice into serious disrepute, any shares to which the participant may have become entitled at the end of the performance period, and any shares held by the participant under the PSP are forfeited by the participant. 71 Mortgage Choice Limited Notes to the financial statements continued 30 June 2006 If the Board determines that a participant has acted fraudulently or dishonestly, has committed an act of harassment or discrimination, is in serious breach of any duty to Mortgage Choice, or, in the Board’s reasonable opinion, has brought Mortgage Choice into serious disrepute, any shares to which the participant may have become entitled at the end of the performance period, and any shares held by the participant under the PSP are forfeited by the participant. Details of performance shares in the Company provided as remuneration to each Director and key management personnel of Mortgage Choice Limited are set out below. Further information on the options is set out in the remuneration report. Set out below are summaries of performance shares conditionally issued under the plan: Offer Date Vesting date Value Balance at start of the year Granted during the year Exercised during the year Expired during the year Forfeited during the year Balance at end of the year Exercisable at end of the year Number Number Number Number Number Number Number Consolidated and parent entity – 2006 10 August 2004 10 August 2007 6 September 2004 6 September 2007 4 January 2005 4 January 2008 24 February 2005 24 February 2008 2 September 2005 2 September 2008 Total Weighted average exercise price $1.05 372,500 $1.05 24,800 $0.91 155,707 $1.08 24,500 - - - - $1.43 - 479,200 577,507 479,200 $1.01 $1.43 - - - - - - - - - - - - (75,100) 297,400 - 24,800 (37,807) 117,900 - 24,500 (41,600) 437,600 (154,507) 902,200 $1.12 $1.21 - - - - - - - Offer Date Vesting date Value Balance at start of the year Granted during the year Exercised during the year Expired during the year Forfeited during the year Balance at end of the year Exercisable at end of the year Number Number Number Number Number Number Number Consolidated and parent entity – 2005 10 August 2004 10 August 2007 6 September 2004 6 September 2007 4 January 2005 4 January 2008 24 February 2005 24 February 2008 $1.05 $1.05 $0.91 $1.08 Total Weighted average exercise price - - - - - - 422,300 56,000 155,707 24,500 658,507 $1.02 - - - - - - - - - - (49,800) 372,500 (31,200) 24,800 - - 155,707 24,500 (81,000) 577,507 $1.05 $1.01 - - - - - - The weighted average remaining contractual life of performance shares outstanding at the end of the period was 1.70 years (2005 - 2.25 years). The assessed fair value at grant date of share rights granted to individuals is allocated equally over the period from grant date to vesting date, and the amount is included in the remuneration tables above. Fair values at grant date are independently determined using a Monte Carlo simulation model utilising a Black-Scholes option pricing model framework that takes into account the term of the rights, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the rights, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the share rights. 72 The model inputs for performance shares granted during the year ended 30 June 2006 included: (a) share rights are granted for no consideration, each tranche vests and is exercisable after three anniversaries of the date of grant; (b) grant date: 2 September 2005; (c) expiry date: 2 September 2015; (d) share price at grant date: $1.43; (e) expected price volatility of the company’s shares: 30.0%; (f) expected dividend yield: 6.0%; and (g) risk-free interest rate: 5.0%. (c) Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were as follows: Options issued under EPOP Shares issues under PSP Consolidated Parent entity 2006 $’000 2005 $’000 2006 $’000 2005 $’000 72 180 252 20 71 91 72 180 252 20 71 91 73 Mortgage Choice Limited Notes to the financial statements continued 30 June 2006 N OT E 33 E X PL A N AT I O N O F T R A NSI T I O N TO AUS T R A L I A N EQU I VA L EN T S TO I FR S (1) Reconciliation of equity reported under previous Australian Generally Accepted Accounting Principles (AGAAP) to equity under Australian equivalents to IFRSs (AIFRS) (a) At the date of transition to AIFRS: 1 July 2004 Consolidated Effect of transition to AIFRS $’000 Previous AGAAP $’000 Notes AIFRS $’000 Previous AGAAP $’000 Parent entity Effect of transition to AIFRS $’000 AIFRS $’000 ASSETS Current assets Cash and cash equivalents Trade and other receivables Other Total current assets Non-current assets Property, plant and equipment Deferred tax assets Intangible assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Current tax liabilities Provisions Other Total current liabilities Non-current liabilities Provisions Other Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained earnings/ (accumulated losses) Total equity (a) (a) 11,199 8,289 1,223 20,711 1,862 1,158 - 3,020 23,731 11,461 1,329 503 3,193 16,486 113 270 383 16,869 6,862 8,293 5,349 (6,780) 6,862 - - - - 11,199 11,199 8,289 1,223 8,289 1,223 20,711 20,711 (774) - 774 - - - - - - - - - - - - - - - - 1,088 1,158 774 3,020 1,862 1,158 - 3,020 23,731 23,731 11,461 11,461 1,329 503 3,193 1,329 503 3,193 16,486 16,486 113 270 383 113 270 383 16,869 16,869 6,862 6,862 8,293 5,349 8,293 5,349 (6,780) (6,780) 6,862 6,862 - - - - (774) - 774 - - - - - - - - - - - - - - - - 11,199 8,289 1,223 20,711 1,088 1,158 774 3,020 23,731 11,461 1,329 503 3,193 16,486 113 270 383 16,869 6,862 8,293 5,349 (6,780) 6,862 74 (b) At the end of the last reporting period under previous AGAAP: 30 June 2005 Consolidated Effect of transition to AIFRS $’000 Previous AGAAP $’000 Notes AIFRS $’000 Previous AGAAP $’000 Parent entity Effect of transition to AIFRS $’000 AIFRS $’000 ASSETS Current assets Cash and cash equivalents Trade and other receivables Other Total current assets Non-current assets Property, plant and equipment Deferred tax assets Intangible assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Current tax liabilities Provisions Total current liabilities Non-current liabilities Payables Provisions Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained earnings Total equity 11,462 9,571 222 21,255 - - - - 11,462 11,462 9,571 222 9,571 222 21,255 21,255 - - - - (a) (a) 2,934 1,206 (1,472) - - 1,472 1,462 1,206 1,472 4,140 2,934 1,206 (1,472) - - 1,472 4,140 4,140 25,395 11,585 3,121 530 15,236 232 144 376 15,612 9,783 81 - 9,702 9,783 (d) (c) (c),(d) - - - - - - - - - - - 25,395 25,395 11,585 11,585 3,121 530 3,121 530 15,236 15,236 232 144 376 232 144 376 15,612 15,612 9,783 9,783 - - - - - - - - - - - 122 91 (213) - 203 91 9,489 9,783 81 - 9,702 9,783 122 91 (213) - 11,462 9,571 222 21,255 1,462 1,206 1,472 4,140 25,395 11,585 3,121 530 15,236 232 144 376 15,612 9,783 203 91 9,489 9,783 75 Mortgage Choice Limited Notes to the financial statements continued 30 June 2006 (2) Reconciliation of profit for the year ended 30 June 2005 Consolidated Effect of transition to AIFRS $’000 Previous AGAAP $’000 Notes AIFRS $’000 Previous AGAAP $’000 Parent entity Effect of transition to AIFRS $’000 AIFRS $’000 108,788 - 108,788 108,788 - 108,788 (b) 1,725 (12) 1,713 1,725 (12) 1,713 (73,831) (3,824) (7,648) (1,836) (5,141) (2) 18,231 (b),(c) (d) (5,488) 12,743 (73,831) (73,831) - - - - - (3,824) (7,648) (1,836) (79) (5,220) - (91) (122) (213) (2) 18,140 (5,610) 12,530 (3,824) (7,648) (1,836) (5,141) (2) 18,231 (5,488) 12,743 - - - - - (73,831) (3,824) (7,648) (1,836) (79) (5,220) - (91) (122) (213) (2) 18,140 (5,610) 12,530 12,743 (213) 12,530 12,743 (213) 12,530 Revenue Other income Expenses from continuing operations Sales Technology Marketing Finance Corporate Finance costs Profit before income tax Income tax expense Profit for the year Net profit attributable to the members of Mortgage Choice Limited (3) Reconciliation of cash flow statement for the year ended 30 June 2005 The adoption of AIFRSs has not resulted in any material adjustments to the cash flow statement. (4) Notes to the reconciliations (a) Intangible assets Under AASB 138 Intangible Assets, computer software is classified as a class of intangible asset. Under previous AGAAP computer software was classified as a class of property, plant and equipment. The effect of this is: (i) At 1 July 2004 For the consolidated and parent entity there has been a decrease in property, plant and equipment of $774,000. Intangible assets has increased by $774,000. (ii) At 30 June 2005 For the consolidated and parent entity there has been a decrease in property, plant and equipment of $1,472,000. Intangible assets has increased by $1,472,000. (iii) For the year ended 30 June 2005 There is no effect on the consolidated and parent entity. (b) Revenue disclosure in relation to the sale of non-current assets Under AIFRS the revenue recognised in relation to the sale of non-current assets is the net gain on the sale. Under previous AGAAP the gross proceeds from the sale are recognised as revenue and the carrying amount of the asset sold is recognised as an expense. The effect of this is: (i) At 1 July 2004 There is no effect on the consolidated and parent entity. (ii) At 30 June 2005 There is no effect on the consolidated and parent entity. (iii) For the year ended 30 June 2005 For the consolidated and parent entity there has been a reduction in other income of $12,000 and a reduction in Corporate expenses of $12,000. 76 c) Share-based payments Under AASB 2 Share-based Payment from 1 July 2004 the Group is required to recognise an expense for those options that were issued to employees under the Mortgage Choice Executive Performance Option Plan (EPOP) and rights issued under the Mortgage Choice Performance Share Plan (PSP) after 7 November 2002 but that had not vested by 1 January 2005. The effect of this is: (i) At 1 July 2004 There is no effect on the consolidated and parent entity. (ii) At 30 June 2005 For the consolidated and parent entity there has been a decrease in retained earnings of $91,000 and a corresponding increase in reserves. (iii) For the year ended 30 June 2005 For the consolidated and parent entity there has been an increase in employee benefits expense of $91,000. (d) Deferred tax liability Under previous AGAAP income tax expense was calculated by reference to the accounting profit after allowing for permanent differences. Deferred tax was not recognised in relation to amounts recognised directly in equity. The adoption of AIFRS has resulted in a change in accounting policy. The application of AASB 112 Income Taxes has resulted in the recognition of future income tax benefits in relation to IPO costs directly in equity. The effects are as follows: (i) At 1 July 2004 There is no effect on the consolidated and parent entity. (ii) At 30 June 2005 For the consolidated and parent entity there has been an increase in contributed equity of $122,000 and a corresponding decrease in retained earnings. (iii) For the year ended 30 June 2005 For the consolidated and parent entity there has been an increase in income tax expense of $122,000. (e) Retained earnings The effect on retained earnings of the changes set out above are as follows: Share-based payments Deferred tax liability Total adjustment Attributable to: Equity holders of the parent 1 July 2004 30 June 2005 Consolidated $’000 Parent entity $’000 Consolidated $’000 Parent entity $’000 Notes (c) (d) - - - - - - - - (91) (122) (213) (91) (122) (213) (213) (213) 77 Mortgage Choice Limited Notes to the financial statements continued 30 June 2006 (5) Adjustments on transition to AASB 132 Financial Instruments: Disclosure and Presentation and AASB 139 Financial Instruments: Recognition and Measurement: 1 July 2005 Consolidated Parent entity 30 June 2005 $’000 Adjustment $’000 1 July 2005 $’000 30 June 2005 $’000 Adjustment $’000 1 July 2005 $’000 ASSETS Current assets Cash and cash equivalents Trade and other receivables Other Total current assets Non-current assets Receivables Property, plant and equipment Deferred tax assets Intangible assets Total non-current assets 11,462 9,571 222 - 36,473 - 21,255 36,473 11,462 46,044 222 57,728 11,462 9,571 222 - 36,473 - 21,255 36,473 11,462 46,044 222 57,728 - 90,418 90,418 - 90,418 90,418 1,462 1,206 1,472 4,140 - - - 1,462 1,206 1,472 90,418 94,558 1,462 1,206 1,472 4,140 - - - 1,462 1,206 1,472 90,418 94,558 Total assets 25,395 126,891 152,286 25,395 126,891 152,286 LIABILITIES Current liabilities Trade and other payables 11,585 20,991 32,576 11,585 20,991 32,576 Current tax liabilities Provisions 3,121 530 - - 3,121 530 3,121 530 - - 3,121 530 Total current liabilities 15,236 20,991 36,227 15,236 20,991 36,227 Non-current liabilities Payables Deferred tax liabilities Provisions Other Total non-current liabilities - - 144 232 376 Total liabilities 15,612 56,119 14,934 - - 71,053 92,044 56,119 14,934 144 232 71,429 107,656 - - 144 232 376 15,612 56,119 14,934 - - 71,053 92,044 56,119 14,934 144 232 71,429 107,656 Net assets 9,783 34,847 44,630 9,783 34,847 44,630 EQUITY Contributed equity Reserves Retained earnings Total equity 203 91 9,489 9,783 - - 34,847 34,847 203 91 44,336 44,630 203 91 9,489 9,783 - - 34,847 34,847 203 91 44,336 44,630 Refer to notes 10, 11 and 15 for further information on the transition to AASB 132 Financial Instruments: Disclosure and Presentation and AASB 139 Financial Instruments: Recognition and Measurement on 1 July 2005. 78 D I R E C T O R S ’ D E C L A R A T I O N In the Directors’ opinion: (a) the financial statements and notes set out on pages 34 to 78 are in accordance with the Corporations Act 2001 (Cth), including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of the Company’s and consolidated entity’s financial position as at 30 June 2006 and of its performance, as represented by the results of their operations, changes in equity and their cash flows, for the financial year ended on that date; and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and (c) the audited remuneration disclosures set out on pages 25 to 28 of the Directors’ report comply with Accounting Standard AASB 124 Related Party Disclosures and the Corporations Regulations 2001. The directors have been given the declarations by the chief executive officer and chief financial officer required by section 295A of the Corporations Act 2001 (Cth). This declaration is made in accordance with a resolution of the Directors. Peter Ritchie Director Sydney 23 August 2006 79 Independent audit report to the members of Mortgage Choice Limited PricewaterhouseCoopers ABN 52 780 433 757 Darling Park Tower 2 201 Sussex Street GPO BOX 2650 SYDNEY NSW 1171 DX 77 Sydney Australia www.pwc.com/au Telephone +61 2 8266 0000 Facsimile +61 2 8266 9999 Matters relating to the electronic presentation of the audited financial report This audit report relates to the financial report and remuneration disclosures of Mortgage Choice Limited (the Company) and the Mortgage Choice Group (defined below) for the financial year ended 30 June 2006 included on Mortgage Choice Limited’s web site. The Company’s directors are responsible for the integrity of the Mortgage Choice Limited web site. We have not been engaged to report on the integrity of this web site. The audit report refers only to the financial report and remuneration disclosures identified below. It does not provide an opinion on any other information which may have been hyperlinked to/from the financial report or the remuneration disclosures. If users of this report are concerned with the inherent risks arising from electronic data communications they are advised to refer to the hard copy of the audited financial report and remuneration disclosures to confirm the information included in the audited financial report and remuneration disclosures presented on this web site. Audit opinion In our opinion: 1. the financial report of Mortgage Choice Limited: � � gives a true and fair view, as required by the Corporations Act 2001 in Australia, of the financial position of Mortgage Choice Limited and the Mortgage Choice Group (defined below) as at 30 June 2006, and of their performance for the year ended on that date, and is presented in accordance with the Corporations Act 2001, Accounting Standards and other mandatory financial reporting requirements in Australia, and the Corporations Regulations 2001, and 2. the remunerations disclosures that are contained in section 13 of the directors’ report comply with Accounting Standard AASB 124 Related Party Disclosures (AASB 124) and the Corporations Regulations 2001. This opinion must be read in conjunction with the rest of our audit report. Scope The financial report, remunerations disclosures and directors’ responsibility The financial report comprises the balance sheet, income statement, cash flow statements, statement of changes in equity, accompanying notes to the financial statements, and the directors’ declaration for both Mortgage Choice Limited (the company) and the Mortgage Choice Group (the Liability limited by a scheme approved under Professional Standards Legislation 80 consolidated entity), for the year ended 30 June 2006. The consolidated entity comprises both the company and the entities it controlled during that year. The company has disclosed information about the remuneration of directors and executives (remuneration disclosures) as required by AASB 124, under the heading “remuneration report” in section 13 of the directors’ report, as permitted by the Corporations Regulations 2001. The directors of the company are responsible for the preparation and true and fair presentation of the financial report in accordance with the Corporations Act 2001 This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report. The directors are also responsible for the remuneration disclosures contained in the directors’ report. Audit approach We conducted an independent audit in order to express an opinion to the members of the company. Our audit was conducted in accordance with Australian Auditing Standards, in order to provide reasonable assurance as to whether the financial report is free of material misstatement and the remuneration disclosures comply with AASB 124 and the Corporations Regulations 2001. The nature of an audit is influenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected. For further explanation of an audit, visit our website http://www.pwc.com/au/financialstatementaudit. We performed procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001, Accounting Standards and other mandatory financial reporting requirements in Australia, a view which is consistent with our understanding of the company’s and the consolidated entity’s financial position, and of their performance as represented by the results of their operations, changes in equity and cash flows. We also performed procedures to assess whether the remuneration disclosures comply with AASB 124 and the Corporations Regulations 2001. We formed our audit opinion on the basis of these procedures, which included: � � examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial report and remuneration disclosures, and assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made by the directors. Our procedures include reading the other information in the Annual Report to determine whether it contains any material inconsistencies with the financial report. While we considered the effectiveness of management’s internal controls over financial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls. Our audit did not involve an analysis of the prudence of business decisions made by directors or management. 81 Independence In conducting our audit, we followed applicable independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001. PricewaterhouseCoopers Andrew Sneddon Partner Sydney 23 August 2006 82 S H A R E H O L D E R I N F O R M A T I O N The shareholder information set out below was applicable as at 11 September 2006. A . DIS T RI BU T I O N O F EQU I T Y SECU RI T I ES Analysis of numbers of equity security holders by size of holding: 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Class of equity security Ordinary Shares Options Conditional entitlements 123 483 224 184 47 1,061 1 3 4 1 20 1 22 There were 8 holders of less than a marketable parcel of ordinary shares. B. EQU I T Y SECURI T Y HO L DER S Twenty largest quoted equity security holders The names of the twenty largest holders of quoted equity securities are listed below: J P Morgan Nominees Australia Limited National Nominees Limited R G Higgins Ochoa Pty Ltd Basscave Pty Limited ANZ Nominees Limited Westpac Custodian Nominees Limited SCJ Pty Ltd atf Jermyn Family Trust RBC Dexia Investor Services Australia Nominees Pty Limited RBC Dexia Investor Services Australia Nominees Pty Limited Cogent Nominees Pty Limited Citicorp Nominees Pty Limited Citicorp Nominees Pty Limited Citicorp Nominees Pty Limited HSBC Custody Nominees (Australia) Limited Queensland Investment Corporation Cogent Nominees Pty Limited Mr Ian Edwards & Mrs Josephine Edwards RBC Dexia Investor Services Australia Nominees Pty Limited Victorian Workcover Authority Ordinary Shares Number held Percentage of issued shares 21,498,764 16,801,884 10,366,583 9,620,000 8,431,534 5,423,727 5,386,530 4,000,000 3,628,288 3,337,407 2,476,669 2,023,929 1,900,100 1,368,645 1,324,727 1,112,252 1,036,420 675,000 627,688 560,423 18.28 14.29 8.82 8.18 7.17 4.61 4.58 3.40 3.09 2.84 2.11 1.72 1.62 1.16 1.13 0.95 0.88 0.57 0.53 0.48 101,600,570 86.40 83 Unquoted equity securities Options issued under the Executive Performance Option Plan Conditional entitlements over ordinary shares pursuant to the Performance Share Plan C. SU BS TA N T I A L HO L DER S Substantial holders in the Company are set out below: Ordinary shares R G Higgins and Ochoa Pty Ltd FMR Corp. & Fidelity International Limited P G Higgins and Basscave Pty Limited Renaissance Smaller Companies Pty Ltd Hyperion Asset Management Limited Perpetual Limited INVESCO Australia Limited D. VOT I NG RIGH T S Number on Issue Number of holders 1,230,200 892,900 4 22 Number held Percentage 19,991,583 15,004,105 8,436,534 7,850,601 7,642,600 7,248,883 5,933,230 17.00 12.76 7.17 6.68 6.50 6.16 5.04 The voting rights attaching to each class of equity securities are set out below: (a) Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. (b) Options No voting rights (c) Conditional entitlements No voting rights 84 D I R E C T O R Y Directors Secretary Senior Management P D Ritchie Chairman P A Lahiff Managing Director P G Higgins R G Higgins D E Ralston S C Jermyn D M Hoskins A D Crossley Chief Operating Officer A J Fraser Chief Financial Officer M C Newton Chief Information Officer M B McDonald Group Franchise Operations Manager W J O’Rourke National Corporate Affairs Manager L A Wyatt National Marketing Manager D A Player National Lending Manager M N Writer National Human Resources Manager M Bardwell National Business Development Manager 85 Notice of annual general meeting The annual general meeting of Mortgage Choice Limited will be held at: The Pavilion Gallery Level Star Court – Darling Park 201 Sussex Street Sydney NSW time: 11:00 am date: Tuesday 21 November 2006 A formal notice of meeting is enclosed. Principal registered office in Australia Mortgage Choice Limited Level 7 Share and debenture register Auditor Solicitors Bankers 182 – 186 Blues Point Road North Sydney NSW 2060 (02) 8907 0444 Link Market Services Limited Level 8, 580 George Street Sydney NSW 2000 PricewaterhouseCoopers Chartered Accountants Darling Park Tower 2 201 Sussex Street Sydney 1171 Minter Ellison Aurora Place, 88 Phillip Street Sydney NSW 2000 ANZ Banking Group Limited 116 Miller Street North Sydney 2000 Stock exchange listings Mortgage Choice Limited shares are listed on the Australian Stock Exchange. Website address www.mortgagechoice.com.au 86 M o r t g a g e C h o c e A n n u a i l R e p o r t 2 0 0 6

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