Mortgage Choice Limited Annual Report 2007

Plain-text annual report

Annual Report 2007 Contents Chairman’s Report 1 Managing Director’s Overview 3 Financial Highlights 6 Review of Operations 7 Strategy at a Glance 13 Outlook 15 Board of Directors 16 Senior Management 17 Corporate Governance Note 18 Directors’ Report 23 Financial Report 37 Chairman’s Report In this our fifteenth year of operation, I am delighted to report that Mortgage Choice has achieved another strong year of growth. The housing market over the past 12 months has been described as being two, if not three, paced. The resources boom has driven high demand for housing finance in Western Australia, Northern Territory and Queensland. At the other end of the spectrum, New South Wales has been variable, with house prices and demand for housing finance increasing in some areas and falling in others. Victoria and South Australia performed in line with longer term historical trends. Despite this challenging market, our outstanding franchise network and their commitment to satisfying their customers’ needs, combined with our talented staff, has been central to our success. The financial result for the year to 30 June 2007 was a net profit after tax (AIFRS) of $19.6 million, up 9.7% on the previous period. The Board has declared a second half fully franked dividend of 8.5 cents per share, bringing the total ordinary dividend for the year to 14 cents per share. This represents a payout ratio of 100% out of AGAAP profits for the year to 30 June 2007. This is up on the dividend paid out of FY2006 profits of 12.5 cents per share. In FY2006 a special dividend of 2 cents was also paid out of accumulated profits. Earnings per share were 16.6 cents compared to 15.2 cents per share in FY2006. Our housing loan approvals during the financial year to 30 June 2007 showed steady growth, totalling $11.1 billion up 4% on the previous year of $10.7 billion. Our loan book has grown to $29.6 billion at year’s end, 15% up on the previous year. The expected average life of loans has increased to 3.9 years. This is an outstanding result in a very competitive market. BROKER GROWTH 1 ��To our staff, my warmest congratulations. Their commitment to supporting the franchise network is unparalleled. Managing Director Paul Lahiff has again 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 strategies put in place to grow the business over the next twelve months and beyond are exciting and will establish a strong platform to compete and grow market share. 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. The Mortgage Choice business is built on a series of partnerships. A critical partnership is the one we have with our franchise network, a team of committed, entrepreneurial, independent businesspeople who put enormous energy and time into meeting their customers’ needs… Our growth in broker numbers has been pleasing with the total broker network increasing to 663 as at 30 June 2007, up from 620 in the previous year. At the same time our retail presence grew by 28 to 213 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. Franchise growth improved on the prior year, with net franchise numbers increasing by 22 to 445 as at 30 June 2007. The current state of the employment market, the competition for new franchisees and a continuing and deliberate focus on quality candidates over quantity, continues to create a challenging environment for recruitment. Importantly, there has been an increase in the sale of existing franchises, with these currently exceeding sales of new licences. This outcome is positive for Mortgage Choice as it recognises that, as the business matures, it is important to have a well developed succession/transition strategy for those franchise owners contemplating retirement and the sale of their business. The Mortgage Choice business is built on a series of partnerships. A critical partnership is the one we have with our franchise network, a team of committed, entrepreneurial, independent businesspeople who put enormous energy and time into meeting their customers’ needs and, as a result, grow their own businesses. I have had the opportunity to meet many franchisees and their staff during my time as Chairman and I am always impressed 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. 2 Managing Director’s Overview In a period when the Reserve Bank of Australia increased interest rates in August and November and indeed three times over calendar year 2006, the last twelve months provided many challenges. However, with interest rate stability in the first half of 2007 and a quick turnaround in consumer confidence, the housing finance market continued to record strong approval figures and Mortgage Choice was no different. The Housing Finance Market With house prices in most markets either rising or already at high levels, much has been written about the state of housing affordability in this country. Notwithstanding this concern, homebuyers are still entering the market and, based on current Australian Bureau of Statistics (ABS) data, the value 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 Queensland have continued their robust growth off the back of the resources boom, while Victoria and South Australia 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 – 2007 3 ��The national demand for fixed rate loans, which represented around 30% of Mortgage Choice’s approvals in FY2006 continued into FY2007, peaking in December 2006 at 35% of all approvals. With continued speculation about another rate rise, consumers, in particular first homebuyers, took the opportunity to lock in rates. Since that time, the percentage has slowly declined (but is still at historically high levels), which suggests consumers have become more attuned to the realities of the market, particularly to interest rates on offer. Housing affordability, particularly among first homebuyers, remains an issue. Whilst the levels of participation were steady in terms of dwellings financed, first homebuyer approvals, which averaged around 18% of all dwellings financed last year, dropped to an annualised average of 17% to 30 June 2007 (ABS data). While housing finance commitments have continued to be robust, system growth – the growth in outstanding “stock” of housing loans – continues to record steady growth of around 12.8% annualised. Although this is down from a peak of 21% in 2003, it still represents very healthy growth in the mortgage market. This measure has only dropped below 10% twice since 1975. (See graph below). Regulation Mortgage Choice has welcomed the amendments to the W.A. Finance Brokers Control (Code of Conduct) Regulations 2007, which came into effect on 29 June 2007. The company has a strong interest in any regulatory development that protects consumers and increases their confidence in the mortgage broking sector. Mortgage Choice implemented the majority of the new W.A. requirements in all states and territories, even though not obliged to do so. As a consequence, customers receive a level of pre-borrowing information that well exceeds that required by law and provided by many of our competitors. Notwithstanding this advance in state regulation, national regulation of the mortgage broking industry remains a critical part of Mortgage Choice’s strategic agenda. Mortgage Choice has been actively arguing for national uniform regulation since 2002 and it is with a deep sense of frustration that the latest indications are that it may be 2009 before we see any tangible national initiative. GROWTH IN HOUSING CREDIT (incl securitisations) June 2002 – June 2007 4 ��A pleasing aspect of our business is the growing number of franchise owners completing ten years or more service with the company. Considering the company commenced franchising in 1994, this is a significant achievement. Naturally, the results we detail in this report 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 FY2008. Performance The year under review for Mortgage Choice has been very pleasing. The strength and reputation of our business model and the franchise network has once again been recognised through yet another industry accolade. Mortgage Choice was honoured to once again be recognised as Best Mortgage Broker 2007 by the readers of Australian Banking & Finance Magazine. This award was especially significant because we won the same award in its inaugural year in 2004 and again in 2005, hence winning three of the four years in its existence. 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 with the Board, twice a year. Discussions also take place at our bi-annual state conferences, our national conference and a range of other state based and regional meetings. 5 ��Financial Highlights All figures quoted are based on AIFRS unless otherwise stated. ■ Franchise growth was higher than the previous corresponding period with net franchise numbers increasing to 445 as at 30 June 2007, up from 423 in the previous year. ■ Total sales of Mortgage Choice licences was 59. This was made up of 26 sales of existing and 33 sales of new licences. The sales of existing licences augurs well for the company’s succession/transition strategy. ■ A total of 66.1% of commission revenues was paid to franchise owners compared to 65.6% for the previous period. The high average size of loans written by Mortgage Choice brokers reflects the strength of the Mortgage Choice broker network, especially in the eastern states of Australia where property prices are higher. Net assets at 30 June 2007 were $52.2 million (AFRIS) compared to $47.5 million in the previous corresponding period. The balance sheet is underpinned by $9.1 million in cash on hand (FY2006 – $8.4 million). Cash flow from operating activities during the year was $16.7 million compared to $12.8 million in the previous year. ■ Record net profit after tax $19.6 million, up 9.7% on FY2006 of $17.9 million. ■ Total revenue $157 million, up 10.6% on previous period. ■ Earnings per share 16.6 cents compared to 15.2 cents per share in FY2006. ■ A final dividend 8.5 cents per share brings the total out of FY2007 profits to 14.0 cents per share. This represents a payout ratio of 100% out of AGAAP profits for the year to 30 June 2007. This is up on the dividend paid out of FY2006 profits of 12.5 cents per share. In FY2006 a special dividend of 2 cents was also paid out of accumulated profits. ■ Cash received for trailing commission was $71.9 million being 52.4% of total commissions received for FY2007 compared with 50.4% in FY2006. ■ Mortgage Choice generated $11.1 billion in housing loan approvals during FY2007 and continues to achieve industry high productivity levels per broker. ■ The loan book now stands at $29.6 billion, 15% up on FY2006; this compares to system growth of 12.8% year on year. ■ Average Mortgage Choice loan size up 4.7% to $265,166 remains 8% higher than the ABS average $244,551 (ABS excludes investor loans, alterations and additions). ■ Total broker growth was strong, increasing to 663 as at 30 June 2007, up from 620 in the previous corresponding period. 6 Review of Operations Competitive advantage Mortgage Choice believes that the combination of the fundamental components of its business model provide it with significant competitive advantages over other brokers in the marketplace: ■ 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; ■ 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; ■ 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. ‘The Franchise Advisory Council continues to be highly effective and provides a valuable bridge between Franchisee and Franchisor’ 7 To date, 14 lenders are participating with both the Over Fifty Group and AMP Bank joining during the year. With an expected increase in participating lenders over the next 12 months, it is anticipated there will again be an increase in the volumes submitted through this platform. Significantly reduced approval times are already being 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. Lender Partners Mortgage Choice recognises the importance of developing and nurturing the relationships between broker and lender. Dedicated specialist staff oversee the operational relationships between the Company and its franchisees and the lender panel. This team provides lenders with structured feedback from and 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. Three new lenders in AMP Bank, Over Fifty Group and Home Building Society were added to the panel during the year. Mortgage Choice believes the benefits enjoyed by lenders from dealing with credible brokers such as Mortgage Choice include: ■ Volume: Brokers provide incremental mortgage business that would not necessarily be generated through the lender’s branch or other networks; ■ Cost flexibility: By outsourcing an element of their origination business, lenders attract new business on a variable cost basis; Tracking through the Mortgage Maze Mortgage Choice assists customers in the selection of a mortgage from a complex range of products from its 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 350 housing loan products offered by a panel of 29 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. The completed loan application form is 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 and include not only the loan application process but also settlement and beyond. Electronic Lodgement Electronic lodgement allows faster turnaround time for loan applications by taking data input direct from the broker to the lender’s underwriting system. Mortgage Choice submitted its first loans electronically in May 2004. In FY2007, $8 billion in new loans were lodged electronically. This represents a significant increase on the previous year when $3.8 billion in new loans were lodged. The focus this past year has been on enhancing the existing system, which has reflected in the results achieved. 8 ■ 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; 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. Learning and Development 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 and tools to enable the network to be the best they can be at what they do. On joining Mortgage Choice, all franchisees and loan consultants undertake comprehensive training (accredited by the MFAA), which 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. Our e-Learning platform delivers ongoing mortgage origination, sales and office productivity training for franchisees and their staff. ■ 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. Franchise Operations Mortgage Choice licenses the use of the Mortgage Choice brand and business systems to its Franchise network. Accredited mortgage brokers comprise franchisees and their loan consultants. The relationship between Mortgage Choice and its franchisees is governed by a Franchise Agreement and an Operations Manual that sets out the Company’s policies and procedures, including minimum performance standards. We abide by the Franchising Code of Conduct. 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. 9 A Licence to Grow – National Learning Experience Perth, Western Australia was the venue for the tenth Mortgage Choice national conference. This showcase event held in January each year, provides our franchise network, sponsors and a number of group and state office staff, the opportunity to further develop their understanding of the business from a strategic perspective as well as on an individual franchise basis. Themed – A Licence to Grow – the conference focused on providing learning opportunities through structured plenary, workshop and roundtable sessions. Leading speakers covered topics such as, growth strategies, the economy and property market and, insights into success. Networking is a vital element of the conference and the evening functions provide not only a basis for casual interaction, but also fun. With over 600 in attendance, the Gala Dinner transformed Burswood’s Grand Ballroom into a James Bond – Licence to Grow theme. The highlight of the evening is the national Business Excellence Awards, which saw an impressive Queensland landslide and Russell Passfield and Rod Poxon’s franchise taking out National Franchise of the Year. 10 Formal delegate feedback consistently rates the conference in the 90 percentile and above in terms of satisfaction. Sponsors rate it as the benchmark for the industry. Planning is well underway for the 2008 national conference, which will be held in Christchurch, New Zealand. The challenge as always, is to ensure it is better and brighter each year. Franchisee Support Services 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 has maintained its commitment to ensuring compliance remains a key priority for the business. To satisfy the Australian Standards for compliance, the company’s web based compliance knowledge training and development tool, ecomply, was comprehensively reviewed during the year. This process, conducted by one of the nation’s leading legal firms, allows for new legislative and regulatory requirements to be included in the training material, as well as any changes to relevant laws to be noted. Access by all staff and network representatives to the most current information in respect of our legal obligations is critical to effective corporate governance. During the year, we were able to provide the franchise network with the ability to order customer credit history reports on-line, instantaneously and at no cost to the customer. This initiative enhanced our service offering even further, enabling our franchisees to prepare and submit loan applications more effectively and efficiently, thereby delivering a quicker response to applicants. Branding, Marketing and Promotion 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 mortgage specialisation and 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. National campaigns are developed regularly and full marketing support is provided to all franchisees. This is complemented by a well-planned, proactive public relations strategy designed to build and maintain a positive profile for Mortgage Choice by articulating Company and industry understanding to consumers through media coverage on every level from local to national outlets. Group office engages in national and statewide marketing that generates leads through the Mortgage Choice customer service centre and corporate website and aims to build a trustworthy brand that may be leveraged by franchisees in their local area marketing. Group Office leads are distributed to the franchise network on an equitable basis by marketing area. Off the back of a strong consumer brand, direct response TV was used in a campaign designed to stimulate enquiry and which offered comprehensive and informative Property Packs tailored to first homebuyers and first time investors. This initiative has contributed to strong lead growth. Mortgage Choice introduced the phone word 13MORTGAGE as our main customer service contact number. This device was readily adopted by consumers and has quickly developed into one of the most memorable numbers in the mortgage industry in Australia. In a further development of our “client for life” program, Mortgage Choice introduced an email based nurture facility for those with an early interest in the mortgage market. Pathways is designed to educate and create relationships with those who are a few months away from purchasing a property, by providing handy hints and fact sheets. 11 THERE’S ONLY ONE CHOICEMCAFL-63x90-CMYKFinding the perfect home loan can take up a lot of time and energy. But it’s much easier when agreat team can do the hard yards for you. Your Mortgage Choice expert will search from hundreds of home loans and pass the best ones to you. Call the home team that backs you now. This information refers only to loans provided by our panel of up to 28 lenders with whom Mortgage Choice has an arrangement, under which it receives commissions and other payments.When it comes to home loans, we can help you reach your goals.MCAFL-63x90-CMYK.indd 118/5/07 5:34:37 AMInformation Technology Mortgage Choice in the Community Mortgage Choice has leveraged 15 years experience in the Australian market to develop proprietary software to assist in matching our customer’s needs to the most 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 evolving business structures, deliver improved customer relationship management capability and provide a platform for continued business growth. 12 Mortgage Choice recognises the importance of supporting those members of the community who are less fortunate. As a supporter of Barnardos, the children’s charity, and in particular through its Munch Box program, management and staff have involved themselves in not only fund raising but also the assembly of the munch boxes. These go to appreciative, single young parents. Events like “City to Surf” in Sydney and a variety of social club events provide a focus and a catalyst to raise funds for the charity. Many of our franchisees around Australia also support local charities as they also believe in “giving something back” to their communities. A number of Mortgage Choice staff and franchisees serve on committees to assist in raising funds for a variety of good causes. Strategy at a Glance During the year, the Mortgage Choice Board and senior management conducted a review of strategy. The business subsequently reaffirmed its focus on organic growth. Whilst the business is unquestionably soundly based, the Board has taken a medium term view of the business and has committed to a higher level of reinvestment. While it will still provide sound profit growth, some shorter term investment is required to fund longer-term shareholder value. In a highly competitive mortgage market, some participants have announced plans to sell or list their businesses and as a consequence will have access to additional capital. The Board considers that now is the time to develop an aggressive platform for growth and, work to achieve increased market share for the company. While the business has consistently invested in marketing and public relations and has gained recognition as a strong consumer brand, the plan is to “super charge” consumer awareness and brand reputation. The strategic platform for the business going forward will build on the core strengths of the business model. There will be three key areas of focus: 1. Increased lead generation – by generating quality leads, it will facilitate strong growth for the existing network and provide a sound basis to attract additional franchisees. The company will reposition its marketing and focus on its strength of being a trusted and experienced mortgage specialist. A comprehensive campaign has been developed to take full advantage of this repositioning. 2. Better lead conversion – by providing franchise owners with better skills and tools, it will assist in the growth and development of their businesses. A program of better training, better selling and other business related skills will result in improved lead conversion. 3. Grow the Franchise population – by selective recruitment of new franchisees and assisting them to attract and retain quality staff will provide a sound basis for growth going forward. 13 Insert photo shopfront – to be supplied Insert photo shopfront – to be supplied The benefits to customers from a larger retail presence, of greater channel choice and strengthening the Mortgage Choice brand, will ensure the growth in the number of retail premises continues. Each of the three strands of the strategy reinforces the others. Increased lead generation combined with improved conversion and productivity creates a more attractive environment for future franchisees, which in turn will result in a stronger Mortgage Choice able to reinvest further in lead generation and improved conversion and more profitable businesses. 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 28 to 213 permanent outlets in the year to 30 June 2007. The ongoing growth is being driven by franchisees who see the move into retail as a profitable growth strategy for their businesses. Locating Mortgage Choice outlets close to other complementary businesses and increasing the presence in local communities continues to bring new and repeat customers to Mortgage Choice. 14 Outlook Mortgage Choice operates as a residential mortgage specialist and this has facilitated consistent growth through a focused approach and a refinement of expertise. Mortgage Choice intends to remain focused on the residential mortgage broking market. The Company believes that, given the relative immaturity of the broking sector, the overall size of the housing finance market and the attraction of the broking proposition to consumers, there remains strong potential for brokers as a whole to increase their share of mortgage origination and for Mortgage Choice to increase its market share within the broking sector. Mortgage Choice believes this focus on its core competency represents a low risk, high potential growth strategy. Under its “Invest to Grow” strategy, the Board has taken a medium term view of the business and has committed to a higher level of reinvestment. With an aggressive platform for growth, it is designed to deliver increased market share for the company. 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 administration, and a preference by lenders to deal with a smaller number of larger, high quality broker organisations. The Company will be alert to acquisition opportunities given this environment, but will review any opportunity cautiously and prudently. Clearly however, the major focus of the business is on organic growth. Summary Mortgage Choice is confident that it is well placed to achieve profitable growth in the coming year. Prudent expense control, increased marketing, improved broker recruitment and the ability to scale up the business will continue to be important going forward. 15 Board of Directors Peter Ritchie NON-EXECUTIVE CHAIRMAN Chairman of Nomination and Remuneration Committees BCom, FCPA, AO Peter is Deputy Chairman of Seven Network, Chairman of Reverse Corp Limited and a Director of Tennis Australia. 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 65. 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. He is a member of the Board of the Cancer Council (NSW) and a non-executive director of Radio Rentals Limited. Age 54. Peter is co-founder of Mortgage Choice. He is also a Director of 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 47. 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 52. Deborah is Professor and Pro Vice Chancellor Engagement 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 54. Paul Lahiff MANAGING DIRECTOR BSc Agr, FAIM Peter Higgins NON-EXECUTIVE DIRECTOR Member of Audit Committee Rodney Higgins NON-EXECUTIVE DIRECTOR Member of Nomination and Remuneration Committees Deborah Ralston NON-EXECUTIVE DIRECTOR Member of Audit Committee PhD, FFin, FAIM, FCPA Steve Jermyn NON-EXECUTIVE DIRECTOR Chairman of Audit Committee FCPA Steve joined McDonald’s Australia Ltd in 1984 and joined the Board of Directors in 1986. 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. Steve is also a Director of Reverse Corp Limited. Age 58. 16 Senior Management Tony Crossley CHIEF FINANCIAL OFFICER Tony has over 15 years experience in senior financial roles within the financial services industry, including 10 years in the international insurance and reinsurance industries, and, from early 2000, three years as CFO and then CEO of Mortgage Choice. After a period as CFO of Macquarie Bank’s Securitised Lending Division, where he had responsibility for management of funding, financial and risk management activities of its Australian and US mortgage operations, Tony returned to Mortgage Choice in early 2005. Tony is responsible for directing and controlling the financial activities of the organisation as well as providing financial assessments and information to ensure planning and budgeting activities meet corporate goals. Mark Newton CHIEF OPERATING OFFICER Mark has over 20 years experience in information technology, including 14 years in senior management positions. Mark joined Mortgage Choice in May 2000. As Chief Information Officer, Mark was responsible for IT strategy, applications development and infrastructure management. As Chief Operating Officer, he is responsible for successfully integrating new franchises into the system, assessing the strategic requirements of the group in relation to the key lender partners and, growing the network through further accredited business writers. Mark holds a Diploma in Computer Programming Technology and a Business Management Certificate from the Australian Institute of Management. Neill Rose-Innes CHIEF INFORMATION OFFICER With over 20 years experience in the information technology industry, Neill was formerly Head of Operations for Greenway Capital. He has worked previously in financial services and consultancy in similar capacities. Prior to coming to Australia from South Africa in 2000, Neill held a series of roles in the information technology industry. As Chief Information Officer, Neill is responsible to direct, control and administer the overall IT infrastructure, software development/deployment and all associated support activities for the organisation. David Hoskins COMPANY SECRETARY David commenced with Mortgage Choice in June 2000. He has a Bachelor of Commerce from the University of NSW and is a CPA and a member of Chartered Secretaries Australia, from which he has a Graduate Diploma in Corporate Management. David has had over 20 years experience in 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. Debbie Ennis HEAD OF SALES Debbie has close to 20 years experience in financial services and small business. This includes senior positions in branch management, human resources and project management at St.George Bank. Debbie joined Mortgage Choice in November 2000 as Business Analyst. In 2002, she was appointed to the key role of State Manager for Victoria and Tasmania, being responsible for leadership, sales, franchise management and recruitment. In July 2007 she was appointed to her present role and is responsible for providing direction, leadership and coaching through the state management teams to ensure the franchise network continues to develop and build their sales and business generation skills. Brent McDonald GROUP FRANCHISE OPERATIONS MANAGER Brent has over 20 years experience in franchising and small business management. He joined Mortgage Choice in November 1998 and is responsible for Franchise Operations. This area has major responsibilities in the management, development and support of the Mortgage Choice Franchise system. Brent has a Bachelor of Applied Science from the University of Western Sydney. Warren O’Rourke NATIONAL CORPORATE AFFAIRS MANAGER Warren has over 20 years experience in financial services in marketing and communications, covering both corporate and consulting roles. Warren joined Mortgage Choice as Group Manager, Marketing and Communications in March 1999. In August 2002, Warren was appointed National Corporate Affairs Manager and is responsible for corporate affairs, public relations, communications and media issues. Warren holds a Marketing Degree from the University of Technology, Sydney. Debra Player NATIONAL LENDING MANAGER Debra has over 20 years experience in the finance sector. As National Lending Manager, she is responsible for the development and communication of lender strategy, co-ordination of lender interaction with the Franchise network and monitoring of industry trends. Debra joined Mortgage Choice in July 2004. She holds a Graduate Diploma in Finance and Bank Management, is a Fellow of Finsia and Fellow and President for the Institute of Financial Services (East Coast Division). Michael Writer NATIONAL HUMAN RESOURCES MANAGER Formerly National Manager Leadership and Talent Development with Deloitte and having worked previously at AMP Bank, Aussie Home Loans and Westpac, Michael’s experience covers line management positions as well as organisational development activity. Michael is responsible for planning, development and implementation of the Franchisor’s HR practices, ensuring policies and procedures are effective and compliance with these. Lynne Wyatt NATIONAL MARKETING MANAGER 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, development of advertising messages, media placement and strategic marketing programs, as well as delivering a range of sales support tools. 17 CORPORATE GOVERNANCE NOTE 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. THE BOARD 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 prior 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 16. 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 judgement. ■ 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; 18 ■ 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 2007. 19 Corporate Governance note continued BOARD COMMITTEES 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. CODES OF CONDUCT 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 ■ 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. 20 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. CORPORATE REPORTING 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. CONTINUOUS 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. COMMUNICATION TO SHAREHOLDERS 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. 21 Corporate Governance note continued EXTERNAL AUDITOR 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 and Ethical Standards APES110, The Institute of Chartered Accountants in Australia and CPA Australia). 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. COMPLIANCE AND RISK MANAGEMENT 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 repeat the program at prescribed intervals. New staff must complete the program within a specified period. 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. 22 Mortgage Choice Limited and controlled entities DIRECTORS’ REPORT For the year ended 30 June 2007 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 2007, referred to hereafter as “Mortgage Choice”, “the Mortgage Choice Group” or “the Group”. 1. DIRECTORS 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. PRINCIPAL ACTIVITIES 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. DIVIDENDS Dividends paid or payable to members during the financial year were as follows: 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 and paid on 18 September 2006. An interim ordinary dividend of $6.479 million (5.5 cents per fully paid share) was declared out of profits of the Company for the half-year ended 31 December 2006 and paid on 19 March 2007. A final ordinary dividend of $10.039 million (8.5 cents per fully paid share) was declared out of profits of the Company for the year ended 30 June 2007 on 22 August 2007 to be paid on 18 September 2007. 4. REVIEW OF OPERATIONS 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 7-12 of this annual report. 5. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS 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. MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR No other matter or circumstance has arisen since 30 June 2007 that has significantly affected, or may significantly affect: (a) (b) (c) the consolidated entity’s operations in future financial years, or the results of those operations in future financial years, or the consolidated entity’s state of affairs in future financial years. 7. LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS 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. 23 Directors’ Report continued 8. ENVIRONMENTAL REGULATION 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. INFORMATION ON DIRECTORS 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 16 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 * 1,493,600 options over ordinary shares granted under EPOP ** 5,822,939 ordinary shares 15,226,215 ordinary shares 2,000,000 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. COMPANY SECRETARY 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 17 of this annual report. 11. MEETINGS OF DIRECTORS The numbers of meetings of the Company’s Board of Directors and of each Board committee held during the year ended 30 June 2007, 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 10 10 10 10 10 10 Number of meetings attended 9 9 9 10 10 9 Audit Committee Remuneration Committee Committee meetings Number of meetings held n/a 3 n/a 3 3 Number of meetings attended n/a 1 n/a 3 3 Number of meetings held 3 n/a 3 n/a n/a Number of meetings attended 3 n/a 2 n/a n/a No nomination committee meetings were held during the year ended 30 June 2007. 12. RETIREMENT, ELECTION AND CONTINUATION IN OFFICE OF DIRECTORS In accordance with the Constitution, Deborah Ralston and Rodney Higgins retire by rotation and, being eligible, offer themselves for re-election. 24 13. REMUNERATION REPORT 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 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. 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 2007 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. The following fees have been applied: Chairman Other non-executive Directors From 1 July 2007 $119,900 $65,400 From 1 July 2006 to 30 June 2007 $119,900 $65,400 25 Directors’ Report continued Retirement allowances for Directors Non-executive Directors do not receive retirement allowances. Superannuation contributions required under the Australian superannuation guarantee legislation is paid on non-executive Directors’ remuneration. Executive pay The executive pay and reward framework has three components: ■ base pay and beneﬁts, including superannuation; ■ short-term performance incentives; and ■ long-term incentives through participation in executive and employee share plans. 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. Superannuation 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. Short-term incentives Should the Company achieve a pre-determined profit target set by the Board then a pool of short-term incentives (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 maximum STI target bonus opportunity ranges from 30% to 50% 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 2007, 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. Long-term incentives Long-term incentives are provided to certain employees via the Executive Performance Option Plan (EPOP) and the Performance Share Plan (PSP), see pages 29-32 for further information. 26 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 being: ■ A D Crossley – Chief Operating Ofﬁcer ■ A J Fraser – Chief Financial Ofﬁcer ■ 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 ■ L A Wyatt – National Marketing Manager A J Fraser resigned from the position of Chief Financial Officer on 6 July 2007. At this time A D Crossley was appointed Chief Financial Officer and M C Newton was appointed Chief Operating Officer. Key management personnel of Mortgage Choice Limited Short-term benefits Cash salary and fees $ Cash bonus $ Non- monetary benefits $ Post-employment benefits Super- annuation $ Retirement benefits $ Long-term benefits Long service leave** $ Equity Rights & options $ 2007 Name Non-executive Directors P D Ritchie Chairman P G Higgins R G Higgins S C Jermyn D E Ralston Sub-total non-executive Directors 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 L A Wyatt Total key management personnel compensation 110,000 60,000 60,000 28,000 60,000 318,000 – – – – – – – – – – – – 9,900 5,400 5,400 37,400 5,400 63,500 464,887 250,000 14,293 91,375 257,500 212,384 188,216 190,023 158,311 124,880 161,312 81,000 67,500 67,773 40,728 36,958 33,244 34,320 – 2,116 7,536 14,441 12,720 3,124 2,380 29,790 23,895 49,806 21,500 28,509 26,295 14,919 2,075,513 611,523 56,610 349,589 – – – – – – – – – – – – – – – Total $ 119,900 65,400 65,400 65,400 65,400 381,500 – – – – – – – – – – – – 4,580 190,904 1,016,039 1,378 (3,157) 5,151 4,603 5,168 384 278 42,330 26,446 37,221 20,363 18,507 9,442 5,606 411,998 329,184 355,703 291,658 260,173 197,369 218,815 18,385 350,819 3,462,439 * Denotes one of the 5 highest paid executives of the company, as required to be disclosed under the Corporations Act 2001. ** Remuneration in the form of long service leave includes negative amounts for entitlements forfeited during the year. 27 Directors’ Report continued 2006 Name Non-executive Directors P D Ritchie Chairman P G Higgins R G Higgins S C Jermyn D E Ralston Sub-total non-executive Directors 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) Total key management personnel compensation Short-term benefits Cash salary and fees $ Cash bonus $ Non- monetary benefits $ Post-employment benefits Super- annuation $ Retirement benefits $ Long – term benefits Long service leave** $ Equity Rights & options*** $ Total $ 1,000 55,000 55,000 55,000 55,000 221,000 – – – – – – 99,000 – – – – 9,000 4,950 4,950 4,950 4,950 99,000 28,800 475,000 203,625 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 10,611 23,328 20,378 25,009 21,910 18,686 4,102 18,704 – 1,980 50,914 33,367 1,080 4,095 163,223 20,992 3,094 15,638 2,031,573 453,947 128,100 239,604 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 109,000 59,950 59,950 59,950 59,950 348,800 2,910 80,230 827,201 518 1,946 4,288 3,668 4,181 – – – 24,492 13,326 21,538 12,352 11,222 307,536 262,072 328,708 283,909 241,503 3,443 121,226 – 23,980 (8,839) 80,617 (7,305) – 195,642 10,206 157,764 3,021,194 * Denotes one of the 5 highest paid executives of the company, as required to be disclosed under the Corporations Act 2001. ** Remuneration in the form of long service leave includes negative amounts for entitlements forfeited during the year. *** Remuneration in the form of options includes negative amounts for options forfeited during the year. The relative proportions of remuneration that are linked to performance and those that are fixed are as follows: Fixed remuneration 2006 2007 At risk – STI At risk – LTI 2007 2006 2007 2006 57% 66% 24% 25% 19% 10% 70% 71% 70% 79% 79% 78% 82% – – 84% 83% 75% 79% 81% 97% 100% 70% 89% 20% 21% 19% 14% 14% 17% 16% – – 8% 12% 19% 16% 14% – – 41% 11% 10% 8% 10% 7% 7% 5% 3% – – 8% 5% 7% 4% 5% 3% – (11%) – Name Executive Directors of Mortgage Choice Limited P A Lahiff Other key management personnel of Group A D Crossley A J Fraser M C Newton D M Hoskins W J O’Rourke M N Writer L A Wyatt D S Bayes I C Pepper 28 C Service agreements (audited) On appointment to the Board, all non-executive Directors enter into a service agreement with the Company in the form of a letter of appointment. The letter summarises the Board policies and terms, including compensation, relevant to the Director. 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. ■ 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 six months base salary where departure is for any reason other than misconduct. ■ 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. 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 2007, 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 are drawn from a group within an approximate range of 40% to 200% of the market capitalisation of Mortgage Choice. The companies comprising the comparator group for the year ending 30 June 2007 are Australian Agricultural Company Limited, Servcorp Limited, Commander Communications Limited, Skilled Group Limited, PMP Limited, InvoCare Limited, WHK Group Limited, Prime Television Limited, Colorado Group Limited, Macmahon Holdings Limited, Miller’s Retail Limited, Cellestis Limited, GasNet Australia Group, Graincorp Limited, Village Roadshow Limited, Vision Systems Limited, Pharmaxis Ltd, MYOB Limited, Ridley Corporation Limited, Pacifica Group Limited, S8 Limited, Novogen Limited, Credit Corp Group Limited, McGuigan Simeon Wines Limited, Salmat Limited, Fleetwood Corporation Limited, Automotive Holdings Group Limited, Programmed Maintenance Services Ltd, Photon Group Limited, Rebel Sport Limited, SP Telemedia Limited, Capral Aluminium Limited, Vision Group Holdings Limited, AVJennings Limited, Fantastic Holdings Limited, Oakton Limited, IBA Health Limited, ION Limited, Wattyl Limited, RCR Tomlinson Limited, Infomedia Limited, Biota Holdings Limited, K&S Corporation Limited, Repco Corporation Limited, Domino’s Pizza Australia New Zealand Limited, Ventracor Limited, Coffey International Limited, Funtastic Limited, ST Synergy Limited and Freedom Group 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) At or below the 50th percentile At the 51st percentile 75th percentile or above Percentage of offered options allocated 0% 52% 100% 29 Directors’ Report continued Between the 51st percentile and 75th percentiles, an additional 2% 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. 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 ■ twelve 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 10 August 2004 24 February 2005 2 September 2005 12 December 2006 Date vested and exercisable From 10 August 2007 From 24 February 2008 From 2 September 2008 From 31 August 2009 Expiry date 10 August 2014 24 February 2015 2 September 2015 12 December 2016 Exercise price $1.05 $1.08 $1.43 $2.60 Value per option at grant date $0.32 $0.32 $0.28 $0.67 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 Number of options granted during the year Number of options vested during the year 2007 2006 2007 2006 746,300 424,100 109,700 45,650 97,250 128,600 71,400 108,900 – – – – – – – – 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 2007 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: $2.60 (2006 – $1.43); (c) grant date: 12 December 2006 (2006 – 2 September 2005); (d) expiry date: 12 December 2016 (2006 – 2 September 2015); (e) share price at grant date: $2.68 (2006 – $1.43); (f) expected price volatility of the company’s shares: 40% (2006 – 30%); (g) expected dividend yield: 5.6% (2006 – 6%); and (h) risk-free interest rate: 5.76% (2006 – 5%). 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 2007 (2006 – nil). 30 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 2007 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 except where the shares have been acquired by the Mortgage Choice Performance Share Plan Trust (refer note 1(b)(ii)). 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 12 December 2006 Value per performance share at offer date $1.05 $1.05 $0.91 $1.08 $1.43 $2.21 Vesting date 10 August 2007 6 September 2007 4 January 2008 24 February 2008 2 September 2008 31 August 2009 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. 31 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 L A Wyatt Other key management personnel I C Pepper Number of performance share rights granted during the year Number of performance shares issued during the year 2007 – – 13,850 – 17,700 16,100 14,000 14,950 – 2006 83,300 25,300 14,000 21,400 26,200 23,800 14,200 – 23,600 2007 2006 – – – – – – – – – – – – – – – – – – 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 2007 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: 12 December 2006 (2006 – 2 September 2005); (c) expiry date: 12 December 2016 (2006 – 2 September 2015); (d) share price at grant date: $2.68 (2006 – $1.43); (e) expected price volatility of the Company’s shares: 40% (2006 – 30%); (f) expected dividend yield: 5.6% (2006 – 6.0%); and (g) risk-free interest rate: 5.76% (2006 – 5.0%). 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 2007 (2006 – nil). E Additional information – unaudited Performance of Mortgage Choice Limited The remuneration of key management personnel includes short-term incentives (STI), as detailed in Section A Principles used to determine the nature and amount of remuneration, and long-term incentives (LTI) as detailed in Section D Share-based compensation. Payments made under the STI plan are conditional upon the Company achieving a pre-determined profit target. The following table lists Mortgage Choice Limited’s earnings per share (EPS) since listing on the ASX in August 2004: Year 2005 2006 2007 EPS (cents per share)* 10.9 15.2 16.6 * Until 30 June 2005, earnings per share were calculated in accordance with Australian GAAP as opposed to Australian Equivalents to International Financial Reporting Standards (AIFRS). 32 Payments made under the LTI plan are based on the Total Shareholder Return (TSR) of the Company over a three year period compared to the TSRs of comparator groups 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 following table lists Mortgage Choice Limited’s TSR since listing on the ASX in August 2004: Year 2005 2006 2007 TSR 71% 157% 34% 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 27-28 and 30-32, 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 3 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 as the amount of the grant date fair value of the share rights and options that is yet to be expensed. Cash bonus Paid % 100 Forfeited % – 100 100 100 100 100 100 100 – – – – – – – Year granted 2007 2006 2005 2007 2006 2005 2007 2006 2005 2007 2006 2005 2007 2006 2005 2007 2006 2005 2007 2006 2007 Vested % – – – – – – – – – – – – – – – – – – – – – Name P A Lahiff A D Crossley A J Fraser M C Newton D M Hoskins W J O’Rourke M N Writer L A Wyatt Forfeited % – – – – – – – – – – – – – – – – – – – – – Share rights and options Financial years in which rights and options may vest Minimum total value of grant yet to vest $ Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Maximum total value of grant yet to vest $ 399,693 67,000 3,641 58,778 20,331 6,669 45,198 11,272 2,776 52,069 17,208 1,037 26,439 9,053 658 24,049 8,224 597 20,912 4,907 22,257 30/6/2010 30/6/2009 30/6/2008 30/6/2010 30/6/2009 30/6/2008 30/6/2010 30/6/2009 30/6/2008 30/6/2010 30/6/2009 30/6/2008 30/6/2010 30/6/2009 30/6/2008 30/6/2010 30/6/2009 30/6/2008 30/6/2010 30/6/2009 30/6/2010 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 14.9% 7.3% 3.7% 7.5% B Value at grant date $ 500,371 73,584 30,643 65,184 C Value at exercise date $ – – – – D Value at lapse date $ – – – – E Total of columns B-D $ 500,371 73,584 30,643 65,184 33 Directors’ Report continued 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 L A Wyatt A Remuneration consisting of performance shares 4.2% 3.2% 4.7% 3.2% 7.1% 7.3% 5.3% 3.0% B Value at offer date $ – – 25,993 – 33,099 30,107 26,180 27,863 C Value at entitlement date $ – – – – – – – – D Value at lapse date $ – – – – – – – – E Total of columns B-D $ – – 25,993 – 33,099 30,107 26,180 27,863 A = The percentage of the value of remuneration consisting of options or performance shares, based on the value of options or performance shares expensed during the current year. B = The value at grant date calculated in accordance with AASB 2 Share-based Payment of options or performance shares 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. Shares under option Unissued ordinary shares of Mortgage Choice Limited under option at the date of this report are as follows: Date options granted 10 August 2004 24 February 2005 2 September 2005 12 December 2006 Expiry date 10 August 2014 24 February 2015 2 September 2015 12 December 2016 Issue price of shares $1.05 $1.08 $1.43 $2.60 Number under option 415,400 81,800 661,600 953,250 2,112,050 No option holder has any right under the options to participate in any other share issue of the Company or any other entity. 14. Insurance of officers Insurance premiums were paid for the year ended 30 June 2007 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. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 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. 34 16. Non-audit services 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. 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 as none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. 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: 1. Audit services PricewaterhouseCoopers Australian firm: Audit and review of financial reports Total remuneration for audit services 2. Non-audit services Audit-related services PricewaterhouseCoopers Australian firm: Audit of regulatory returns Other assurance services Total remuneration for audit-related services Taxation services PricewaterhouseCoopers Australian firm: Tax compliance services Other tax services Total remuneration for taxation services Other services PricewaterhouseCoopers Australian firm: Consulting on employee share trust Total remuneration for other services Total remuneration for non-audit services 17. Auditors’ independence declaration Consolidated 2007 $ 2006 $ 211,450 211,450 228,350 228,350 2,500 7,500 10,000 15,500 9,780 25,280 40,090 40,090 75,370 – 7,000 7,000 18,800 15,283 34,083 – – 41,083 A copy of the auditors’ independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 36. 18. Rounding of amounts The Company is of a kind referred to in Class Order 98/100 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. Auditor PricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of the Directors. Peter Ritchie Director Sydney 22 August 2007 35 AUDITORS’ INDEPENDENCE DECLARATION 36 Mortgage Choice Limited ABN 57 009 161 979 Annual financial report – 30 June 2007 CONTENTS Financial report Income statements Balance sheets Statements of changes in equity Cash flow statements Notes to the financial statements Directors’ declaration Independent audit report to members of Mortgage Choice Limited 38 39 40 41 42 71 72 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 22 August 2007. 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 our website: www.mortgagechoice.com.au. 37 INCOME STATEMENTS FOR THE YEAR ENDED 30 JUNE 2007 Revenue from continuing operations Other income Expenses from continuing operations Sales Technology Marketing Finance Corporate Finance costs Profit before income tax Income tax expense Notes 5 6 7 Consolidated Parent entity 2007 $’000 155,992 1,126 (99,035) (4,033) (8,318) (1,556) (5,275) (10,690) 28,211 2006 $’000 141,070 982 (89,445) (3,802) (6,813) (1,677) (5,145) (9,320) 25,850 2007 $’000 155,992 1,126 (99,035) (4,033) (8,318) (1,556) (5,275) (10,690) 28,211 2006 $’000 141,070 982 (89,445) (3,802) (6,813) (1,677) (5,145) (9,320) 25,850 8 (8,624) (7,990) (8,624) (7,990) Net profit attributable to the members of Mortgage Choice Limited 19,587 17,860 19,587 17,860 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 Cents 16.6 16.4 Cents 15.2 15.0 31 31 The above income statements should be read in conjunction with the accompanying notes. 38 BALANCE SHEETS AS AT 30 JUNE 2007 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 The above balance sheets should be read in conjunction with the accompanying notes. Consolidated Parent entity Notes 2007 $’000 2006 $’000 2007 $’000 2006 $’000 9 10 11 12 13 14 15 16 17 18 19 9,121 58,070 8,393 52,677 9,121 58,070 8,393 52,677 67,191 61,070 67,191 61,070 114,981 1,223 1,115 2,653 101,823 1,192 1,197 2,075 114,981 1,223 1,115 2,653 101,823 1,192 1,197 2,075 119,972 106,287 119,972 106,287 187,163 167,357 187,163 167,357 40,674 2,071 511 36,265 2,368 517 40,674 2,071 511 36,265 2,368 517 43,256 39,150 43,256 39,150 73,401 17,866 410 64,210 16,357 185 73,401 17,866 410 64,210 16,357 185 91,677 80,752 91,677 80,752 134,933 119,902 134,933 119,902 52,230 47,455 52,230 47,455 20 21(a) 21(b) 203 830 51,197 203 343 46,909 203 830 51,197 203 343 46,909 52,230 47,455 52,230 47,455 39 STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2007 Consolidated Parent entity Notes 2007 $’000 2006 $’000 2007 $’000 2006 $’000 Total equity at the beginning of the financial year Adjustment on adoption of AASB 132 and AASB 139, net of tax, to: Retained profits 47,455 9,783 47,455 9,783 – 34,847 – 34,847 Restated total equity at the beginning of the financial year 47,455 44,630 47,455 44,630 Profit for the year Transactions with equity holders in their capacity as equity holders: Employee share rights and options Dividends provided for or paid 19,587 17,860 19,587 17,860 32 22 487 (15,299) (14,812) 252 (15,287) (15,035) 487 (15,299) (14,812) 252 (15,287) (15,035) Total equity at the end of the financial year 52,230 47,455 52,230 47,455 The above statements of changes in equity should be read in conjunction with the accompanying notes. 40 CASH FLOW STATEMENTS FOR THE YEAR ENDED 30 JUNE 2007 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 the trailing commissions Interest paid on the trailing commissions Income taxes paid Consolidated Parent entity Notes 2007 $’000 2006 $’000 2007 $’000 2006 $’000 134,691 (117,112) 17,579 17,165 (10,690) (7,330) 120,894 (106,729) 14,165 15,216 (9,320) (7,311) 134,691 (117,112) 17,579 17,165 (10,690) (7,330) 120,894 (106,729) 14,165 15,216 (9,320) (7,311) Net cash inflow from operating activities 30 16,724 12,750 16,724 12,750 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 (590) 1 (736) 628 (332) 2 (883) 681 (590) 1 (736) 628 (332) 2 (883) 681 Net cash (outflow) from investing activities (697) (532) (697) (532) Cash flows from financing activities Dividends paid (15,299) (15,287) (15,299) (15,287) Net cash (outflow) from financing activities (15,299) (15,287) (15,299) (15,287) Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year 728 8,393 (3,069) 11,462 728 8,393 (3,069) 11,462 Cash and cash equivalents at the end of year 9 9,121 8,393 9,121 8,393 The above cash flow statements should be read in conjunction with the accompanying notes. 41 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NOTE 1 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 Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001. Compliance with International Financial Reporting Standards (IFRS) Australian Accounting Standards include Australian equivalents to International Financial Reporting Standards (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 International Financial Reporting Standards (IFRS) in accordance with AASB 101 Presentation of Financial Statements except that it has elected to apply the relief provided in respect of certain disclosure requirements contained in AASB 132 Financial Instruments: Disclosure and Presentation. 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 (i) 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 2007 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. 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. (ii) Employee Share Trust The Group has formed a trust to administer the Group’s employee share scheme. This trust is consolidated, as the substance of the relationship is that the trust is controlled by the Group. (c) Segment reporting A business segment is identified for 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 identified when products or services are provided within a particular economic environment subject to risks and returns that are different from those of segments operating in other economic environments. 42 (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. 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. (e) Income tax The income tax expense 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 income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. 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. 43 Mortgage Choice Limited Notes to the financial statements continued 30 June 2007 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 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. (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, equity instruments 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. 44 (j) Trade receivables Trade receivables are recognised in accordance with the revenue recognition policy outlined in note 1(d). Collectibility of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. A provision for impairment of trade 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. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. 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 original effective interest rate. The amount of the provision is recognised in the income statement in other expenses. (k) Investments and other financial assets 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 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 trade and other 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. The carrying amount of the replaced part is derecognised. 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 Computer equipment Furniture and fittings 5-10 years 3-4 years 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. (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 five 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. 45 Mortgage Choice Limited Notes to the financial statements continued 30 June 2007 (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. (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 the provision for employee entitlements 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 entitlements 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. 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. The impact of the revision to original estimates, if any, is recognised in the income statement with a corresponding adjustment to equity. (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. 46 (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) 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. (v) Rounding of amounts The Company is of a kind referred to in Class Order 98/100, 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. (w) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2007 reporting periods. The Group’s and the parent entity’s assessment of the impact of these new standards and interpretations is set out below. 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 and the parent entity’s financial instruments. 47 Mortgage Choice Limited Notes to the financial statements continued 30 June 2007 FINANCIAL RISK MANAGEMENT NOTE 2 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. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS NOTE 3 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) 2007 Between 3.0 and 3.5 years 12% 2006 Between 3.0 and 3.5 years 12% 62% 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 $4.7 million (made up of increases in current assets of $1.5 million, non current assets of $17.2 million, current liabilities of $0.9 million, non-current liabilities of $11.1 million and deferred tax liabilities of $2.0 million) if favourable; or – a decrease in net assets of $4.4 million (made of decreases in current assets of $1.2 million, non current assets of $16.4 million, current liabilities of $0.7 million, non-current liabilities of $10.6 million and deferred tax liabilities of $1.9 million if unfavourable. Management do not consider material 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. 48 (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. NOTE 4 The Mortgage Choice Group of companies operates predominantly in Australia and in one segment, the mortgage broking industry. SEGMENT INFORMATION NOTE 5 REVENUE Revenue from continuing operations Sales revenue Services Other revenue Interest (note (a)) (a) Interest Consolidated Parent entity 2007 $’000 2006 $’000 2007 $’000 2006 $’000 138,199 125,173 138,199 125,173 17,793 155,992 15,897 141,070 17,793 155,992 15,897 141,070 Interest income includes the unwinding of the discount in relation to receipt of trailing commission as well as interest earned on deposits and loans. NOTE 6 OTHER INCOME Conference sponsorships (note (a)) Amortisation of software licence cost recovery (note (b)) Other (a) Conference sponsorships Consolidated Parent entity 2007 $’000 1,085 20 21 1,126 2006 $’000 948 13 21 982 2007 $’000 1,085 20 21 1,126 2006 $’000 948 13 21 982 Lenders sponsor Mortgage Choice’s national conference, High Flyers’ conference, quarterly state conferences, training days and workshops. (b) 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 to five years, consistent with the amortisation of the corresponding intangible asset. 49 Mortgage Choice Limited Notes to the financial statements continued 30 June 2007 NOTE 7 EXPENSES Profit from ordinary activities before income tax includes the following specific expenses: Finance costs Interest and finance charges (note (a)) 10,690 9,320 10,690 9,320 Net loss on disposal of property, plant and equipment 11 73 11 73 Consolidated Parent entity 2007 $’000 2006 $’000 2007 $’000 2006 $’000 Depreciation Plant and equipment Amortisation Leasehold improvements Computer software Other provisions Employee entitlements Rental expense relating to operating leases Defined contribution superannuation expense (a) Interest and finance charges 199 264 199 264 347 158 44 848 1,099 263 280 28 839 895 347 158 44 848 1,099 263 280 28 839 895 Interest expense includes the unwinding of the discount in relation to payment of trailing commission to Franchisees. NOTE 8 INCOME TAX (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: (Increase)/decrease in deferred tax assets (note 13) Increase/(decrease) in deferred tax liabilities (note 18) (b) Numerical reconciliation of income tax expense to prima facie tax payable Profit from continuing operations before income tax expense Income tax calculated @ 30% (2006 – 30%) Tax effect of amounts which are not deductible in calculating taxable income: Entertainment Share based payments Under/(over) provision from prior years Income tax expense Consolidated Parent entity 2007 $’000 7,032 1,591 1 8,624 8,624 8,624 2006 $’000 6,567 1,431 (8) 7,990 7,990 7,990 2007 $’000 7,032 1,591 1 8,624 8,624 8,624 2006 $’000 6,567 1,431 (8) 7,990 7,990 7,990 (3,602) 5,193 1,591 (3,314) 4,745 1,431 (3,602) 5,193 1,591 (3,314) 4,745 1,431 28,211 8,463 25,850 7,755 28,211 8,463 25,850 7,755 158 2 8,623 1 8,624 167 76 7,998 (8) 7,990 158 2 8,623 1 8,624 167 76 7,998 (8) 7,990 No part of the deferred tax asset shown above and in note 13 is attributable to tax losses. (c) Tax consolidation legislation Mortgage Choice and its 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 NOTE 9 CURRENT ASSETS – CASH AND CASH EQUIVALENTS Cash at bank and on hand Deposits at call Deposits at call Consolidated Parent entity 2007 $’000 106 9,015 9,121 2006 $’000 270 8,123 8,393 2007 $’000 106 9,015 9,121 2006 $’000 270 8,123 8,393 The deposits are bearing interest rates between 6.00% and 6.24% (2006 – 5.63% and 5.88%). These deposits have an average maturity of 60 days. NOTE 10 CURRENT ASSETS – TRADE AND OTHER RECEIVABLES Trade receivables (1) Net present value of future trailing commissions receivable Franchisee receivables Other receivables Prepayments Consolidated Parent entity 2007 $’000 12,512 45,037 202 149 170 58,070 2006 $’000 11,121 40,885 285 125 261 52,677 2007 $’000 12,512 45,037 202 149 170 58,070 2006 $’000 11,121 40,885 285 125 261 52,677 (1) Subject to a limited charge in favour of The Loan Book Security Trust (refer to note 15) (a) Other receivables These amounts generally arise from transactions outside the usual operating activities of the consolidated entity. (b) 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). (c) 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 2007 NOTE 11 NON-CURRENT ASSETS – RECEIVABLES Net present value of future trailing commissions receivable (a) Interest rate risk Consolidated Parent entity 2007 $’000 114,981 2006 $’000 101,823 2007 $’000 114,981 2006 $’000 101,823 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. 2007 Trade receivables* Franchisee and other receivables Weighted average interest rate 2006 Trade receivables* Franchisee and other receivables Weighted average interest rate Fixed interest maturing in: Floating interest rate $’000 – 1 year or less $’000 45,037 Over 1 to 2 years $’000 33,305 Over 2 to 3 years $’000 24,387 Over 3 to 4 years $’000 17,884 Over 4 to 5 years $’000 13,196 – – – – 45,037 12.00% – 33,305 12.00% – 24,387 12.00% – 17,884 12.00% – 13,196 12.00% Fixed interest maturing in: Floating interest rate $’000 – 1 year or less $’000 40,885 Over 1 to 2 years $’000 30,116 Over 2 to 3 years $’000 21,710 Over 3 to 4 years $’000 15,624 Over 4 to 5 years $’000 11,316 – – – 64 40,949 11.99% – 30,116 12.00% – 21,710 12.00% – 15,624 12.00% – 11,316 12.00% Over 5 years $’000 26,209 – 26,209 12.00% Over 5 years $’000 23,057 – 23,057 12.00% Non- interest bearing $’000 12,512 351 12,863 – Non- interest bearing $’000 11,121 346 11,467 – Total $’000 172,530 351 172,881 Total $’000 153,829 410 154,239 * 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 NOTE 12 NON-CURRENT ASSETS – PROPERTY, PLANT AND EQUIPMENT Consolidated Parent entity At 1 July 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 Year ended 30 June 2007 Opening net book amount Additions Disposals Depreciation charge Closing net book amount At 30 June 2007 Cost Accumulated depreciation Net book amount Plant and Equipment $’000 Leasehold Improvements $’000 3,100 (2,402) 698 698 197 (57) (264) 574 3,031 (2,457) 574 574 257 (5) (199) 627 3,259 (2,632) 627 1,490 (726) 764 764 135 (18) (263) 618 1,504 (886) 618 618 332 (7) (347) 596 1,738 (1,142) 596 Total $’000 4,590 (3,128) 1,462 1,462 332 (75) (527) 1,192 4,535 (3,343) 1,192 1,192 589 (12) (546) 1,223 4,997 (3,774) 1,223 Plant and Equipment $’000 Leasehold Improvements $’000 3,100 (2,402) 698 698 197 (57) (264) 574 3,031 (2,457) 574 574 257 (5) (199) 627 3,259 (2,632) 627 1,490 (726) 764 764 135 (18) (263) 618 1,504 (886) 618 618 332 (7) (347) 596 1,738 (1,142) 596 Total $’000 4,590 (3,128) 1,462 1,462 332 (75) (527) 1,192 4,535 (3,343) 1,192 1,192 589 (12) (546) 1,223 4,997 (3,774) 1,223 53 Mortgage Choice Limited Notes to the financial statements continued 30 June 2007 NOTE 13 NON-CURRENT ASSETS – DEFERRED TAX ASSETS Consolidated Parent entity The balance comprises temporary differences attributable to: NPV of future trailing commissions payable Employee benefits Depreciation and amortisation Accrued expenses Share issue expenses 2007 $’000 2006 $’000 2007 $’000 2006 $’000 30,139 683 322 58 52 26,455 647 325 147 78 30,139 683 322 58 52 26,455 647 325 147 78 Total deferred tax assets Set-off of deferred tax assets pursuant to set-off provisions (note 18) 31,254 (30,139) 27,652 (26,455) 31,254 (30,139) 27,652 (26,455) Net deferred tax assets Deferred tax assets to be recovered within 12 months Deferred tax assets to be recovered after more than 12 months 1,115 8,873 22,381 31,254 1,197 8,048 19,604 27,652 1,115 8,873 22,381 31,254 1,197 8,048 19,604 27,652 Movements – Consolidated and Parent entity At 1 July 2005 Change on adoption of AASB 132 and AASB 139 Charged/(credited) to the income statement Charged directly to equity At 30 June 2006 Charged/(credited) to the income statement At 30 June 2007 NPV of future trailing commissions payable $’000 – 23,132 3,323 – 26,455 3,684 30,139 Employee benefits $’000 617 – 30 – 647 36 683 Depreciation and amortisation $’000 286 – 39 – 325 (3) 322 Accrued expenses $’000 169 – (22) – 147 (89) 58 Other $’000 134 – (28) (28) 78 (26) 52 Total $’000 1,206 23,132 3,342 (28) 27,652 3,602 31,254 54 NOTE 14 NON-CURRENT ASSETS – INTANGIBLE ASSETS Consolidated Computer Software* $’000 Parent entity Computer Software* $’000 At 1 July 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 Year ended 30 June 2007 Opening net book amount Additions Amortisation charge Closing net book amount At 30 June 2007 Cost Accumulated amortisation Net book amount 2,893 (1,421) 1,472 1,472 883 (280) 2,075 3,776 (1,701) 2,075 2,075 736 (158) 2,653 4,512 (1,859) 2,653 2,893 (1,421) 1,472 1,472 883 (280) 2,075 3,776 (1,701) 2,075 2,075 736 (158) 2,653 4,512 (1,859) 2,653 *Capitalised computer software includes internally generated software development costs, a significant component of these costs will not be installed ready for use until August 2007 at which time amortisation will commence. 55 Mortgage Choice Limited Notes to the financial statements continued 30 June 2007 NOTE 15 CURRENT LIABILITIES – TRADE AND OTHER PAYABLES Trade payables(1) Net present value of future trailing commissions payable Licence fees repayable Other payables (1) Loan Book Security Trust Consolidated Parent entity 2007 $’000 10,558 27,263 320 2,533 40,674 2006 $’000 8,971 24,174 400 2,720 36,265 2007 $’000 10,558 27,263 320 2,533 40,674 2006 $’000 8,971 24,174 400 2,720 36,265 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 2007, the amount subject to charge resulting from applying the specified percentage to the trailing commission subsequently received by Mortgage Choice Limited is $2,678,606 (2006 – $2,528,625). This is included as part of the balance of trade creditors at 30 June 2007 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. NOTE 16 CURRENT LIABILITIES – PROVISIONS Employee entitlements – annual leave NOTE 17 NON-CURRENT LIABILITIES – PAYABLES Net present value of future trailing commissions payable Licence fees repayable Consolidated Parent entity 2007 $’000 511 2006 $’000 517 2007 $’000 511 2006 $’000 517 Consolidated Parent entity 2007 $’000 73,201 200 73,401 2006 $’000 64,010 200 64,210 2007 $’000 73,201 200 73,401 2006 $’000 64,010 200 64,210 56 NOTE 18 NON-CURRENT LIABILITIES – DEFERRED TAX LIABILITIES The balance comprises temporary differences attributable to: NPV of future trailing commissions receivable Set-off of deferred tax assets pursuant to set-off provisions (note 13) Net deferred tax liabilities Deferred tax liabilities to be settled within 12 months Deferred tax liabilities to be settled after more than 12 months Movements – Consolidated and Parent entity At 1 July 2005 Change on adoption of AASB 132 and AASB 139 Charged/(credited) to the income statement At 30 June 2006 Charged/(credited) to the income statement At 30 June 2007 Consolidated Parent entity 2007 $’000 2006 $’000 2007 $’000 2006 $’000 48,005 (30,139) 17,866 42,812 (26,455) 16,357 48,005 (30,139) 17,866 42,812 (26,455) 16,357 13,511 34,494 48,005 12,265 30,547 42,812 13,511 34,494 48,005 12,265 30,547 42,812 NPV of future trailing commissions payable $’000 – 38,067 4,745 42,812 5,193 48,005 Total $’000 – 38,067 4,745 42,812 5,193 48,005 57 Mortgage Choice Limited Notes to the financial statements continued 30 June 2007 NOTE 19 NON-CURRENT LIABILITIES – PROVISIONS Make good provision Employee entitlements – long service leave (a) Make good provision Consolidated Parent entity 2007 $’000 175 235 410 2006 $’000 – 185 185 2007 $’000 175 235 410 2006 $’000 – 185 185 Mortgage Choice is required to restore the leased premises of its offices to their original condition at the end of the respective lease terms. A provision has been recognised for the present value of the estimated expenditure required to remove any leasehold improvements. These costs have been capitalised as part of the cost of leasehold improvements and are amortised over the shorter of the term of the lease or the useful life of the assets. (b) Movements in provisions Movements in each class of provision during the financial year, other than employee benefits, are set out below: Consolidated and Parent entity – 2007 Non-current Carrying amount at start of year Additional provision recognised – charged to leasehold improvements Carrying amount at end of year NOTE 20 CONTRIBUTED EQUITY (a) Share capital Ordinary shares – fully paid Make good provision $’000 – 175 175 Parent entity 2007 number ’000 2006 number ’000 Consolidated and Parent entity 2007 $’000 2006 $’000 117,593 117,593 203 203 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 2005 30 June 2007 Details Opening balance Balance (c) Employee share scheme Number of shares 117,592,767 117,592,767 $’000 203 203 Information relating to the employee share scheme, including details of shares issued under the scheme, is set out in note 32. (d) Options 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 29 to 32. 58 NOTE 21 RESERVES AND RETAINED PROFITS (a) Reserves Share-based payments reserve Movements: Share-based payments reserve Balance 1 July Options and performance shares expensed Issue of shares to the Mortgage Choice Performance Share Plan Trust Funding of acquisition of shares by the Mortgage Choice Performance Share Plan Trust Balance 30 June (b) Retained profits Balance 1 July Adjustment on adoption of AASB 132 and AASB 139, net of tax Net profit for the year Dividends Balance 30 June (c) Nature and purpose of reserves Share-based payments reserve Consolidated Parent entity 2007 $’000 830 2006 $’000 343 2007 $’000 830 2006 $’000 343 343 487 – – 830 91 252 – – 343 343 487 477 (477) 830 91 252 – – 343 Consolidated Parent entity 2007 $’000 46,909 – 19,587 (15,299) 51,197 2006 $’000 9,489 34,847 17,860 (15,287) 46,909 2007 $’000 46,909 – 19,587 (15,299) 51,197 2006 $’000 9,489 34,847 17,860 (15,287) 46,909 The share-based payments reserve is used to recognise: ■ the fair value of options and performance shares granted but not vested; ■ in the parent entity – the fair value of options and performance shares issued and funding of acquisition of shares by the Mortgage Choice Performance Plan Trust. 59 Mortgage Choice Limited Notes to the financial statements continued 30 June 2007 NOTE 22 DIVIDENDS (a) Ordinary shares Final dividend declared out of profits of the Company for the year ended 30 June 2005 of 6 cents per fully paid share paid on 19 September 2005: Fully franked based on tax paid @ 30% 6 cents per share Interim dividend declared out of profits of the Company for the half-year ended 31 December 2005 of 5 cents per fully paid share paid 21 March 2006: Fully franked based on tax paid @ 30% 5 cents per share Special dividend declared out of retained profits at 31 December 2005 of 2 cents per fully paid share paid 21 March 2006: Fully franked based on tax paid @ 30% 2.0 cents per share Final dividend declared out of profits of the Company for the year ended 30 June 2006 of 7.5 cents per fully paid share paid on 18 September 2006: Fully franked based on tax paid @ 30% 7.5 cents per share Interim dividend declared out of profits of the Company for the half-year ended 31 December 2006 of 5.5 cents per fully paid share paid 19 March 2007: Fully franked based on tax paid @ 30% 5.5 cents per share (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 8.5 cents per fully paid ordinary share, (2006 – 7.5 cents) fully franked based on tax paid at 30%. The aggregate amount of the proposed dividend expected to be paid on 18 September 2007 out of retained profits at 30 June 2007, but not recognised as a liability at year end, is (c) Franked dividend The franked portions of the final dividends recommended after 30 June 2007 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 2008. Parent entity 2007 $’000 2006 $’000 – – – 7,056 5,879 2,352 8,819 – 6,480 15,299 – 15,287 10,039 8,819 Franking credits available for subsequent financial years based on a tax rate of 30% Consolidated Parent entity 2007 $’000 5,019 2006 $’000 4,542 2007 $’000 5,019 2006 $’000 4,542 The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for: (a) (b) (c) franking credits that will arise from the payment of the amount of the provision for income tax; franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; and 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 $4,302,000 (2006: $3,788,000). 60 NOTE 23 KEY MANAGEMENT PERSONNEL 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 Chief Operating Officer A J Fraser M C Newton D M Hoskins Chief Financial Officer Chief Information Officer Company Secretary W J O’Rourke National Manager Corporate Affairs M N Writer L A Wyatt Human Resources Manager National Marketing Manager All of the above persons were also specified executives during the year ended 30 June 2006. A J Fraser resigned from the position of Chief Financial Officer on 6 July 2007. At this time A D Crossley was appointed Chief Financial Officer and M C Newton was appointed Chief Operating Officer. (c) Key management personnel compensation Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments Consolidated Parent entity 2007 $ 2,743,646 349,589 18,385 350,819 3,462,439 2006 $ 2,613,620 239,604 10,206 157,764 3,021,194 2007 $ 2,743,646 349,589 18,385 350,819 3,462,439 2006 $ 2,613,620 239,604 10,206 157,764 3,021,194 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 25-29. (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 29-32. 61 Mortgage Choice Limited Notes to the financial statements continued 30 June 2007 (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. 2007 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 2006 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 S Bayes (iii) Performance share rights 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 747,300 746,300 210,400 71,400 201,100 109,700 45,650 97,250 – – – – – – – – 1,493,600 320,100 117,050 298,350 – – – – 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 323,200 424,100 81,800 – 92,200 126,000 128,600 71,400 108,900 – – – – – – – 747,300 – – – (126,000) 210,400 71,400 201,100 – – – – – – 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. 2007 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 M N Writer L A Wyatt 2006 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 M N Writer D S Bayes* I C Pepper* 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 180,300 – 49,800 38,700 49,000 60,100 54,600 14,200 – – 13,850 – 17,700 16,100 14,000 14,950 – – – – – – – – – – – – – – – – 180,300 49,800 52,550 49,000 77,800 70,700 28,200 14,950 – – – – – – – – 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 97,000 83,300 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 – – – – – – – – – – – – 180,300 – – – – – – (37,807) (30,500) 49,800 38,700 49,000 60,100 54,600 14,200 – – – – – – – – – – – * Entitlement to shares has been forfeited as part of termination of employment 62 (iv) 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. 2007 Name Directors of Mortgage Choice Limited P A Lahiff P D Ritchie P G Higgins R G Higgins S C Jermyn D E Ralston 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 L A Wyatt 2006 Name Directors of Mortgage Choice Limited P A Lahiff P D Ritchie P G Higgins R G Higgins S C Jermyn D E Ralston 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 L A Wyatt D Bayes* I C Pepper* 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 100,000 350,125 8,436,534 19,991,583 4,000,000 50,000 – – – 50 1,500 – – – – – – – – – – – – – – – – – (2,613,595) (4,765,368) (2,000,000) – – – – – 589 – – 100,000 350,125 5,822,939 15,226,215 2,000,000 50,000 – – – 50 2,089 – – 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 100,000 297,297 25,286,534 26,841,583 2,000,000 50,000 – – – 50 1,500 – – – 11,000 – – – – – – – – – – – – – – – – 52,828 (16,850,000) (6,850,000) 2,000,000 50,000 100,000 350,125 8,436,534 19,991,583 4,000,000 50,000 – – – – – – – N/a N/a – – – 50 1,500 – – N/a N/a *I C Pepper and D Bayes were not employees of the Group at 30 June 2006. 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. 63 Mortgage Choice Limited Notes to the financial statements continued 30 June 2007 NOTE 24 REMUNERATION OF AUDITORS 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: (a) Audit services PricewaterhouseCoopers Australian firm: Audit and review of financial reports Total remuneration for audit services (b) Non-audit services Audit-related services PricewaterhouseCoopers Australian firm: Audit of regulatory returns Other assurance services Total remuneration for audit-related services Taxation services PricewaterhouseCoopers Australian firm: Tax compliance services Other tax services Total remuneration for taxation services Other services PricewaterhouseCoopers Australian firm: Consulting on employee share trust Total remuneration for other services Total remuneration for non-audit services NOTE 25 CONTINGENCIES CONTINGENT LIABILITIES Consolidated Parent 2007 $ 2006 $ 2007 $ 2006 $ 211,450 211,450 228,350 228,350 211,450 211,450 228,350 228,350 2,500 7,500 10,000 – 7,000 7,000 2,500 7,500 10,000 – 7,000 7,000 15,500 9,780 25,280 18,800 15,283 34,083 15,500 9,780 25,280 18,800 15,283 34,083 40,090 40,090 75,370 – – 41,083 40,090 40,090 75,370 – – 41,083 The parent entity and consolidated entity had contingent liabilities at 30 June 2007 in respect of: Guarantees Guarantees given in respect of: premises leases $297,552 (2006: $244,666). Western Australia broker licences nil (2006: $50,000). 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 2007, 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. NOTE 26 COMMITMENTS 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 2007 $’000 2006 $’000 2007 $’000 2006 $’000 648 539 1,187 623 807 1,430 648 539 1,187 623 807 1,430 64 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. NOTE 27 RELATED PARTY TRANSACTIONS (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. (d) Loans to/from related parties Loans to subsidiaries Beginning of the year Loans advanced to share plan trust* End of year Consolidated Parent entity 2007 $ 2006 $ 2007 $ 2006 $ – – – – – – – 478 478 – – – * The Group has formed a trust to administer the Group’s employee share scheme. The trust is consolidated, as the substance of the relationship is that the trust is controlled by the Group. No provisions for doubtful debts have been raised in relation to any outstanding balances, and no expense has been recognised in respect of bad or doubtful debts due from related parties. NOTE 28 SUBSIDIARIES The consolidated financial statements incorporate the assets, liabilities and results of the following in accordance with the accounting policy described in note 1(b). Name of entity Country of incorporation Class of Shares Equity holding Cost of parent entity’s investment Mortgage Choice (W.A.) Pty Limited MC Loan Book Security Pty Limited Australia Australia Ordinary Ordinary 2007 % 100 100 2006 % 100 100 2007 $ 100 2 2006 $ 100 2 NOTE 29 EVENTS OCCURRING AFTER THE BALANCE SHEET DATE DIVIDEND PAYMENT A final ordinary dividend of $10,039,000 (8.5 cents per fully paid share) was declared out of profits of the Company for the year ended 30 June 2007 on 22 August 2007 to be paid on 18 September 2007. The financial effects of the above transaction have not been brought to account at 30 June 2007. 65 Mortgage Choice Limited Notes to the financial statements continued 30 June 2007 NOTE 30 RECONCILIATION OF PROFIT AFTER INCOME TAX TO NET CASH INFLOW FROM OPERATING ACTIVITIES Consolidated Parent entity Profit for the year Depreciation and amortisation Non-cash employee expense benefits – share-based payments Non-cash net present value of future trailing inflows Non-cash net present value of future trailing outflows Interest received on cash and deposits at call Net loss on sale of non-current assets Change in operating assets and liabilities: (Increase)/decrease in trade and other debtors Decrease/(increase) in deferred tax asset Decrease/(increase) 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 Net cash inflow from operating activities NOTE 31 EARNINGS PER SHARE Basic earnings per share Diluted earnings per share Earnings used in calculating earnings per share – profit from continuing operations 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 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 2007 $’000 19,587 705 487 (17,310) 12,280 (628) 11 (1,332) 82 91 1,587 (267) (297) 1,509 219 16,724 2006 $’000 17,860 806 252 (15,817) 11,075 (681) 74 (1,744) 9 (255) 493 (32) (753) 1,422 41 12,750 2006 $’000 17,860 806 252 (15,817) 11,075 (681) 74 (1,744) 9 (255) 493 (32) (753) 1,422 41 12,750 2007 $’000 19,587 705 487 (17,310) 12,280 (628) 11 (1,332) 82 91 1,587 (267) (297) 1,509 219 16,724 Consolidated 2007 Cents 16.6 16.4 $’000 19,587 2007 Number 2006 Cents 15.2 15.0 $’000 17,860 2006 Number 117,701,730 117,592,767 1,396,210 1,179,070 119,097,940 118,771,837 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. 66 NOTE 32 SHARE-BASED PAYMENTS (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 2007, 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 for the year ending 30 June 2007 are Australian Agricultural Company Limited, Servcorp Limited, Commander Communications Limited, Skilled Group Limited, PMP Limited, InvoCare Limited, WHK Group Limited, Prime Television Limited, Colorado Group Limited, Macmahon Holdings Limited, Miller’s Retail Limited, Cellestis Limited, GasNet Australia Group, Graincorp Limited, Village Roadshow Limited, Vision Systems Limited, Pharmaxis Ltd, MYOB Limited, Ridley Corporation Limited, Pacifica Group Limited, S8 Limited, Novogen Limited, Credit Corp Group Limited, McGuigan Simeon Wines Limited, Salmat Limited, Fleetwood Corporation Limited, Automotive Holdings Group Limited, Programmed Maintenance Services Ltd, Photon Group Limited, Rebel Sport Limited, SP Telemedia Limited, Capral Aluminium Limited, Vision Group Holdings Limited, AVJennings Limited, Fantastic Holdings Limited, Oakton Limited, IBA Health Limited, ION Limited, Wattyl Limited, RCR Tomlinson Limited, Infomedia Limited, Biota Holdings Limited, K&S Corporation Limited, Repco Corporation Limited, Domino’s Pizza Australia New Zealand Limited, Ventracor Limited, Coffey International Limited, Funtastic Limited, ST Synergy Limited and Freedom Group 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) At or below the 50th percentile At the 51st percentile 75th percentile or above Percentage of offered options allocated 0% 52% 100% Between the 51st percentile and 75th percentiles, an additional 2% 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. 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 ■ twelve 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. 67 Mortgage Choice Limited Notes to the financial statements continued 30 June 2007 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 Consolidated and parent entity – 2007 10 August 2014 10 August 2004 24 February 2015 24 February 2005 2 September 2005 2 September 2015 12 December 2006 12 December 2016 Total Weighted average exercise price Grant Date Expiry date Consolidated and parent entity – 2006 10 August 2004 4 January 2005 24 February 2005 2 September 2005 Total Weighted average exercise price 10 August 2014 4 January 2015 24 February 2015 2 September 2015 Exercise price Balance at start of the year Number Granted during the year Number Exercised during the year Number Expired during the year Number Forfeited during the year Number Balance at end of the year Number Exercisable at end of the year Number $1.05 $1.08 $1.43 $2.60 415,400 81,800 733,000 – 1,230,200 $1.28 – – – 998,900 998,900 $2.60 – – – – – – – – – – – – – – – – 415,400 81,800 733,000 998,900 2,229,100 $1.87 – – – – – – Exercise price Balance at start of the year Number Granted during the year Number Exercised during the year Number Expired during the year Number Forfeited during the year Number Balance at end of the year Number Exercisable at end of the year Number $1.05 $0.91 $1.08 $1.43 415,400 126,000 81,800 – 623,200 $1.03 – – – 733,000 733,000 $1.43 – – – – – – – – – – – (126,000) – – (126,000) $0.91 415,400 – 81,800 733,000 1,230,200 $1.28 – – – – – – The weighted average remaining contractual life of share options outstanding at the end of the period was 2.43 years (2006 – 1.78 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 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 2007 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: $2.60 (2006 – $1.43); (c) grant date: 12 December 2006 (2006 – 2 September 2005); (d) expiry date: 12 December 2016 (2006 – 2 September 2015); (e) share price at grant date: $2.68 (2006 – $1.43); (f) expected price volatility of the company’s shares: 40% (2006 – 30%); (g) expected dividend yield: 5.6% (2006 – 6%); and (h) risk-free interest rate: 5.76% (2006 – 5%). 68 (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 2007 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. 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 Number Granted during the year Number Exercised during the year Number Expired during the year Number Forfeited during the year Number Balance at end of the year Number Exercisable at end of the year Number 10 August 2007 6 September 2007 4 January 2008 24 February 2008 2 September 2008 Consolidated and parent entity – 2007 10 August 2004 6 September 2004 4 January 2005 24 February 2005 2 September 2005 12 December 2006 31 August 2009 Total Weighted average exercise price $1.05 $1.05 $0.91 $1.08 $1.43 $2.21 297,400 24,800 117,900 24,500 437,600 – 902,200 $1.21 – – – – – 216,150 216,150 $2.21 – – – – – – – – – – – – – – – – – – (23,100) – (21,700) (4,350) (49,150) $1.25 297,400 24,800 94,800 24,500 415,900 211,800 1,069,200 $1.42 – – – – – – – – 69 Mortgage Choice Limited Notes to the financial statements continued 30 June 2007 Offer Date Vesting date Value Balance at start of the year Number Granted during the year Number Exercised during the year Number Expired during the year Number Forfeited during the year Number Balance at end of the year Number Exercisable at end of the year Number Consolidated and parent entity – 2006 10 August 2004 6 September 2004 4 January 2005 24 February 2005 2 September 2005 Total Weighted average exercise price 10 August 2007 6 September 2007 4 January 2008 24 February 2008 2 September 2008 $1.05 $1.05 $0.91 $1.08 $1.43 372,500 24,800 155,707 24,500 – 577,507 $1.01 – – – – 479,200 479,200 $1.43 – – – – – – – – – – – – (75,100) – (37,807) – (41,600) (154,507) $1.12 297,400 24,800 117,900 24,500 437,600 902,200 $1.21 – – – – – – – The weighted average remaining contractual life of performance shares outstanding at the end of the period was 1.99 years (2006 – 1.70 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. The model inputs for performance shares granted during the year ended 30 June 2007 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: 12 December 2006 (2006 – 2 September 2005); (c) expiry date: 12 December 2016 (2006 – 2 September 2015); (d) share price at grant date: $2.68 (2006 – $1.43); (e) expected price volatility of the company’s shares: 40% (2006 – 30%); (f) expected dividend yield: 5.6% (2006 – 6.0%); and (g) risk-free interest rate: 5.76% (2006 – 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 2007 $’000 217 270 487 2006 $’000 72 180 252 2007 $’000 217 270 487 2006 $’000 72 180 252 70 DIRECTORS’ DECLARATION 30 JUNE 2007 IN THE DIRECTORS’ OPINION: (a) the financial statements and notes set out on pages 38 to 70 are in accordance with the Corporations Act 2001, 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 2007 and of their 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 32 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 Managing Director and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. Peter Ritchie Director Sydney 22 August 2007 71 INDEPENDENT AUDITOR’S REPORT 72 73 74 SHAREHOLDER INFORMATION The shareholder information set out below was applicable as at 17 August 2007. A. DISTRIBUTION OF EQUITY SECURITIES 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 Ordinary Shares 162 526 229 169 38 1,124 Class of equity security Options Conditional entitlements 3 3 17 1 18 There were 12 holders of less than a marketable parcel of ordinary shares. B. EQUITY SECURITY HOLDERS 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 HSBC Custody Nominees (Australia) Limited National Nominees Limited Ochoa Pty Ltd Basscave Pty Limited R G Higgins ANZ Nominees Limited Citicorp Nominees Pty Limited RBC Dexia Investor Services Australia Nominees Pty Limited Citicorp Nominees Pty Limited RBC Dexia Investor Services Australia Nominees Pty Limited Cogent Nominees Pty Limited Citicorp Nominees Pty Limited SCJ Pty Ltd atf Jermyn Family Trust Citicorp Nominees Pty Limited < Cwlth Bank Off Super A/c> AMP Life Limited Mr Ian Edwards & Mrs Josephine Edwards Cogent Nominees Pty Limited RBC Dexia Investor Services Australia Nominees Pty Limited Australian Reward Investment Alliance Unquoted equity securities Options issued under the Executive Performance Option Plan Conditional entitlements over ordinary shares pursuant to the Performance Share Plan Ordinary Shares Number held 22,934,292 17,947,264 10,111,548 9,620,000 5,817,939 5,601,215 5,138,367 5,113,513 4,852,553 3,351,672 3,228,846 2,788,002 2,692,553 2,000,000 1,879,142 1,063,061 675,000 598,546 429,398 385,154 106,228,065 Percentage of issued shares 19.47 15.23 8.58 8.17 4.94 4.75 4.36 4.34 4.12 2.84 2.74 2.37 2.29 1.70 1.60 0.90 0.57 0.51 0.36 0.33 90.17 Number on Issue 2,112,050 797,700 Number of holders 3 18 75 C. SUBSTANTIAL HOLDERS Substantial holders in the Company are set out below: Ordinary shares FMR Corp. & Fidelity International Limited R G Higgins and Ochoa Pty Ltd Commonwealth Bank of Australia Paradice Investment Management Pty Ltd Hyperion Asset Management Limited Perpetual Limited Renaissance Smaller Companies Pty Ltd D. VOTING RIGHTS Number held Percentage 17,270,302 15,226,215 12,020,070 9,840,719 9,457,911 7,968,325 7,850,601 14.66 12.92 10.20 8.35 8.03 6.76 6.68 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 76 DIRECTORY Directors Secretary Senior Management Notice of annual general meeting Principal registered office in Australia Share and debenture register Auditor Solicitors Bankers Stock exchange listings Website address www.mortgagechoice.com.au P D Ritchie Chairman P A Lahiff Managing Director P G Higgins R G Higgins S C Jermyn D E Ralston D M Hoskins A D Crossley Chief Financial Officer M C Newton Chief Operating Officer Neill Rose-Innis Chief Information Officer D L Ennis Head of Sales M B McDonald Group Franchise Manager W J O’Rourke National Corporate Affairs Manager D A Player National Lending Manager M N Writer National Human Resources Manager L Wyatt National Marketing Manager 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 2000 Time: 11.00am Date: 20 November 2007 A formal notice of meeting is enclosed Level 7 182 - 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 NSW 2000 Minter Ellison Aurora Place, 88 Phillip Street Sydney NSW 2000 ANZ Banking Group Limited 116 Miller Street North Sydney NSW 2060 Mortgage Choice Limited shares are listed on the Australian Stock Exchange. 77

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