Tyro Payments
Annual Report 2009

Plain-text annual report

MoneySwitch Limited ABN 49 103 575 042 (Trading as Tyro Payments) Annual report to shareholders Year ended 30 June 2009 MoneySwitch Limited ABN 49 103 575 042 Annual Report 2009 1 CONTENTS Building a specialised banking institution (SCCI) for merchants Tyro Health Tyro Retail Tyro Culture Directors’ Report Independent Auditor Declaration Income Statement Balance Sheet Cash Flow Statement Statement of Changes in Equity Notes to the Financial Statements for the year ended 30 June 2009 Note 1 – Statement of Accounting Policies Note 2 – Revenue and Expenses Note 3 – Income Tax Note 4 – Cash and Cash Equivalents Note 5 – Trade and Other Receivables Note 6 – Prepayments Note 7 – Held to Maturity Investments Note 8 – Inventories Note 9 – Available for Sale Investments Note 10 – Property, Plant and Equipment Note 11 – Share Based Payment Expense Note 12 – Trade and Other Payables Note 13 – Provisions Note 14 – Contributed Equity and Reserves Note 15 – Financial Risk Management Objectives, Policies and Procedures Note 16 – Commitments and Contingencies Note 17 – Subsequent Events Note 18 – Segment Reporting Note 19 – Auditor’s Remuneration Note 20 – Related Party Disclosures Directors’ Declaration Independent Auditor Report PAGE 3 4 5 7 8 14 15 16 17 18 19 27 29 30 30 31 31 31 31 32 33 36 36 36 39 43 44 44 44 45 50 51 MoneySwitch Limited ABN 49 103 575 042 Annual Report 2009 2 Building a specialised banking institution (SCCI) for merchants MoneySwitch Limited trading as Tyro Payments (or “Tyro”) is a new Australian banking institution specialised in facilitating the acceptance of electronic payments on behalf of merchants and recurrent billers. Tyro is the first new entrant into the payment industry in over 10 years. Tyro holds an authority under the Banking Act to carry on banking business as a Specialist Credit Card Institution (SCCI) and operates under the supervision of the Australian Prudential Regulation Authority (APRA). Tyro does not take money on deposit. Tyro is a Principal Member of Visa and MasterCard and a Tier One Member of the Australian payment clearing streams BECS and CECS. Tyro provides an in-house developed, end-to-end solution, authorising, clearing and settling electronic payments. Tyro accepts Visa, MasterCard, American Express/JCB, Diners, PIN based EFTPOS as well as Medicare Easyclaim, gift and loyalty card transactions. Under its banking authority, Tyro Payments is also able to provide additional services of BPAY and direct debit services. The Tyro Payments solution is IP based and all transactions are processed in real time. As an acquirer only, Tyro does not take money on deposit and does not issue cards, thereby eliminating any potential conflict of interest between serving cardholders and merchants. At the end of June 2009, Tyro completed its second full fiscal year trading, since the commercial launch of its EFTPOS facility on 28 April 2007. Our vision and guiding principles Our vision is to be the most efficient acquirer of electronic card transactions in Australia, providing innovative service, functionality and value. Our directors, managers and employees strive to demonstrate honesty, integrity and diligence, to act in accordance with the law and always to maintain a spirit of fairness, justice and equity at all times. Our governance The Board of Directors, constituted in line with the requirements of APRA Prudential Standard 510: Governance, sets policy and direction, supported by operational management. The Board also establishes advisory committees to assist it in carrying out its functions, as well as providing it with expert advice on acquiring and other matters. The primary role of the board is to provide effective governance over company affairs (including its strategic direction, establishing goals for management and monitoring the achievement of those goals) to ensure the interests of stakeholders are protected and the confidence of the merchant acquiring market is maintained, whilst having regard for the interests of all stakeholders including customers, employees, suppliers and local communities. The directors have set a standard of conduct at all levels that ensure compliance with the company code of conduct, the Corporations Act 2001, the Australian Prudential Regulation Authority Prudential Standards, the EFT Code of Conduct, National Privacy Principles 2001 and the Banking Act 1959. MoneySwitch Limited ABN 49 103 575 042 Annual Report 2009 3 Tyro Health: medical practices and pharmacies Tyro and Health Communication Network (HCN), the leading Australian provider of e-health and practice automation solutions, have launched an integrated EFTPOS solution for general practices (PracSoft) in February 2008 and small specialist medical practices (BlueChip) in June 2008. A version for larger specialist practices (BlueChip Terminal Services) was launched in late 2008. By end of June 2009, there were 658 Tyro merchant facilities in medical practices. Tyro launched an integrated EFTPOS solution for pharmacies with software provider POS Solutions and CDC Systems. By June 2009, there were 55 pharmacies in production. Medicare Easyclaim Tyro implemented an integrated Easyclaim platform. Easyclaim is a real-time Medicare claiming and re- imbursement service for patient-paid and bulk bill claims using an EFTPOS terminal and the EFTPOS network from the medical practice immediately after the consultation has occurred. HCN has integrated the Easyclaim platform into its PracSoft practice management system. The highly automated end-to-end solution was launched in April 2009. Tyro and HCN have developed a seamless process of electronic payment, claiming, reimbursement and reconciliation. The claim and Medicare card data is automatically transferred from the practice management system (PMS), where it resides, through the Tyro EFTPOS terminal to Medicare and from Medicare back to the PMS for reconciliation. This integrated approach is a requirement clearly stated by the industry. Compared with the stand-alone alternative (currently being offered by three major banks) of 4 card swipes and up to 20+ keystrokes, the Tyro solution requires 2 card swipes and 2 keystrokes. Processing time is reduced to seconds. Tyro has signed a five-year exclusive development and marketing contract with HCN (Health Communication Network) to provide an integrated EFTPOS and Easyclaim solution to the primary health market. Upon commercial launch of the HCN Easyclaim solution, the agreement allows Tyro to make its Easyclaim platform available to other practice management software providers. Medicare estimates that there are currently 7000 general practices and 8000 specialist practices with 85% having an existing EFTPOS device. Easyclaim is available to those practices and parts of the ancillary health space. Medicare pays Tyro, as an accredited Easyclaim provider, a fee of 23 cents (including GST) per claim. 26 May 2009, Medicare awarded a subsidy totaling $1,072,087 to be expended until 31 August 2009 as part of the rollout of the Medicare integrated Easyclaim solution for PracSoft users. This subsidy was part of $6m available that went to multiple industry participants as a way of encouraging the design, development and rollout of integrated Easyclaim to the medical community. The subsidy funded the development of an online application solution, terminal management improvements, infrastructure upgrades as well as increased sales and Help Desk resources. Tyro offered free installation and free training for the first 1,000 practices to speed up adoption of the new solution. The Tyro rollout website (www.rollout.tyro.com) is an industry first, since it allows for totally paperless registration, sign-up and application process including the EFTPOS application and the direct debit authority all with digital signatures. By end of June 2009, 450 practices had signed up for integrated Easyclaim, compared to an addressable market in excess of 3,500 practices. Further Growth Opportunities The entire ancillary medical market could open up for integrated EFTPOS, Easyclaim and eClaiming with private health insurance companies. The pre-requisite is for Tyro to gain access to a sufficient number of leading private health funds in Australia, either through direct connections with each of them or through a gateway provider. MoneySwitch Limited ABN 49 103 575 042 Annual Report 2009 4 Tyro Retail Tyro launched its first stand alone EFTPOS facility commercially on 28 April 2007. At the end of 2007, Tyro launched an Internet EFTPOS integration platform for the software industry in general. The payment terminal communicates with the POS through the payment switch over public broadband using TCP-IP over Ethernet or WiFi. Vendors can choose web service, net or com as interface. This new architecture supports thin client and ASP models, complies with new scheme rules regarding integrated EFTPOS over IP and allows zero-configuration, remote diagnostics and downloads. 30 June 2008 Tyro Certified Software Vendors HCN PracSoft and BlueChip Retail Pro SVI/QQQ Systems Riva/Aloha Intouch/Aloha CDC Systems POS Solutions DeliverIT Unilink Data/Booknet 30 June 2009 further Tyro Certified Software Vendors Barcode Solutions Imagatec iPOS Microsoft Dynamics RMS MYOB Retail Manager OsiPOS Syscap Retail Systems Torex DRS-POS Tower Software Another two dozen software vendors are in the discussion, negotiation, and integration or certification process. In the Tyro business model for integrated EFTPOS the software or POS provider is the sales channel. This is achieved by revenue sharing with our business partners. As well as medium and larger retail enterprises, Tyro is providing integrated EFTPOS to small retailers who do not need a complex business process – the “mum and pop” single store businesses such as grocers, hairdressers and cafes. By June 2009, there were 53 merchant facilities deployed with motor dealers and 908 with general retailers and others. Toyota Financial Services A stand-alone Tyro EFTPOS facility has been deployed to the Toyota Finance affiliated dealer network. Toyota has specified Tyro integrate EFTPOS for their new version of Revolution Dealer Management System. The second version planned to be deployed in the new year is to include Tyro integrated EFTPOS. Also with the support of a Toyota dealer, Pentana (Reynold & Reynolds) is evaluating the implementation of integrated EFTPOS with their Dealer Management System. An increasing penetration of the Toyota dealer network would provide a platform to facilitate ongoing product and program development complemented by Tyro’s specialist capabilities. As a consequence of the Global Financial Crisis having impacted particularly hard the motor car industry, all projects have been either cancelled or put on hold for the time being. MoneySwitch Limited ABN 49 103 575 042 Annual Report 2009 5 Gift and Loyalty Through partnership with Opticard, Tyro offers merchants greater revenue build up and increased customer loyalty through personalised gift card programs. This year Tyro successfully rolled out the gift card program to the Collins Book Group. Tyro Projects: special applications With completion of the Medicare development project, engineering resources have become available during the year for further custom tailored payment solutions. The projects benefited from the immediate availability of Tyro’s efficient and low cost end-to-end acquiring infrastructure, Tyro’s capability of integrating payment processing into existing software solutions quickly using web services and agile development and Tyro’s readiness to share revenues with partners providing access to their customer franchise. Pure Commerce - Dynamic Currency Conversion On September 10, 2008 Tyro and payment solutions vendor Pure Commerce started developing jointly a Dynamic Currency Conversion (DCC) application for Tyro EFTPOS terminals. DCC allows foreign cardholders to pay merchants with their credit card in their home currency denomination. With DCC, the sale amount is converted from Australian dollars to the customer’s home currency with the exchange rate fixed at the time of the transaction. The currency conversion fee is split between the Tyro, Pure Commerce, and the merchant. Increased customer satisfaction is one of the major benefits of DCC as customers know exactly how much they are paying and there are no surprises in their credit card statements. Pure Commerce provides the currency management as well as manages the sales and marketing of the Tyro DCC solution to the Australian tourism and hospitality industries. The solution was launched in December 2008. The Nuance Group The Nuance Group is Australia’s leading operator of duty free stores across all major airports. Starting in April 2009, Tyro and Pure Commerce deployed an integrated IP EFTPOS solution with DCC capability. This implementation has cut significantly the processing times and increased the stability and robustness of the integration. The online reporting supports the financial back office working through reconciliation, enquiry, charge back and analysis tasks. National Billing Group Pty Ltd This Melbourne based cab, limousine and payment services operator has launched a Tyro mobile payment solution for secure real-time fare payment processing, reducing fraud associated with manual processing. Tyro and National Billing Group have deployed over 1,000 terminals among cab and limousine operators in Melbourne, Sydney and Brisbane. Another 500 terminals are currently in deployment. Tyro continues a dialogue with larger retailer groups with the idea of providing them with customised and comprehensive solutions reducing their overall infrastructure costs, reducing their interchange and scheme fee expense and increasing their efficiency with integration and automation of the various payment instruments and channels. Begin, Learn, Challenge, Win As Tyro builds its reputation around successfully delivered projects, it is increasingly also approached by larger prospects who are traditionally reluctant to engage with early phase companies but have sophisticated requirements that need innovative solutions beyond the technological and organisational capabilities of incumbent competitors. That was certainly the experience when winning Coca Cola after competing with all the major banks. MoneySwitch Limited ABN 49 103 575 042 Annual Report 2009 6 Leveraging the Internet Our architecture allows larger retail organizations to cut their infrastructure cost by reducing communication expense through the use of the public internet and by eliminating an expensive software and hardware middleware layer used by incumbents for aggregation and integration purposes. Tyro is the only EFTPOS provider with the capability of secure integrated credit and debit card processing in a “thin client” (web-based) infrastructure. Tyro removes constraints and enables businesses, no longer tied to legacy technology, to radically improve the efficiency of their processes. Product Expansion As Tyro moves forward, it plans to benefit from expansion into higher value added segments of the payment market and from geographic expansion. One direction of growth is the extension of Tyro’s innovative platform into the card- not-present channels, accepting payment transactions from websites, call centres and IVR systems. Tyro Culture Environmental Sustainability Climate change is not simply an environmental issue – it is a key business and social issue impacting us all. By the very nature of its innovative internet-based technology, Tyro is working towards a sustainable future. With paperless statements, online reporting and web-based documentation, Tyro subscribes to a predominantly paperless organisation. With the development of integrated receipt Tyro has expanded our own environmental awareness beyond corporate headquarters to a growing proportion of our customer base. We have implemented a company-wide recycling program and continue to search for new and efficient ways to minimise our footprint on the environment. Supporting our Employees Tyro’s 41 employees are critical to the continued success of the company. Tyro endeavours to recruit, retain and suitably reward the best people in the industry. Tyro uses a comprehensive recruiting and performance management system. As Tyro continues to grow, learning and development programs will be created with direct support to employees through external and internal training. All employees participate in the Tyro Employee Share Plan. Today 100% of Tyro’s employees have equity options in the company. Security Tyro is the first financial institution in Australia to have become PCI DSS (Payment Card Industry Data Security Standards) certified by Visa. Our highly sophisticated fraud engine pro-actively monitors and manages transactions in real time with military grade encryption between our EFTPOS terminals and our core systems. The company continues to review and improve our security failability and scalability to meet the growing volume of transactions, technological development and partner requirements. With card schemes mounting pressure on acquiring banks and the merchant community, fraud prevention is an increasingly important consideration. Tyro is in the final phase of certifying for EMV or chip card acceptance with Visa and MasterCard. While the banks upgrade their terminal infrastructure to higher security standards, Tyro terminals, being of European design where these security standards are already mandatory, are ready for the EMV upgrade planned before the end of the calendar year 2009. The new security standards increasingly shift the vulnerability to the retailer. Tyro is working with merchants to gauge data fraud risk and take appropriate action to protect their business and customers. MoneySwitch Limited ABN 49 103 575 042 Annual Report 2009 7 Directors Report The Board of Directors of MoneySwitch Limited has pleasure in submitting its report for the financial year ended 30 June 2009. The names and details of the company’s directors in office during the financial year and until the date of this report are as follows. All directors were in office for the entire year unless otherwise stated. Names, qualifications, experience and special responsibilities: Rob Ferguson (Chairman) Non-executive Director since 14 November 2005 Rob began his career as a research analyst for a Sydney stockbroker. He joined Bankers Trust Australia in 1972 and became managing director in 1985. Through his ongoing delivery of higher investment performance, he and his team built BT Funds Management into the leader in the retail mutual funds business. By mid 1990s, BT had $50 billion under management. Rob became chairman of BT Funds Management in 1999 until he resigned the position in 2002. Rob is Chairman of the Remuneration Committee and a member of the Audit Committee and the Risk Committee. Directorships held during the past 3 years: • Rob is Chairman of IMF (Australia) Ltd • Non-executive Chairman of Primary Health Care Limited • Deputy Chairman of GPT Management Holdings Limited • Deputy Chair of the Sydney Institute • Director of the Lowy Institute. Other previous directorships of listed or unlisted companies held by Rob Ferguson: • Director of Westfield Holdings Ltd (1994 – 2004) • Chairman of Vodafone Australia (2000 – 2002) • Chairman of Nextgen Limited (2000 – 2004) • Director of Racing, NSW (2004 – 2009) Brad Banducci Non-executive Director since 14 December 2006 Brad spent 15 years working in Australia, USA and New Zealand for the Boston Consulting Group, a leading global management consulting firm specialising in working with the global 2000 companies to grow and transform their business. Brad spent the last 8 years as a global vice president and director. He was the leader of the Sydney Office from 2001-2003 and head of its Asia-Pacific Corporate Strategy and Finance Practice from 2003-2005. Brad was CFO of MoneySwitch from August 2005 until October 2006. He is now CEO of Cellarmasters Group. Brad is Chairman of the Risk Committee and a member of the Audit and Remuneration Committees. Directorships held during the past 3 years: • • MoneySwitch Limited Kennedy Corporation (t/a Cellarmasters Group) MoneySwitch Limited ABN 49 103 575 042 Annual Report 2009 8 Dr Thomas Girgensohn Non-executive Director since 9 March 2006 Thomas brings to Tyro Payments extensive Australian and international experience in the consulting sector. He was previously managing partner (Australia and NZ) of the Boston Consulting Group and was former chairman of Netcomm Ltd and TDG Logistics. He has a PhD in Business Administration from the University of Munich, a Masters of Business Administration from the University of Saarbrucken and a Bachelor of Economics from the University of Bochum, all in Germany. Dr Girgensohn is a current Fellow of the Australian Institute of Company Directors. Thomas is Chairman of the Audit Committee and a member of the Remuneration and Risk Committees. Directorships held during the past 3 years: • Australian Co-operative Foods Limited (ceased) • Beviron Pty Limited (ceased) • Compass Resources Ltd (ceased) • MoneySwitch Limited • Stemcor Australia Pty Ltd Kerry Roxburgh Non-executive Director since 18 April 2008 Kerry was one of the founders, CEO then Chairman of E*Trade Australia until ANZ Banking Group acquired the business in 2007. Kerry spent 10 years as an Executive Director of the Hong Kong Bank of Australia Group including 5 years as managing director of their corporate finance subsidiary. He is non-executive chairman of Charter Hall Limited, of eircom Holdings Limited and of Tasman Cargo Airlines Pty Limited. He is a non-executive director of Ramsay Health Care, The Medical Indemnity Protection Society Group, Law Cover Insurance Pty Limited, Professional Insurance Australia Pty Limited and of a private investment company. Directorships held during the past 3 years: • Ramsay Health Care Limited • Charter Hall Limited • eircom Holdings Limited • Everest Financial Group Limited (ceased May 2009) • E*trade Australia Limited (ceased June 2007) • Everest Capital Investment Management Limited (ceased December 2006) • MoneySwitch Limited • BTIG Australia Limited (ceased January 2009) Jost Stollmann Director and Chief Executive Officer since 5 April 2005 Jost founded and grew the German system and network integrator CompuNet Computer AG into a US$1B company, sold it to GE Capital and led the integration and expansion of GE Capital IT Solutions across the continent as president of Europe. As Federal Shadow Minister of Economy and Technology, he ran and managed his own election campaign contributing significantly to the landslide victory of the first German government of Chancellor Gerhard Schröder. Jost has not held any other directorships during the past 3 years. Paul Rickard Paul Rickard was appointed as a new independent non-executive Director of MoneySwitch Limited on 28 August 2009. Until July 2009, Paul was the Executive General Manager & Chief Information Officer, Payments & Business Technology for the Premium Business Services organisation at the Commonwealth Bank of Australia. The board believes that Paul brings a tremendous amount of commercial acumen and experience in the delivery of IT projects and services. MoneySwitch Limited ABN 49 103 575 042 Annual Report 2009 9 Justin Mitchell Company Secretary since 12 April 2007 Justin is the Audit and Compliance Manager at Tyro Payments. Justin has thirteen years experience in the financial services and banking industry, having spent five years with Westpac in operational and project roles and most recently as Risk and Audit Manager with EDS. During this time Justin has established internal audit functions, risk frameworks and internal compliance controls and has developed and delivered enterprise-wide risk training. Justin has not held any directorships during the past 3 years. Interests in the shares and options of the company and related bodies corporate As at the date of this report, the interests of the directors in the shares and options of Tyro Payments were: Director Rob Ferguson# Brad Banducci Thomas Girgensohn^ Jost Stollmann Kerry Roxburgh* Shares Options 11,569,524 2,392,545 3,437,523 29,704,061 440,182 1,328,631 1,439,570 683,150 8,648,656 - # Includes Ordinary Shares and options held by Torryburn Superannuation Fund being an associate of Rob Ferguson ^ Includes Ordinary Shares and options held by Dacroft Pty Ltd and The Thomas Girgensohn Family Trust being associates of Thomas J Girgensohn * Shares jointly held with Alex Roxburgh as trustees for the Kerry & Alex Roxburgh Superannuation Fund DIVIDENDS No dividends have been declared or paid since the date of incorporation. CORPORATE INFORMATION Corporate Structure MoneySwitch Limited trading as Tyro Payments (“Tyro”) is an unlisted public company. It is incorporated and domiciled in Australia. The registered office of Tyro is Level 2, 125 York Street, Sydney, New South Wales, 2000. Nature of operations and principal activities Tyro Payments principal activities are: • Providing electronic transaction acquiring services to Australian businesses (merchants). This includes the authorisation, clearing and settlement of credit card, pin based debit card, EFTPOS, Easyclaim and giftcard transactions. • Developing the transaction switching and payment software and infrastructure required to support the provision of credit and debit acquiring services. There have been no significant changes in the nature of those activities during the year. Employees The company employed 41 employees as at 30 June 2009 (compared to 33 employees at 30 June 2008). MoneySwitch Limited ABN 49 103 575 042 Annual Report 2009 10 OPERATING AND FINANCIAL REVIEW Overview Tyro Payments was founded on 3 February 2003 by Paul Wood, Peter Haig and Andrew Rothwell. Two founders Peter Haig and Andrew Rothwell have maintained their active association with Tyro Payments. 11 November 2004 Jost Stollmann met the founders and became a major investor, director and CEO. 17 November 2005 Rob Ferguson joined as non-executive Director. He was Appointed Chairman of the Board on 21 September 2006. The company positions itself as a specialized banking institution focused on merchant acquiring acting as a developer of its own acquiring technology, as a processor of its own transactions and as acquirer of record with its own banking authority. Credit and Debit Acquiring Services Tyro Payments is a specialist financial institution focussed on providing credit and debit acquiring services. As such, the Company has implemented the necessary frameworks, policies, procedures and systems to comply with the stringent prudential and regulatory requirements to perform electronic transaction processing, clearing and settlement activities within the Australian banking sector. Software development Tyro Payments’s focus is on using proven modern technology to provide extremely reliable, secure, low cost and flexible acquiring services to merchants and value-added resellers. As such, Tyro Payments owns its own switching and payment software and has continued to develop this for further competitive advantage over the course of the year. Performance Indicators The Board and Management monitor Tyro Payments’s overall performance - from risk management and overall business positioning through to the performance of the Company - against software engineering development plans, business performance operating plans and financial budgets. The Board, together with Management, has identified key milestones and deadlines that are used to monitor Tyro Payments’s development. Directors receive reporting for review prior to each Board and Committee meeting. Operating Results for the Year The Company reported an operating loss after providing for income tax of $5,113,175 (2008: $5,854,710 loss). This result was in line with expectations given that the Company is still an emerging operational business. 2009 2008 Revenues Operating Loss Revenues Operating Loss Tyro Payments $ 6,282,651 $ 5,113,175 $1,510,476 $5,854,710 Investments for Future Performance The Company is investing significant human resources to develop its switching and payments system architecture. It has also invested in the purchase of computer servers and networking and security monitoring equipment to ensure sufficient scalability and performance of the production IT infrastructure to meet the expected demand for acquiring services. In parallel, the Company has been building the non-engineering capability of the business to support the sales and operations functions necessary to offer acquiring services. Capital Structure During the period, the Company issued 85,842,931 ordinary shares on 22 October 2008 raising $5,150,575.86 of additional capital. The capital was raised to ensure that Tyro Payments was fully compliant with the prudential capital requirements imposed on it by the Australian Prudential Regulation Authority (APRA) and to fund on-going operations. As at 30 June 2009 the Company had accounts payable of $285,692 MoneySwitch Limited ABN 49 103 575 042 Annual Report 2009 11 Cash from Operations Tyro Payments continued to operate at a loss for the 2008/09 financial year, in line with the fact that the Company is still an emerging operational business. The Company had interest income of $349,152 for the period. Funding The Company had cash in bank of $3,830,633 at the end of the period. Under Tyro Payments’s banking authority as a Specialist Credit Card Institution (SCCI), the Company is required by APRA to hold Tier 1 capital in the greater of the following two amounts: (a) $5 million; or (b) 20% of the value of the risk weighted on and off balance sheet credit exposures of the company (at the time of calculation). The total Tier 1 capital held by Tyro Payments as at 30 June 2009 was $7,783,138. The company has always held sufficient capital to meet APRA’s Tier 1 capital requirements. Risk Management Tyro Payments is prudentially supervised by the Australian Prudential Regulation Authority (APRA) and is required to comply with prudential standards and provide quarterly capital adequacy and liquidity reporting. The Company has undertaken substantive improvements to the risk management frameworks, policies, procedures and systems required to ensure on-going compliance with regulatory requirements and to satisfy both business needs and external stakeholders of its acquiring business. Statement of Compliance This report is based on the guidelines in The Group of 100 Incorporated Publication Guide to the Review of Operations and Financial Condition. Liquidity Although the Company has made operating losses in prior years, this is inline with expectations given that Tyro Payments was in the start-up and development phase of its business. Tyro Payments has sufficient cash and any additional cash requirements will need to be met by fundraising activities for the 2009/10 financial year to pay its debts as and when they become due and payable. It is also able to manage and control its expenses. For these reasons the directors believe the Company is a viable going concern as the next phase of the business plan, which is one of an emerging operational business, approaches. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS There were no significant changes in the state of affairs. Significant events after balance date The company has a standby letter of credit (SBLC) to MasterCard for AUD 1,400,000 (USD 1,126,265) secured by an ASIC registered charge. At the time of gaining its principal membership with MasterCard, MasterCard identified the SBLC as a way of mitigating the settlement risk exposure of MoneySwitch Limited. The SBLC was a condition for principal membership. MasterCard has since reviewed the SBLC and has informed the company on 12 August 2009 that due to increased transaction volumes, the current SBLC is requested to be increased by another USD 840,000. Likely developments and expected results The directors predict that in the 2009/10 financial year Tyro Payments will continue to grow the acquiring business and continue to expand the functionality of electronic transaction acquiring services. After a second full year of operations, the financial modelling and assumptions behind the business model have been validated. MoneySwitch Limited ABN 49 103 575 042 Annual Report 2009 12 SHARE OPTIONS Unissued shares As at the date of this report, there were 39,629,896 un-issued ordinary shares under options. Option holders do not have any right, by virtue of the option, to participate in any share issue of the company. Shares issued as a result of the exercise of options During the financial year, no options have been exercised. Since the end of the financial year, no further options have been exercised. INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS During or since the financial year, the company has not in respect of any person who is, or has been, an officer or auditor of the company or of a related body corporate: Indemnified or made any relevant agreement for indemnifying against a liability, including costs and expenses in successfully defending legal proceedings with the exception of the general indemnity provisions contained in the Company's Constitution. During or since the financial year, the company has paid premiums in relation to a contract insuring all the directors and officers of Tyro Payments against legal costs incurred in defending proceedings for conduct involving: (a) a wilful breach of duty; or (b) a contravention of sections 182 or 183 of the Corporations Act 2001, as permitted by section 199B of the Corporations Act 2001. DIRECTORS’ MEETINGS The number of meetings of directors (including meetings of committees of directors) held during the year and the number of meetings attended by each director is as follows: Number of meetings held during the year Director Rob Ferguson Brad Banducci Thomas Girgensohn Kerry Roxburgh Jost Stollmann Board Meetings Audit Committee Risk Committee Remuneration Committee 10 10 7 9 8 10 3 3 3 3 3 3 6 6 5 5 5 6 1 1 1 1 1 1 Committee Membership As at the date of this report, the Company had an Audit Committee, a Risk Committee and a Remuneration Committee of the Board of Directors. Members acting on the Committees of the Board during the year were: Audit Committee Risk Committee Remuneration Committee T Girgensohn (Chairman) R Ferguson B Banducci K Roxburgh B Banducci (Chairman) T Girgensohn R Ferguson K Roxburgh R Ferguson (Chairman) B Banducci T Girgensohn MoneySwitch Limited ABN 49 103 575 042 Annual Report 2009 13 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2009 Revenue Fees and commission income Fees and commissions expense Net fees and commissions Income Terminal and accessories sale Terminal and accessories COGS Net Terminal and Accessories Sale Income Medicare Subsidy Interest Income Other Income Net gain on financial instruments Total Operating income Less : Expenses Engineering expenses Operations expenses Sales and marketing expenses Administrative expenses Impairment of inventory Bad debt and chargeback loss expense Total operating expenses Operating loss before tax expense Income tax expense Net loss for the year Note 2009 $ 2008 $ 2 2 2 2 2 2 2 2 3 4,760,168 (3,162,177) 1,597,991 674,255 (595,877) 78,378 499,075 1,021,116 (814,361) 206,755 23,462 (17,268) 6,194 349,152 465,898 55,254 4,809 670 186,918 2,580,520 870,574 1,828,118 2,742,894 541,000 2,435,662 38,842 107,179 7,693,695 1,950,676 1,993,576 484,566 2,302,254 - (5,787) 6,725,284 (5,113,175) (5,854,710) - - (5,113,175) (5,854,710) The above Income Statement should be read in conjunction with the accompanying notes. 15 BALANCE SHEET AS AT 30 JUNE 2009 ASSETS Current Assets Cash and cash equivalents Trade and other receivables Prepayments Held-to-maturity investment Inventories Total Current Assets Non-current Assets Available-for-sale investment Property, plant and equipment Total Non-current Assets TOTAL ASSETS LIABILITIES Current Liabilities Trade payables and other liabilities Provisions Total Current Liabilities TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Reserves Retained earnings TOTAL EQUITY MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 Note 2009 $ 2008 $ 4 5 6 7 8 9 10 12 13 14 14 14 7,384,983 101,478 88,755 - 527,400 8,102,614 117,745 1,300,563 1,418,307 3,759,808 107,580 95,719 1,791,218 445,724 6,200,049 129,618 1,304,390 1,434,008 9,520,921 7,634,057 1,251,853 224,111 1,475,964 421,378 131,859 553,237 1,475,964 553,237 8,044,957 7,080,820 26,733,899 5,471,373 (24,160,315) 21,536,912 4,473,963 (18,930,055) 8,044,957 7,080,820 The above Balance Sheet should be read in conjunction with the accompanying notes. 16 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 CASH FLOW STATEMENT FOR THE YEAR ENDED 30 JUNE 2009 STATEMENT OF CASH FLOWS Cash flows from operating activities Payments to suppliers and employees Medicare Subsidy received Interest and fee income received Terminals & Accessories Sale Net cash used in operating activities Cash flows from investing activities Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Proceeds from disposal of investments Proceeds from maturity of treasury bonds Payments for purchase of treasury bonds Net cash flows used in investing activities Cash flows from financing activities Proceeds from issue of shares Note 2009 $ 2008 $ (9,429,310) (6,502,875) 1,072,087 5,092,261 674,255 - 1,524,955 4 (2,590,707) (4,977,920) (841,341) 115,437 - 1,791,218 - 1,065,314 (546,245) - 98,680 1,806,048 (1,791,218) (432,735) 5,150,567 3,256,251 Net cash flows from financing activities 5,150,567 3,256,251 Net increase/ (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year 3,625,174 3,759,809 (2,154,405) 5,914,213 Cash and cash equivalents at end of year 4 7,384,983 3,759,808 The above Statement of Cash Flows should be read in conjunction with the accompanying notes. 17 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2009 Attributable to equity holders of MoneySwitch Limited Contributed Equity Retained Earnings Reserves Total Note $ $ $ $ At 1 July 2007 Loss for the year Total income and expense for the year Issue of share capital Share-based payments Available-for-sale reserve Transfer to general reserve for credit losses 18,280,661 (13,030,429) 3,374,791 8,625,023 - - (5,854,710) (5,854,710) 3,256,251 - - - - (44,916) - - - 1,006,502 47,754 44,916 (5,854,710) (5,854,710) 3,256,251 1,006,502 47,754 - At 30 June 2008 21,536,912 (18,930,055) 4,473,963 7,080,820 Loss for the year Total income and expense for the year Issue of share capital Share-based payments Available-for-sale reserve Transfer to general reserve for credit losses - - 5,196,987 - - - (5,113,175) (5,113,175) - - - (117,085) - - - 892,198 (11,873) 117,085 (5,113,175) (5,113,175) 5,196,987 892,198 (11,873) 0 At 30 June 2009 14 26,733,899 (24,160,315) 5,471,373 8,044,957 The above Statement of Changes in Equity should be read in conjunction with the accompanying notes. 18 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 1. STATEMENT OF ACCOUNTING POLICIES The significant policies which have been adopted in the preparation of this financial report are set out below: The financial report of MoneySwitch Limited (the Company) was authorised for issue in accordance with a resolution of the directors on 14 September 2009. MoneySwitch Limited is an unlisted public company, incorporated and domiciled in Australia. (a) Basis of preparation The financial report is a general-purpose financial report, which has been prepared in accordance with the Corporations Act 2001 and Australian Accounting Standards. Unless otherwise indicated, all amounts are expressed in Australian Dollars ($). The financial report has been prepared on the basis of historical cost and except for some assets, as disclosed in this report, have been measured at fair values. (b) Going concern The Company is in its third year of operation and has made an operating loss of $5,113,175. It commenced operation in April 2007 with the launch of stand-alone EFTPOS facilities to the general public and has been incurring losses since. The Company has a history of raising sufficient capital to meet the Company's expenditure and prudential capital needs. MoneySwitch Limited is able to control its expenses. Should current cash levels not be sufficient to meet the Company's prudential capital requirements, the Company will seek to raise additional funding through capital raising in the 2009/2010 financial year internally from existing shareholders and/or externally from additional strategic investors as and when required. The company is not reliant on debt funding to manage liquidity. Liabilities recognised relate to trade payables from the course of ordinary operations and unearned income from the Medicare subsidy. No other lending has been sought from financial or other entities. It is for the for the above reasons that the directors consider the company is able to pay its debts as and when they fall due, and therefore the entity is able to continue as a going concern. (c) Statement of compliance The financial report complies with Australian Accounting standards issued by the Australian Accounting Standards Board and complies with International Financial Reporting Standards issued by the International Financial Reporting Standards Board. New Australian Accounting Standards which have recently been issued or amended but are not yet effective have not been adopted for the financial year ended 30 June 2009. At the date of this report, the directors have not assessed the impact of these new Australian Accounting Standards. (d) Significant accounting judgements, estimates and assumptions In applying the Company's accounting policies management continually evaluates judgements, estimates and assumptions based on experience and other factors, including expectations of future events that may have an impact on the Company. All judgements, estimates and assumptions made are believed to be reasonable based on the most current set of circumstances available to management. Actual results may differ from the judgements, estimates and assumptions. Significant judgements, estimates and assumptions made by management in the preparation of these financial statements are outlined as follows: Share-based payments transactions - The Company recognises the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date on which they are granted. The fair value is determined using the Black-Scholes model, with the assumptions detailed in Note 11. 19 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 1. STATEMENT OF ACCOUNTING POLICIES (cont'd) (d) Significant accounting judgements, estimates and assumptions (cont'd) Classification of and valuation of investments - The Company classifies its investments in listed securities as 'available -for-sale' investments and movements in fair values are recognised directly in equity. The fair value of listed shares has been determined by reference to published price quotations in an active market. Estimation of useful lives of assets - The estimation of the useful lives of assets has been based on historical experience. In addition, the condition of the assets is assessed at least once per year and considered against their remaining useful lives. Adjustments to useful lives are made when considered necessary. Depreciation charges are included in Note 10. (e) Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised. (i) Fees income The Company derives fees income from the following sources: - Merchant service fee income is generated from merchant customers for credit and debit card acquiring services. Fees are charged to merchants depending on the type of transaction being performed based on a percentage of transaction value or on a fixed amount per transaction. Fees related to the payment transactions are recognised at the time transactions are processed. Interchange fee is recognised as an expense instead of netting-off against merchant service fee income in the income statement. - Revenue from gift-card transaction fees generated from merchants is based on a fixed fee per transaction and is recognised when transactions are processed. (ii) Interest income - Interest income is recognised in the income statement on an accruals basis, using the effective Interest method. This method measures the amortised cost of a financial asset and allocates the interest income over the relevant period using the effective interest which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. (iii) Service income - Unearned income is recognised on the balance sheet upon receipt of payment for contractual agreements with customers. Revenue is brought to account in the income statement over time on a percentage completion basis. (iv) Government/Medicare grant - Government and government body grant income (such as Medicare) is recognised on a systematic basis over the term of the grant in the income statement. Amounts not yet taken to the income statement are held as "unearned income" in trade payables and other liabilities at the present value of future income to be recognised. (f) Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and whether the arrangement conveys a right to use the asset. Leases in which the Company retains substantially all the risks and benefits of ownership of the leased asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognised as an expense over the lease term on the same basis as lease rental income. Operating lease payments are recognised as an income or expense in the income statement on a straight-line basis over the lease term. Deferred Income is recognised as a liability on the balance sheet on inception of the lease. The deferred lease incentive is then recognized in the income statement on a straight line basis over the term of the lease, through lease expense. 20 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 1. STATEMENT OF ACCOUNTING POLICIES (cont'd) (g) Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held at call with financial institutions and settlement account balances, presented on a net basis. Settlement account balances result from timing differences in the Company's settlement processes with the schemes and the merchants. These timing differences are primarily due to the timing between the funds received from the card issuers and settlement payments made to the merchants. Settlement funds due from/due to other financial institutions are generally convertible into cash within two (2) business days. Merchant payables are settled on the next business day following the transaction processing date. For the purposes of the Cash Flow Statement, cash and cash equivalents are reported net of outstanding bank overdrafts. (h) Trade and other receivables Trade receivables, which generally have 30-90 day terms, are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less an allowance for any uncollectible amounts. Collectability of trade receivables is reviewed on an ongoing basis. Debts that are known to be uncollectible are written off when identified. An allowance for doubtful debts is raised when there is objective evidence that the Company will not be able to collect the debt. (i) Available-for-sale and held-to-maturity investments Available-for-sale and held-to-maturity investments are initially recognised at fair value plus transaction costs that are directly attributable to the acquisition of the investment. After initial recognition, investments which are classified as available-for-sale are measured at fair value. Gains or losses on available-for-sale investments are recognised as a separate component of equity until the investment is sold, collected or otherwise disposed of or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is transferred to the income statement. Investments that are intended to be held-to-maturity, after initial recognition at fair value, are subsequently measured at amortised cost less provision for impairment in value. Amortised cost is calculated by taking into account any discount or premium on acquisition, over the period to maturity. For investments carried at amortised cost, gains and losses are recognised in the income statement when the investments are amortised, derecognised or impaired. The Company currently does not have any investments categorised as held-for-trading. Purchases and sale of investments are recognised on settlement date - the date on which the Company receives or delivers the asset. (j) Inventories The costs of purchase of inventories comprise the purchase price, import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities), and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services. Trade discounts, rebates and other similar items are deducted in determining the costs of purchase. Inventories are subsequently held at the lower of cost and their recoverable amounts. Impairment is assessed on an annual basis (refer to Note 1(n)). Inventories are derecognised upon transfer to property, plant and equipment when leased out to merchant or rights to benefits are transferred to a third party. 21 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 1. STATEMENT OF ACCOUNTING POLICIES (cont'd) (k) Income Taxes Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the taxation authority. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to recognise the deferred tax asset or liability. An exemption is made for temporary differences arising from the initial recognition of an asset or a liability. No deferred tax asset or liability is recognised in relation to temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or loss or taxable profit or loss. Deferred tax assets relating to tax losses, unused tax credits and deductible temporary differences are not carried forward as an asset unless it is probable that the future taxable amounts will be available to utilise those temporary differences, losses and tax credits. (l) Other Taxes Goods and Services Tax (GST) Revenues, expenses, assets and liabilities are recognised net of the amount of GST except for the following: - when the GST incurred on the purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and - trade receivables and trade payables are stated with the amount of GST included. The net amount of GST recoverable from or payable to the taxation authority is included as part of other receivables or other payables in the balance sheet. Cash flows used in or from operating activities are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from or payable to the taxation authority are classified as part of the Company's operating cash flows. Commitments and contingencies are disclosed net of the amount of GST. (m) Acquisition of assets All assets acquired including property, plant and equipment are initially recorded at their cost of acquisition at the date of acquisition, being the fair value of the consideration provided plus any incidental costs directly attributable to the acquisition. Expenditure is only recognised as an asset only when it is probable that future economic benefits associated with the asset will flow to the Company and the cost of the item can be measured reliably. All other expenditure is expensed as incurred. 22 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 1. STATEMENT OF ACCOUNTING POLICIES (cont'd) (n) Recoverable amount of inventory and property, plant and equipment The carrying amounts of inventory and property, plant and equipment valued on the cost basis are reviewed to determine whether they are in excess of their recoverable amounts at balance date. If the carrying amount of such an asset exceeds its recoverable amount, the asset is written down to its recoverable amount. The write-down is expensed in the reporting period in which it occurs. Recoverable amount of an asset is the greater of its fair-value-less-costs-to-sell and its value-in-use. In assessing value-in-use, the estimated future cash flows are discounted to their present values using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where a group of assets working together supports the generation of cash inflows, their recoverable amounts are determined as part of the cash-generating unit to which the group of asset belongs, unless the value-in-use of this group of assets can be estimated to be close to its fair value. (o) Property, plant and equipment (i) Cost and Valuation Property, plant and equipment are measured at cost less accumulated depreciation and any impairment in value (Note 1 (n)). The Company recognises in the carrying amount of an item of property, plant and equipment the cost of replacing parts when the cost is incurred and the recognition criteria are met. When each major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant or equipment, as a replacement, provided that the recognition criteria are satisfied. (ii) Depreciation Depreciation is provided on a straight-line basis over the estimated useful life of each specific item of property, plant and equipment. Estimated useful lives are as follows: Plant and equipment: - EFTPOS machines - Furniture and office equipment - Computer equipment 2009 2008 3 years 5 years 4 years 3 years 5 years 4 years The assets' residual values, remaining useful lives and depreciation methods are reassessed and adjusted, if appropriate at each balance sheet date. (iii) Impairment The impairment testing for property, plant and equipment is conducted in accordance with the Accounting Policy in Note 1(n). (iv) Derecognition and disposal An item of property, plant and equipment is derecognised on disposal or when no future economic benefits are expected to arise from continued use of the asset. Gains and losses on disposals are calculated as the difference between the net disposal proceeds and the asset's carrying amount and are included in the income statement in the year the asset is derecognised. 23 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 1. STATEMENT OF ACCOUNTING POLICIES (cont'd) (p) Research and development costs Research costs are expensed as incurred. An intangible asset arising from development expenditure on an internal project is recognised only when the Company can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the development and the ability to measure reliably the expenditure attributable to the intangible asset during its development. Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure so capitalised is amortised over the period of expected benefit from the related project. (q) Trade and other payables Liabilities for trade and other payables are carried at cost, which is the fair value of the consideration to be paid in the future for goods and services received, whether or not billed to the Company. (r) Provisions and contingencies Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the impact of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. Contingent liabilities are not recognised in the balance sheet, but are disclosed in the relevant notes to the financial statements. They may arise from uncertainty as to the existence of a liability or represent an existing liability in respect of which settlement is not probable or the amount cannot be reliably measured. Only when settlement becomes probable will a liability be recognised. The Company is contingently liable for processed credit card sales transactions in the event of a dispute between the cardholder and a merchant. If a dispute is resolved in the cardholder’s favour, the Company will credit or refund the amount to the cardholder and charge back the transaction to the merchant. If the Company is unable to collect the amount from the merchant, the Company will bear the loss for the amount credited or refunded to the cardholder. Management evaluates the risk of such transactions and estimates its potential loss for chargebacks based primarily on historical experience and other relevant factors. If there is objective evidence that a loss on merchant accounts has been incurred, a provision is maintained for merchant losses necessary to absorb chargebacks and other losses for merchant transactions that have been previously processed and on which revenues have been recorded. (s) General reserve for charge backs The Company provisions against credit risk by a general reserve for charge backs. The Company estimates the reserve by using loss rates published by card providers applied against operational flows over a 120 days period. The general reserve for charge backs is then allocated as a seperate reserve within equity. The methodology and assumptions used for estimating chargeback provisions are reviewed regularly to reduce any possibilities that uncollectible chargebacks may not have been specifically identified. 24 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 1. STATEMENT OF ACCOUNTING POLICIES (cont'd) (t) Employee benefits Provision is made for employee benefits accumulated as a result of employees rendering services up to the reporting date. These benefits include wages and salaries, annual leaves and long service leaves. Entitlements arising in respect of salaries and wages, annual leaves and other employee benefits that are expected be settled within one year have been measured at their nominal amounts. Entitlements that arise in respect of long service leave which are expected to be settled more than 12 months after the reporting date have been measured at their present values of expected future payments. No provision has been made for sick leaves as all sick leaves are non-vesting and the average sick leave to be taken in the future by all employees at reporting date is estimated to be less than the annual entitlement for sick leaves. Employee benefit expenses arising in respect of the following categories: - wages and salaries, non-monetary benefits, annual leave, long service leave and other leave benefits; and - other types or employee benefits are recognised in the income statement on a net basis in their respective categories. (u) Share-based payment transactions Share-based compensation benefits are provided to employees (including Key Management Personnel) via the MoneySwitch Stock Option Plans, whereby employees render services in exchange for rights over the Company's shares. The cost of these equity-settled transactions with employees is measured by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined internally using the Black-Scholes Option Valuation Model. The cost of equity-settled transactions is recognised, together with any corresponding increase in equity, over the period in which the employees become fully entitled to the award (the vesting period). The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects the extent to which the vesting period has expired and the number of awards that, in the opinion of the Directors of the Company, will ultimately vest. This opinion is based on the best available information at the reporting date. No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date. No expense is recognised for awards that do not ultimately vest. There were no modifications to the terms of the outstanding options during the financial year. Details of the types of share-based payments and their respective terms and vesting conditions are disclosed in Note 11. 25 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 1. STATEMENT OF ACCOUNTING POLICIES (cont'd) (v) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are accounted in contributed equity as a deduction, net of tax, from the proceeds of issue. (w) Foreign currency translation Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the spot rate of exchange ruling at the balance sheet date. Non-monetary assets and liabilities are translated at their historic rates of exchange at their respective transaction dates. (x) Derecognition of assets and liabilities Assets and liabilities are derecognised from the balance sheet upon sale, maturity or settlement. Gains and losses arising from the derecognition of these assets and liabilities are accounted in the income statement. (y) Prepayments Prepayments are recognised for amounts paid whereby goods have not transferred ownership to the company or where services have not yet been provided. Upon receipt of good or the service the corresponding asset is recognised in the balance sheet or the expense is recognised in the income statement. 26 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 2. REVENUE AND EXPENSES The Operating loss before tax expense has been arrived at after accounting for the following items: Fees and commission income Easyclaim income DCC commission Merchant service fee Debit card interchange fee Terminal rental income Development fee Other fee income Fees and commission expense Interchange fees Switching and settlement fees Gift card processing expenses Scheme fees Commissions expense Other expenses Interest income Interest on cash and cash equivalents Interest on held-to-maturity investment Net gain on available-for-sale investments Miscellaneous share income Engineering expenses Employee benefits expense Recruitment Training Depreciation Other expenses Operations expenses Communication and hosting Employee benefits expense Depreciation Software and hardware maintenance Other expenses 27 2009 $ 2008 $ 33,622 79,836 3,728,242 166,302 549,771 194,442 7,954 4,760,168 2,074,756 72,365 (424) 726,439 215,469 73,573 3,162,177 349,152 - 349,152 - - 784,092 18,176 118,044 94,000 6,804 1,021,116 460,730 12,564 2,520 262,132 59,260 17,155 814,361 355,499 110,399 465,898 670 186,918 1,764,850 13,476 - 38,074 11,718 1,828,118 411,256 1,147,378 660,040 112,990 411,230 2,742,894 1,867,523 37,194 6,806 37,849 1,304 1,950,676 357,544 989,259 436,540 41,458 168,774 1,993,576 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 2. REVENUE AND EXPENSES (cont'd) Sales and marketing expenses Marketing and branding Employee benefits expense Other expenses Administrative expenses Employee benefits expense Professional fees Interconnect and membership Legal Telephone and internet Depreciation Travel Office supplies Insurance Provision for employee leave (adjustment)/entitlement Recruitment Utilities Occupancy expenses Share based payments expense Shares issued in lieu of service period Miscellaneous share expense Other expenses Extracted from the above are the following: Employee benefits expense Wages, salaries and commissions Termination Payment Superannuation Depreciation of non-current assets Property, plant and equipment 2009 $ 2008 $ 8,932 500,880 31,187 541,000 508,558 277,729 107,621 93,989 52,520 33,624 31,426 79,148 17,884 92,253 33,235 11,842 110,177 892,198 79,677 - 13,781 2,435,662 3,405,673 29,063 297,021 3,731,757 36,571 411,986 36,009 484,566 448,392 196,967 99,628 72,188 47,743 42,557 39,287 37,793 24,041 (2,807) 16,983 11,132 215,365 1,013,245 - 6,375 33,365 2,302,254 3,196,380 - 296,180 3,492,561 731,738 516,946 28 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 3. INCOME TAX Operating loss for the year Prima facie income tax benefit on the operating loss for the year at 30% income tax rate (2008:30%) Benefit of tax losses not brought to account Tax effect of temporary differences and current year tax losses not brought to account This future income tax benefit will only be obtained if: (a) future taxable income is derived of a nature and amount sufficient to enable the benefit to be realised; (b) the conditions for deductibility imposed by taxation legislation continue to be complied with; (c ) no changes in taxation legislation adversely affect the Company in realising the benefit. Income tax expense/(benefit) attributable to operating loss 2009 $ 2008 $ (5,113,175) (1,533,953) (5,854,710) (1,756,413) 1,533,953 1,756,413 - - - - - - - - - - The estimated potential future income tax benefit at year end calculated at 30% in respect of tax losses not brought to account 6,018,905 4,484,952 No deferred tax asset/liability on any of the Company's tax losses and/or temporary differences have been brought to account as the probability of any future taxable profits arising to recoup these losses and/or the reversal of temporary differences are considered to be remote at reporting date. 4. CASH AND CASH EQUIVALENTS Call deposits Exchange settlement balance Due from other financial institutions Due to other financial institutions Due to merchants Cash in hand 3,830,633 8,064,043 6,000,179 (7,404,142) (3,106,231) 500 7,384,983 2,635,559 1,651,265 1,908,024 (895,728) (1,539,812) 500 3,759,808 Call deposits earn interest at floating rates based on daily bank deposit rates. The Reserve Bank of Australia (RBA) pays interest on balances held in exchange settlement accounts at a rate of 25 basis points below the cash rate. Refer to note 16 for details of cash and cash equivalents pledged as security. 29 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 4. CASH AND CASH EQUIVALENTS (cont'd) Reconciliation of operating loss after tax to net cash flows used in operations Operating loss for the year Adjustments for: Depreciation of non-current assets (Adjustment) / Provision for employee entitlements Share-based payments and share issuance expense Other non-cash income Other non-cash expense Changes in assets and liabilities (Increase) / Decrease in trade and other receivables Increase in prepayments Increase in inventory Increase in trade and other payables 2009 $ 2008 $ (5,113,175) (5,854,710) 731,738 92,253 971,875 - - 6,781 (26,293) (81,676) 827,788 516,946 (2,807) 1,013,245 (191,727) 7,249 (7,889) (95,719) (441,237) 78,729 Net cash used in operating activities (2,590,707) (4,977,920) 5. TRADE AND OTHER RECEIVABLES Trade debtors Interest receivable GST recoverable Other receivables 83,497 4,292 11,784 1,905 101,478 14,001 72,548 21,032 - 107,580 The Company's ageing of trade and other receivables is as follows: Trade and other receivables before Impairment / Write off Carring Value 2009 (Total $101,478 Current $ 73,126 - 73,126 1-30 days* $ 31-60 days* $ 61-90 days* $ >90 days* $ 12,596 - 12,596 - - - 11,919 - 11,919 26,425 (22,588) 3,837 2008 (Total $107,580) 95,756 398 426 - 11,000 * These balances are past due net of impairment at balance sheet date. Movements in the general reserve for credit losses account are detailed in Note 14 and the Company's accounting policy is outlined in Note 1(s). 30 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 6. PREPAYMENTS Prepayments Prepaid remuneration expense 7. HELD-TO-MATURITY INVESTMENTS Treasury bonds 8. INVENTORIES Terminals and accessories EFTPOS paper rolls Impairment of inventory 9. AVAILABLE-FOR-SALE INVESTMENTS 2009 $ 2008 $ 88,755 - 88,755 62,461 33,258 95,719 - 1,791,218 554,821 11,421 (38,842) 527,400 439,976 5,748 - 445,724 Investment in VISA shares 117,745 129,618 These investments were acquired following the demutualisation of VISA International, as a result of which listed VISA shares were issued to members of the VISA network. All VISA shares were listed on the New York Stock Exchange (NYSE) on 26th March 2008 with VISA’s certificate of incorporation providing for the mandatory buy back of up to 80% of the common stock allocated to VISA members out of IPO proceeds as soon as possible after listing. 31 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 10. PROPERTY, PLANT AND EQUIPMENT Reconciliation of net carrying amounts at the beginning and end of the year: Year ended 30 June 2008 At 1 July 2007 net of accumulated depreciation and impairment Additions Disposals/transfers Depreciation charge for the year At 30 June 2008 net of accumulated depreciation and impairment At 1 July 2007 Cost or fair value Accumulated depreciation and impairment Net carrying amount At 30 June 2008 Cost or fair value Accumulated depreciation and impairment Net carrying amount Eftpos Machines $ Furniture and Office Computer Equipment Equipment $ $ Total $ 380,601 387,865 90,574 14,296 688,579 259,421 - 1,159,754 661,582 - (218,611) (28,127) (270,208) (516,946) 549,855 76,743 677,792 1,304,390 479,788 (99,187) 380,601 867,653 (317,798) 549,855 146,912 (56,338) 90,574 121,186 (44,443) 76,743 1,014,463 (325,884) 688,579 1,273,884 (596,092) 677,792 1,641,163 (481,409) 1,159,754 2,262,724 (958,334) 1,304,390 Reconciliation of net carrying amounts at the beginning and end of the year: Eftpos Machines $ Furniture and Office Equipment $ Computer Equipment $ Total $ Year ended 30 June 2009 At 1 July 2008 net of accumulated depreciation and impairment Additions/transfers Disposals/transfers Depreciation charge for the year At 30 June 2009 net of accumulated depreciation and impairment At 1 July 2008 Cost or fair value Accumulated depreciation and impairment Net carrying amount At 30 June 2009 Cost or fair value Accumulated depreciation and impairment Net carrying amount 549,855 793,898 (112,894) (405,107) 76,743 22,122 (537) (28,018) 677,792 25,321 - (298,613) 1,304,390 841,341 (113,430) (731,738) 825,752 70,310 404,500 1,300,563 867,653 (317,798) 549,855 1,501,796 (676,044) 825,752 121,186 (44,443) 76,743 136,093 (65,783) 70,310 1,273,884 (596,092) 677,792 1,299,205 (894,705) 404,500 2,262,724 (958,334) 1,304,390 2,937,095 (1,636,532) 1,300,563 During the year, a customer in the taxi industry bought the 203 terminals they were renting for $171,535. 32 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 11.SHARE-BASED PAYMENTS The Company will provide benefits to employees and directors from time to time including share-based payments as remuneration for service. (a) MoneySwitch Stock Option Plan The MoneySwitch Stock Option Plan was established to grant options over ordinary shares in the Company to employees or directors of the company or to external consultants who provide services to the Company. The rules of the MoneySwitch Stock Option Plan provides that the Board has the authority, in its discretion, and subject to such terms and conditions as it deems appropriate, to grant options to directors, employees and consultants of the Company. Options granted pursuant to the MoneySwitch Stock Option Plan may be exercised, in whole or part, subject to vesting terms and conditions as indicated below: Type of Option Linear vesting schedule Vesting Terms and Conditions Options granted will vest in proportion to the time that passes linearly during the vesting schedule, subject to maintaining continuous status as an employee or consultant with the Company during the vesting schedule. Service vesting schedule The options with service vesting schedule may be exercised as to a set number of shares per agreed day of consulting service, as defined in the specific option grant. Fully vested at time of grant Options may be exercised as to all shares from the vesting commencement date. Other relevant terms and conditions applicable to options granted under the MoneySwitch Stock Option Plan include: - all stock options granted under those plans had an exercise price equal to the fair value of the underlying ordinary shares on the date of the grant. - the term of each option grant shall be 10 years from the date of grant or such shorter term as provided in the Stock Option Grant agreement. However, in the case of options granted to Optionholders who, at the time the options is granted, owns ordinary shares representing more than 10% of the voting power of all classes of ordinary shares of the Company, the term of the Option Grant shall be 5 years from the grant date or such shorter term as may be provided in the Stock Option Grant agreement. - each option entitles the holder to one ordinary share. - all awards granted under the MoneySwitch Stock Option Plan are equity-settled. 33 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 11.SHARE BASED PAYMENTS (cont'd) (b) Fair value of options The weighted average fair value of the share options granted during the financial year is 4 cents (2008: 28 cents). The fair value of each option grant was estimated on the date of the grant using the Black-Scholes Option Valuation Model. The following table lists the assumptions used in determining the fair value of the options granted in the years ended 30 June 2009 and 30 June 2008: Dividend yield (%) Expected volatility (%) Risk-free interest rate (%) 2009 0% 74% 5.25% 2008 0% 74% 6.20% A zero dividend policy assumption is used for valuing all option grants. This is in line with the Company's capital management policy and growth strategy. Expected volatility used is the historical volatility of the peer group. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may not necessarily be the actual outcome. The average expected life for 10 year options is assumed to be 5 to 8 years from the grant date. For all other options with a contractual life of 5 years or less, the expected life is assumed to be the total contractual life (years) from grant date to expiry date. There were no options exercised during the year ended 30 June 2009 (2008: $0). The weighted average remaining contractual life for the share options outstanding as at 30 June 2009 was 5.53 years (2008: 4.66 years). The following table summarises further details of the stock options outstanding at 30 June 2009: Range of Exercise Prices Contractual life Vesting conditions 6 cents to 55 cents 6 cents to 45 cents 6 cents to 55 cents 6 cents to 55 cents Total 10 years or less 5 years and 10 years 3, 5 and 10 years 10 years or less 5 year linear vesting 12 months service 12 months linear vesting Fully vested at time of grant No of Outstanding Options 10,227,572 5,112,560 4,505,162 15,190,227 35,035,521 34 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 11.SHARE BASED PAYMENTS (cont'd) The following table illustrates the number and weighted average exercise prices (WAEP) in Cents and movements of share options during the year: 2009 No 2009 WAEP (Cents) 2008 No 2008 WAEP (Cents) Linear vesting schedule Outstanding at the beginning of the year Granted during the year Exercised during the year Forfeited/expired during the year Outstanding at the end of the year Exercisable at the end of the year Fully vested at time of grant Outstanding at the beginning of the year Granted during the year Exercised during the year Forfeited/expired during the year Outstanding at the end of the year Exercisable at the end of the year Service vesting schedule Outstanding at the beginning of the year Granted during the year Exercised during the year Forfeited/expired during the year Outstanding at the end of the year Exercisable at the end of the year Total outstanding at the end of the year Total exercisable at the end of the year 32 9 43 22 21 39 6 10 16 16 13 6 10 11 11 15,130,516 4,026,085 - (4,423,867) 14,732,734 8,236,623 4,757,797 13,043,478 - (2,611,048) 15,190,227 15,190,227 4,182,222 2,434,782 - (1,504,444) 5,112,560 5,112,560 35,035,521 28,539,410 35 30 - 31 32 32 39 43 - 37 39 39 13 - - - 13 13 8,371,880 5,545,647 - (2,357,311) 11,560,216 7,785,700 7,944,943 1,410,960 - (2,777,778) 6,578,125 4,755,499 4,851,112 - - (668,889) 4,182,222 4,182,222 22,320,563 16,723,421 The expense recognised in the income statement in relation to share-based payments is disclosed in Note 2. 35 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 12. TRADE PAYABLES AND OTHER LIABILITIES Accounts payable Unearned income Rent payable Accruals Other liabilities 13. PROVISIONS Annual leave provision Balance at the beginning of the year Additional (adjustment) / provision recognised during the year Balance at the end of the year 2009 $ 2008 $ 285,692 573,012 60,677 147,925 184,546 1,251,853 131,859 92,253 224,111 37,181 45,000 99,000 146,530 93,667 421,378 134,666 (2,807) 131,859 Current 224,111 131,859 No chargeback losses have been provided at reporting date. No liability for long service leave existed at reporting date. 14. CONTRIBUTED EQUITY AND RESERVES (i) Ordinary Shares Issued and fully paid - 3,540,688 Ordinary shares paid at 10 cents each - 10,475,433 Ordinary shares paid at 15 cents each - 32,387,503 (2006/07:21,666,667) Ordinary shares paid at 30 cents each - 8,111,112 Ordinary shares paid at 45 cents each - 11,282,322 Ordinary shares paid at 55 cents each - 133,334 Ordinary shares paid at 30 cents each - 86,616,446 Ordinary shares paid at 6 cents each 354,069 1,571,315 9,716,251 3,650,001 6,205,276 40,000 5,196,987 26,733,899 354,069 1,571,315 9,716,251 3,650,001 6,205,276 40,000 - 21,536,912 36 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 14. CONTRIBUTED EQUITY AND RESERVES (cont'd) Terms and conditions of contributed equity Ordinary shares have the right to receive dividends when declared and, in the event of winding up of the Company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on ordinary shares held. Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of the Company. Movement in ordinary shares on issue At 1 July 2007 Shares issued during the year: -16 Nov 2007 equity raising at 30c each - 7 Jan 2008 equity raising at 30c each - 18 Apr 2008 shares issued as remuneration for service at 30c each At 1 July 2008 Shares issued during the year: - 22 Oct 2008 shares issued as remuneration for service at 6c each - 22 Oct 2008 equity raising at 6c each - 19 Jun 2009 shares issued as remuneration for service at 6c each At 30 June 2009 (ii) Share-based payments reserve Balance at the beginning of the year Share-based payments expensed during the year - Share options issued during the year Balance at the end of the year No: Shares $ 55,076,222 18,280,661 7,000,000 3,720,836 133,334 65,930,392 20,752,586 65,090,345 773,515 152,546,838 2,100,000 1,116,251 40,000 21,536,912 1,245,155 3,905,421 46,411 26,733,899 2009 $ 2008 $ 4,370,351 3,363,849 892,198 5,262,549 1,006,502 4,370,351 37 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 14. CONTRIBUTED EQUITY AND RESERVES (cont'd) Nature and purpose of reserve The share-based payments reserve is used to record the value of share-based payments / benefits provided to any directors, employees and consultants as part of their remuneration or compensation. Refer to Note 11 for further details of these plans. (iii) General reserve for credit losses Balance at the beginning of the year Transfer from retained earnings Balance at the end of the year 55,858 117,085 172,943 10,942 44,916 55,858 Nature and purpose of reserve The general reserve for credit losses has been created to satisfy The Australian Prudential and Regulation Authority (APRA) prudential standards for Authorised Deposit-Taking Institutions (ADI) to maintain a general reserve for credit losses. The Company applies an internal methodology to estimate the credit risk of its merchant customers and the maximum expected losses based upon a number of assumptions concerning the performance of merchants in relation to the Company's credit risk grading system. (iv) Available-for-sale investment revaluation reserve Balance at the beginning of the year Total revaluations for the year Balance at the end of the year 2009 $ 2008 $ 47,754 (11,873) 35,881 - 47,754 47,754 Total reserves at the end of the year 5,471,373 4,473,963 (v) Retained losses Movements in retained losses were as follows: Retained losses at the beginning of the financial year Net loss attributable to shareholders of the Company Transfer to general reserve for credit losses Retained losses at the end of the financial year (18,930,055) (5,113,175) (117,085) (24,160,315) (13,030,429) (5,854,710) (44,916) (18,930,055) 38 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 15. FINANCIAL RISK MANAGEMENT OBJECTIVES, POLICIES AND PROCESSES The Company's principal financial instruments include cash and cash equivalents, trade and other receivables, held-to-maturity investments, available-for-sale financial assets and trade and other payables. (i) Risk management The Board is responsible for approving and reviewing the risk management strategy and framework and all risk management policies. The Board also ensures senior management has identified all risks and that those risks are managed and controlled appropriately. Senior management is responsible for implementing the Board's approved risk management strategy and for developing policies, controls, processes and procedures to identify and manage risks in all of the Company’s activities. The Board has installed a Board Risk Committee to assist the Board in fulfilling its responsibilities in the managment of risk. The Risk Committee overseas matters relating to managing credit, capital, liquidity, operational and other aspects of risk management. (ii) Risk controls Risk is controlled through a system that identifies key risks, establishes controls to manage those risks (with an emphasis on preventive control rather than detective control), and maintains a regular review process to monitor the effectiveness of the controls. Business risks are controlled within tolerance levels set by the Chief Executive Officer and approved by the Board. A set of control and compliance principles provide prudent standards for risk management. (iii) Internal audit The Company has an effective internal audit program to ensure that at all times the risks to which the company are exposed to in the normal course of its business are minimised. This program of internal control and audit is reviewed and approved on a regular basis by the Audit Committee. (iv) Credit risk Credit risk represents the loss that would impact the Company if counterparties failed to perform as contracted. Credit risk arises from trade receivables, cash and cash equivalent balances, exposures to merchants and held to maturity investments. The maximum exposure to credit risk is partly represented by the carrying amounts of the financial assets at reporting date. The Company's credit risk management principles define the framework and core values which govern its credit risk taking activities and reflect the priorities established by the Board. From these principles flow the development of the target market strategies, underwriting standards and credit procedures which define the operating processes. Portfolio-level counterparty limits are established by the use of a credit risk grading system, which segments the Company's client portfolio into performing and non-performing sales. Credit risk grades are monitored on a regular basis. The operation of a credit risk grading system coupled with ongoing monitoring, reporting and review controls allows the Company to identify changes in the credit quality at client and portfolio levels, and take necessary corrective actions in a timely manner. In addition, the Company is subject to the risk of credit card chargebacks in the event of a merchant failure. The maximum period of credit risk the Company is potentially liable for such chargebacks is estimated to be 120 days after the date of the transaction. The Company prudently manages the credit risk associated with its merchant portfolio both at an individual and a portfolio level, by monitoring the concentration of risk by industry and type of counterparty. It is the Company's policy that all merchants are subject to credit verification procedures including an assessment of their independent credit rating, financial position, past experience and industry reputation. Risk limits are set for each individual customer in accordance with parameters set by the Board. These risk limits are regularly monitored. The Company has an existing portfolio of low-risk merchant categories and therefore minimal exposure to credit risk in terms of liabilities. 39 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008 15. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (cont'd) As part of equity, a general provision reserve for credit losses is raised to cover losses due to uncollectible chargebacks that have not been specifically identified. The reserve is calculated based on estimation of potential credit risk in the merchant portfolio based on the concentration of merchant transactions by industry type and the merchant counterparty's credit risk grading as per the Company's credit risk policy. (iv) Credit risk (cont'd) The Company does not hold any credit derivatives of collaterals to offset its credit exposure. The Company trades only with recognised, creditworthy third parties and as such no collaterals are requested nor is it the Company's policy to securitise any of its financial assets. Credit exposures are monitored on an ongoing basis with the result that the Company's exposure to bad debts is not significant at reporting date. 30 June 2009 Standard & Poors Credit Rating* AAA AA A+ AA- BBB+ unrated 30 June 2008 Standard & Poors Credit Rating* AAA AA AA- unrated *Long-term credit rating Cash and balances with financial institutions Due from other financial institutions Trade receivables Held-to-maturity financial assets 8,064,043 3,830,633 74,703 5,187,479 518,235 219,817 101,478 Cash and balances with financial institutions Due from other financial institutions Trade receivables Held-to-maturity financial assets 1,651,265 1,185,936 1,449,623 1,908,024 107,580 1,791,218 (v) Operational risk Operational risk is the exposure to inadequate or failed internal processes, people and systems or external events. Operational risk includes legal and regulatory risk, the risk of legal or regulatory penalty, financial or reputation loss arising from a failure to satisfy the regulatory standards that apply to an Specialist Credit Card Institution (SCCI). (vi) Market risk Market risk is the risk the fair value or future cashflows of a financial instrument will fluctuate because of changes in market prices or conditions, and comprises of interest rate risk, foreign currency risk and other price risk. The Company does not engage in financial market trading activities nor assume any foreign exchange, interest rate or other derivative positions and does not have a trading book. The Company does not undertake any hedging around the values of its financial instruments as any risk of loss is considered insignificant to the operations of the Company. Any government securities, bank bills or other marketable instruments that the Company holds are for investment or liquidity purposes and held in the normal course of business in line with investment and liquidity guidelines. Each component of market risk is detailed below as follows: (a) Interest rate risk The Company's financial assets and liabilities are subject to interest rate risk as their fair values will fluctuate in accordance with movements in the market interest rates. The Company has exposure to interest rate risk on its variable interest-bearing cash and cash equivalent balances. Held-to-maturity investments in treasury bonds are at fixed interest rate rates and as such are not exposed to any interest rate risk fluctuations. All other financial assets and financial liabilities at reporting date are non-interest bearing. 40 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 15. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (cont'd) (v) Market risk (cont'd) The following net exposure to interest rate risk is to be reported at balance sheet date: Cash and cash equivalents Sensitivity analysis: 2009 2008 7,384,482 3,759,307 An increase of 100 basis points in the general cash rate (assuming every other factors being constant) will reduce the Company's loss after tax and increase equity by $51,691 (2008:$26,315). A decrease of 100 basis points in the general cash rate will have an equal and opposite effect. (b) Foreign Currency risk The Company's settlement of fees with card schemes and the purchases of inventory from foreign suppliers are transacted in foreign currencies and any balances at reporting date are translated at the exchange rate prevailing the balance sheet date. At reporting date the Company has some US Dollar and Euro exposure The following USD and EUR net exposure is to be reported at balance sheet date: AUD 2009 AUD 2008 Available-for-sale investments-VISA shares Trade Payables USD EUR 117,745 180,391 129,618 - Sensitivity analysis: An appreciation of 15% of the US Dollar and EUR compared to the Australian Dollar (assuming every other factors being constant) will reduce the Company's loss after tax and increase equity by $7,970 (2008: $1,852). A depreciation of 15% of the US Dollar and EUR compared to the Australian Dollar will increase the company's loss after tax and reduce equity by $4,695 (2008:$1,799). (c ) Other Price Risk The Company's investment in available-for-sale financial assets are valued by way of reference to an underlying listed equity on the New York Stock Exchange (NYSE) and as such its fair value will fluctuate in direct proportion with the quoted market price indicated. However, this investment is not linked to any NYSE Market Index and any form of Price risk as a result of movements caused by any specific index is considered minimal. No sensitivity analysis has been performed. (vi) Liquidity risk Liquidity risk is the risk that the Company will have insufficient liquidity to meet its obligations as they fall due. This risk is managed by liquidity forecasting and scenario analysis, maintaining adequate cash resources for future expenditure and other financial commitments. The Company's liquidity risk management policy aims to ensure that enough high quality liquid assets are always available for the Company's cash flow and liquidity requirements. The company forcasts cashflow and liquidity needs on a monthly basis with detailed scenarios analysis for critical funding periods such as Christmas. The company also has a capital plan in place which outlines triggers for required funding should liquidity be required. At balance sheet date, the board of directors determined that there was sufficient cash resources available to meet its anticipated expenditure and other financial liabilities. The Company does not have any contractual financial liabilities at reporting date. 41 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 15. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (cont'd) (vii) Fair values At reporting date the carrying amounts of all financial assets and financial liabilities approximate their fair values. (viii) Capital Management The Company maintains an actively managed capital base to cover risks inherent in the business. The adequacy of the Company's capital is monitored using, among other measures, the rules and ratios established by the Australian Prudential Regulatory Authority (APRA). The Company has aligned its objectives and processes in respect of risk management around the Prudential Regulations requirements. The Company has an internal policy target ratio above the prudential limit requirement and includes elements for risk exposures such as market, operations and credit risk. During the past year, the Company had complied in full with all its externally imposed capital requirements. The Company will maintain Tier 1 Capital in the greater of 20% of risk weighted assets or $5 million net assets (2008:$5 million). In all planning, the Company maintains a minimum of 22% capital adequacy or $5.5 million net assets to ensure there is a sufficient buffer to levels required under the Company’s Specialist Credit Card Institution (SCCI) licence. Regulatory capital Tier 1 capital Tier 2 capital Total capital Risk weighted assets Tier 1 capital ratio Total capital ratio Actual 2009 Required 2009 Actual 2008 Required 2008 7,783,138 57,006 7,840,144 8,800,104 88% 89% 5,000,000 6,910,088 5,000,000 - - - 6,910,088 4,159,789 166% 166% Below defines what APRA considers as Capital : Tier 1 Capital consists of ordinary shares, general reserves, retained earnings, non-cumulative irredeemable preference shares (approved by the Board and APRA) and other APRA approved Tier 1 Capital instruments. Upper Tier 2 Capital consists of general provision for Doubtful Debts and other APRA approved Upper Tier 2 Capital instruments. Lower Tier 2 Capital (not to exceed 50% of net Tier 1 Capital) consists of APRA approved Term Subordinated Debt. The Company does not have any lower Tier 2 Capital. 42 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 2009 $ 2008 $ 16. COMMITMENTS AND CONTINGENCIES (a) Operating lease commitments - Company as lessee Future minimum rentals payable under the non-cancellable operating leases as at 30 June 2009 are as follows: - Within one year 297,000 - After one year but not more than five years 173,250 470,250 297,000 470,250 767,250 The operating lease commitments relates to the lease of the Company's registered office located at 125 York Street, Sydney NSW. It is a non-cancellable lease with a term of 4 years ending 28 February 2011. The lease agreement provides the Company with a right of renewal on expiry at which time all terms will be renegotiated. Lease payments are subject to discretionary annual increases of 4%. (b) Contingent liabilities -secured (I) Irrecoverable standby letters of credit in favour of: - MasterCard International - Visa International (ii) Bank Guarantee in favour of: - Dukeville Pty Ltd, the lessor of 125 York Street, Sydney 1,400,000 140,000 1,400,000 140,000 245,025 1,785,025 245,025 1,785,025 (c) Assets pledged as security The carrying amount of assets used to collateralise the Company's exposure to contingent liabilities is as follows: - Held to maturity investments - 1,791,218 The Company has provided irrevocable standby letters of credit of $1,540,00, secure through fixed charges over term deposits with the Commonwealth Bank of Australia, to MasterCard International and Visa International. These are one-year arrangements that are subject to automatic renewal on a yearly basis. MasterCard International and Visa International, at their discretion, may increase the required amounts of the standby letters of credit upon written request to the Company. The required amounts of the standby letters of credit are dependent on MasterCard International's and Visa International's view of their risk exposure to the Company. A bank guarantee is held with the Commonwealth Bank of Australia in relation to the lease arrangement for the office premises. The amount represents 9 months rent and is refundable on expiry of the lease agreement, subject to satisfactory vacation of the leased premises. 43 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 17. SUBSEQUENT EVENTS The company has a standby letter of credit (SBLC) to Mastercard for AUD1,400,000 secured by an ASIC registered charge. The SBLC was a condition for principal membership. Mastercard has since reviewed this and has informed the company on the 12 August 2009 that due to increased transaction volumes, the current SBLC is no longer adequate and will be increased by another USD 840,000. 18. SEGMENT REPORTING The Company operates in one geographical segment being Australia and within one business segment being the provision of credit and debit card acquiring services to merchants. 19. AUDITOR'S REMUNERATION Amounts received or due and receivable by Ernst & Young: - an audit of the financial report of the Company - other services in relation to the Company 20. RELATED PARTY DISCLOSURES (a) Key Management Personnel 2009 $ 2008 $ 135,960 - 135,960 103,469 3,605 107,074 The total cash remuneration paid to the Directors and Executives of the Company amounted to $847,784 (2008: $787,953). Details of compensation paid to key management personnel including all monetary and non-monetary components are shown in the various tables in this note. Details of Key Management Personnel Appointed Resigned Directors Robert Ferguson Jost Stollmann Thomas Girgensohn Bradford L Banducci Kerry Roxburgh Executives Peter J Haig John Hallis Garry Duursma Justin Mitchell Non-executive Chairman Chief Executive Officer Non-executive Non-executive Non-executive Title VP Engineering VP Operations VP Sales and Marketing Company Secretary 14-Nov-05 05-Apr-05 09-Mar-07 14-Dec-06 18-Apr-08 3-Feb-03 14-Feb-06 1-Jan-07 19-Mar-07 31-May-09 44 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 20. RELATED PARTY DISCLOSURES (Cont'd) Compensation of Key Management Personnel Short-term Benefits Post Employment benefits (superannuation) Other long-term benefits Termination Benefits Share-based Payments Total 2009 $ 2008 $ 644,122 174,599 - 29,063 613,056 652,545 135,408 - - 647,922 1,460,840 1,435,876 30 June 2009 Directors Jost Stollmann Rob Ferguson Thomas Girgensohn Bradford L Banducci Kerry Roxburgh Executives Peter J Haig John Hallis Garry Duursma Justin Mitchell 30 June 2008 Directors Jost Stollmann William J. Bartlett Rob Ferguson Thomas Girgensohn Bradford L Banducci Kerry Roxburgh Executives Peter J Haig John Hallis Mark Wood Garry Duursma Justin Mitchell Short-term Termination Post Share-based Benefits Salary & fees ($) Benefits ($) Employment Super- annuation ($) Payments Options ($) Total ($) 28,823 - - - 78,779 199,654 217,777 119,089 - - - - - 29,063 - - 2,594 - - - 97,557 17,969 45,760 10,718 226,882 40,334 20,167 33,612 - 151,856 50,418 50,418 39,369 258,299 40,334 20,167 33,612 - 328,192 297,104 313,955 169,176 644,122 29,063 174,599 613,056 1,460,840 Short-term Benefits Salary & fees ($) Termination Benefits ($) Post Employment Super- annuation ($) Share-based Payments Options ($) Total ($) 2,736 - - - - 77,301 21,725 2,700 21,804 9,142 231,850 24,198 48,397 24,198 24,198 40,000 151,078 38,724 21,268 19,362 24,649 264,990 24,198 48,397 24,198 24,198 40,000 259,259 301,834 57,659 255,767 135,375 135,408 647,922 1,435,875 30,404 - - - - 30,880 241,385 33,691 214,601 101,584 652,545 - - - - - - - - - - - 45 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 20. RELATED PARTY DISCLOSURES (cont'd) 30 June 2009 Directors Jost Stollmann Robert Alexander Ferguson Thomas Girgensohn (Dacroft Pty Ltd) Bradford Leon Banducci Kerry Roxburgh Executives Peter and Nola Haig Garry John Duursma John Hallis (Mackbron Pty Ltd) Total Outstanding at start of year 20,845,105 5,258,413 3,170,856 1,505,849 133,334 2,072,222 483,758 434,633 33,904,170 On exercise Outstanding Shares Issued of during the options year 8,858,956 6,311,111 266,667 886,696 306,848 1,667,088 515,615 (181,819) 18,631,162 at end of year 29,704,061 11,569,524 3,437,523 2,392,545 440,182 3,739,310 999,373 252,814 52,535,332 - - - - - - - - Shareholdings of Key Management Personnel and their Related Entities Transactions 30 June 2008 Directors Jost Stollmann William and Delwyn Bartlett Robert Alexander Ferguson Thomas Girgensohn (Dacroft Pty Ltd) Bradford Leon Banducci Kerry Roxburgh Executives Peter and Nola Haig Garry John Duursma John Hallis (Mackbron Pty Ltd) Mark Wood Stephen Mitchinson Total Outstanding Shares On exercise Outstanding at start of year Issued during the year of options at end of year 18,137,332 1,107,555 5,143,836 3,170,856 1,505,849 2,072,222 317,091 380,304 666,667 58,136 32,559,848 3,335,067 - - - - 133,334 - 166,667 54,329 - - 3,689,397 - - - - - - - - - - - 21,472,399 1,107,555 5,143,836 3,170,856 1,505,849 133,334 2,072,222 483,758 434,633 666,667 58,136 36,249,245 46 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 20. RELATED PARTY DISCLOSURES (cont'd) Option Holdings of Key Management Personnel Outstanding Granted at start as of period Remuneration 30 June 2009 Linear/Service vesting schedule 1-Jul-08 Options exercised/ expired during the year Outstanding Exercisable at end of period 2009 at end of period 2009 Directors Jost Stollmann Rob Ferguson Thomas Girgensohn Bradford L Banducci Executives Executives Peter J Haig John Hallis Garry Duursma Justin Mitchell Fully vested at time of grant Directors Jost Stollmann Bradford L Banducci Executives Peter J Haig John Hallis Garry Duursma Justin Mitchell Total 2,506,364 285,153 161,411 460,914 1,339,921 1,120,746 909,091 213,043 6,996,643 272,727 109,091 1,327,273 309,091 109,091 25,820 2,153,093 9,149,736 5,869,565 1,043,478 521,739 869,565 - - - - 8,304,347 - - 3,913,043 1,304,348 1,304,348 652,174 7,173,913 15,478,260 - - - - - 909,091 909,091 - 1,818,182 - - 1,000,000 - 1,000,000 2,818,182 8,375,929 1,328,631 683,150 1,330,479 1,339,921 211,655 - 213,043 13,482,808 272,727 109,091 4,240,316 1,613,439 1,413,439 677,994 8,327,006 8,375,929 1,328,631 683,150 1,330,479 1,339,921 211,655 - 213,043 13,482,808 272,727 109,091 4,240,316 1,613,439 1,413,439 677,994 8,327,006 21,809,814 21,809,814 47 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 20. RELATED PARTY DISCLOSURES (cont'd) Option Holdings of Key Management Personnel (cont'd) Outstanding Granted at start as of period Remuneration 30 June 2008 Linear/Service vesting schedule 1-Jul-07 Options exercised during the year Outstanding Exercisable at end of period 30-Jun-08 at end of period 30-Jun-08 - 52,174 - - - 660,000 - - - 712,174 - 2,777,778 - - 727,273 727,273 - 4,232,324 4,944,498 2,506,364 2,506,364 482,477 285,153 161,411 460,914 1,339,921 211,655 - 213,043 5,447,895 272,727 109,091 1,327,273 184,910 1,218,182 1,018,182 25,820 4,130,365 9,578,260 482,477 285,153 161,411 460,914 1,220,250 211,655 - 47,802 5,328,224 272,727 109,091 1,327,273 184,910 309,091 109,091 25,820 2,312,183 7,640,407 Directors Jost Stollmann William J Bartlett Rob Ferguson Thomas Girgensohn Bradford L Banducci Executives Executives Peter J Haig John Hallis Garry Duursma Justin Mitchell Fully vested at time of grant Directors Jost Stollmann Bradford L Banducci Executives Peter J Haig Mark Wood John Hallis Garry Duursma Justin Mitchell Total 1,456,364 1,050,000 430,303 76,457 57,063 356,566 1,478,182 211,655 - 89,091 4,155,681 109,091 2,886,869 1,109,091 75,819 1,727,273 1,636,364 - 7,544,507 11,700,188 104,348 208,696 104,348 104,348 521,739 - - 123,952 2,217,431 163,636 - 218,182 109,091 218,182 109,091 25,820 818,182 3,035,613 48 MONEYSWITCH LIMITED (TRADING AS TYRO PAYMENTS) ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 20. RELATED PARTY DISCLOSURES (cont'd) Option Terms and Conditions Stock option grants may be exercised, in whole or in part, subject to vesting terms and conditions indicated below: Type Type of Option Linear vesting schedule Terms and Conditions Vesting Terms and Conditions Options granted will vest in proportion to the time that passes linearly during the vesting schedule, subject to maintaining continuous status as an employee or consultant with the Company during the vesting schedule. Service vesting schedule The options with service vesting schedule may be exercised as to a set number of shares per agreed day of consulting service, as defined in the specific option grant. Fully vested at time of grant Options may be exercised as to all shares from the vesting commencement date. (b) Transactions with related parties The following table provides the total amount of transactions that were entered into with related parties for the relevant financial year. These transactions were on commercial terms & conditions. Related Party Health Communications Network Commissions Paid 56,505 There are no other amounts receivable from or payable to related parties. 49 corporate information directors Rob Ferguson (Chairman) Brad Banducci Thomas Girgensohn Kerry Roxburgh Jost Stollmann company secretary Justin Mitchell registered office Level 2 125 York Street Sydney NSW 2000 (02) 8907 1700 solicitors Cowell Clarke Level 5, 63 Pirie Street Adelaide SA 5000 (08) 8228 1111 auditors Ernst & Young 680 George Street Sydney NSW 2000 (02) 9248 5555 internet address www.tyro.com MoneySwitch Limited ABN 49 103 575 042 Annual Report 2009 53 

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