Tyro Payments
Annual Report 2011

Plain-text annual report

Tyro Payments Limited ABN 49 103 575 042 Annual report to shareholders Year ended 30 June 2011 Tyro Payments Limited ABN 49 103 575 042 Annual Report 2011 1 CONTENTS PAGE Building a specialised banking institution (SCCI) for merchants Tyro Health Tyro Retail Tyro Culture Directors’ Report Independent Auditor Declaration Statement of Comprehensive Income Statement of Financial Position Statement of Cash Flow Statement of Changes in Equity Notes to the Financial Statements for the year ended 30 June 2010 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 – Inventories Note 7 – Available for Sale Investments Note 8 – Property, Plant and Equipment Note 9 – Share Based Payment Note 10 – Trade Payables and Other Liabilities Note 11 – Interest Bearing Loans and Borrowing Note 12 – Provisions Note 13 – Long Service Leave Liability Note 14 – Contributed Equity and Reserves Note 15 – Financial Risk Management Objectives, Policies and Processes Note 16 – Commitments and Contingencies Note 17 – Leases Note 18 – Segment Reporting Note 19 – Auditor’s Remuneration Note 20 – Related Party Disclosures Directors’ Declaration Independent Auditor Report 3 4 5 6 7 14 15 16 17 18 19 25 27 28 28 28 28 29 30 31 31 31 31 32 33 36 36 36 36 37 41 42 Tyro Payments Limited ABN 49 103 575 042 Annual Report 2011 2 Building a specialised banking institution (SCCI) for merchants Tyro Payments Limited (or “Tyro”) is an Australian banking institution specialised in facilitating the acceptance of electronic payments on behalf of merchants and recurrent billers. Tyro holds an authority under the Banking Act to carry on a 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 is also able to provide additional services of BPAY and direct debit services. The Tyro solution is IP based and all transactions are processed in real time. At the end of June 2011, Tyro completed its fourth full fiscal year trading, since the commercial launch of its EFTPOS facility on 26 April 2007. Our vision and guiding principles Tyro Payments provides the Merchant’s EFTPOS and it just works. Tyro listens, understands, develops, integrates and supports flawless solutions that plug in and just work for the merchant’s business. Tyro People dare to challenge the EFTPOS Industry and they succeed. Tyros learn, think, respect, debate, decide, act and grow for a new world where innovation, fairness and transparency prevail. Tyro shares the wealth and recognition fairly among its many stakeholders. Tyro aspires to build wealth for its staff and shareholders and to contribute innovation and competition to the Australian banking industry. Our governance Whilst senior management has responsibility for day-to-day management, in line with prudential and regulatory requirements, the Board of Directors (the board) has ultimate responsibility for Tyro’s sound and prudent management. In line with best practice and in particular the requirements of APRA Prudential Standard 510: Governance, the board establishes frameworks, policy and direction, supported by operational management. The board also establishes advisory committees in respect of key aspects of the business which assist it in carrying out its functions, as well as providing it with expert advice on key issues. 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 that 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 and suppliers. The board currently consists of five directors, with a majority of four directors and the Chairman meeting APRA’s independence requirements. These requirements are largely consistent with that of the Corporations Act. The directors of the board have set standards of policy and conduct applicable at all levels of Tyro to ensure stringent compliance with the Tyro Code of Conduct, the Corporations Act 2001, the National Privacy Principles 2001 and the Banking Act 1959 and all other applicable regulation. In particular, the board is cognisant of its lifecycle and requirements and the need to maintain access to independent expertise. Consequently it has established a policy of board renewal that ensures it has the necessary expertise and general reinvigoration while also maintaining ongoing understanding of Tyro’s business. Tyro Payments Limited ABN 49 103 575 042 Annual Report 2011 3 Building the merchant portfolio Tyro has grown his merchant portfolio in the health and general retailing space. June 2009 June 2010 June 2011 Growth No of merchants or merchant outlets (MID) 1,431 2,991 4,520 No of credit and debit card transactions 929,124 1,696,299 2,553,213 No of Medicare Easyclaim transactions 96,000 595,800 804,514 Value of credit and debit card transactions $78.8 million $127.3 million $183.1 million 51% 51% 39% 44% Tyro Health: Medical Practices and Pharmacies Since launching, Tyro has focused on opportunities within primary care and related health markets. Specifically Tyro has targeted the installed base of Health Communication Network (HCN). HCN is the leading Australian provider of e-health and practice automation solutions and addresses both the General Practitioner and Specialist Practitioner market place. Medicare Easyclaim Tyro has deployed Australia’s first integrated Easyclaim platform. Easyclaim is a real-time Medicare claiming and reimbursement 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 first 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. Medicare statistics show that in June 2011 there were 8,695,968 million claims for GP Professional Attendances. During the same month, Tyro processed 804,514 Easyclaim transactions. Thus at this juncture Tyro is assumed to process in excess of 9% of GP professional attendances in Australia. By end of June 2011, 1,110 HCN practices used integrated Easyclaim. Tyro Payments Limited ABN 49 103 575 042 Annual Report 2011 4 Tyro Retail Tyro is continuing to execute its overall strategy of accessing merchants via Point of Sale (POS) vendors. The Tyro Terminal Adaptor (TTA) enables the POS vendors to implement the Tyro integration protocol directly; This means that integration with Tyro no longer requires weeks of effort but merely days and integrations are far more robust. As at 30 June 2011, Tyro had thirty-seven certified POS integrations. During the year Tyro completed integration and certification with a twelve POS vendors. The Product Management Team has been working closely with POS providers to deliver integrated reporting, reconciliation and settlement solutions that automate the end of day processing used by our merchants. There is a “headless” version of the TTA that allows the POS vendor to provide integrated EFTPOS with his own skin i.e. the look and feel of his own user interface. Tyro Hospitality During the 2011 financial year Tyro launched its integrated Pay at Table solution. This solution permits the payment terminal to communicate with a restaurants POS over a wireless network, thus permitting pay at table transactions to be conducted on an integrated basis. At this stage Tyro is not aware of any other acquirer that offers similar functionality. As at June 30th 2011 Tyro has signed up to 388 hospitality merchants. Leveraging the Internet Tyro architecture allows larger retail organizations to cut their infrastructure cost by reducing communication expense through the use of their corporate network and/or 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 To date, the TTA only suits a generic retail environment (purchases and refunds). Tyro has recognised that if it is to achieve greater success with this strategy, then it needs to become closer aligned to the workflow of POS systems. Tyro has identified the hospitality sector as an attractive market segment. There are several POS vendors in the hospitality sector with whom Tyro has integrated with or recently begun an integration project. Tyro is working closely with the leading players in this sector to develop its differentiated hospitality product. Further solutions are planned to be released in stages over the next financial year. Tyro Payments Limited ABN 49 103 575 042 Annual Report 2011 5 Tyro Culture Environmental Sustainability Climate change is not simply an environmental issue. It is a key business and social issue which impacts us all. By the very nature of its innovative internet-based technology, Tyro is contributing to a more sustainable future with paperless statements, integrated receipt, online reporting and web based documentation. With the development of integrated receipt Tyro continues to further expand its environmental awareness beyond corporate headquarters to a growing proportion of its customer base. Tyro has implemented a company wide recycling program and continues to search for new and efficient ways to minimise its environmental footprint. Supporting Employees Tyro’s 54 employees are critical to its continued success. By utilising comprehensive recruitment and pre-screening practices for all employees, along with at least annual performance management reviews, Tyro endeavours to recruit, retain and suitably reward the best people in the industry. All employees are offered to participate in the Employee Share Option Plan. Security is top of mind in the financial industry EMV (chip card) for Visa and MasterCard penetration is now over 98.5% of the terminal fleet. A measure of success in the application is the rate of fallback transactions, where the operator has been unsuccessful in processing with the chip and instead falls back to using the magnetic strip. The industry average for Australia is around 3%, while tyro is currently well down on this at 1.4%. Last year Tyro reported that we were engaged in achieving a PCI compliant state. We have successfully certified our integration solution under PCI PA DSS. This means that merchants using our integrated solution and only using our terminals have no PCI issues to deal with. PCI DSS for our own operations continues to be an ongoing goal. Our merchant community is mostly covered by our PA DSS certification, although merchants with Mail Order and Telephone Order do have some compliance assurance issues to achieve. Tyro has continued to have negligible fraud and its chargeback ratio is low by industry standards. Availability Tyro has achieved a 100% availability with its live-live infrastructure. Even during maintenance downtime merchants are able to continue to transact as our terminals will automatically connect to either data centre, and either application switch within each of those data centres. One major customer is still working to enable their POS to use either data centre. All other customers are able to transparently access either data centre from their POS, providing uninterrupted integrated EFTPOS services. During the year, we completed development of improvements in recovery over transient network failures, greatly improving the resiliency of the merchant’s environment. This next year will see enhancements to avoid the unnecessary cancelling and restarting of a transaction during a transient network outage. While we have achieved high availability ourselves, our customers are still impacted by failures caused by TELCOs, Data Centre Infrastructure or our interconnected banks. We continue to work towards reducing the impact of these dependency failures for our customers. Tyro Payments Limited ABN 49 103 575 042 Annual Report 2011 6 Directors Report The Board of Directors of Tyro Payments Limited has pleasure in submitting its report for the financial year ended 30 June 2011. 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: Kerry Roxburgh (Chairman) 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 and of Tasman Cargo Airlines Pty Limited. He is a non-executive director of Ramsay Health Care, The Medical Indemnity Protection Society Group and of a private investment company. Kerry is a member of the Audit Committee, Remuneration Committee and Risk Committee. Directorships held during the past 3 years: • BTIG Australia Limited (ceased January 2009) • Charter Hall Limited • eircom Holdings Limited (ceased January 2010) • Everest Financial Group Limited (ceased May 2009) • Tyro Payments Limited • Professional Insurance Australia Pty Ltd (ceased June 2010) • Ramsay Health Care Limited • Tasman Cargo Airlines Pty Limited • The Medical Indemnity Protection Society Group • Law Cover Insurance Pty Limited Michael Cannon-Brookes Non-executive Director since 10 December 2009 Michael is Co-Founder, CEO and director of Atlassian, an innovative, award-winning enterprise software company based in Australia and established in 2002. Michael was named Australian IT Professional of the Year in 2004, awarded 'Australian Entrepreneur of the Year' by Ernst & Young in 2006 and honoured by the World Economic Forum in 2009 as a Young Global Leader. Michael is an active investor and advisor to technology-focused ventures. Michael is Chairman of the Remuneration Committee and member of the Audit and Risk Committees. Directorships held during the past 3 years: • Atlassian Corporation Pty Limited & Subsidiaries • Tyro Payments Limited  Rob Ferguson  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 Risk Committee and a member of the Audit and Remuneration Committees. Tyro Payments Limited ABN 49 103 575 042 Annual Report 2011 7 Directorships held during the past 3 years: • Chairman of GPT Management Holdings Limited • Deputy Chair of the Sydney Institute • Director of the Lowy Institute. • Tyro Payments Limited • Non-executive Chairman of IMF (Australia) Ltd • Non-executive Chairman of Primary Health Care Limited 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) Dr Thomas Girgensohn Non-executive Director 9 March 2006 to 31 December 2010 Thomas brings extensive Australian and international experience in the consulting sector to Tyro Payments Limited. Previously managing partner (Australia and NZ) of the Boston Consulting Group and 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. Thomas is a current Fellow of the Australian Institute of Company Directors. During the year Thomas served as 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) • Make-A-Wish Australia • Stemcor Australia Pty Ltd • Tyro Payments Limited Paul Rickard Non-executive Director since 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. Paul is Chairman of the Audit Committee and member of the Risk Committee. Directorships held during the past 3 years: • Tyro Payments Limited • Halidon Asset Management Ltd • Religare Securities Australia Pty Ltd • Switzer Financial Group Pty Ltd • Lumus Financial Services Pty Ltd Tyro Payments Limited ABN 49 103 575 042 Annual Report 2011 8 Jost Stollmann Director and CEO 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. Directorships held during the past 3 years: • Tyro Payments Limited Justin Mitchell Company Secretary since 12 April 2007 Justin is Company Secretary and Head of Compliance & Risk at Tyro Payments Limited. Justin has over fifteen 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. His wide risk, compliance and audit experience includes the design and set up of internal audit functions, design and implementation of risk frameworks and internal compliance plans and controls. Justin has also developed and delivered enterprise-wide risk and compliance 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 Limited were: Director Shares Options Kerry Roxburgh* Michael Cannon-Brookes% Rob Ferguson# Thomas Girgensohn^ Paul Rickard Jost Stollmann@ 690,182 0 2,037,967 2,736,110 22,072,348 12,868,079 8,533,052 124,102 4,997,356 1,457,436 41,585,685 30,137,206 * Includes ordinary Shares and options jointly held with Alex Roxburgh as trustees for the Kerry & Alex Roxburgh Superannuation Fund being associates of Kerry Roxburgh. % Includes shares and options held by Abyla Pty Ltd being an associate of Michael Cannon-Brookes # Includes ordinary Shares and options held by Torryburn Superannuation Fund and Ordinary Shares and options jointly held by Simon Peter Price and Rachel Emma Ferguson being associates of Rob Ferguson ^ Includes ordinary Shares and options held by Dacroft Pty Ltd and Dacroft Pty Ltd ATF The Girgensohn Family Trust being associates of Thomas Girgensohn @ Includes ordinary shares and options held by Fiona Stollmann being associates of Jost Stollmann. DIVIDENDS No dividends have been declared or paid since the date of incorporation. Tyro Payments Limited ABN 49 103 575 042 Annual Report 2011 9 CORPORATE INFORMATION Corporate Structure Tyro Payments Limited (“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’s 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 gift card 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 Tyro employed 54 employees as at 30 June 2011 (compared to 51 employees at 30 June 2010). OPERATING AND FINANCIAL REVIEW Overview Tyro was founded on 3 February 2003 by Peter Haig, Andrew Rothwell and Paul Wood. Two founders Peter Haig and Andrew Rothwell have maintained their active association with Tyro. In November 2004 Jost Stollmann became a major investor, then Director and CEO. Kerry Roxburgh joined as non-executive Director on 18 April 2008. He was appointed Chairman of the Board on 19 February 2010. Tyro positions itself as a specialised 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 is a specialist financial institution focused on providing credit and debit acquiring services. As such, it 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’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 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 Reviewing and approving all Tyro business strategies and significant policies, the board ensures that it is satisfied that all aspects of management and operations conform to its strategy, direction and policies. Additionally, the board monitors management practice and ensures that senior management adhere to set KPI’s in all spheres of the business. It practices a rigorous program of board meetings, board committee meetings and the stringent review of Tyro Payments Limited ABN 49 103 575 042 Annual Report 2011 10 a range of regular management reports encompassing all aspects of the business, including finance, operations, sales and strategy. In particular, the board ensures that an effective system of risk management and internal control is established and maintained, and that senior management proactively monitors the effectiveness of the risk management framework. Operating Results for the Year Tyro reported an operating loss after providing for income tax of $1,815,517(2010: $1,823,959 loss). 2011 Revenues Operating Loss 2010 Revenues 2009 Revenues Operating Loss Operating Loss $19,912,640 $1,815,517 $14,298,130 $1,823,959 $6,282,651 $5,113,175 One of Tyro’s business partners agreed with Tyro to forego commission payments for the period from 1 January 2009 to 30 June 2010 in return for a heightened commission payment for the period from 1 July 2010 to 31 December 2011. The impact of this agreement decreased losses for fiscal year 2009 by $0.1 million, 2010 by $0.9 million and increased losses for fiscal year 2011 by $0.7 million. Investments for Future Performance Tyro has invested significantly in human resources to develop its availability and speed of the 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 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 operational capability necessary as it scales up its acquiring services. Capital Structure During the period, Tyro did not issue any additional capital during the period. As at 30 June 2011 Tyro had accounts payable of $456,922. Cash from Operations Tyro continued to operate at a loss for the 2010/11 financial year, in line with the fact that it is still operating under the heightened commission agreement for the period and is still in the phase scaling up the operational business. Tyro had interest income of $615,194, for the period. Funding Tyro had cash and cash equivalents of 15,800,649 at the end of the period. Under its banking authority as a Specialist Credit Card Institution (SCCI), Tyro is subject to a Prudential Capital Ratio (PCR) set by APRA. The regulatory minima are set in three ways, by a PCR, minimum Tier 1 Ratio and a minimum Net Tier 1 Capital requirement. The PCR is confidential and cannot be disclosed. APRA requires Tyro to always maintain a prudent buffer above the regulatory minima. Tyro Payments Limited ABN 49 103 575 042 Annual Report 2011 11 Internal limits are always above the capital minima and these internal limits currently are: Level 1 PCR 22% Tier 1 Ratio Net Tier 1 Capital 22% $5.5 million Total Tier 1 capital held as at 30 June 2011 was $8.8M. Tyro has always held sufficient capital to meet APRA’s prudential capital requirements. Risk Management Tyro is prudentially supervised by APRA and is required to comply with prudential standards and provide quarterly capital adequacy reporting. Tyro has undertaken improvements to its 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 Tyro has made operating losses in prior years, this is in line with expectations given that Tyro remains in the start-up and development phase of its business. Tyro has maintained its operating loss for the year ended 30 June 2011 in line with forecast and holds sufficient cash 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 Tyro is a viable going concern as the next phase of the business plan approaches; one of a fully operational business. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS There were no significant changes in the state of affairs. Significant events after balance date There are no significant events after balance date. Likely developments and expected results The directors predict that in the 2011/12 financial year Tyro will continue to grow the acquiring business and continue to expand the functionality of electronic transaction acquiring services. SHARE OPTIONS Unissued shares As at the date of this report, there were 77,384,544 un-issued ordinary shares under options under the Employee Share Option Plan. There are a further 61,018,733 un-issued ordinary shares under options attached to the 11 December 2009 capital- raising, these options expire on 11 December 2011. Tyro Payments Limited ABN 49 103 575 042 Annual Report 2011 12 There are a further 7,500,000 un-issued shares attached to the 17 December 2010 loan facility for $2.5M, these options expire on 17 December 2020. 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. INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS During or since the financial year, Tyro 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, Tyro has paid premiums in relation to a contract insuring all of its directors and officers against legal costs incurred in defending proceedings for conduct involving: (a) a willful 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 Kerry Roxburgh Michael Cannon-Brookes* Rob Ferguson* Thomas Girgensohn^ Paul Rickard Jost Stollmann Board Meetings Audit Committee Risk Committee Remuneration Committee 12 12 9 8 7 11 11 4 4 4 3 2 3 4 7 7 6 6 3 7 7 2 2 2 2 1 1 1 * Both Michael Cannon-Brookes and Rob Ferguson did not attend three Board Meetings due to declared conflict of interests at those meetings. ^Thomas Girgensohn resigned as director on 31 December 2010. Thomas attended all meetings prior to resigning with the exception of one meeting for each of the Board, Audit Committee, Risk Committee and Remuneration Committee. Committee Membership As at the date of this report, Tyro 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 P. Rickard (Chairman) M. Cannon-Brookes R Ferguson K Roxburgh Remuneration Committee M. Cannon-Brookes (Chairman) R. Ferguson K Roxburgh Risk Committee R Ferguson (Chairman) M. Cannon-Brookes P. Rickard K Roxburgh Tyro Payments Limited ABN 49 103 575 042 Annual Report 2011 13 STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2011 Continuing Operations 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 Other expenses Interest Expense Total operating expenses Foreign Currency gain/(loss) Operating loss before tax expense Operating loss before tax expense Income tax expense Net loss for the year Other Comprehensive Income TYRO PAYMENTS LIMITED ABN 49 103 575 042 Note 2011 $ 2010 $ 2 2 2 2 2 2 2 2 2 2 3 18,579,778 (11,665,071) 6,914,707 717,668 (566,551) 151,117 12,648,612 (7,134,777) 5,513,835 733,200 (586,998) 146,202 - 573,012 615,194 343,306 12,946 666 - 2,584 7,694,629 6,578,940 2,408,426 3,161,850 1,004,072 2,353,153 55,276 209,645 9,192,422 2,074,291 3,033,126 841,269 2,527,378 38,802 - 8,514,866 (317,723) 111,969 (1,497,793) (1,497,793) (1,935,927) (1,935,927) - - (1,815,517) (1,823,958) Net fair value gain/(loss) on available for sale financial instrument (6,980) 9,635 Total comprehensive income for the period (1,822,496) (1,814,323) The above Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 15 15 STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2011 ASSETS Current Assets Cash and cash equivalents Trade and other receivables Prepayments 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 Interest-bearing loans and borrowings Provisions Total Current Liabilities Non - current Liabilities Long Service Leave Liability Total Non - current Liabilities TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Reserves Reserves Retained earnings TOTAL EQUITY The above Balance Sheet should be read in conjunction with the accompanying notes. TYRO PAYMENTS LIMITED ABN 49 103 575 042 Note 2011 $ 2010 $ 15,800,649 12,035,508 493,940 157,762 108,151 457,601 111,447 280,882 16,560,502 12,885,437 120,399 1,388,465 1,508,864 127,380 1,340,348 1,467,728 18,069,366 14,353,165 6,109,187 2,413,052 295,839 8,818,078 93,917 93,917 3,411,351 - 262,438 3,673,789 - - 8,911,995 3,673,789 9,157,373 10,679,376 30,401,219 6,525,996 6,525,996 (27,769,842) 30,401,219 6,184,977 6,184,977 (25,906,819) 9,157,373 10,679,376 4 5 6 7 8 10 11 12 13 14 14 14 14 16 16 STATEMENT OF CASH FLOW FOR THE YEAR ENDED 30 JUNE 2011 STATEMENT OF CASH FLOWS Cash flows from operating activities Payments to suppliers and employees Interest and fee income received Dividend 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 Net cash flows used in investing activities Cash flows from financing activities Proceeds from issue of shares Proceeds from Loan Net cash flows from financing activities Net increase/ (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year TYRO PAYMENTS LIMITED ABN 49 103 575 042 Note 2011 $ 2010 $ 4 (17,262,563) 18,726,209 666 717,668 2,181,980 (912,678) (4,161) (916,839) - 2,500,000 (16,127,049) 12,765,973 2,584 733,200 (2,625,292) (911,781) 10,083 (901,698) 3,667,320 - 2,500,000 3,667,320 3,765,141 12,035,508 140,332 11,895,176 Cash and cash equivalents at end of year 4 15,800,649 12,035,508 The above Statement of Cash Flows should be read in conjunction with the accompanying notes. 1717 TYRO PAYMENTS LIMITED ABN 49 103 575 042 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2011 Attributable to equity holders of Tyro Payments Limited Contributed Equity Asset revaluation reserve Employee equity benefits reserve Retained Earnings General Reserve for Credit Losses Total Note $ $ $ $ At 1 July 2009 26,733,899 35,881 5,262,549 (24,160,315) 172,943 8,044,957 Loss for the year Other Comprehensive income Total comprehensive income Issue of share capital Share-based payments Available-for-sale reserve Transfer to general reserve for credit losses - - - 3,667,320 - - - 9,635 9,635 - - - - - - - 781,423 (1,823,958) - (1,823,958) - - - - - - - - 77,454 (77,454) (1,823,958) 9,635 - (1,814,323) 3,667,320 781,423 - - At 30 June 2010 30,401,219 45,516 6,043,972 (25,906,818) 95,489 10,679,377 Loss for the year Other Comprehensive income Total comprehensive income Issue of share capital Share-based payments - - - - - (6,980) (6,980) - - - - - - 133,774 (1,815,517) - (1,815,517) - - - - - - - (1,815,517) (6,980) - (1,822,497) - 133,774 - The above Statement of Changes in Equity should be read in conjunction with the accompanying notes. 1818 TYRO PAYMENTS LIMITED ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 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 Tyro Payments (the Company) was authorised for issue in accordance with a resolution of the directors on 29 September 2011. Tyro Payments 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, has been measured at fair values. The principal accounting policies applied in the preparation of the Financial Report are set out below. These policies have been consistently applied to the current year and the comparative period, unless otherwise stated in the relevant note disclosures. Where necessary, comparative information has been reclassified to be consistent with current period disclosures. (b) Going concern The Company is in its fifth year of operation and has made an operating loss of $ 1,815,517. 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. Tyro Payments Limited is able to control its expenses. Should current cash levels not be sufficient to meet the Company's prudential capital requirements, the Company may seek to raise additional funding internally from existing shareholders and/or externally from additional strategic investors or implement cost reduction measures. Liabilities recognised relate to trade payables from the course of ordinary operations and a loan and related interest from shareholders. No other lending has been sought from financial or other entities. It is 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. (d) Accounting standards and interpretations issued but not effective Australian Accounting Standards and Interpretations, which have recently been issued or amended but are not yet effective have not been adopted by the company for the annual reporting period ending 30 June 2011, as outlined in the table below: These new standards, when applied in future periods, are not expected to have a material impact on the statement of financial position and statement of comprehensive income of the These new standards, when applied in future periods, are not expected to have a material impact on the statement of financial position and statement of comprehensive income of the company. Reference Title Summary AASB 9 Financial Instruments AASB 9 includes requirements for the classification and measurement of financial assets resulting from the first part of Phase 1 of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement (AASB 139 Financial Instruments: Re Application date of standard Application date for Company 1-Jan-13 1-Jul-13 These requirements improve and simplify the approach for classification and measurement of financial assets compared with the requirements of AASB 139. The main changes from AASB 139 are described below. (a) Financial assets are classified based on (1) the objective of the entity’s business model for managing the financial assets; (2) the characteristics of the contractual cash flows. This replaces the numerous categories of financial assets in A (b) AASB 9 allows an irrevocable election on initial recognition to present gains and losses on investments in equity instruments that are not held for trading in other comprehensive income. Dividends in respect of these investments that are a r (c) Financial assets can be designated and measured at fair value through profit or loss at initial recognition if doing so eliminates or significantly reduces a measurement or recognition inconsistency that would arise from measuring assets or l 19 19 TYRO PAYMENTS LIMITED ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 1. STATEMENT OF ACCOUNTING POLICIES (cont'd) (d) Accounting standards and interpretations issued but not effective (cont'd) Reference Title Summary AASB 2009-11 AASB 124 (Revised) Amendments to Australian Accounting Standards arising from AASB 9 [AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 121, 127, 128, 131, 132, 136, 139, 1023 & 1038 and Interpretations 10 & 12] Related Party Disclosures (December 2009) The revised Standard introduces a number of changes to the accounting for financial assets, the most significant of which includes: ► two categories for financial assets being amortised cost or fair value ► strict requirements to determine which financial assets can be classified as amortised cost or fair value, Financial assets can only be classified as amortised cost if (a) the contractual cash flows from the instrument represent principal and interest ► an option for investments in equity instruments which are not held for trading to recognise fair value changes through other comprehensive income with no impairment testing and no recycling through profit or loss on derecognition ► reclassifications between amortised cost and fair value no longer permitted unless the entity’s business model for holding the asset changes ► changes to the accounting and additional disclosures for equity instruments classified as fair value through other comprehensive income The revised AASB 124 simplifies the definition of a related party, clarifying its intended meaning and eliminating inconsistencies from the definition, including: (a) the definition now identifies a subsidiary and an associate with the same investor as related parties of each other; (b) entities significantly influenced by one person and entities significantly influenced by a close member of the family of that person are no longer related parties of each other; and (c) the definition now identifies that, whenever a person or entity has both joint control over a second entity person or entity has both joint control over a second entity and joint control or significant influence over a third party, the second and third entities are related to each other. A partial exemption is also provided from the disclosure requirements for government-related entities. Entities that are related by virtue of being controlled by the same government can provide reduced related party disclosures. Application date of standard Application date for Company 1-Jan-13 1-Jul-13 1-Jan-11 1-Jul-11 AASB 1053 Application of Tiers of Australian Accounting Standards This Standard establishes a differential financial reporting framework consisting of two Tiers of reporting requirements for preparing general purpose financial statements: (a) Tier 1: Australian Accounting Standards; and 1-Jan-13 1-Jul-13 (b) Tier 2: Australian Accounting Standards – Reduced Disclosure Requirements. Tier 2 comprises the recognition, measurement and presentation requirements of Tier 1 and substantially reduced disclosures corresponding to those requirements. The following entities apply Tier 1 requirements in preparing general purpose financial statements: (a) for-profit entities in the private sector that have public accountability (as defined in this Standard); and (b) the Australian Government and State, Territory and Local Governments. This Standard gives effect to Australian Accounting Standards – Reduced Disclosure Requirements. AASB 1053 provides further information regarding the differential reporting framework and the two tiers of reporting requirements for preparing general purpose 1-Jan-13 1-Jul-13 AASB 2010-2 Amendments to Australian Accounting Standards arising from reduced disclosure requirements 20 20 TYRO PAYMENTS LIMITED ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 1. STATEMENT OF ACCOUNTING POLICIES (cont'd) (d) Accounting standards and interpretations issued but not effective (cont'd) Reference Title Summary AASB 2010-4 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project [AASB 1, AASB 7, AASB 101, AASB 134 and Interpretation 13] Emphasises the interaction between quantitative and qualitative AASB 7 disclosures and the nature and extent of risks associated with financial instruments. Clarifies that an entity will present an analysis of other comprehensive income for each component of equity, either in the statement of changes in equity or in the notes to the financial statements. Provides guidance to illustrate how to apply disclosure principles in AASB 134 for significant events and transactions Clarify that when the fair value of award credits is measured based on the value of the awards for which they could be redeemed, the amount of discounts or incentives otherwise granted to customers not participating in the award credit scheme, is to be at Application date of standard Application date for Company 1-Jan-13 1-Jul-13 (e) 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 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 option valuation model, with the assumptions detailed in Note 9. 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 8. 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 8. (f) 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. - Revenue from processing Medicare Easyclaim 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) 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. 21 21 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 1. STATEMENT OF ACCOUNTING POLICIES (cont'd) TYRO PAYMENTS LIMITED ABN 49 103 575 042 (g) 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 recognised in the income statement on a straight line basis over the term of the lease, through lease expense. (h) Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held at call with financial institutions and the Exchange Settlement Account balance (held with the RBA). For the purposes of the Cash Flow Statement, cash and cash equivalents are reported net of outstanding bank overdrafts. (i) Trade and other receivables Trade receivables, which generally have 30 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. (j) 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. (k) Available-for-sale Investments Available-for-sale investments are initially recognised at fair value plus transaction costs that are directly attributable to the acquisition of the investment. After initial recognition these investments 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. 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. (l) 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 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(p)). Inventories are derecognised upon transfer to property, plant and equipment when leased out to merchants or rights to benefits are transferred to a third party. (m) 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. (n) 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. 22 22 TYRO PAYMENTS LIMITED ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 1. STATEMENT OF ACCOUNTING POLICIES (cont'd) (o) 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. (p) 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. (q) 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 (o)). 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 terminals - Furniture and office equipment - Computer equipment 2011 2010 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(o). (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. Any expenditure so capitalised is amortised over the period of expected benefit from the related project. (r) Trade and other payables Merchant Payables are amounts owing to merchants for transactions done in which Tyro has received the monies from the relevant schemes and financial institutions. Merchant Payables to merchants are only recognised to the extent that a liability arises. This liability arises when the proceeds have been paid by the schemes and financial institutions. 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. (s) Interest-bearing loan and borrowings All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest-bearing loans and liabilities are subsequently measured at amortised cost using the effective interest method. Fees paid on the establishment of loan facilities that are yield related are included as part of the cost of the loans and liabilities. The fair value of the options attached to the loan are also included in the cost of the loan. Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for 12 months after the reporting date. Borrowing costs consists or interest and other costs incurred in the borrowing of funds. Tyro Payments does not currently hold qualifying assets but, if it did, the borrowing costs directly associated with this asset would be capitalised (including any other associated costs directly attributable to the borrowing and temporary investment income earned on the borrowing ). (t) 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. 23 23 TYRO PAYMENTS LIMITED ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 1. STATEMENT OF ACCOUNTING POLICIES (cont'd) (t) Provisions and contingencies (cont'd) 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. (u) 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 a multiple of historical losses over a rolling 120 day period of transaction values. The general reserve for charge backs is then allocated as a separate 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. (v) 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 leave and long service leave. 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 leave as all sick leave is 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. (w) Share-based payment transactions Share-based compensation benefits are provided to employees (including Key Management Personnel) via the Employee Share Option Plan, 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 9. (x) 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. (y) 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. (z) Derecognition of assets and liabilities Assets and liabilities are derecognised from the balance sheet upon sale, maturity or settlement. Gains and losses arising from derecognition of these assets and liabilities are accounted in the income statement. 24 24 TYRO PAYMENTS LIMITED ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 2. REVENUE AND EXPENSES The Operating loss before tax expense has been arrived at after accounting for the following items: 2011 $ 2010 $ 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 expense Interest income Interest on cash and cash equivalents Other Income Gain on disposal of PPE Net gain on available-for-sale investments Miscellaneous share income Engineering expenses Employee benefits expense Recruitment Depreciation Other expenses Operations expenses Communication and hosting Employee benefits expense Depreciation Software and hardware maintenance Terminal Management & Logistics Data centre and Infrastructure Other expenses 1,785,018 364,948 13,775,930 957,849 1,613,444 26,146 56,443 1,091,024 245,482 9,455,544 531,204 1,155,055 125,999 44,304 18,579,778 12,648,612 6,629,829 420,517 18,867 1,999,487 2,500,640 95,732 11,665,071 615,194 615,194 12,946 12,946 4,865,541 270,641 7,541 1,647,771 241,347 101,936 7,134,778 343,306 343,306 - - 666 2,584 2,282,259 1,962,536 51,632 22,179 52,357 57,995 32,910 20,850 2,408,426 2,074,291 175,053 1,429,388 791,497 123,991 378,684 155,256 107,980 331,065 1,259,919 785,284 201,380 313,333 115,370 26,775 3,161,850 3,033,126 25 25 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 TYRO PAYMENTS LIMITED ABN 49 103 575 042 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 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 Other expenses Other expenses Impairment of inventory Other Write offs Bad debt and chargeback loss expense Loss on disposal of PPE 2011 $ 79,665 903,875 20,532 1,004,072 905,009 317,386 157,759 119,065 42,226 42,101 35,616 52,666 51,967 127,319 15,803 15,911 285,097 133,774 51,456 2010 $ 23,680 773,083 44,506 841,269 687,762 335,777 128,559 116,873 53,360 41,103 22,641 48,703 40,872 38,326 1,873 19,043 119,678 781,423 91,386 2,353,153 2,527,378 4,804,858 27,270 432,356 5,264,484 4,075,773 15,990 362,873 4,454,637 855,777 859,297 - 50,616 4,660 - 55,276 22,543 - 13,644 2,615 38,802 Other Write offs refer to a once of expense taken as a result of the implementation of a system reconciliation of all receivable and settlement accounts that had been previously unreconciled. This is expected to be a one off cost. 26 26 TYRO PAYMENTS LIMITED ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 3. INCOME TAX (a) Income tax expense The major components of income tax expenses are Income statement Current income tax Current income tax charge Derecognition of deferred tax asset from tax losses* Deferred income tax Deferred income tax relating to origination and reversal of temporary differences Derecognition of deferred income tax from temporary differences* Income tax expense reported in the statement of comprehensive income (b) Amount charged or credited directly to equity Deferred tax on unrealised gain/(loss) on available-for-sale investment Derecognition of deferred income tax* Income tax expense reported in equity (c) Reconciliation between tax expense recognised in statement of comprehensive income and tax expense calculated per the statutory income tax rate Accounting profit before income tax At the statutory income tax rate of 30% Non deductible expenditure Other Derecognition of deferred income tax* Total (d) Recognised deferred tax assets and liabilities (i) Deferred tax assets Property plant and equipment Provisions and accruals Available-for-sale investments Other (ii) Deferred tax liabilities Property plant and equipment Prepayments Available-for-sale investments Net deferred tax asset/(liability) prior to derecognition Derecognition of deferred income tax from temporary differences* Net deferred tax asset recognised in the statement of financial position 2011 $ 2010 $ (313,734) 313,734 (343,685) 343,685 - (2,094) 2,094 - (1,815,517) (544,655) 42,266 (155,030) 657,419 - 201,734 24,176 2,094 119,249 347,253 - 1,474 - 1,474 345,779 (345,779) - (305,870) 305,870 (136,145) 136,145 - 2,891 (2,891) - (1,823,958) (547,187) 238,404 (133,231) 442,014 - 125,432 10,487 - 1,288 137,207 - 1,062 2,891 3,953 131,332 (131,332) - * The company has not recognised any deferred tax on the basis that it does not meet the requirements under AASB 112 "Income Taxes" The new Australian legislation for financial arrangements, TOFA, aims to align the tax and accounting recognition and measurement of financial arrangements and their related flows. The Company does not meet the threshold requirement for an automatic application of the TOFA regime for the 30 June 2011 income year, nor has made any election in relation to the election methodologies under the TOFA provisions. 4. CASH AND CASH EQUIVALENTS Comparatives for prior period have been restated due to the derecognition of scheme receivables and the related merchant payables Merchant payables have been reclassified from "Cash and Cash Equivalents" to "Trade Payables and Other Liabilities" (Note 10) Term Deposit Call deposits Exchange settlement balance Cash in hand 2011 $ 1,210,541 2,576,552 12,012,732 823 15,800,649 2010 $ 1,525,285 2,903,653 7,606,070 500 12,035,508 27 27 TYRO PAYMENTS LIMITED ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 4. CASH AND CASH EQUIVALENTS (cont'd) 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 15 for details of cash and cash equivalents pledged as security. Term deposits earn interest based on an agreed rate and term. 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 Share-based payments and share issuance expense Gain / Loss on disposal of property plant and equipment Changes in assets and liabilities (Increase) / Decrease in trade and other receivables (Increase) / Decrease in prepayments (Increase) / Decrease in inventory Increase /(Decrease) in trade and other payables 2011 $ 2010 $ (1,815,517) (1,823,958) 855,777 133,774 12,946 (8,018,524) (13,948) 172,731 10,854,741 859,297 781,423 2,615 (3,465,782) (22,692) 246,518 797,288 Net cash used in operating activities 2,181,980 (2,625,292) 5. TRADE AND OTHER RECEIVABLES Trade debtors Interest receivable Other receivables 454,478 21,384 18,078 493,940 437,973 17,852 1,776 457,601 The Company's ageing of trade and other receivables is as follows: Trade and other receivables before impairment 274,602 218,313 1,023 2 0 Carrying Value 2011 (Total $493,940) Current 1-30 days* 31-60 days* 61-90 days* >90 days* $ $ $ $ $ 2010 (Total $457,601) 191,540 144,183 119,654 880 1,344 * 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(u). 6. INVENTORIES Terminals and accessories EFTPOS paper rolls Impairment of inventory 7. AVAILABLE-FOR-SALE INVESTMENTS 2011 $ 2010 $ 108,151 - - 108,151 295,142 8,285 (22,544) 280,882 Investment in VISA shares 120,399 127,380 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. 28 28 TYRO PAYMENTS LIMITED ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 8. PROPERTY, PLANT AND EQUIPMENT Reconciliation of net carrying amounts at the beginning and end of the year: Year ended 30 June 2010 At 1 July 2009 net of accumulated depreciation and impairment Additions Disposals/transfers Depreciation for the year At 30 June 2009 net of accumulated depreciation and impairment At 1 July 2009 Cost or fair value Accumulated depreciation and impairment Net carrying amount At 30 June 2010 Cost or fair value Accumulated depreciation and impairment Net carrying amount Eftpos Terminals $ Furniture and Office Equipment $ Computer Equipment $ Total $ 825,752 780,131 (12,223) (584,161) 70,310 27,200 - 404,500 103,974 - (28,217) (246,919) 1,300,563 911,305 (12,223) (859,297) 1,009,498 69,294 261,556 1,340,348 1,501,796 (676,044) 825,752 2,254,817 (1,245,319) 1,009,498 136,093 (65,783) 70,310 159,121 (89,827) 69,294 1,299,205 (894,705) 404,500 1,403,179 (1,141,624) 261,556 2,937,094 (1,636,532) 1,300,563 3,817,118 (2,476,770) 1,340,348 Reconciliation of net carrying amounts at the beginning and end of the year: Eftpos Terminals $ Furniture and Office Equipment $ Computer Equipment $ Total $ Year ended 30 June 2011 At 1 July 2010 net of accumulated depreciation and impairment Additions/transfers Disposals/transfers Depreciation for the year Depreciation for the year At 30 June 2011 net of accumulated depreciation and impairment At 1 July 2010 Cost or fair value Accumulated depreciation and impairment Net carrying amount At 30 June 2011 Cost or fair value Accumulated depreciation and impairment Net carrying amount 1,009,498 720,721 (8,197) (658,726) (658,726) 69,294 6,247 - 261,556 185,710 (587) (27,490) (27,490) (169,561) (169,561) 1,340,348 912,678 (8,784) (855,777) (855,777) 1,063,297 48,051 277,117 1,388,465 2,254,817 (1,245,319) 1,009,498 2,954,383 (1,891,087) 1,063,297 159,121 (89,827) 69,294 160,059 (112,007) 48,051 1,403,179 (1,141,624) 261,556 1,585,192 (1,308,075) 277,117 3,817,118 (2,476,770) 1,340,348 4,699,634 (3,311,169) 1,388,465 Fully depreciated assets as at 30th June 2011 $1,240,429 (2010 : $108,713) 29 29 TYRO PAYMENTS LIMITED ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 9.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) Employee Share Option Plan The Employee Share 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. Options granted pursuant to the Employee Share Option Plan may be exercised, in whole or part, subject to vesting terms and conditions as indicated below: Type of Option Linear vesting schedule Service 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. The options vest according to a period of service may be exercised as to a set number of shares per agreed day of 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 Employee Share Option Plan include: - the term of each option grant shall be 7 years from the date of grant or such shorter term as provided in the Employee Share Option Plan agreement. - Each option entitles the holder to one ordinary share. - All awards granted under the Employee Share Option Plan are equity-settled. (b) Fair value of options The weighted average fair value of the share options granted during the financial year is 2 cents (2010: 2 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 2011 and 30 June 2010: Dividend yield (%) Expected volatility (%) Risk-free interest rate (%) Share price ($) 2011 0% 74% 4.70% - 5.28% $0.04 2010 0% 74% 5.79% $0.04 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. 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 7 year options is assumed to be 5 - 6 years from the grant date. The expected life for 10 year option is assumed to be 5 - 8 years. For all other options with a contractual life of 1 - 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 2011 (2010: 103,261). The weighted average remaining contractual life for the share options outstanding as at 30 June 2011 was 5.65 years (2010: 5.27 years). The following table summarises further details of the stock options outstanding at 30 June 2011: 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 20,650,800 2,434,782 15,679,793 31,210,566 69,975,941 30 30 TYRO PAYMENTS LIMITED ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 9.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: 2011 No 2011 WAEP (Cents) 2010 No 2010 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 22 8 20 12 13 10 6 39 10 10 6 10 6 6 29,762,147 9,301,317 - (2,732,871) 36,330,593 31,935,352 21,782,169 9,905,804 - (477,407) 31,210,566 31,210,566 2,634,782 - - (200,000) 2,434,782 2,434,782 69,975,941 65,580,700 22 8 6 34 15 16 16 6 55 10 10 11 16 6 6 14,732,734 17,065,770 (103,261) (1,933,096) 29,762,147 14,942,557 15,190,227 6,847,827 - (255,885) 21,782,169 21,782,169 5,112,560 - - (2,477,778) 2,634,782 2,634,782 54,179,098 39,359,508 The expense recognised in the income statement in relation to share-based payments is disclosed in Note 2. 10. TRADE PAYABLES AND OTHER LIABILITIES Comparatives for prior period have been restated due to the derecognition of scheme receivables and the related merchant payables Comparatives for prior period have been restated due to the derecognition of scheme receivables and the related merchant payables Merchant payables have been reclassified from "Cash and Cash Equivalents" (Note 4) to "Trade Payables and Other Liabilities" Merchant Payables Accounts payable Rent payable Interest Payable Accruals Other liabilities 11. INTEREST-BEARING LOANS AND BORROWINGS Loans from related parties 2011 $ 2010 $ 4,762,856 456,922 - 106,849 475,840 306,720 6,109,187 2,413,052 2,413,052 2,470,604 267,688 22,355 - 297,866 352,838 3,411,351 - - On 17 December 2010, Tyro received a loan for liquidity funding purposes. The loan was for $2.5M until 15 January 2012 at a contractual interest rate of 8%. 12. PROVISIONS Annual leave provision Balance at the beginning of the year Provision during the year Leave taken during the year Balance at the end of the year 13. LONG SERVICE LEAVE LIABILITY Balance at the beginning of the year Provision during the year Balance at the end of the year 2011 $ 262,438 99,376 (65,974) 295,839 2011 $ - 93,917 93,917 2010 $ 224,111 74,572 (36,245) 262,438 2010 $ - - - 31 31 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 TYRO PAYMENTS LIMITED ABN 49 103 575 042 14. CONTRIBUTED EQUITY AND RESERVES (i) Ordinary Shares Issued and fully paid Ordinary shares paid at 6 cents each 147,738,440 Ordinary shares paid at 10 cents each Ordinary shares paid at 15 cents each Ordinary shares paid at 30 cents each Ordinary shares paid at 45 cents each Ordinary shares paid at 55 cents each 3,540,688 10,475,433 32,520,837 8,111,112 11,282,322 2011 $ 2010 $ 8,864,306 354,069 1,571,315 9,756,251 3,650,001 6,205,277 8,864,306 354,069 1,571,315 9,756,251 3,650,001 6,205,277 30,401,219 30,401,219 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 2009 Shares issued during the year: - 11 Dec 2009 equity raising at 6c each - 7 May 2010 shares exercised at 6c each At 1 July 2010 No shares issued during the year At 30 June 2011 (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 $ 152,546,838 26,733,899 61,018,733 103,261 213,668,832 - 3,661,124 6,196 30,401,219 - 213,668,832 30,401,219 2011 $ 2010 $ 6,043,972 5,262,549 133,774 6,177,746 781,423 6,043,972 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 9 for further details of these plans. (iii) General reserve for credit losses Balance at the beginning of the year Transfer (to) / from retained earnings Balance at the end of the year 2011 $ 95,489 47,506 142,995 2010 $ 172,943 (77,454) 95,489 The general reserve for credit losses has been created to satisfy 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 and actual experience. (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 (v) Option Premium Reserve Balance at the beginning of the year Total revaluations for the year Balance at the end of the year 2011 $ 2010 $ 45,516 (6,980) 38,536 35,881 9,635 45,516 - 166,720 166,720 - - - The option premium reserve correspond to the fair value of the equity instruments issued in consideration of the $2.5 million loan taken out by Tyro. The fair value of the options has been determined using the Black Scholes option valuation model. Total reserves at the end of the year 6,525,996 6,184,977 (vi) 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 (25,906,818) (1,815,517) (47,506) (27,769,842) (24,160,315) (1,823,958) 77,454 (25,906,818) 32 32 TYRO PAYMENTS LIMITED ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 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 management of risk. The Risk Committee overseas matters relating to credit, capital, liquidity, operational and other aspects of risk management. (ii) Risk controls Risks are controlled through a system that identifies key risks, establishes controls to manage those risks (with an emphasis on preventive control), and maintains a regular review process to monitor the effectiveness of 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 internal audit function program which provides independent assurance to the Board to the adequacy and effectiveness of the control environment and risk framework. Internal Audit also reviews the controls implemented by management to ensure compliance with APRA's prudential requirements. 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 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 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. 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 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. The Company has an existing portfolio of low-risk merchant categories and therefore minimal exposure to credit risk in terms of liabilities. 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 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 a multiple of historical loss experience. '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 securities 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 2011 Standard & Poors Credit Rating* AAA AA A+ unrated 30 June 2010 Standard & Poors Credit Rating* AAA AA A+ unrated *Long-term credit rating Cash and balances with financial institutions 12,012,732 3,786,912 181 Cash and balances with financial institutions 7,606,070 4,384,793 44,145 Trade receivables 493,940 Trade receivables 457,601 (v) Operational risk Operational risk is the risk that arises from inadequate or failed internal processes, people and systems, or from external events. The definition is aligned to the regulatory (Basel II) definition, including legal and regulatory risk but excluding strategic and reputation risk. (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 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: 33 33 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 15. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (cont'd) TYRO PAYMENTS LIMITED ABN 49 103 575 042 (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. The following net exposure to interest rate risk is to be reported at balance sheet date: Cash and cash equivalents Sensitivity analysis: 2011 2010 15,799,885 12,035,007 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 $157,998 (2010:$120,350). A decrease of 100 basis points in the general cash rate will have an equal and opposite effect. (b) Foreign Currency risk Tyro is not exposed to foreign currency risk in the settlement of merchant transactions as all moneys received and paid are in Australian Dollars. 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: Available-for-sale investments-VISA shares Trade Payables USD Term Deposit Sensitivity analysis: AUD 2011 120,399 207,153 1,210,541 AUD 2010 127,380 115,689 1,525,285 USD EUR USD 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 $177,879 (2010: $248,752). 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 $309,354 (2010:$432,612). (c ) Other Price Risk The Company's investment in available-for-sale financial assets is 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. (vii) 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 , 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 forecasts cashflow and liquidity needs on a monthly basis with detailed period 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 a sufficient cash resources available to meet its anticipated expenditure and other financial liabilities. Year ended 30 June 2011 Liquid financial assets Cash and cash equivalents Trade and other receivables Financial Liabilities Trade payables and other liabilities Interest-bearing loans and borrowings < 6 months $000 6-12 months $000 Total $000 15,800,649 493,940 16,294,589 - - - 15,800,649 493,940 16,294,589 (6,002,337) - (6,002,337) (106,849) (2,413,052) (2,519,902) (6,109,187) (2,413,052) (8,522,239) Net inflow/(outflow) 10,292,252 (2,519,902) 7,772,350 Year ended 30 June 2010 Liquid financial assets Cash and cash equivalents Trade and other receivables Financial Liabilities Trade payables and other liabilities Interest-bearing loans and borrowings Net inflow/(outflow) < 6 months $000 6-12 months $000 Total $000 12,035,508 457,601 12,493,109 - - - 12,035,508 457,601 12,493,109 (3,411,351) - (3,411,351) 9,081,757 - - - - (3,411,351) - (3,411,351) 9,081,757 34 34 TYRO PAYMENTS LIMITED ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 15. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (cont'd) (viii) Fair values The Company uses various methods in estimating the fair value of a financial instrument. The methods comprise: Level 1 – the fair value is calculated using quoted prices in active markets. Level 2 – the fair value is estimated using inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices). Level 3 – the fair value is estimated using inputs for the asset or liability that are not based on observable market data. The fair value of the financial instruments as well as the methods used to estimate the fair value are summarised in the table below. Quoted market price (Level 1) Year ended 30 June 2011 Valuation technique - market observable inputs (Level 2) Valuation technique - non market observable inputs (Level 3) Total - 120,399 - 120,399 Quoted market price (Level 1) Year ended 30 June 2010 Valuation technique - market observable inputs (Level 2) Valuation technique - non market observable inputs (Level 3) Total 127,380 - 127,380 Financial Asset Available for sale Financial Asset Available for sale Quoted market price represents the fair value determined based on quoted prices on active markets as at the reporting date without any deduction for transaction costs. For financial instruments not quoted in active markets, the Company uses valuation techniques such as present value techniques, comparison to similar instruments for which market observable prices exist and other relevant models used by market participants. These valuation techniques use both observable and unobservable market inputs. Transfer between categories There were no transfers between Level 1 and Level 2 during the year. There were no transfers between Level 1 and Level 2 during the year. (ix) 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 APRA. The Company has aligned its objectives and processes in respect of risk management around the prudential standards. 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 complied in full with APRA's capital minima. In all planning, the Company maintains a buffer above regulatory capital adequacy requirements to ensure that the level of capital held is appropriate for the level and type of risks associated with the acquiring business. Regulatory capital Tier 1 capital Tier 2 capital Total capital Risk weighted assets Tier 1 capital ratio Total capital ratio Actual 2011** Actual 2010* 8,835,427 14,819 8,850,246 10,482,586 23,591 10,506,176 5,462,961 6,350,133 162% 162% 165% 165% *These are per the final submitted APRA return for June 2010 and have not been adjusted for new comparatives **Current year figures have been calculated with the new accounting treatment in place. The updated APRA return has not been submitted to date. 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. 35 35 TYRO PAYMENTS LIMITED ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 16. COMMITMENTS AND CONTINGENCIES Commitments relating to BECS Tyro pays merchants through the BECS system (Bulk Electronic Clearing System). Tyro commits the amount to be paid to merchants with the BECS file sent. The amount committed must be available on the RBA Exchange Settlement Account (ESA), a day before the actual payment. At balance date, the amount committed was $7,158,179. This commitment was settled the following day. On each settlement day, Tyro would have received a portion of the funds committed, thus the actual contingent asset and corresponding liability would be less than the total amount committed. 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 2011 $ 2010 $ 2,610,541 140,000 291,308 3,041,849 2,925,285 140,000 245,025 3,310,310 The Company has provided an irrevocable standby letter of credit of $2,750,541, secure through fixed charges over term deposits with the Commonwealth Bank of Australia and Westpac Banking Corporation, 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 Westpac Banking Corporation 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. 17. LEASES (a) Operating lease commitments - Company as lessor Prior to April 2010, Tyro operated a "rent to own" model whereby ownership of the terminal would transfer to the merchant once they had made 36 consecutive rental payments. However Tyro bears the risk of repairing or replacing the terminal over the 3 year period. The merchant would then continue to pay a service and maintenance fee after this period. There is no minimum rental period for merchants and they are able to terminate with Tyro at any time with no penalty or buy out fees. From April 2010, the company has moved to a perpetual rental model whereby there will be no transfer of ownership of the asset and the merchant will pay rental for the duration that they are with Tyro. Type of Terminals Type of Terminals Xenta Xentissimo Cost Cost 2,040,128 914,255 2,954,383 Depreciation Depreciation Expense Net Carrying Net Carrying Value 1,297,804 593,282 1,891,086 742,324 320,973 1,063,297 (b) Operating lease commitments - Company as lessee Future minimum rentals payable under the non-cancellable operating leases as at 30 June 2011 are as follows: - Within one year - After one year but not more than five years 2011 $ 353,100 912,175 1,265,275 2010 $ 173,250 - 173,250 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 31 January 2015. 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%. 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 2011 $ 190,000 45,474 235,474 2010 $ 209,500 8,500 218,000 36 36 TYRO PAYMENTS LIMITED ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 20. RELATED PARTY DISCLOSURES (a) Key Management Personnel The total cash remuneration paid to the Directors and Executives of the Company amounted to $944,613 (2010: $816,375). 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 Kerry Roxburgh Michael Cannon-Brookes Rob Ferguson Thomas Girgensohn Paul Rickard Jost Stollmann Executives Garry Duursma Peter Haig Justin Mitchell Non-executive Chairman Non-executive Non-executive Non-executive Non-executive Chief Executive Officer Title VP Sales and Marketing Chief Information Officer Company Secretary Compensation of Key Management Personnel Short-term Benefits Post Employment benefits (superannuation) Share-based Payments 18-Apr-08 10-Dec-09 14-Nov-05 09-Mar-07 28-Aug-09 05-Apr-05 1-Jan-07 3-Feb-03 19-Mar-07 2011 $ 817,665 126,948 237,871 31-Dec-10 2010 $ 683,073 133,302 565,324 Total 1,182,484 1,381,699 30 June 2011 Directors Kerry Roxburgh Michael Cannon-Brookes Michael Cannon-Brookes Rob Ferguson Thomas Girgensohn Paul Rickard Jost Stollmann Executives Garry Duursma Peter Haig Justin Mitchell 30 June 2010 Directors Kerry Roxburgh Brad Banducci Michael Cannon-Brookes Rob Ferguson Thomas Girgensohn Paul Rickard Jost Stollmann Executives Garry Duursma Peter J Haig Justin Mitchell Short-term Benefits Salary & fees ($) Termination Benefits ($) Post Employment Super- annuation ($) Share-based Payments Options ($) Total ($) - - - - - - 206,468 244,199 221,331 145,669 817,665 Short-term Benefits Salary & fees ($) Termination Benefits ($) - - - - - - 104,347 242,429 199,831 136,466 683,073 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 44,742 21,905 46,080 14,220 126,948 18,373 11,066 11,066 11,066 5,116 11,066 48,561 43,096 56,651 32,876 237,871 18,373 11,066 11,066 11,066 5,116 11,066 299,771 309,200 324,061 192,765 1,182,484 Post Employment Super- annuation ($) Share-based Payments Options ($) Total ($) 23,677 11,838 15,785 35,515 23,677 23,677 176,304 79,840 126,266 48,745 565,324 23,677 11,838 15,785 35,515 23,677 23,677 326,327 352,160 371,550 197,493 1,381,699 - - - - - - 45,676 29,891 45,453 12,282 133,302 37 37 TYRO PAYMENTS LIMITED ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 20. RELATED PARTY DISCLOSURES (cont'd) Shareholdings of Key Management Personnel and their Related Entities Transactions 30 June 2011 Directors Kerry Roxburgh Michael Cannon-Brookes Rob Ferguson Thomas Girgensohn Paul Rickard Jost Stollmann Executives Garry Duursma Peter Haig Justin Mitchell Total 30 June 2010 Directors Kerry Roxburgh Brad Banducci Michael Cannon-Brookes Rob Ferguson Thomas Girgensohn Paul Rickard Jost Stollmann Executives Garry Duursma Garry Duursma Peter Haig Justin Mitchell Total Outstanding at start of year 690,182 - 22,072,348 8,533,052 124,102 41,585,685 2,155,379 5,405,977 - 80,566,725 On exercise Outstanding Shares Issued of during the options year - - - - - - - - - - at end of year 690,182 - 22,072,348 8,533,052 124,102 41,585,685 2,155,379 5,405,977 - 80,566,725 - - - - - - - - - - Outstanding at start Shares Issued On exercise of of year during the options Outstanding at end of year 440,182 2,392,545 - 13,791,746 5,552,180 - year 250,000 2,392,545 - 8,280,602 2,980,872 124,102 29,704,061 11,881,624 1,197,433 1,197,433 3,739,310 - 56,817,457 957,946 957,946 1,666,667 - 28,534,358 - - - - - - - - - - - - 690,182 4,785,090 - 22,072,348 8,533,052 124,102 41,585,685 2,155,379 2,155,379 5,405,977 - 85,351,815 38 38 TYRO PAYMENTS LIMITED ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 20. RELATED PARTY DISCLOSURES (cont'd) Option Holdings of Key Management Personnel 30 June 2011 Linear/Service vesting schedule Directors Kerry Roxburgh Michael Cannon-Brookes Rob Ferguson Thomas Girgensohn Paul Rickard Jost Stollmann Executives Garry Duursma Peter Haig Justin Mitchell Fully vested at time of grant Directors Michael Cannon-Brookes Rob Ferguson Jost Stollmann Executives Garry Duursma Peter Haig Justin Mitchell Total 30 June 2010 30 June 2010 Linear/Service vesting schedule Directors Kerry Roxburgh Brad Banducci Michael Cannon-Brookes Rob Ferguson Thomas Girgensohn Paul Rickard Jost Stollmann Executives Garry Duursma Peter Haig Justin Mitchell Fully vested at time of grant Directors Brad Banducci Jost Stollmann Executives Garry Duursma Peter Haig Justin Mitchell Total Outstanding at start of period 1-Jul-10 Options granted Options exercised/ expired/forfeited during the year Outstanding Exercisable at end of period 2011 at end of period 2011 666,667 444,443 2,328,631 1,349,817 666,667 4,773,797 545,046 2,812,244 595,927 14,183,239 - - 8,098,814 3,369,961 6,196,838 1,656,255 19,321,868 33,505,107 Outstanding at start of period 1-Jul-09 1-Jul-09 - 1,197,146 - 1,328,631 683,150 - 2,506,364 - 1,339,921 213,043 7,268,255 109,091 6,142,292 1,413,439 4,240,316 677,994 12,583,132 19,851,387 1,121,300 666,667 666,667 666,667 666,667 - - - - 3,787,968 1,625,000 1,625,000 5,516,304 2,173,913 2,391,304 1,449,283 14,780,804 18,568,772 Options granted 666,667 333,333 444,443 1,000,000 666,667 666,667 3,154,100 545,046 1,472,323 382,884 9,332,130 - 1,956,522 1,956,522 1,956,522 978,261 6,847,827 16,179,957 - - 32,821 333,333 - 133,333 - - - 499,487 - - - - - - - 499,487 1,787,967 1,111,110 2,962,477 1,683,151 1,333,334 4,640,464 545,046 2,812,244 595,927 17,471,720 1,625,000 1,625,000 13,615,118 5,543,874 8,588,142 3,105,538 34,102,672 51,574,392 1,787,967 1,111,110 2,962,477 1,683,151 1,333,334 4,019,711 545,046 2,812,244 595,927 16,850,967 1,625,000 1,625,000 13,615,118 5,543,874 8,588,142 3,105,538 34,102,672 50,953,639 Options exercised/ expired/forfeited during the year Outstanding at end of period 2010 2010 Exercisable at end of period 2010 2010 - 223,233 - - - - 886,667 - - - 1,109,900 666,667 1,307,246 444,443 2,328,631 1,349,817 666,667 4,773,797 545,046 2,812,244 595,927 15,490,485 109,091 - - 8,098,814 - - - 109,091 1,218,991 3,369,961 6,196,838 1,656,255 19,321,868 34,812,353 666,667 1,307,246 444,443 2,328,631 1,349,817 666,667 3,854,185 545,046 2,812,244 595,927 14,570,873 - 8,098,814 3,369,961 6,196,838 1,656,255 19,321,868 33,892,741 39 39 TYRO PAYMENTS LIMITED ABN 49 103 575 042 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 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 Service 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. 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 2011 $ 2,038,749 2010 $ - Rob Ferguson, a director of Tyro Payments is also the Non-Executive Chairman of Primary Health Care Ltd. Health Communications Network is a subsidiary of Primary Health Care Ltd. c) Loans from related parties On 3 December 2010 the company entered into a six day loan facility of $750,000 with three lenders, all of whom being Directors or related parties for the purpose of funding operational liquidity requirements. Consideration paid consisted of an Establishment Fee equal to 1% of loan amount, a Line Fee of 1.5% of maximum loan amount and interest equal to 16% per annum payable on the total outstanding. The facility was documented and approved by the Board. Abyla Pty Ltd ABN 92 119 827 593 related party Michael Cannon-Brookes (Director) Loan Amount Interest Paid $ 250,000.00 $6,907.53 Robert Alexander Ferguson (Director) $ 250,000.00 $6,907.53 Fiona Stollmann related party Jost Stollmann (Director) related party Jost Stollmann (Director) $ 250,000.00 $6,907.53 On 9 December 2010 the company entered into a seven day loan facility of $750,000 with three lenders, all of whom being Directors or related parties to Directors for the purpose of funding operational liquidity requirements. Consideration paid was interest equal to 16% per annum payable on the total outstanding. The facility was documented and approved by the Board. Abyla Pty Ltd ABN 92 119 827 593 related party Michael Cannon-Brookes (Director) Loan Amount Interest Paid $ 250,000.00 $767.12 Robert Alexander Ferguson (Director) $ 250,000.00 $767.12 Fiona Stollmann related party Jost Stollmann (Director) $ 250,000.00 $767.12 On 17 December 2010 the company entered into a loan facility of $2,500,000 with four lenders, all of whom being Directors, major shareholders or related parties for the purpose of funding operational liquidity requirements. The Loan Facility commenced on 17 December 2010 and ends on 16 January, 2012. Consideration for the facility is 8% p.a. interest rate and 7,500,000 options granted at time of drawdown. The facility was documented and approved by the Board. At balance date the carrying value of this loan was $2,413,052. The interest expense attributable to the options attached to the loan as at 30 June 2011 was $79,772. No additional rights are attached to the options. The options do represent an equity instrument and thus have a corresponding reserve against equity in the Statement of Equity. The term of the options is 10 years and the exercise price is $0.08 per option. The average effective interest rate including options for the $2,500,000 facility is 15.3%. Abyla Pty Ltd ABN 92 119 827 593 related party Michael Cannon-Brookes (Director) Fiona Stollmann related party Jost Stollmann (Director) Loan Amount No of Options Interest to be paid $625,000.00 1,625,000 options. $26,712 $625,000.00 1,625,000 options. $26,712 Euclid Capital Partners ABN 79 937 786 536 related party David Fite (Major Shareholder) $625,000.00 2,625,000 options. $26,712 Robert Alexander Ferguson (Director) $625,000.00 1,625,000 options. $26,712 40 40 corporate information directors kerry roxburgh (Chairman) mike cannon-brookes rob ferguson paul rickard 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 Tyro Payments Limited ABN 49 103 575 042 Annual Report 2011 

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