MYOB Limited 2006 Annual Report

Annual Report 2006 Minding our business Building your investment Our Vision To liberate and empower businesses MYOB is a global provider of solutions that liberate business owners and accountants from the burden of day to day administration, empowering them to achieve business success. Our Clients China MYOB BusinessBasics provides more time for creativity Since its establishment seven years ago, Chinese company Pioneer Times has evolved from a creative design organisation providing traditional brand promotion services, to an organisation working with the newly emerging fields of digital and online design and production. Finding the right solution Mr Zheng originally came across BusinessBasics by chance. After seeing what it could do, he investigated further and realised that BusinessBasics offered exactly the functions that Pioneer Times needed. Advice for other clients “After implementing BusinessBasics, I went in to discuss a contract with a client. Beforehand, I had a look at the client’s historical project records in the new system. During the meeting, my client was astonished to hear me quoting every expenditure item from our working history – and of course we won the business!” “It makes me feel good that everything is back under my control.” “I never thought software like this could change our company’s business operations beyond my wildest imagination.” The key challenge “Our business is still small so we don’t have the budget to recruit a professional accountant. However, the company’s financial management is crucial to our success. I have a team full of creative ideas but no-one who is passionate about accounting!” The owner of Pioneer Times, Wei Zheng, often found it difficult to track projects, outcomes or spend per project. – Wei Zheng, Pioneer Times Contents MYOB Limited – Annual Report 2006 Joint Report from the Chairman and Chief Executive Officer Operating Review Our Clients Financial Summary Board of Directors Directors’ Report Corporate Governance Financial Statements Notes to the Financial Statements Directors’ Declaration Shareholder Information Additional Information Note to Shareholders Company Directory 2 4 4 6 8 0 29 35 4 04 05 06 07 08 MYOB Limited Annual Report 2006 >  Joint Report from the Chairman and Chief Executive Officer For MYOB, growing your business by helping our clients’ businesses to grow has been a central element of our success since the company’s inception. In 2006, MYOB Limited again achieved strong financial results, with consolidation in existing markets and significant expansion occurring in new markets and in every region across the globe. Strong performance 2006 was another year of significant revenue and EBITDA growth. Your company’s revenue from continuing operations of $182.3 million for the year ended 31 December 2006 increased by more than 13% compared with the previous year. MYOB achieved an EBITDA margin in 2006 of 35.1% after an investment in China during the year of $3.7 million. The underlying EBITDA margin (ie. excluding China) was 37.2%. Net profit after tax grew 5% to $17.3 million, taking into account a significant planned increase in product development amortisation. Recurring revenue continues to be a strong contributor to our business, representing 82% of the total revenue in 2006, evidence that our core products and clients have continued to be a strong focus for the management team throughout the year. During the year, a buyback was announced, with the company buying back shares to the value of $8.6 million. The Directors have provided for a final dividend of 3.0 cents per share fully franked. The dividend will be paid on 20 April 2007 to all shareholders on the register at the book’s closing date of 2 April 2007. Driving future growth Two major components of your company’s growth strategy over the last number of years have been delivering greater value to existing clients together with geographic expansion. In 2006, MYOB’s presence as a global company was reinforced with significant growth in all our regions across the globe. Our largest division, the Australian Business Division, grew recurring revenue by more than 15% from an already substantial base. In New Zealand the growth was pleasing in the face of a difficult economic environment and whilst bedding down a number of acquisitions. In Europe, initiatives to improve the performance in our Accountants Division and the distribution reach of our Business Division began yielding results. MYOB’s venture into China – which is considered to be a significant opportunity, but one which requires long-term investment to reap the full rewards – has moved forward enormously over the past 12 months. After the early days of getting started, MYOB China is now a fully-functioning operation. Key developments in 2006 included moving to a new central office in Chengdu, filling all key management positions, and installing vital systems to bring world-class MYOB products into the hands of many of China’s dynamic entrepreneurs. Our first revenue from this operation was earned in 2006, with new product releases continuing into 2007. Consolidating the foundations The same commitment we have always had to lifting the burden from business owners in all our markets remains as strong today as it has always been. MYOB’s core markets continue to be critical to our success. In 2006, the Business Division’s revenue grew by 19.9%, while the Accountants Division’s revenue grew by 5.6%. As the number of MYOB clients and our reach into expanding markets continue to grow, the company’s vision remains – making business life easier and more effective for our clients... 2 > MYOB Limited Annual Report 2006 As your company has grown in size, we have the scope to operate more efficiently and effectively and gain from our scale. The improvement in the underlying EBITDA margin of 37.2% reflects this growth. One of the great strengths of the MYOB business is its underlying cash flow, which was up 28% in 2006. With net cash of over $25 million at year end and access to significant debt capacity, we continue to consider acquisition opportunities in a number of regions – providing another avenue for continued growth. In 2006 – and continuing with vigour into 2007 – we have been broadening our capabilities beyond compliance in order to find and deliver new value for our clients. With the launch of new services such as MYOB Accountants Resourcing and continuing initiatives such as MYOB M-Powered Services, which provide transactional services, we are moving from the more traditional value of software into broader business services and solutions. Looking ahead The prospects for 2007 are exciting. All of our operations have started the year well and have initiatives in place to underpin continued growth in revenue and profits. Importantly for you, our shareholders, we are likely to see underlying profits grow significantly faster than revenue, resulting in strong cash generation and improved returns into the future. As the number of MYOB clients and our reach into expanding markets continue to grow, the company’s vision remains – making business life easier and more effective for our clients and potential clients. This continues to drive MYOB to provide a deeper and broader suite of solutions for an ever more demanding marketplace. We are pleased to present to you the 2006 Annual Report and invite you to join us at the Annual General Meeting on Friday 27 April 2007. CRAIG WINKLER Chief Executive Officer SIMON MCKEON Chairman Simon McKeon Craig Winkler MYOB Limited Annual Report 2006 > 3 Operating Review Australia The Australian Business Division continued to deliver a strong financial performance in 2006, with double digit growth in revenue combined with significant margin improvement. The Professional Partner Network grew to over 12,000 partners with great gains in bookkeepers, educational partners and third party developers complementing MYOB’s traditional strength in public accountants and certified consultants. This group is continuing to grow as a direct sales channel with 31% of new license sales coming directly from professional partners, up from 24% two years ago. Transactional services continued to grow, crossing the 10,000 active services mark. During the year, MYOB increased its focus on medium-sized businesses (20 – 200 employees), an expansion of the company’s traditional strength in small business (0 – 20 employees). The rebranding and subsequent success of MYOB Exonet has proven the relevance of MYOB’s brand to these medium-sized businesses. MYOB Exonet experienced a doubling of inbound sales leads and excellent results from positioning MYOB Exonet as the solution that allows MYOB Premier customers to upgrade their business management tools but stay with MYOB. In the Accountants Division, 2006 was a year of innovation. At the beginning of 2006, MYOB had a strong market share and cross-sell of traditional applications: practice management, tax and accounts preparation. In 2006, there was increased penetration of these traditional applications, and also success in sales of MYOB ProfitOptimiser (launched in 2005), a product which allows accountants to engage in business advisory services. The launch of MYOB Accountants Resourcing, MYOB Accountants Education, MYOB Accountants Precedents and MYOB Accountants Advice marked the expansion from simply providing productivity tools to now assisting practices to improve the skills and knowledge of their teams, as well as supplement the practice’s team with access to additional, qualified resources. Asia The Business Division continued with its strategy of customer acquisition and brand building in all territories. MYOB is now the leading provider in Hong Kong and Singapore, and a very strong number two in Malaysia. The emphasis during 2006 has been on improving the selling channels and upgrading the Professional Partner Program, resulting in growth of over 20% during the year. There has also been investment in enhancing the management capability across the region. During the year, MYOB sold its minority shareholding in UBS Corporation Berhad, earning a profit on sale of $2.5 million. After entering mainland China in December 2005, the venture is now fully operational. MYOB global infrastructure and business processes have been successfully embedded in the organisation. The operation has a new head office in Chengdu, and there is a network of 15 branch offices throughout China. At the beginning Our Clients Australia - Global Alloys Facing serious global and competitive threats over the past 10 years, Global Alloys, a manufacturer, importer, wholesaler and retailer of alloy products, has grown to be a substantial business. They have innovatively expanded their product line, from 100-200 items to a stock list of around 4,000 products. Global Alloys now has a wide range of clients spanning the Asia-Pacific region. The key challenge An MYOB Premier user for 10 years until the end of 2005, the business owners felt they had outgrown the software. The business needed a flexible software solution to grow with them. Their key requirements were: • Sophisticated inventory management • Detailed reporting on sales by customer, including price versus cost and budgeted price • Reporting on sales by sales representative • Customer reporting 4 > MYOB Limited Annual Report 2006 of 2006, to expedite the development of the operation, extensive training of local personnel occurred with two teams of experienced MYOB staff living in China for three month assignments. The first localised MYOB product, MYOB BusinessBasics, was released in July 2006, with MYOB Premier following in January 2007. Momentum is building steadily and with a greater range of products being released in 2007, significant growth is expected. months. The business is set up well for significant revenue and new client growth in 2007. The Accountants Division continued to consolidate its strong market position, and returned to growth, with revenue increasing by 12.8% for the year. The order book has increased significantly and the introduction of a new product, MYOB Insolvency, has helped round out the product range. Zealand acquired Comacc Limited, bringing a range of successful products and services that complement MYOB’s existing solutions for employers. MYOB’s relationship with public accountants remains strong both as recommenders of our business products and as users of accountants’ systems. There have been significant wins in some of the larger practices in New Zealand and the rollout of the Accountants Enterprise range to complement the Accountants Office suite has been well received. Europe The European market is an important one for MYOB, accounting for 17% of Group revenue. In 2006, a number of initiatives in both the Business and Accountants Divisions began to yield results. The Business Division grew by 18.2%, driven by a good product release and strong upgrade revenue. The integration following the acquisition of Dosh at the end of October has gone well, delivering a key bank relationship and customer database. The addition of MYOB products into PC World stores has been very pleasing, gaining significant sell-through within three New Zealand The New Zealand business continued to grow well, despite weaker economic conditions. Acquisitions in this market helped push revenue growth to 45.7% on 2005. The breadth and strength of channels in New Zealand continue to serve the company well, with 46% of new unit sales coming through professional partners. Growth in the number of professional partners was also pleasing. In June, MYOB acquired JumpStart Computer Accounting and Trainers, a leading provider of MYOB business management software training in New Zealand. In August, MYOB New • • • Multi-location Contact management Extra fields and easy customisation Greater stock control allows the business to calculate the requirements of all sales representatives, meaning they don’t have to carry excess stock. Advice for other clients “Firstly, do your homework and know what your business requirements are as it’s no use searching for something if you don’t really know what you want. Also, ensure you have a budget and a timeframe for providers to work towards as this will give all parties the best chance of meeting your needs.” “And of course if your existing software is beginning to feel the strain under your growing business, certainly consider MYOB Exonet.” – Doug Walker, Global Alloys Finding the right solution Global Alloys produced a detailed requirements document and conducted an exhaustive search canvassing dozens of potential software providers, before deciding on MYOB Exonet. “MYOB Exonet provided faster access to our information, increased accuracy, and a decreased lead time for product delivery and fulfilment.” The outcomes “The ability to tailor MYOB Exonet to suit our needs is a great feature of the software. For us it means flexibility to add extra fields on sales orders, debtors and other areas to capture more information at the time of processing.” “We’ve found the training very tailored to the individual needs of each staff member, and staff have found it very easy.” MYOB Limited Annual Report 2006 > 5 Financial Summary 12 Months to 31 December ($ million) Operating revenue (from continuing operations) Operating EBITDA Operating EBIT Non operating revenues and specific costs Net interest & share of associate loss Profit before tax Taxation expense Profit after tax from continuing operations Earnings per share Fully franked dividends (declared) per share (cents) 2004 116.0 42.9 19.3 (6.8) 1.0 13.5 (6.4) 7.1 2.01 2.25 2005 161.2 60.4 27.7 (3.1) 0.9 25.5 (8.0) 17.5 4.20 4.00* 2006 182.3 64.1 22.8 3.2 (0.3) 25.7 (8.4) 17.3 4.49 3.00 * Includes special dividend of 1.25 cents per share Total Operating Revenue ($ million) 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 63.4 75.7 88.2 122.1 166.0 182.3 16.1 24.0 35.8 45.0 115.0 30 60 90 120 150 180 210 Operating EBITDA (pre-specific costs) ($ million) 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 15.4 26.1 31.9 42.9 60.4 64.1 5.4 7.7 11.8 15.0 40.7 10 20 30 40 50 60 70 6 > MYOB Limited Annual Report 2006 Our Clients New Zealand International Flavours & Fragrances (IFF) IFF is a leading creator and manufacturer of flavours and fragrances including fine fragrances and toiletries, soaps, detergents, and other household products, beverages and food products. Finding the right solution IFF found what is now known as MYOB Comacc Payroll Enterprise – a powerfully simple payroll solution for large and small businesses. IFF has also found payroll reporting to be very simple and easy. In particular, Holiday Pay Accrual reports and Pay Slip reports have allowed IFF to keep both the company and their employees informed of their holiday and pay details. “We particularly like the fact that Pay Slips can be simply emailed to our employees, making it easy for them to be aware of their pay and holidays,” add Bruce. Outcomes “With MYOB Comacc Payroll Enterprise we have a timely and efficient means of paying our employees,” says Bruce. In spite of ongoing tax and legislation changes in New Zealand, IFF has been able to manage the ever-increasing burden of preparing payroll, tracking holiday and sick leave and keeping employee records up to date, with the help of MYOB Comacc Payroll Enterprise. Key challenge In 2000, the New Zealand division of IFF searched for an easy-to-use payroll solution that would streamline the payroll function for their 31 employees. IFF NZ Finance Manager, Bruce Fletcher, was keen to ensure the payroll solution contained the latest pay and compliance requirements under ever-changing compliance rules. Advice for other clients “It is wise to ensure some on-site training and that in the first week of running the payroll, you have your trainer on-site to guide you through any challenges.” United Kingdom Bird Luckin With two offices, 13 partners and over 90 staff, Bird Luckin is a sizeable accounting practice in UK terms. However, the practice prefers to concentrate on building a name for itself within the local business community, and has established a reputation for innovation and service, using MYOB software to support both the delivery of those services and the practice’s long term development plans. The outcomes “Individually, and as an integrated suite, MYOB applications have enabled us to work more efficiently, which is an increasingly important consideration in today’s competitive accounting market,” says Kevin. Document management and filing is an area in which MYOB’s market leading software has had a particularly profound impact. “There’s only so much you can charge for something like a basic tax return, unless you’re able to build other valueadded services into it. This is exactly what MYOB software allows us to do.” The key challenge “Software has had an important role to play in Bird Luckin’s success. Starting with the production of client accounts, we have progressively implemented MYOB software to handle more and more functions within the practice, replacing existing systems along the way. “ Advice for other clients “At the end of the day,” says Kevin, “selecting software is not about solving specific technical issues, or even about solving your own business problems; it’s all about solving your clients’ problems. The software is just a means to that end, and it’s important to select a supplier like MYOB who understands this.” – Kevin Thomas, Bird Luckin MYOB Limited Annual Report 2006 > 7 Board of Directors The names and details of Company Directors in office during the financial year and until the date of this report are as follows. Directors were in office for the entire period unless otherwise stated. Simon McKeon BCom, LLB, FAICD Independent Non-Executive Chairman Simon joined the MYOB Board at the end of 2005 and has been Chairman since April 2006. He is Executive Chairman of Macquarie Bank Limited’s Melbourne office. Simon practised as a solicitor with Blake Dawson Waldron in Sydney prior to joining Macquarie Bank, and is a Fellow of the Australian Institute of Company Directors. Simon is President of the Federal Government’s Australian Takeovers Panel and also Chairman of MS Research Australia, the Association of Independent Schools in Victoria, Melbourne Cares and the Federal Government’s Point Nepean Community Trust. Simon is the Chairman of the Remuneration and Nomination Committees and a member of the Audit Committee. Craig Winkler MBA Chief Executive Officer Craig has been passionate about helping business owners to achieve success for more than 20 years. Since co-founding the business that is now MYOB in 1991, Craig has been instrumental in the company’s growth and strategic development. Experienced in every facet of the business from product development, market expansion, business acquisitions and integration, Craig has been the MYOB Chief Executive Officer since 1999. Craig is a member of the Remuneration and Nomination Committees. Colin Henson FCPA, Dip Law (BAB), FCIS, FCIM, FAICD Independent Non-Executive Director Colin joined the MYOB Board in August 2004 following the merger with Solution 6, on which Board he served previously. Colin has worked in a range of industries from brewing to electronics over 35 years, the last 15 of which have been in company reconstruction roles. Numerous senior management and/or board positions have included Cranswick Premium Wines Limited; Tooth & Co Limited; Australian Consolidated Investments Limited; and Burns Philp & Co. Limited. Colin is Chairman of ERG Limited and Chairman of Bishop Technology Group Limited. Colin is a member of the Audit Committee. Simon McKeon 8 > MYOB Limited Annual Report 2006 Craig Winkler Colin Henson John Stewart BBus, FCA, FAICD Independent Non-Executive Director John was appointed to the Board of MYOB Limited in April 1999. He is a Chartered Accountant and a former Chairman of the New South Wales Branch of the Institute of Chartered Accountants in Australia. He is a Director of his own business advisory practice specialising in advice to large private companies as well as a Director of the Australian Committee for UNICEF Limited. John is Chairman of the Audit Committee and a member of the Remuneration and Nomination Committees. 2002 after more than a decade of senior strategic positions at a regional and global level. He then became Director and subsequently Chairman of Traffion Technologies. Christopher is a Fellow of the Australian Institute of Bankers, Fellow of the Australian Institute of Export and a Member of the Australian Institute of Company Directors. Christopher is a member of the Remuneration Committee. Graeme C Pearson Dip App Chem Graeme retired as non-executive Chairman and a Director of MYOB Limited on 28 April 2006 having held these positions since 1999. He had previously been Managing Director of BTR Nylex Limited and a Director of the UK parent company BTR Plc. He has held senior management roles in Australia, New Zealand and Malaysia, and was a Director of private and public companies throughout Asia, North America and Europe. Until his retirement, Graeme was the Chairman of the Remuneration and Nomination Committees and a member of the Audit Committee. Christopher Lee BA, MBA Executive Director In 1982 Chris co-founded Teleware Inc, a company specialising in the development of microcomputer software for online financial services. After spearheading the original development of the MYOB Accounting software, Chris became president of Teleware Inc in 1991. Following a series of ownership changes, Chris acquired equity in, and became a Director of group entities in 1996. Christopher Williams FAleX, F.Fin Independent Non-Executive Director Christopher joined the MYOB Board in June 2004, bringing expertise in strategic marketing, the SME market and customer value management process design. He retired as senior executive of the National Australia Bank Group in Company Secretary – Robert Reside Robert Reside was appointed Company Secretary in August 2001. He is a lawyer with a background in private and corporate practice. He has been MYOB Limited’s Group Counsel since 2000. John Stewart Christopher Williams Christopher Lee MYOB Limited Annual Report 2006 > 9 Directors’ Report MYOB Limited – Year ended 31 December 2006 The Directors of MYOB Limited submit their report for the year ended 31 December 2006. Principal Activities The principal activities within the MYOB Group during the period were the development and publishing of software and the provision of services for small and medium enterprises, including accountants in public practice. Consolidated Result The consolidated profit for the period attributable to the members of MYOB Limited was: ($’000) 17,445 Employees The Group had 1,131 employees as at 31 December 2006 (2005: 1,098 employees). Dividends Dividends paid or declared for payment are as follows: Fully franked dividend of 2.75 cents per share for the year ended 31 December 2005 as declared by the Directors on 21 February 2006 and paid 21 April 2006 Fully franked special dividend of 1.25 cents per share declared by the Directors on 21 February 2006 and paid 21 April 2006 Fully franked dividend of 3.00 cents per share for the year ended 31 December 2006 as declared by the Directors on 13 February 2007 and payable on 20 April 2007 (not recognised as a liability) 10,791 4,905 11,559 0 > MYOB Limited Annual Report 2006 Review of Operations For the 12 months ended 31 December 2006 the MYOB Group reported operating revenue from continuing operations of $182.3 million, up 13.1% compared with the year ended 31 December 2005. MYOB achieved an underlying EBITDA margin in 2006 of 35.1%. MYOB’s profit from continuing operations before income tax, specific items, share of loss of associate, depreciation and amortisation increased by 6% to $64.1 million (up from $60.4 million in 2005). Included in the result is amortisation of product development of $21.6 million and acquired intangibles of $9.5 million. During 2006 MYOB continued to invest in the business with expenditure on product development of $35.3 million and equipment of $14.8 million. In addition, the Company made gains or incurred charges on a number of specific items in relation to recent investments. These included further integration costs in relation to the merger with Solution 6 of $0.5 million, a $2.5 million gain on the sale of the investment in UBS Corporation Berhad and $1.7 million as the Company’s share of losses of 32% owned NetReturn. Further, some outstanding legal matters were resolved that had been inherited as part of the Solution 6 acquisition. The Directors have provided for a final dividend of 3.00 cents per share fully franked. The dividend will be paid on 20 April 2007 to all shareholders on the register at the books closing date of 2 April 2007. As a result of the strong cash position and access to significant debt capacity to fund appropriate acquisitions, the Directors have continued the on-market buyback of the issued capital of the Company announced in February 2006. Significant Changes in State of Affairs Significant changes in the state of affairs of the MYOB Group occurred during the period: a) On 16 August 2006, MYOB New Zealand Ltd, a subsidiary of MYOB Ltd acquired 100% ownership of the net assets of Comacc Limited for $5.8m. Comacc is based in New Zealand and has a range of products and services for employers. This acquisition secured MYOB the market leadership position in the SME employer services segment in New Zealand. MYOB Ltd spent $1.6m on assessing a potentially significant acquisition. As at the date of issuing these accounts it is unlikely that the acquisition will proceed. b) In the opinion of the Directors there were no other significant changes in the state of affairs of the consolidated entity that occurred during the period under review not otherwise disclosed in this report or the consolidated financial statements. Significant Events after the Balance Sheet Date In early January 2007, MYOB NZ Ltd purchased from an outside party the remaining 25% of Exonet Pty Ltd for $3.0 million ($3.3 million NZD) and now holds 100% full equity ownership. This purchase forms part of MYOB’s enterprise solutions strategy. There are no other matters or circumstances that have arisen since the end of the period which significantly affected or may significantly affect the operations of the consolidated entity, the results of those operations or the state of affairs of the consolidated entity in subsequent financial years. Likely Developments and Future Results It is expected that revenue growth in 2007 will be similar to 2006. A further increase in EBITDA margin is expected during 2007, particularly as the nascent China operation moves towards profitability. Product development expenditure for the year will be relatively flat on 2006 at $36 million. MYOB Limited Annual Report 2006 >  Directors’ Report (continued) Directors’ interests in the shares and options of the company and related bodies corporate At the date of this report the interests of the Directors in the shares and options of the Company and related bodies corporate were: MYOB Limited Ordinary Shares Held Name of Director Mr Simon McKeon Mr John Stewart Mr Christopher Williams Mr Colin Henson Mr Craig Winkler Mr Chris Lee Directly 102,236 25,335 3,000,000 717,964 Indirectly 269,307 302,913 98,349 98,349 105,224,044 120,000 500,000 $0.50 Director Options Exercisable at $0.66 $.24 1,800,000 - Directors’ Meetings The number of Directors’ meetings and number of meetings attended by each of the Directors of the Company during the period were: Full Meetings of Directors Name of Director Mr Graeme Pearson* Mr Simon McKeon Mr John Stewart Mr Christopher Williams Mr Colin Henson Mr Craig Winkler Mr Chris Lee Attended 4 14 13 15 15 15 15 Held/ Eligible 4 15 15 15 15 15 15 Meetings of Committees Audit Attended 2 6 5 6 Held/ Eligible 2 6 6 6 Remuneration Attended 2 4 3 4 4 Held/ Eligible 2 4 4 4 4 Nomination Attended 2 2 2 Held/ Eligible 2 2 2 - As at the date of this report, the Company had an Audit Committee, Remuneration Committee and a Nomination Committee. Committee Membership Members acting on the committees of the Board during the year were: Audit Mr Graeme Pearson* Mr Simon McKeon Mr John Stewart^ Mr Colin Henson Remuneration Mr Graeme Pearson* Mr Simon McKeon^ Mr John Stewart Mr Christopher Williams Mr Craig Winkler * Mr Graeme Pearson resigned as a Director and a member of committees in April 2006. ^ Chairman Nomination Mr Graeme Pearson* Mr Simon McKeon^ Mr John Stewart Mr Craig Winkler 2 > MYOB Limited Annual Report 2006 Remuneration Report This report outlines the remuneration arrangements in place for Directors and executives of MYOB Limited and its controlled entities (the Group), and provides the disclosures which meet the remuneration reporting requirements of the Corporations Act 2001. This report also provides the disclosures required by accounting standard AASB 124 Related Party Disclosures. Remuneration Philosophy The performance of the Group depends upon the quality of its Directors and executives. To create value, the Group must attract, motivate and retain highly skilled Directors and executives. To this end, the Group embodies the following principles in its framework: • • • • • provide competitive rewards to attract high calibre executives; link executive rewards to shareholder value; allocation of a significant portion of executive remuneration ‘at risk’, dependent upon meeting pre-determined performance benchmarks; establish appropriate, demanding performance hurdles in relation to variable executive remuneration; and encourage Directors to take a high portion of their fees in shares. Remuneration Committee The Board is responsible for determining and reviewing compensation arrangements for the Directors, the Chief Executive Officer and the executive team. The Board has established a Remuneration Committee comprising three non-executive Directors and the Chief Executive Officer. A non-executive Director chairs all meetings. The Remuneration Committee reviews and makes recommendations to the Board regarding the: • • • • appointment and compensation arrangements for the Directors, executive Directors and senior management of the Group (including, without limitation, incentive, share option and other benefit plans and service contracts); general remuneration policies and practices for the Group; recruitment and termination policies within the Group; and Group’s superannuation requirements. Remuneration Structure In accordance with best practice corporate governance, the structure of non-executive Directors’ and executives’ remuneration is separate and distinct. Non-Executive Director Remuneration Objective The Board seeks to set aggregate remuneration at a level which provides the Company with the ability to attract and retain Directors of the highest calibre, whilst incurring a cost which is acceptable to shareholders. Structure The Constitution and the ASX Listing Rules specify that the aggregate remuneration of non-executive Directors shall be determined from time to time by a general meeting. The latest determination was at the 2005 Annual General Meeting when shareholders approved an aggregate remuneration of $350,000 per year. The amount of aggregate remuneration sought to be approved by shareholders and the manner in which it is apportioned amongst Directors is reviewed and approved every three years. The Board considers advice from external consultants and national benchmarking data when undertaking the review process. MYOB Limited Annual Report 2006 > 3 Directors’ Report (continued) The current annual base fees for non-executive Directors are as follows: • • Chairman Directors $75,000 $40,000 All non-executive Directors who chair a Board committee receive an additional yearly fee of $7,500 per chairmanship. Members of the committees receive an additional yearly fee of $5,000 per committee. Compulsory superannuation contributions of 9% of fees are paid on behalf of each Director in addition to the fees. There is no cap on the superannuation contributions by MYOB Limited. Non-executive Directors are encouraged to hold shares in the Company and can elect to sacrifice fees for shares in the MYOB Deferred Share Plan. Under ASX Listing Rules, any issue of shares to Directors is required to be approved by shareholders. Remuneration of Non-Executive Directors for the Year Ended 31 December 2006 The remuneration of non-executive Directors for the year ending 31 December 2006 is detailed below: Name of Non-Executive Director Mr Graeme Pearson Mr Simon McKeon Mr John Stewart Mr Christopher Williams Mr Colin Henson Total Remuneration 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 Short-term Employee Benefits Cash 3,675 17,250 39,579 2,329 5,750 13,625 4,500 24,750 4,500 24,750 58,004 82,704 Salary Sacrifice 28,500 77,750 42,750 51,750 43,875 40,500 20,250 40,500 20,250 204,000 162,125 Post Employment Superannuation 2,850 8,550 7,410 210 5,175 4,050 4,050 4,050 4,050 4,050 23,535 20,910 Total 35,025 103,550 89,739 2,539 62,675 61,550 49,050 49,050 49,050 49,050 285,539 265,739 Executive and Executive Director Remuneration Objective The Group aims to reward executives with a level and mix of remuneration commensurate with their position and responsibilities within the Group and so as to: • • • • reward executives and employees for company, business unit and individual performance against targets set by reference to appropriate benchmarks; align the interests of executives and employees with those of shareholders; link reward with the strategic goals and performance of the Company; and ensure total remuneration is competitive by market standards. 4 > MYOB Limited Annual Report 2006 Structure The Remuneration Committee of the Board of Directors is responsible for determining and reviewing compensation arrangements for the Chief Executive Officer and the executive team. The Remuneration Committee assesses the appropriateness of the nature and amount of emoluments of such executives on a periodic basis by reference to relevant employment market conditions and external consultants, with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality executive team. Remuneration consists of the following key elements: • • fixed remuneration; variable remuneration; variable pay and short term incentives; equity plans and long term incentives; and post employment benefits. • The arrangements for fixed and variable remuneration are established for each executive and executive Director by the Remuneration Committee. The Committee also review the overall remuneration strategy for the Group and its application by executives to all employees. Fixed Remuneration The level of fixed remuneration is set so as to provide a base level of remuneration, which is both appropriate to the position and is competitive in the market. Fixed remuneration for executives and executive Directors is reviewed annually by the Remuneration Committee and the process consists of a review of the Group, business unit and individual performance, relevant comparative remuneration in the market and internal and, where appropriate, external advice on policies and practices. The Committee has access to external advice independent of management. All employees, including executives and executive Directors are given the opportunity to receive their fixed (primary) remuneration in a variety of forms, including cash and fringe benefits such as motor vehicles and expense payment plans. It is intended that the manner of payment chosen will be optimal for the recipient without creating undue administration cost for the Company. Superannuation/pension contributions on behalf of staff are made at the local statutory rate. Variable Pay and Short Term Incentives (STI) The objectives of the Group’s variable pay programs are to link the achievement of the Group’s operational targets and profitability with the remuneration received by all staff. Profit Share Plan All employees, including executives, are eligible to participate in the Profit Share Plan. Under the plan, an amount of up to 10% of Group earnings before tax and interest is set aside for payment to employees. The profit share amount is divided by the total remuneration of the Group to arrive at a profit share amount as a percentage. Each employee automatically receives 50% of the profit share percentage multiplied by their remuneration for the period (known as the team portion). To be eligible for the other 50% of profit share, the employee’s business unit must have achieved its key performance indicators and the individual employee must have received a performance rating of at least “achieves objectives” for the period. The amount of profit share paid increases the higher the individual’s performance rating. Individuals with a rating of “developing” or who are still in their first three months of employment are eligible to half the 50% payment assuming business unit indicators have been met. MYOB Limited Annual Report 2006 > 5 Directors’ Report (continued) Subject to the Board’s discretion, profit share is paid every six months following the release of the half or full year results. Employees and executives who are entitled to receive any other form of short term incentive payments are only eligible to receive the team portion of the payment. The profit share percentage for 2006 was 3.1%. Short term incentives In addition to the Profit Share Plan, the Group offers a short term incentive (STI) component to selected employees, managers and executives. The STI program is to link the achievement of the Group’s operational targets with the remuneration received by the executives and employees charged with meeting those targets. The total potential STI available is set at a level so as to provide sufficient incentive to the employee to achieve the operational targets and such that the cost to the Group is reasonable in light of market practice and total remuneration. Actual STI payments granted to an employee depend on the extent to which specific operating targets set at the beginning of the period are met. The operational targets consist of a number of key performance indicators covering both financial and non-financial measures of performance. Typically included are measures such as revenue, EBITDA (earnings before interest, tax, depreciation and amortisation), customer satisfaction, customer numbers, employee turnover and product delivery. The Group has predetermined benchmarks which must be met in order to trigger payments under the STI scheme. Equity Plans and Long Term Incentives The objective of the equity plans and long term incentives (LTI) is to create opportunities for employees to participate as equity owners in the Company based on company performance and other relevant factors, and to reward key staff and executives in a manner which aligns this element of remuneration with the creation of shareholder wealth. Consideration is given on an annual basis (and at other times as the Remuneration Committee deems appropriate) to LTI grants, using the employee share and option plans. All employees are entitled to participate in share offers when the Board determines such offers should be made. The form of the share offer depends on local regulations and tax laws. In Australia, eligible employees are able to be offered shares with a restriction on trading of these shares for three years. Past offers have been made on the basis of a number of free shares offered to employees, with a matching offer from the Company for further share subscriptions by staff. No general offer of shares was made in 2006. Option grants are only made to executives and selected employees who are able to significantly influence the generation of shareholder wealth and thus have a direct impact on the Group’s performance. Individual participation in such grants is determined based on the: • • • • strategic significance of the role and outcomes achieved; impact on strategic outcomes in terms of special achievements or requirements; future potential and succession planning requirements; and performance and personal effectiveness in achieving outstanding results. During 2006, MYOB Limited issued the following options: Grant Date 2 May 2006 2 May 2006 Vesting Date 2 May 2009 2 May 2009 Expiry Date 2 May 2010 2 May 2010 Exercise Price No. of Options 2,195,431 908,617 No. of Grantees 193 21 908,617 options issued during the year were subject to performance hurdles. Details of the performance hurdles are contained further in this report. 6 > MYOB Limited Annual Report 2006 The Company introduced “zero exercise price options” or “ZEPOs” in 2006. These became the standard long term incentive mechanism. Performance hurdles were applied to the ZEPOs granted to key executives. Remuneration of Executives for the Year Ended 31 December 2006 During the year the following persons were the executives with the greatest authority for the strategic direction and management of the Group and comprise the key management personnel for the purposes of disclosure under AASB 124 and Class Order CO 06/50. Name of Executive Mr Craig Winkler Mr Chris Lee Mr Matthew Critchley Mr Simon Martin Mr Tim Reed Mr Richard Allen Mr David Lowe Mr Robert Reside Mr Jason Noorman Current Title Chief Executive Officer & Executive Director Executive Director Chief Operating Officer Chief Financial Officer Managing Director, Australia Acting Managing Director, New Zealand Managing Director, Europe Managing Director, New Zealand Group Manager, Product Management Company Secretary and Group Counsel Group Manager, Product Development Period of Responsibility Full year Full year Full year Full year Full year From 1 December 2006 Full year 1 January to 31 August 2006 From 1 September 2006 Full year From 1 December 2006 In addition to the above, the following executives, whilst not key management personnel in accordance with AASB 124, should be included in the executive remuneration report due to the fact that they were among the five highest remunerated executives during the year (in accordance with Class Order CO 06/50): • • • Mr Simon Crompton – General Manager, Accountants Division Europe Mr Anthony Stevenson – Group Manager, Marketing Ms Rebecca McGaw – Group Manager, IT Operations Each of the above held their positions for the whole year. Employment Agreements All service agreements for executives are unlimited in term but may be terminated by written notice from either party or by the employing entity within the Group making a payment in lieu of notice. The service agreements outline the components of the remuneration paid to executives and require the remuneration of executives to be reviewed annually. The service agreements do not require the Group to increase base salary, pay a short term incentive (excluding profit share), make termination payments or offer a long term incentive in any given year. In the event of retrenchment, the executives listed in the table below are entitled to the written notice or payment in lieu of notice as provided in their service agreement. The employment of the executives may be terminated without notice or payment in lieu of notice in some circumstances. Generally, this could occur where the executive: • • • • • is charged with a criminal offence that is capable of bringing the organisation into disrepute; is declared bankrupt; breaches a provision of their employment agreement; is guilty of serious and wilful misconduct; or unreasonably fails to comply with any material and lawful direction given by the company. All executives are required to agree to a restraint of trade clause post employment to ensure that valuable knowledge and experience is not accessed by competitors through poaching of staff. Most executives are entitled to STI payments based on performance against key performance indicators. MYOB Limited Annual Report 2006 > 7 Directors’ Report (continued) The table below sets out the key employment terms for key management personnel: Name of Executive Notice Period Company Executive Directors Mr Craig Winkler Mr Chris Lee Current Executives Mr Matthew Critchley Mr Simon Martin Mr Tim Reed Mr Richard Allen Mr David Lowe Mr Robert Reside Mr Jason Noorman Mr Simon Crompton Mr Anthony Stevenson Ms Rebecca McGaw 3 months 6 months 3 months 3 months 3 months 6 months 3 months 3 months 12 months 4 weeks 3 months 3 months 3 months 3 months 3 months 3 months 3 months 3 months 3 months 4 weeks 6 months post employment 6 months post employment 6 months post employment 6 months post employment 6 months post employment 12 months post employment 6 months post employment 6 months post employment 12 months post employment 6 months post employment 25% 25% 25% 25% 25% N/A 20% 40% 20% 20% 25% 25% 25% 25% 25% 20% 20% 0% 20% 20% 6 months 6 months 3 months 3 months 6 months post employment 6 months post employment N/A N/A Option grants Option grants Employee Restraint Period Incentives as a % of Base Salary Short Term Incentive Long Term Incentive Long Term Incentives are satisfied by the issue of options. The value is set as a percentage of base salary and the amount granted is calculated by reference to the five day VWAP of the MYOB share price prior to issue less the exercise price of options, normally zero. Short Term Incentive Payments for the year ended 3 December 2006 The amount of short term incentive is set in a range based on performance against key operational indicators which are set as part of the planning process in the year prior. Each indicator is given a weighting and a range in determining payments at the end of the year. 8 > MYOB Limited Annual Report 2006 The table following sets out the key performance targets set by the Remuneration Committee for 2006 for executives eligible for STI. Performance Condition Revenue Reasons for Use Absolute revenue targets are set for each business to emphasise the importance of achieving budget and ensure each business is stretching for growth. MYOB seeks to maintain a high level of profitability on revenue, with a close focus on costs. All executives are charged with the close management of expenses and finding new ways to become efficient in the delivery of services and products to our clients. A target EBITDA margin is set for each business each year, balancing a focus on efficiency with investment in the business to drive growth. Group Earnings Before Interest and Taxation New Revenue This measure links performance to the overall Group operational result. This allows the measure of innovation in particular in sourcing new revenue streams. The views of our clients are extremely important to us. Employees are crucial to our success and account for around 70% of our costs. Strong staff retention maintains business efficiency, impacting revenue and costs. Staff are surveyed twice annually to assess factors contributing to their engagement. Group EBIT achieved versus plan. New revenue from sources not in the income statement in 2005. Satisfaction rating percentage versus planned. Staff retention over the year versus planned retention. Method Used to Assess Revenue achieved versus plan. Earnings Before Interest Taxation, Depreciation and Amortisation margin before intra group transfers EBITDA margin versus planned margin or achievement of an absolute EBITDA amount. Client Survey Results Staff Retention Staff Satisfaction Survey Satisfaction rating percentage versus planned. In addition to the above, each of the executives may have specific, role-based objectives for delivery during the course of the year. These are also a factor of STI achievement, however they are considered commercially sensitive. Long Term Incentives for the year ended 3 December 2006 Long term incentives are satisfied by the grant of options. Options are granted at the discretion of the Board based on recommendations by the Remuneration Committee. Options are issued by MYOB Limited and each option entitles the holder to subscribe for one fully paid ordinary share in the entity under the terms and conditions specified. The table on the next page sets out the option grants made to each executive during the year. There were no options granted as equity compensation to non-executive Directors during the year. For some executives, their service agreements set out a target LTI value of up to 25% of base salary. The target value is based on the face value of the instrument used, that is, in the case of options, the difference between the share price at the date of grant and the option exercise price. MYOB Limited Annual Report 2006 > 9 Name of Executive Number Granted Exercise Price Amount Paid Grant Date Vesting Date Expiry Date Value per Option Value of Value of Options Options granted during exercised the year during the year Executive Directors 53,250 53,250 - 20 > MYOB Limited Annual Report 2006 Mr Craig Winkler - Mr Chris Lee - Total Executive Directors - Current Executives 02-May-06 02-May-06 02-May-06 02-May-06 02-May-09 02-May-09 02-May-09 02-May-09 02-May-06 02-May-09 02-May-06 02-May-09 02-May-06 02-May-09 02-May-10 02-May-10 02-May-10 02-May-10 02-May-10 02-May-10 02-May-10 02-May-06 02-May-09 02-May-10 02-May-06 02-May-09 02-May-10 02-May-06 02-May-09 02-May-10 0.5677 0.8624 0.5677 0.8624 0.5677 0.8624 0.5677 0.8624 0.5677 0.8624 02-May-06 02-May-09 02-May-10 0.8624 02-May-06 02-May-09 02-May-10 0.5677 02-May-06 02-May-09 02-May-10 0.8624 02-May-06 02-May-09 02-May-10 0.5677 21,348 32,431 22,216 33,748 24,848 37,746 10,660 16,193 11,476 17,433 10,089 15,326 10,509 15,964 334,035 334,035 02-May-06 02-May-09 02-May-10 0.8624 32,592 02-May-06 02-May-09 02-May-10 0.5677 21,455 16,200 82,350 98,550 5,800 Mr Matthew Critchley 37,793 37,792 Directors’ Report (continued) Mr Simon Martin 37,605 37,605 Mr Tim Reed 39,134 39,133 Mr Richard Allen 43,770 43,769 Mr David Lowe 18,778 18,777 Mr Robert Reside 20,215 20,214 Mr Jason Noorman - Mr Simon Crompton - Mr Anthony Stevenson 17,772 17,771 Ms Rebecca McGaw 18,512 18,511 Total Current Executives 467,151 Total 467,5 The Company introduced “zero exercise price options” or “ZEPOs” in 2006. These became the standard long term incentive mechanism. Performance hurdles were applied to the ZEPOs granted to key executives. The options will only vest on completion of a continuous three year service period with MYOB (or one of its subsidiaries) from the time of grant of the options AND if the following performance hurdles have been met: 1. 50% of the options will vest if the trading price of MYOB Shares outperforms the S&P200 accumulation index for a period of 10 consecutive business days in the six months either side of the vesting date. The index will be measured from 1 March 2006. 2. Up to 50% of the options will vest based on the compound annual growth rate (“CAGR”) of MYOB’s earnings before interest, tax, depreciation and amortisation (“EBITDA”) as reported in annual financial results presentations for years 2006 to 2009. The options attached to this performance hurdle vest progressively depending on the target EBITDA growth achieved. If a minimum of 12.5% EBITDA growth is achieved, then 50% of the options attached to this performance hurdle will vest. The number of options vesting increases based on the level of growth such that if 15% EBITDA growth is achieved, 100% of the options attached to this performance hurdle will vest. If the minimum 12.5% EBITDA growth is not achieved, no options attached to this performance hurdle will vest. The fair value of each option was estimated on the date of the grant using a modified Black-Scholes option pricing model. The assumptions used at each relevant valuation date were as follows: Grant Date Dividend Yield Expected Volatility Historical Volatility Risk-free interest rate Expected life of option (days) 02 May 06 2.55% 27.06% 27.06% 5.69% 1,461 The dividend yield reflects the assumption that future dividend yields will reflect the current dividend yield at the grant date. The expected volatility reflects the assumption that the historical volatility is indicative of future volatility at the grant date. The risk-free interest rate was determined as the Commonwealth Bond rate for the expected life of the option at the grant date. The expected life of the options is the period from the grant date to the exercise date and does not reflect anticipated exercise patterns. Where a performance condition applies to the options exercise an independent assessment of the condition was applied as a discount. MYOB Limited Annual Report 2006 > 2 Remuneration Details for the Year Ended 31 December 2006 Post Employment Benefits Superannuation /Pension 4 5 6 Deferred Employee Share Scheme Value of Options Payments Entity/Share Based Payments Other Benefits Total Name of Executive Short Term Incentive 3 Primary/Short-term Benefits 22 > MYOB Limited Annual Report 2006 Cash Salary NonMonetary Benefits Percentage of remuneration consisting of options for the year Notes 1 2 Executive Directors 8,297 2,661 10,958 37,007 80,326 648,955 7,823 206,881 29,184 80,326 442,074 18% 0% 12% Mr Craig Winkler 324,267 - Mr Chris Lee 175,138 21,259 Directors’ Report (continued) Total Executive Directors 499,405 21,259 Current Executives 52,727 56,719 52,924 96,285 17,275 5,224 211 85,981 29,197 41,092 437,635 448,593 16,557 160,898 97,905 16,154 16,794 1,650 18,375 8,893 13,935 18,393 22,962 5,390 21,158 10,049 183,287 263,63 27,961 19,092 27,031 42,938 27,483 29,371 414,946 430,538 410,656 493,458 208,080 250,729 20,194 365,159 245,999 251,662 3,091,421 3,740,376 7% 10% 5% 3% 9% 9% 0% 1% 9% 4% 6% 7% Mr Matthew Critchley 277,865 27,500 Mr Simon Martin 283,213 20,637 Mr Tim Reed 310,679 - Mr Richard Allen 370,461 3,884 Mr David Lowe 172,156 256 Mr Robert Reside 161,706 42,462 Mr Jason Noorman 18,333 - Mr Simon Crompton 253,111 3,884 Mr Anthony Stevenson 156,690 22,800 Ms Rebecca McGaw 159,173 24,791 Total Current Executives 2,163,388 146,213 Total Remuneration 2,662,793 67,472 Remuneration Details for the Year Ended 31 December 2005 Post Employment Benefits Superannuation/ Pension Deferred Employee Share Scheme 5 96,424 735,393 14,770 310,585 81,654 424,808 19% 5% 13% 6 Value of Options Payments Total Entity/Share Based Payments Other Benefits Name of Executive Primary Benefits/Short-term Employee Benefits NonMonetary Benefits 2 20,093 20,093 19,238 38,175 19,238 9,841 28,334 3 4 Short Term Incentive Cash Salary Percentage of remuneration consisting of options for the year Notes 1 Executive Directors Mr Craig Winkler 314,820 Mr Chris Lee 246,643 Total Executive Directors 561,463 Current Executives 30,000 43,160 2,811 75,971 176,748 108,962 44,359 15,924 17,668 9,099 14,568 44,508 14,991 141,964 86,613 32,770 19,558 227,609 17,110 13,275 1,697 227,609 19,567 29,325 46,642 392,005 407,191 433,056 27,395 174,627 258,491 312,594 2,005,359 12% 0% 5% 0% 8% 17% 5% 7% Mr Matthew Critchley 266,471 Mr Simon Martin (7) 147,500 Mr Tim Reed 294,115 Mr Richard Allen 27,395 Mr David Lowe 150,960 Mr Robert Reside 153,155 Mr Simon Crompton 234,509 Total Current Executives 1,274,105 Previously Specified Executives 15,631 19,114 34,745 85,619 13,763 9,477 56,831 71,856 24,270 23,084 68,900 12,386 45,432 126,718 312,285 307,036 317,014 936,335 22% 4% 14% 14% Mr Barry Brott 220,301 Mr Owen Dullea 182,893 Mr Ken Lipnickey 229,228 Total Previously Specified Executives 632,422 Total Current & Previously Specified Executives 110,716 30,809 28,605 262,367 1,906,527 165,793 203,968 - 268,682 365,06 227,609 227,609 2,941,694 3,677,087 9% 0% MYOB Limited Annual Report 2006 > 23 Total Remuneration 2,467,990 Directors’ Report (continued) Notes relating to the tables of Remuneration Details for the Year Ended 31 December 2005 and 2006: 1. Salary represents amounts paid in cash during the financial year. 2. Non-monetary benefits are valued in accordance with the cost to the Group for the provision of motor vehicles, insurance, parking and related fringe benefits tax where items are on a salary sacrifice basis. 3. Short term incentives to be settled in cash for the current performance period accrual and prior performance periods over or under accruals. Short term incentive performance conditions are detailed above. 4. Superannuation includes the employer’s contributions which are recognised on a deemed basis. 5. Executives may elect to receive some of their short term incentive or base salary in the form of MYOB shares rather than cash through participation in the MYOB Deferred Employee Share Scheme. Such shares vest immediately and are valued in accordance with the market value of MYOB Limited shares at the grant/purchase date. 6. Options have been issued based on the criteria contained above in this report. The fair value of each option was estimated on the date of the grant using a modified Black-Scholes option pricing model. The assumptions used at each relevant valuation date are contained in Note 29. 7. During 2005, an entity with which Mr Martin is associated was engaged as a consultant to the Group to assist in the integration of the Solution 6 acquisition. The entity was paid fees of $227,609 (plus GST) during the year. Subsequent to the completion of that assignment Mr Martin became a permanent employee of the Company. 24 > MYOB Limited Annual Report 2006 Performance Remuneration Total remuneration for executives is comprised of “at risk” and “not at risk” remuneration. Base salary, non-monetary benefits and superannuation is “not at risk” whilst STI and share based payments (LTI) are “at risk” as they relate to performance. The percentage of total remuneration that was “at risk” for the executives for 2006 is set out below, together with analysis of the payments actually received: Actual Remuneration in 2006 Remuneration at Risk Base Salary, Benefits & Superannuation STI LTI Total Remuneration Remuneration at Risk Name of Executive Maximum LTI Total Remuneration Potential Remuneration for 2006 Base Salary, Benefits & Superannuation Maximum STI Executive Directors 80,326 80,326 648,955 14% 557,671 10,958 80,326 206,881 1% 204,220 2,661 442,074 20% 353,451 8,297 80,326 442,074 206,881 648,955 20% 1% 14% Mr Craig Winkler 353,451 8,297 Mr Chris Lee 204,220 2,661 Total Executive Directors 557,671 10,958 Current Executives 29,371 42,938 19,092 13,935 18,393 22,962 5,390 21,158 10,049 183,287 3,211,826 251,662 252,700 23% 20% 23% 381,976 28% 23,650 16% 250,729 11% 233,908 26% 172,412 222,543 19,983 273,788 195,644 200,521 2,470,499 493,458 22% 383,238 435,401 22% 338,640 449,781 26% 330,881 56,719 52,924 96,285 17,275 5,224 211 85,981 29,197 41,092 437,635 438,560 24% 332,848 52,727 29,371 42,938 19,092 13,935 18,393 22,962 5,390 21,158 10,049 183,287 414,946 430,538 410,656 493,458 208,080 250,729 20,194 365,159 245,999 251,662 3,091,421 20% 23% 18% 22% 17% 11% 1% 25% 20% 20% 20% Mr Matthew Critchley 332,848 76,341 Mr Simon Martin 330,881 75,963 Mr Tim Reed 338,640 77,670 Mr Richard Allen 383,238 96,285 Mr David Lowe 172,412 43,103 Mr Robert Reside 222,543 5,224 Mr Jason Noorman 19,983 3,667 Mr Simon Crompton 273,788 102,798 Mr Anthony Stevenson 195,644 35,898 Ms Rebecca McGaw 200,521 41,092 Total Current Executives 2,470,499 558,040 MYOB Limited Annual Report 2006 > 25 Total Remuneration 3,028,70 568,998 263,63 3,860,78 2% 3,028,70 448,593 263,63 3,740,376 9% Directors’ Report (continued) Indemnification and Insurance of Directors and Officers During the period the Company paid an insurance premium indemnifying each of the Directors and officers of the economic entity against all liabilities to another person that may arise from the position as Directors or officers of the Group, except where the liability arises out of criminal or dishonest conduct or behaviour involving a lack of good faith. The agreement stipulates that the Group will meet the full amount of such liabilities, including costs and expenses. The total amount of insurance contract premiums paid was $44,103 (2005:$69,662). Rounding The amounts contained in this report and in the financial statements have been rounded off under the option available to the Company under ASIC Class Order 98/100. The Company is an entity to which the Class Order applies. Tax Consolidation MYOB Limited and its 100% owned Australian subsidiaries are a tax consolidated group. Tax Effect Accounting by Members of the Tax Consolidated Group Members of the tax consolidated group have entered into a tax funding agreement. The tax funding agreement provides for the allocation of current taxes to members of the tax consolidated group in accordance with their taxable profit for the period, while deferred taxes are allocated to members of the tax consolidated group in accordance with the principles of AASB 112 Income Taxes. The allocation of taxes under the tax funding agreement is recognised as an increase/decrease in the subsidiaries’ inter-company account with the tax consolidated group head company, MYOB Limited. The group has applied the ‘separate taxpayer within group’ approach in determining the appropriate amount of current taxes to allocate to members of the tax consolidated group. Corporate Governance In recognition of the need for the highest standards of corporate behaviour and accountability, the Directors of the Company support and have adhered to the principles of corporate governance. The Company’s corporate governance statement is contained in this annual report. Auditor Independence and Non-Audit Services The Directors received the following declaration from the auditor of the Company: 26 > MYOB Limited Annual Report 2006 MYOB Limited Annual Report 2006 > 27 Directors’ Report (continued) Non-audit Services Non-audit services were provided by the entity’s auditor, Ernst & Young. The Directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act. The nature and scope of non-audit service provided means that auditor independence was not compromised. Ernst & Young received or are due to receive $81,911 for the provision of tax and other services to Group entities during the year. Signed in accordance with a resolution of the Board of Directors: SIMON MCKEON Chairman MYOB Limited Dated at Melbourne this 13th day of February 2007 CRAIG WINKLER Chief Executive Officer MYOB Limited 28 > MYOB Limited Annual Report 2006 Corporate Governance MYOB Limited – Year ended 31 December 2006 The Company is firmly committed to ethical business practices, a safe workplace and compliance with the law. We pursue the highest standard of ethical conduct in the interests of our shareholders and all other stakeholders and implement all appropriate corporate governance principles and practices. More information concerning the matters disclosed in this report may be obtained from the Company’s website at www.myob.com/investor . Compliance with the ASX Corporate Governance Council Best Practice Recommendations The ASX Listing Rules require companies to disclose certain information concerning corporate governance in their annual report and to provide a statement outlining the extent to which they have followed the 10 ASX Best Practice Recommendations (‘Recommendations’) in the reporting period. At the date of this report, MYOB considers that it complies with all of the Recommendations as is disclosed in this statement. A cross-reference to each of the required items of disclosure is included at the conclusion of this section. Composition of the Board The composition of the Board is determined in accordance with the following principles and guidelines: • the Board should comprise at least five Directors, the majority of whom shall be non-executive Directors; • the Chairperson must be a non-executive Director; • the Board should comprise Directors with an appropriate range of qualifications and expertise; and • the Board shall meet at least once every second month and follow meeting guidelines set down to ensure all Directors are made aware of, and have available, all necessary information to participate in an informed discussion of all agenda items. Board Member Selection Criteria The recommendation and nomination of potential new Directors is done through the Nomination Committee. The Board as a whole then considers and decides on the selection and appointment of new members. Directors consider the appropriate skills and characteristics required by the Board to maximise its effectiveness and assess the blend of skills, knowledge and MYOB Limited Annual Report 2006 > 29 Corporate Governance (continued) experience necessary for the present and future needs of the Company. When a vacancy exists, the full Board may use the assistance of external advisers in seeking nominations and deciding on the most suitable candidates. New Directors are supplied with a letter of appointment detailing their obligations and terms of engagement. MYOB’s Constitution provides for new Directors appointed by the Board to stand for election by the shareholders at the following Annual General Meeting and for all Directors, other than the Chief Executive Officer, to stand for re-election on a rotation basis not exceeding three years. The Chairman is selected by the Board from the non-executive Directors and is responsible for efficient conduct of Board business. Board Responsibilities The Board acts on behalf of, and is accountable to, the shareholders. It seeks, however, to identify not only the expectations of the shareholders, but also the expectations of the community, the regulatory bodies and any other ethical expectations and obligations considered relevant to the operation of the business. The specific responsibilities of the Board include: • approving the strategic direction, policies and budgets of the Company and ensuring that these are followed; • approving major investments and monitoring the return of those investments; • monitoring financial performance, including approval of the annual and half year financial statements and reports; • appointing the Chief Executive Officer and monitoring the performance of the Chief Executive Officer and senior management; • overseeing the remuneration, development and succession planning for the Chief Executive Officer and senior management, and ensuring that appropriate human resource management systems are in place; • ensuring appropriate risk management systems are established and reports on performance are regularly reviewed; • reviewing and approving the Company’s compliance systems and corporate governance principles; • ensuring that the Company provides continuous disclosure of information to the investment community, and that shareholders have available all information they reasonably require to make informed assessments of the Company’s prospects; • overseeing the Company’s commitment to its values, sustainable development, the environment and the health and safety of employees, contractors, customers and the community; and • enhancing and protecting the reputation of the Company. The responsibility for the operation and administration of the consolidated entity is delegated by the Board to the Chief Executive Officer and the executive team. The Board ensures that this team is appropriately qualified and experienced to discharge their responsibilities and has in place procedures to assess their performance. The details of the matters reserved for the Board is available on the website. Board Independence The Company’s policy requires that the majority of the membership of the Board should comprise non-executive and independent Directors. A Director’s independence is assessed in accordance with the guidelines set out in the Recommendations. Simon McKeon, John Stewart, Colin Henson and Christopher Williams are independent Directors. Avoidance of Conflicts of Interests Directors are required to declare any interests they or their related entities may have in matters to be discussed by the Board. Any Director with a material personal interest in a matter must remove themselves during its discussion and not vote on the relevant resolution. Resources Available to the Board Directors have the right of access to Company employees, advisors and records. In relation to their duties and responsibilities, Directors have access to the advice and counsel of the Chairman and the Company Secretary and have, following consultation with the Chairman, the right to seek independent professional advice at the Company’s expense. 30 > MYOB Limited Annual Report 2006 Review of Board Performance The Board conducts annual performance reviews. The process of evaluating the performance of the Board is the responsibility of all Directors and is undertaken at the direction of the Chairman. Each member of the Board completes a performance evaluation questionnaire each year. The Chairman will collate and present the findings to the Board and facilitate a review of these findings. The Board reviews progress made over the year and agrees on development and action as required. The process aims to ensure that individual Directors continue to contribute effectively to the Board’s performance. Board Committee Structure The Board has three committees to assist in the carrying out of its responsibilities and duties. These committees permit the more efficient conduct of business. Remuneration Committee The Board is responsible for determining and reviewing compensation arrangements for the Directors, the Chief Executive Officer and the executive team. The Board has established a Remuneration Committee, comprising of four non-executive Directors and the Chief Executive Officer. A non-executive Director chairs all meetings. The Remuneration Committee reviews and makes recommendations to the Board regarding the: • compensation arrangements for the Directors, executive Directors and senior management of the Company (including, without limitation, incentive, share option and other benefit plans) and service contracts; • general remuneration policies and practices for the Company; • recruitment and termination policies within the Company; and • Company’s superannuation requirements. The level of non-executive Directors’ fees are to be reviewed by the Board following a review by the Chairman and the Chief Executive Officer, taking into consideration any additional time required for involvement in various committees. The Committee will make recommendations to the Chairman and Chief Executive Officer for the purposes of their review. The Committee’s recommendations in relation to these policies must take into account the Company’s performance over the relevant period. Members of the Remuneration Committee for the year were Simon McKeon, John Stewart, Craig Winkler, Christopher Williams and Graeme Pearson (who resigned in April 2006). The Remuneration Committee Charter is available on the website. Audit Committee The Audit Committee assists the Board in the effective discharge of the Company’s responsibilities concerning compliance with financial reporting, internal controls, risk management, audit and insurance. The Audit Committee is responsible for the selection and nomination to the Board of an external auditor and acts as the focal point of communication between the Board, management and the external auditor in relation to any audit issues and to identify any cooperation problems between the external auditor and management. It liaises with the external auditor to identify areas of particular concern arising from the audits and reports to the Board on performance and effectiveness of the external auditor. The Audit Committee must satisfy itself as to the adequacy of the scope and quality of external audits and review the effectiveness of external audits and recommend improvements to the Board. It is also responsible for monitoring internal controls and information management systems, recommending improvements to internal control systems to the Board, reviewing external audit reports and ensuring prompt remedial action is taken for any identifiable breakdowns in controls and monitoring accounting, compliance with the Corporations Act, accounting policies and ASX Listing Rules. The Audit Committee reviews financial statements (including interim reports) and discusses any concerns with relevant parties, monitors the reporting of significant transactions and related party MYOB Limited Annual Report 2006 > 3 Corporate Governance (continued) arrangements and reviews accounting procedures adopted and any changes in reporting made or adopted since the last financial statements. The Audit Committee is responsible for monitoring compliance with the laws, licenses, industry practice standards and internal organisational standards and culture, reporting any departures from the compliance arrangements to the Board, reporting any breach of the laws or license conditions to regulatory bodies and/or appropriate parties (if the Committee is of the opinion that the Company is not dealing with such breaches) and nominating an independent auditor to review the adequacy of the scope and quality of the compliance arrangements within the Company. The Audit Committee reviews and makes recommendations to the Board in relation to areas of significant financial risk and significant transactions which are not a normal part of the Company’s business. In performing its risk management functions, the Committee must ensure that the Company has identified the principal strategic, operational and financial risks to which it is exposed and that systems are in place which facilitate the effective monitoring and management of risk and determine that the Company has instituted adequate reporting systems and internal controls together with appropriate monitoring of compliance activities. The Committee must also satisfy itself that the systems for managing risk are working properly, must monitor policies directed to ensuring that the Company complies with the law and conforms with the highest standards of financial and ethical behaviour. Members of the Audit Committee throughout the year were John Stewart (Chairman), Simon McKeon, Colin Henson and Graeme Pearson (who resigned in April 2006). The Audit Committee Charter is available on the website. Nomination Committee The Nomination Committee assists the Board by providing advice and recommendations such as to ensure that any prospective appointments to the Board are individuals who are best able to discharge the responsibilities of Directors. In assessing the suitability of a candidate, the Nomination Committee considers the skills required by the Board and the extent to which the required skills are represented on the Board. Members of the Nomination Committee throughout the year were Simon McKeon (Chairman), Craig Winkler, John Stewart and Graeme Pearson (who resigned in April 2006). The Nomination Committee Charter is available on the website. Risk Management The Board, through the Audit Committee, is responsible for identifying areas of significant business risk and in ensuring arrangements are in place to adequately manage those risks. The strategic plan encompasses the entity’s vision, mission and strategy statements designed to meet stakeholders’ needs and to manage business risk. Ongoing risk reporting is in place across the group with the Risk Manager reporting to the Audit Committee. Any significant business risk is identified and monitored by the Board. When presenting the financial statements for approval by the Board, the Chief Executive Officer and the Chief Financial Officer provide a written statement to the Board that: • The Group’s financial statements present a true and fair view in all material aspects of MYOB’s financial condition and operational results and are in accordance with the relevant accounting standards; • The Group’s financial statements are founded on a sound system of risk management and internal compliance and control which implements policies adopted by the Board; and • The risk management and internal control systems are sound and operating effectively in all material respects. The Company’s Risk Management Policy is available on the website. 32 > MYOB Limited Annual Report 2006 External Audit The Company’s External Audit Policy provides for the rotation of the lead audit partner every five years. The Company is mindful to ensure that the independence of the auditor is maintained. Any proposal for the performance of permitted non-audit work by the auditor requires the prior approval of the Chief Financial Officer. The auditor or his nominee attends the Annual General Meeting and is available to answer shareholder questions as required. The Company’s External Audit Policy is available on the website. Corporate Conduct Compliance with legislative requirements and acting with a high level of integrity is expected of all Directors and employees. The Company’s Code of Conduct sets out the requirements of Directors, executives and employees. The Company also operates programs dealing with occupational health and safety, the environment, trade practices, dealing in Company securities, equal opportunity, related party transactions and various internal control matters. The Company respects and protects the privacy of its employees and customers, and meets its obligations under the privacy legislation. The Company has developed a set of values and commitment to these values is required of all employees and is part of the Company’s performance management system. The Company’s Code of Conduct and Privacy Policy are available on the website. Remuneration of non-executive Directors Non-executive Directors are separately remunerated from the Company’s employees. The payment of non-executive Directors is consistent with market norms and has been approved by the shareholders at an Annual General Meeting. All payments to nonexecutive Directors are disclosed in the Directors’ Report. The only superannuation payments made to non-executive Directors are those required by legislation. Indemnification and Insurance of Directors and Officers During the period the Company paid an insurance premium indemnifying each of the Directors and officers of the consolidated entity against all liabilities to another person that may arise from their position as Director or officer of the Company and its controlled entities, except where the liability arises out of criminal or dishonest behaviour involving a lack of good faith. The agreement stipulates that the Company will meet the full amount of such liabilities, including costs and expenses. The total amount of insurance contract premiums paid was $44,102.63. Securities Trading and Trading Windows The MYOB Share Trading Policy provides that those persons associated with the Company must not engage in ‘insider trading’, nor the disclosing of inside information to third parties and that Directors and officers, and their associates, may only trade MYOB shares in the period of six weeks following release of MYOB’s annual and half-yearly financial results, the period of six weeks following MYOB’s Annual General Meeting or such other specified period as notified by the Chairman or Chief Executive Officer. The Company’s Share Trading Policy is available on the website. Continuous Disclosure The Continuous Disclosure Manager is responsible to the Board for ensuring MYOB’s compliance with its continuous disclosure requirements. This includes overseeing and coordinating disclosure of information to ASX, analysts, brokers, shareholders, the media and the public and overseeing and maintaining accurate records of all disclosures of information by MYOB. The MYOB Continuous Disclosure Policy provides that neither MYOB nor any Director or executive of MYOB may release any information that is required to be disclosed to ASX under the continuous disclosure rules to any person before the information has been MYOB Limited Annual Report 2006 > 33 Corporate Governance (continued) given to the Continuous Disclosure Manager, the information has been given to the ASX and an acknowledgment of the receipt of that information has been received from the ASX. The Company’s Disclosure Policy is available on the website. Communication to Shareholders The Board ensures that the shareholders are informed of all information necessary to assess the performance of the Company. In addition to complying with the continuous disclosure rules of the ASX, information is communicated to the shareholders through the: • Annual Report which is distributed to all shareholders; • Annual General Meeting and other meetings so called to obtain approval for Board action as appropriate; • Maintenance of the ‘investor’ section of the Company’s website at www.myob.com/investors . Cross reference to ASX Disclosure Requirements The skills, experience and expertise relevant to the position of Director held by each Director in office at the date of the Annual Report. The names of the Directors considered by the Board to constitute independent Directors and the Company’s materiality thresholds. A statement as to whether there is a procedure agreed by the Board for Directors to take independent professional advice at the expense of the Company. The term of office held by each Director in office at the date of the Annual Report. The names of members of the Nomination Committee and their attendance at meetings of the Committee. Details of the names and qualifications of those appointed to the Audit Committee, or, where an Audit Committee has not been formed, those who fulfil the functions of an Audit Committee. The number of meetings of the Audit Committee and the names of the attendees. Whether a performance evaluation for the Board and its members has taken place in the reporting period and how it was conducted. Disclosure of the Company’s remuneration policies including the costs and benefits of the policy and the link between performance and remuneration. The names of the members of the Remuneration Committee and their attendance at meetings of the Committee. The existence and terms of any schemes for retirement benefits, other than statutory superannuation, for non-executive Directors. 8 - 9, 29 30 8-9 12, 32 8 - 9, 31 - 32 12 31 13 - 25, 31, 33 12 13 - 14 Page No. 8-9 34 > MYOB Limited Annual Report 2006 Financial Statements MYOB Limited – Year ended 31 December 2006 2006> MYOB Limited Annual Report 2006 > 35 Financial Statements (continued) Income Statement FOR THE YEAR ENDED 3 DECEMBER 2006 Note CONSOLIDATED 2006 $’000 Continuing operations Revenue Cost of sales Gross profit Gain / (Loss) on disposal of non-current assets Marketing expenses Staff related expenses Telecommunications Occupancy Depreciation and amortisation expenses Specific items Other expenses Finance costs Share of loss of associate Profit from continuing operations before income tax Income tax (expense) / benefit Profit from continuing operations after income tax Discontinued operation Loss after tax from discontinued operation Net profit for the period Attributable to: Minority interest Members of MYOB Limited (117) 17,445 Cents Earnings per share for profit from continuing operations attributable to the ordinary equity holders of the company Basic earnings per share Diluted earnings per share Earnings per share for profit attributable to the ordinary equity holders of the company Basic earnings per share Diluted earnings per share The above income statement should be read in conjunction with the accompanying notes. MYOB LIMITED 2006 $’000 2005 $’000 2005 $’000 4 5 (a) 183,943 (23,950) 159,993 4 (11,011) (57,520) (4,522) (5,846) 163,351 (18,548) 144,803 (45) (11,252) (51,641) (3,606) (4,227) (32,722) (3,110) (11,356) (319) (1,047) 25,478 (8,016) 17,462 34,053 34,053 (63) (8,215) (1,026) (646) (694) 738 (1,448) (1,708) 20,991 732 21,723 17,678 17,678 619 (11) (6,119) (405) (507) (559) (1,467) (806) (1,047) 7,376 2,209 9,585 5 (a) 5 (b) 5 (a) 16 (a) (41,283) 3,223 (15,299) (316) (1,708) 25,715 6 (8,387) 17,328 7 17,328 (1,012) 16,450 21,723 9,585 40 16,410 Cents 21,723 9,585 8 4.49 4.44 4.46 4.43 4.49 4.44 4.20 4.17 36 > MYOB Limited Annual Report 2006 Balance Sheet AS AT 3 DECEMBER 2006 Note CONSOLIDATED 2006 $’000 ASSETS Current Assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Total current assets Non-current Assets Available-for-sale financial assets Other financial assets Investment in associates accounted for using the equity method Investment at cost Deferred income tax asset Property, plant and equipment Intangible assets Total non-current assets TOTAL ASSETS LIABILITIES Current Liabilities Trade and other payables Unearned revenue Interest-bearing loans and borrowings Income tax payable Provisions Total current liabilities Non-current Liabilities Interest-bearing loans and borrowings Deferred income tax liabilities Provisions Total non-current liabilities TOTAL LIABILITIES NET ASSETS EQUITY Equity attributable to equity holders of the parent Contributed equity Retained earnings Reserves Parent interests Minority interests TOTAL EQUITY The above balance sheet should be read in conjunction with accompanying notes. MYOB LIMITED 2006 $’000 2005 $’000 2005 $’000 10 11 12 13 26,009 14,672 872 8,428 49,981 45,495 13,114 793 6,137 65,539 13,630 32,038 4,516 50,184 34,684 30,468 3,495 68,647 14 15 16 (a) 16 (b) 6 17 18 607 6,303 13,485 28,922 259,339 308,656 358,637 3,284 617 6,048 5,405 25,073 243,277 283,704 349,243 607 6,303 327,955 2,616 543 338,024 388,208 585 6,048 307,181 1,262 1,009 316,085 384,732 19 20 21 22 18,982 33,990 1,558 3,796 11,148 69,474 14,249 29,723 1,939 1,006 11,670 58,587 49,080 3,013 2,826 54,919 46,593 1,109 3,854 51,556 21 6 22 1,359 18,127 2,862 22,348 91,822 266,815 7,081 9,442 3,091 19,614 78,201 271,042 2 526 528 55,447 332,761 37 706 743 52,299 332,433 23 (a) 24 (a) 24 (b) 25 228,647 31,609 5,144 265,400 1,415 266,815 235,966 29,860 4,605 270,431 611 271,042 228,647 127 103,987 332,761 332,761 235,966 (6,595) 103,062 332,433 332,433 MYOB Limited Annual Report 2006 > 37 Statement of Changes in Equity Attributable to equity holders of MYOB Limited Minority interest Total equity FOR THE YEAR ENDED 3 DECEMBER 2006 38 > MYOB Limited Annual Report 2006 Issued capital $’000 231,231 (482) 16,410 16,410 40 46 (482) 6 1,473 2,024 (482) 22,196 6 256,924 (476) (476) 16,450 15,974 15,928 46 3,425 1,310 235,966 235,966 (385) (385) 3,063 1,542 (385) 1,590 3,063 1,542 (8,747) 29,860 29,860 17,445 17,445 565 611 611 (40) (40) (117) (157) 3,990 1,310 1,590 (8,747) 271,042 271,042 (425) (425) 17,328 16,903 17,060 (157) 256 992 (8,567) 228,647 3,987 924 1,157 (15,696) 31,609 961 1,415 1,217 992 (8,567) 924 (15,696) 266,815 $’000 $’000 $’000 $’000 $’000 $’000 Foreign currency Employee translation benefit reserves reserve Other reserves Retained earnings CONSOLIDATED At  January 2005 Currency translation differences Total income and expense for the period recognised directly in equity Profit for the period Total income and expense for the period Financial Statements (continued) Attributable to - Equity holders of the parent - Minority interest Equity Transactions: Issue of share capital Exercise of options Cost of share-based payments Equity dividends At 3 December 2005 As at  January 2006 Foreign currency translation Total income and expense for the period recognised directly in equity Profit for the period Total income and expense for the period Attributable to - Equity holders of the parent - Minority interest Equity Transactions: Issue / (forfeiture) of share capital Exercise of options MYOB share buy-back Cost of share-based payments Equity dividends At 3 December 2006 Statement of Changes in Equity Attributable to equity holders of MYOB Limited Total equity FOR THE YEAR ENDED 3 DECEMBER 2006 Issued capital $’000 $’000 325,271 9,585 9,585 231,231 9,585 9,585 1,473 100,000 (7,432) Foreign currency Employee translation benefit reserves reserve Other reserves $’000 $’000 $’000 Retained earnings $’000 MYOB LIMITED At  January 2005 Income and expense for the period recognised directly in equity Profit for the period Total income and expense for the period Equity Transactions: Issue of share capital Exercise of options Cost of share-based payments Equity dividends At 3 December 2005 3,425 1,310 235,966 235,966 3,063 100,000 (6,595) 695 695 21,723 22,418 1,590 3,063 100,000 (8,747) (6,595) 3,425 1,310 1,590 (8,747) 332,433 332,433 695 695 21,723 22,418 As at  January 2006 Prior year tax adjustment Total income and expense for the period recognised directly in equity Profit for the period Total income and expense for the period Equity Transactions: Issue / (forfeiture) of share capital Exercise of options MYOB share buy-back Cost of share-based payments Equity dividends At 3 December 2006 256 992 (8,567) 228,647 924 3,987 - 100,000 (15,696) 127 256 992 (8,567) 924 (15,696) 332,761 MYOB Limited Annual Report 2006 > 39 Financial Statements (continued) Cash Flow Statement FOR THE YEAR ENDED 3 DECEMBER 2006 Notes CONSOLIDATED 2006 $’000 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Dividends received Borrowing costs Income tax (paid) / received Interest received Merger integration costs Net cash flows from operating activities Cash flows from investing activities Proceeds from sale of property, plant and equipment Proceeds from deferred consideration Proceeds from sale of intellectual property Proceeds from equity return on investments Receipts from subsidiaries Purchase of property, plant and equipment Costs associated with divestment of subsidiary Purchase of intangible assets Purchase of investments Net cash flows used in investing activities Cash flows from financing activities Proceeds from issue of shares Share buyback Payment of share buyback cost Proceeds from borrowings Repayment of borrowings Dividends paid by parent entity (net of DRP) Net cash flows from/(used in) financing activities Net increase / (decrease) in cash and cash equivalents Net foreign exchange differences Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period The above cash flow should be read in conjunction with the accompanying notes. MYOB LIMITED 2006 $’000 2005 $’000 2005 $’000 184,419 (149,670) 5 (a) 4 5 (b) (316) (5,035) 1,685 (471) 30,612 163,382 (136,423) (319) (3,181) 2,173 (1,630) 24,002 10,779 (9,657) 20,780 1,246 1,286 (471) 23,963 7,276 (6,700) 10,000 4,811 1,754 (1,467) 15,674 5,876 17 18 (14,753) (135) (11,311) (20,323) 14 4,555 (14,268) (748) (321) (13,054) (23,822) 949 (229) (22,466) (21,746) 619 2,331 (881) (9,176) (7,107) 23 (b) 23 (b) 23 (b) 992 (8,558) (9) (6,496) 1,727 4,593 (1,506) (5,977) (1,163) (983) 12 46,466 45,495 992 (8,558) (9) (15,696) (23,271) (21,054) 34,684 13,630 1,727 (5,977) (4,250) 4,317 30,367 34,684 9, 24 (a) (15,696) (29,767) (19,478) (8) 45,495 10 26,009 40 > MYOB Limited Annual Report 2006 Notes to the Financial Statements For Year ended 31 December 2006 1 Basis of Preparation a) Basis of accounting The financial report is a general-purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards. The financial report has also been prepared on a historical cost basis, except for available-for-sale investments, which have been measured at fair value. The accounting policies have been consistently applied during the year, unless otherwise stated. The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($’000) unless otherwise stated under the option available to the Company under ASIC Class Order 98/100. The Company is an entity to which the class order applies. b) Statement of compliance The financial report complies with Australian Accounting Standards, which include Australian equivalents to International Financial Reporting Standards (AIFRS). The financial report also complies with International Financial Reporting Standards (IFRS). Australian Accounting Standards that have recently been issued or amended but are not yet effective have not been adopted for the annual reporting period ending 31 December 2006. These are outlined in the following table. MYOB Limited Annual Report 2006 > 4 Notes to the Financial Statements (continued) AASB Amendment Affected Standard(s) Nature of change to accounting policy No change to accounting policy required. Therefore no impact. Application date of standard* 1 January 2007 Application date for Group* 1 January 2007 AASB 2005-10 Amendments to Australian Accounting Standards [AASB 132, AASB 101, AASB 114, AASB 117, AASB 133, AASB 139, AASB 1, AASB 4, AASB 1023, AASB 1038] Financial Instruments Disclosures AASB 7 No change to accounting policy required. Therefore no impact. As the group has no investment in foreign operations operating in hyperinflationary economies, these amendments are not expected to have any impact on the Group’s financial report. Unless the Group enters into share-based payment arrangements unrelated to employee services in a future reporting period, these amendments are not expected to have any impact on the Group’s financial report. Unless the Group enters into arrangements containing embedded derivatives in a future reporting period, these amendments are not expected to have any impact on the Group’s financial report. 1 January 2007 1 January 2007 UIG 7 Applying the Restatement Approach under AASB 129 Financial Reporting in Hyperinflationary Economics 1 March 2006 1 January 2007 UIG 8 Scope of AASB 2 Share based Payment 1 May 2006 1 January 2007 UIG 9 Reassessment of Embedded Derivatives 1 June 2006 1 January2007 *designates the beginning of the applicable annual reporting period 42 > MYOB Limited Annual Report 2006 2 Summary of Significant Accounting Policies a) Basis of consolidation The consolidated financial statements comprise the financial statements of the Group. The financial statements of subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. Unrealised losses are eliminated unless costs cannot be recovered. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. Where there is loss of control of a subsidiary, the consolidated financial statements include the results for the part of the reporting period during which the Group had control. The acquisition of subsidiaries is accounted for using the purchase method of accounting. The purchase method of accounting involves allocating the cost of the business combination to the fair value of the assets acquired and the liabilities and contingent liabilities assumed at the date of acquisition. Minority interests not held by the Group are allocated their share of net profit after tax in the income statement and are presented within equity in the consolidated balance sheet, separately from parent shareholders’ equity. b) Significant accounting estimates and assumptions The carrying amounts of certain assets and liabilities are often determined based on estimates and assumptions of future events. The key estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of certain assets and liabilities within the next annual reporting period are: Impairment of goodwill The Group determines whether goodwill and intangibles with indefinite useful lives are impaired at least on an annual basis. This requires an estimation of the recoverable amount of the cash-generating units to which the goodwill and intangibles with indefinite useful lives are allocated. The assumptions used in this estimation of recoverable amount and the carrying amount of goodwill and intangibles with indefinite useful lives are disclosed in note 33. Share-based payment transactions The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by an external valuer using a Black Scholes model, using the assumptions detailed in note 29. c) Investment in associate The Group’s investment in its associate is accounted for under the equity method of accounting in the consolidated financial statements. This is an entity in which the Group has significant influence and which is neither a subsidiary nor a joint venture. The financial statements of the associate are used by the Group to apply the equity method. The reporting dates of the associate and the Group are not identical. However, the associate prepared management accounts as at 31 December 2006 to enable application of the equity method and the Group and the associate both use consistent accounting policies. The investment in the associate is carried in the consolidated balance sheet at cost plus post-acquisition changes in the Group’s share of net assets of the associate, less any impairment in value. The consolidated income statement reflects the Group’s share of the results of operations of the associate. MYOB Limited Annual Report 2006 > 43 Notes to the Financial Statements (continued) 2 Summary of Significant Accounting Policies (continued) c) Investment in associate (continued) Where there has been a change recognised directly in the associate’s equity, the Group recognises its share of any changes and discloses this, when applicable, in the consolidated statement of changes in equity. d) Foreign currency translation Both the functional and presentation currency of MYOB Limited and its Australian subsidiaries is Australian dollars (A$). Transactions in foreign currencies are initially recorded in the functional currency at the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the reporting date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. All exchange differences in the consolidated financial report are taken to profit or loss with the exception of differences on foreign currency borrowings that provide a hedge against a net investment in a foreign entity. These are taken directly to equity until the disposal of the net investment, at which time they are recognised in the profit or loss. The functional currencies of the foreign operations are as follows: United Kingdom New Zealand United States of America Malaysia China Ireland Singapore Hong Kong Great Britain pound New Zealand dollar United States dollar Malaysia ringgit China RMB Euro Singapore dollar Hong Kong dollar The assets and liabilities of these overseas subsidiaries are translated into the presentation currency of MYOB Limited at the rate of exchange ruling at the reporting date and the income statements are translated at the weighted average exchange rates for the period. The exchange differences arising on the retranslation are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement. 44 > MYOB Limited Annual Report 2006 e) Property, plant and equipment Plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows: CLASS OF FIXED ASSET Leasehold improvements Plant and equipment Leased plant and equipment Leased fit-outs DEPRECIATION PERIOD 3-8 years 3-5 years 4-5 years 7 years Impairment The impairment testing for Property, plant and equipment is done in accordance with the Accounting Policy in Note 2(i). f) Borrowing costs Borrowing costs are recognised as an expense when incurred. g) Goodwill Goodwill on acquisition is initially measured at cost, being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortised, instead it is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. As at the acquisition date, any goodwill acquired is allocated to each of the cash-generating units expected to benefit from the synergies arising from the combination. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill has been allocated. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained. h) Intangible assets Acquired both separately and from a business combination Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. MYOB Limited Annual Report 2006 > 45 Notes to the Financial Statements (continued) 2 Summary of Significant Accounting Policies (continued) h) Intangible assets (continued) Intangible assets with indefinite useful lives (other than goodwill) are tested for impairment annually, either individually or at the cash-generating unit level. Such intangibles are not amortised. Where amortisation is charged on assets with finite lives, this expense is taken to the income statement. Research and development costs Research costs are expensed as incurred. Intangible assets, excluding product development costs, created within the business are not capitalised and expenditure is charged against profits in the period in which the expenditure is incurred. Development expenditure incurred on an individual project is capitalised when its future recoverability can reasonably be regarded as assured. Following the initial recognition of the development expenditure, the asset is carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure carried forward is amortised over three years per the table below. The carrying value of development costs is reviewed for impairment annually when the asset is not yet in use or more frequently when an indicator of impairment arises during the reporting year indicating that the carrying value may not be recoverable. A summary of the policies applied to the Group’s intangible assets is as follows: Patents, Trademarks and Licences Useful Lives Method used Internally generated/Acquired Impairment test/Recoverable amount testing 1 to 10 years - straight line Acquired Product Development Costs Finite 3 years - straight line Internally generated 3 to 8 years - straight line Acquired Intellectual Property Carrying value and amortisation method reviewed annually if there is an indication of impairment. Gains or losses arising from sales of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the income statement when the asset is sold. i) Recoverable amount of the assets At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of the recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount. Recoverable amount is the greater of fair value less costs to sell and value in use. It is determined for an individual asset, unless the asset’s value in use cannot be estimated to be close to its fair value less costs to sell and it does not generate cash inflows that are largely independent of those from other assets or groups of assets. The recoverable amount is determined for the cash-generating unit to which the asset belongs. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. 46 > MYOB Limited Annual Report 2006 j) Investments All investments are initially recognised at fair value plus, in the case of investments not measured at fair value through the profit and loss, transaction costs that are directly attributable to the acquisition of the investment. After initial recognition, investments which are classified as available-for-sale are measured at fair value. Gains or losses on available-for-sale investments are recognised as a separate component of equity until the investment is sold, collected or otherwise disposed of, or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the income statement. For investments that are actively traded in organised financial markets, fair value is determined by reference to Stock Exchange quoted market bid prices at the close of business on the reporting date. k) Inventories Inventories are valued at the lower of cost or net realisable value. Costs incurred in bringing each product to its present location and condition are accounted for as follows: Raw materials – purchase cost on an average cost basis, and Finished goods and work-in-progress – cost of direct materials and labour and a proportion of manufacturing overheads based on normal operating capacity but excluding borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. l) Trade and other receivables Trade receivables which generally have 30 day terms are recognised and carried at original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off to the income statement when identified. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off to the income statement when identified. m) Cash and cash equivalents Cash and short-term deposits in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purposes of the Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. n) Trade and other payables Liabilities for trade creditors and other amounts 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 consolidated entity. o) Interest-bearing loans and borrowings All loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of issue costs associated with the borrowing. MYOB Limited Annual Report 2006 > 47 Notes to the Financial Statements (continued) 2 Summary of Significant Accounting Policies (continued) o) Interest-bearing loans and borrowings (continued) After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost, using the effective interest method. Amortised cost is calculated by taking into account any issue costs and any discount or premium on settlement. Gains and losses are recognised in the income statement when the liabilities are derecognised, as well as through the amortisation process. p) Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, 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 effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, 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 borrowing cost. q) Employee entitlements Provision is made for the Group‘s liability for employee entitlements arising from services rendered by employees to the reporting date. Employee entitlements expected to be settled within one year together with entitlements arising from wages and salaries and annual leave which will be settled after one year, have been measured at their nominal amount. Other employee entitlements payable later than one year have been measured at the present value of the estimated future cash outflows to be made for those entitlements. Contributions are made by the group to employee superannuation funds and are charged as expenses when incurred. All employees are entitled to varying levels of benefits on retirement, disability or death. The superannuation plans or equivalent provide accumulated benefits. Contributions are made by the Group in accordance with the statutory requirements of each jurisdiction. Share-based payment transactions The Group provides benefits to employees (including directors) of the Group in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (“equity-settled transactions”). MYOB Limited has adopted the following employee and director incentive plans: - The MYOB Exempt Employee Share Plan; - The MYOB Deferred Share Plan; and - The MYOB Executive Option Plan. Each of these plans has been approved by the Remuneration Committee. Under the Employee Share Plan rules the Board may offer shares to any full time or part time employee. Shares issued under the Plan will be fully paid and will have the same entitlements as other ordinary shares in MYOB Limited. However, Australian employees will not generally be permitted to deal in the shares for three years or until they cease to be employees of the Group, whichever occurs first. Option plan The cost of equity-settled transactions under the Executive Option plan with employees is measured by reference to the fair vale at the date at which they are granted. The fair value is determined by an external valuer using the “Black Scholes Option” pricing model. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of MYOB Limited (“market conditions”). 48 > MYOB Limited Annual Report 2006 q) Employee entitlements (continued) The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (“vesting date”). The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects (i) the extent to which the vesting period has expired and (ii) the number of awards that, in the opinion of the directors of the Group, will ultimately vest. This opinion is formed 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, except for awards where vesting is conditional upon a market condition. Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any increase in the value of the transaction as a result of the modification, as measured at the date of modification. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation. Any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph. The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of earnings per share. (Note 8) Employee Profit Share Scheme Employees can be paid a share of any profit made by the Group each financial year on a bi-annual basis. The Board of Directors have reviewed and formalised the profit share policy. Under the scheme, a total of 10% of MYOB Limited consolidated profit before interest and tax will be available to employees and is paid biannually. The liability relating to the six months ended 31 December 2006 has been recognised in the financial statements. Profit Share is discretionary and must be approved by the Board. r) Leases Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term. Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term. s) Revenue Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised. Sale of goods Revenue is recognised when the significant risk and rewards of ownership of the goods have passed to the buyer and can be measured reliably. Risks and rewards are considered passed to the buyer at the time of delivery of the goods to the customer. In the case of product, the physical stock must have been shipped to the customer. MYOB Limited Annual Report 2006 > 49 Notes to the Financial Statements (continued) 2 Summary of Significant Accounting Policies (continued) s) Revenue (continued) Maintenance/support Unearned income should be recognised upon receipt of payment for maintenance/support contracts. Revenue should be brought to account over time as it is earned. However, to the extent that MYOB has fulfilled all its obligations under the contract, the income should be recognised as being earned at the time when all MYOB’s obligations under the contract have been fulfilled. Services Services revenue such as seminar fees is recognised when the service is provided. However, where customers are no longer able to obtain a refund or credit note on cancellation before the service is conducted, the revenue should be recognised on the last day where refund or credit note would not be available. Interest Revenue is recognised as the interest accrues (using the effective interest method, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument) to the net carrying amount of the financial asset. Royalties Royalties are derived from sale of copyrighted forms and product sales under licence. Revenue is recognised on an accruals basis. Dividends Dividend revenue is recognised when the right to receive a dividend has been established. t) Income tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. Deferred income tax is provided on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences: - except where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affect neither the accounting profit nor taxable profit or loss; and - in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry–forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised: - except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and - in respect of deductible temporary differences associated with investments in subsidiaries, associates and interest in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. 50 > MYOB Limited Annual Report 2006 t) Income tax (continued) The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. 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 reporting date. Income taxes relating to items recognised directly in equity are recognised in equity and not in the income statement. u) Other taxes Revenues, expenses and assets are recognised net of the amount of GST except: - where the GST incurred on a 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 applicable; - receivables and payables which are stated with the amount of GST included; and - the net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet. Cash flows are included in the Cash Flow Statement 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 operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. v) Earnings per share Basic earnings per share is calculated as net profit attributable to members of the parent, adjusted to exclude costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares. Diluted earnings per share is calculated as net profit attributable to members of the parent, adjusted for: - costs of servicing equity (other than dividends); - the after tax effects of dividends and interests associated with dilutive potential ordinary shares that have been recognised as expenses; and - other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares; divided by the weighted average number of ordinary shares and dilutive potential ordinary shares. w) Business combinations The purchase method of accounting is used to account for all business combinations regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange plus costs directly attributable to the combination. Where equity instruments are issued in a business combination, the fair value of the instruments is their published market price as at the date of exchange unless, in rare circumstances, it can be demonstrated that the published price at the date of exchange is an unreliable indicator of fair value and that other evidence and valuation methods provide a more reliable measure of fair value. Transaction costs arising on the issue of equity instruments are recognised directly in equity. Except for non-current assets or disposal groups classified as held for sale (which are measured at fair value less costs to sell), all identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of the business combination over the net fair value of the Group’s share of the identifiable net assets acquired is recognised as goodwill. If the costs of acquisition is less than the Group’s share of the net fair value of the identifiable net assets of the subsidiary, the difference is recognised as a gain in the income statement, but only after a reassessment of the identification and measurement of the net assets acquired. MYOB Limited Annual Report 2006 > 5 Notes to the Financial Statements (continued) Where settlement of any part of the consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. 3 Segment Information The Group’s primary reporting format is geographical segments and its secondary format is business segments. MYOB Limited’s operating companies are organised and managed separately according to the nature of the customers they service, with each segment offering different products and serving different markets. Geographically, the group operates in three predominant segments, being Australia, the United Kingdom and New Zealand. The head office and investment activities of the Group are based in Melbourne, Australia. The Business segment provides business management software and services to small and medium enterprises. The Accountants segment provides business software and services to accounting professionals in practice. Transactions between segments are on normal commercial terms and conditions no more favourable than those available to other parties unless otherwise stated. 52 > MYOB Limited Annual Report 2006 3 Segment Information (continued) a) Geographical Segments Continuing Operations Europe 2006 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 $’000 New Zealand Other Total USA Discontinued Operations Total Operations Australia 2006 2005 $’000 $’000 Segment Revenue 31,649 27,163 23,614 17,473 5,315 3,670 182,258 160,775 4,457 182,258 165,232 Sales to customers outside the consolidated entity 121,680 112,469 Other revenues from customers outside the consolidated entity 109 8,908 40,666 (31,753) (22,001) 183,943 163,351 2,867 2,485 (471) 1,209 (7,139) (316) (1,708) 25,715 (8,387) 17,328 2,448 2,503 2,989 (5,661) (1,573) 31,655 34,912 (1,630) 1,526 (1,476) (1,530) (4,958) (319) (1,047) 25,478 (8,016) 17,462 34,943 25,199 17,961 13,184 4,460 215,696 185,352 7,730 1,534 460 7,854 635 31,753 22,001 50 51 28 15 155 1,685 2,576 412 6,123 1,510 2,343 1,685 31,753 2,988 28,124 Inter-segment revenues 13,457 13,176 Total segment revenue 136,647 127,988 10,992 215,696 196,344 (6,123) (31,753) (28,124) 4,869 183,943 168,220 (1,006) (1,006) (6) (1,012) 31,655 2,485 (471) 1,209 (7,139) (316) (1,708) 25,715 (8,387) 17,328 33,906 (1,630) 1,526 (1,476) (1,530) (4,958) (319) (1,047) 24,472 (8,022) 16,450 Inter-segment elimination Total consolidated Segment Result* 31,946 31,048 Gain on sale of investment in UBS Solution 6 merger integration costs Foreign exchange gain on dormant Solution 6 entities Initial recognition loss on acquisition of holding in UBS Legal and property provisions relating to Solution 6 legacy matters Unallocated expenses Interest expense Share of associates loss Profit before income tax Income tax expense Net Profit MYOB Limited Annual Report 2006 > 53 * Note that the Segment Result includes intragroup charges and revenues. 3 Segment Information (continued) a) Geographical Segments (continued) Continuing Operations Europe 2006 $’000 33,584 4,623 358,637 348,561 3,873 6,303 6,048 29,184 11,617 11,479 2,534 9,404 347,711 338,640 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 $’000 New Zealand Other Total USA Consolidated Discontinued Operations 54 > MYOB Limited Annual Report 2006 Australia 2006 2005 $’000 $’000 Assets 682 347,711 339,322 6,303 4,623 6,048 3,873 682 358,637 349,243 Segment assets 299,976 288,573 Investment in associates 6,303 6,048 Unallocated assets Total Assets Liabilities 13,526 7,451 91,822 6,600 74,114 11,758 3,816 2,442 5,897 2,618 84,371 67,514 4,087 4,087 84,371 7,451 91,822 71,601 6,600 78,201 Segment liabilities 61,132 50,696 Unallocated liabilities Total Liabilities Notes to the Financial Statements (continued) Other segment information 2,001 545 332 250 198 149 492 290 262 145 399 7,496 1,347 1,050 2,063 131 61,780 10,867 31,074 45,860 9,810 23,405 117 84 61,780 10,867 31,074 45,977 9,894 23,405 Capital expenditure (including intangible assets) 51,233 42,051 Depreciation 9,887 8,925 Amortisation 30,544 23,006 3 Segment Information (continued) b) Business Segments Business 2006 $’000 100,736 379 101,115 84,096 81,143 76,826 1,685 (4,869) 2,429 1,685 2,173 1,685 183,943 2,173 (4,869) 163,351 412 147 256 379 88,553 81,143 76,679 181,879 165,232 815 $’000 $’000 $’000 $’000 $’000 $’000 $’000 2005 2006 2005 2006 2005 2006 2005 Accountants Others Total Business Segments Sales to external customers Other revenues from external customers Finance revenue Less: Revenues attributable to discontinued operations Revenue from continuing operations Other segment information: 107,244 101,934 245,090 241,261 352,334 6,303 358,637 40,389 27,688 21,391 18,289 61,780 343,195 6,048 349,243 45,977 Segment assets Investment in associate Total assets Capital expenditure (including intangible assets) c) Prior period segment information is restated to effect the changes in the allocation of intersegmental revenues. This did not alter the consolidated financial information reported for the entity. MYOB Limited Annual Report 2006 > 55 Notes to the Financial Statements (continued) 4 Revenue Revenue Revenue from sale of goods Revenue from services Royalties Finance (interest) revenue Dividends received Other revenues Total revenue from operating activities CONSOLIDATED 2006 2005 $’000 $’000 53,073 128,434 751 1,685 183,943 46,629 113,405 741 2,173 147 256 163,351 MYOB LIMITED 2006 2005 $’000 $’000 11,987 1,286 20,780 34,053 5,668 1,754 10,000 256 17,678 5 Expenses a) Expenses Cost of sales Included in cost of sales: - salaries and related costs for the provision of consulting services - cost of inventories recognised as expense Borrowing costs Finance lease charges Total borrowing costs Employee expenses Superannuation Share based payments Total employee expenses Depreciation of non-current assets Plant and equipment Leasehold improvements Capitalised leased assets Total Depreciation of non-current assets Amortisation of non-current assets Product development Intellectual property Patents and trademarks Total amortisation of non-current assets Gross depreciation and amortisation expense Less: capitalised depreciation Net depreciation and amortisation expenses to Income Statement* Operating lease rental Minimum lease payments - operating lease Total operating lease rentals b) Specific items Foreign exchange gain on dormant Solution 6 entities Legal & property provisions relating to Solution 6 legacy matters Solution 6 merger integration costs Gain on sale of investment in UBS Initial recognition loss on acquisition of holding in UBS Corporation Berhad 8,278 15,672 23,950 316 316 5,114 924 6,038 9,241 703 923 10,867 21,585 8,896 593 31,074 41,941 (658) 41,283 9,253 9,295 18,548 319 319 4,321 1,590 5,911 7,306 1,674 914 9,894 13,622 9,353 430 23,405 33,299 (577) 32,722 489 924 1,413 686 8 694 694 694 310 1,590 1,900 551 8 559 559 559 8,250 8,250 7,565 7,565 1,908 1,908 1,855 1,855 (1,209) 471 (2,485) (3,223) (1,526) 1,530 1,630 1,476 3,110 (1,209) 471 (738) 1,467 1,467 * Does not include depreciation relating to discontinued operation 56 > MYOB Limited Annual Report 2006 6 Income Tax Major components of income tax expense for the years ended 31 December 2006 and 2005 are: Income Statement Current income tax Current income tax charge Adjustments in respect of current income tax of previous years Deferred income tax Relating to origination and reversal of temporary differences Income tax expense reported in income statement A reconciliation of income tax expense applicable to accounting profit before income tax at the statutory income tax rate to income tax expense at the Group’s effective income tax rate for the years ended 31 December 2006 and 2005 is as follows: Accounting profit before tax from continuing operations Loss before tax from discontinued operation Accounting profit before income tax At the domestic statutory income tax rate of 30% (2005: 30%) Effect of higher tax rate in New Zealand Adjustments in respect of current income tax of previous years Unrecognised tax losses Expenditure not allowable for income tax purposes Other Rebateable dividends Intercompany transactions At effective income tax rate 32.6% (Parent: (3.5%)) (2005: 32.8%, Parent: (30%)) Income tax expense reported in income statement Income tax attributable to discontinued operation 25,715 25,715 7,715 61 (452) 1,807 161 (905) 8,387 8,387 8,387 25,478 (1,006) 24,472 7,342 (964) 1,013 724 (99) 8,016 8,016 (6) 8,010 20,991 20,991 6,297 572 (15) (119) (7,467) (732) (732) (732) 7,376 7,376 2,213 (121) 757 (283) (3,000) (1,775) (2,209) (2,209) (2,209) 3,744 8,387 5,923 8,016 4,816 (732) 1,450 (2,209) 5,095 (452) 3,057 (964) (6,120) 572 (3,538) (121) CONSOLIDATED 2006 $’000 2005 $’000 MYOB LIMITED 2006 $’000 2005 $’000 Balance sheet 2006 $’000 Deferred income tax Deferred income tax at 31 December relates to the following: Consolidated Deferred income tax liabilities Accelerated tax depreciation/deductions Interest receivable Intangible assets not deductible for tax purposes Gross deferred income tax liabilities (18,125) (3) (18,127) (7,186) (37) (2,219) (9,442) 2005 $’000 Income statement 2006 $’000 2005 $’000 10,939 (35) (2,219) 4,498 36 (424) MYOB Limited Annual Report 2006 > 57 Notes to the Financial Statements (continued) 6 Income Tax (continued) Consolidated Deferred income tax assets Accelerated accounting deductions Losses available for offset against future taxable income Unrealised foreign exchange losses Other Gross deferred income tax assets Deferred income tax charge Parent Deferred income tax liabilities Interest receivable Gross deferred income tax liabilities Deferred income tax assets Accelerated accounting deductions Unrealised foreign exchange losses Loss available for offset against future taxable income Other Gross deferred income tax assets Deferred income tax charge Balance sheet 2006 $’000 2005 $’000 Income statement 2006 $’000 2005 $’000 5,991 216 7,278 13,485 4,841 202 40 322 5,405 (1,150) 202 (176) (3,816) 3,745 537 1,272 324 (322) 5,921 (2) (2) (37) (37) (35) 36 97 195 2,324 2,616 900 40 322 1,262 803 (155) 4,202 4,816 (62) 324 1,473 (322) 1,449 Deferred Tax Assets and Deferred Tax Liabilities For the 2006 accounts, MYOB has changed its approach to the presentation of deferred tax assets and deferred tax liabilities. In 2005 and prior years the liabilities and assets were netted within each of the entities of the MYOB Group. In 2006 each of the entities have accounted for the gross asset and liability amounts in their accounts separately and this has resulted in the significant movement in “other” of the deferred tax asset and deferred tax liability accounts. Tax consolidation MYOB Limited and its 100% owned subsidiaries are a tax consolidated group. Tax Effect Accounting by Members of the Tax Consolidated Group Members of the tax consolidated group have entered into a tax funding agreement. The tax funding agreement provides for the allocation of current taxes to members of the tax consolidated group in accordance with their taxable profit for the period, while deferred taxes are allocated to members of the tax consolidated group in accordance with the principles of AASB 112 “Income Taxes”. The allocation of taxes under the tax funding agreement is recognised as an increase/decrease in the subsidiaries’ inter-company account with the tax consolidated group head company, MYOB Limited. The Group has applied the ‘separate taxpayer within group’ approach in determining the appropriate amount of current taxes to allocate to members of the tax consolidated group. 58 > MYOB Limited Annual Report 2006 7 Discontinued Operation On 30 November 2005, MYOB Limited announced the disposal of its US operations. As part of a detailed review of its options in relation to the US business, MYOB concluded that the US operations had diverged strategically from the rest of the Group and that its prospects would be maximised in a separate vehicle. It was decided that a buy out by the local management team was the optimal strategy. The disposal occurred as at 5 December 2005. The results of the US business division for the period until disposal are presented below: 2006 $’000 Revenue Expenses Operating EBITDA Costs of disposal * Gain on disposal of assets * Intercompany charges Amortisation and depreciation Pre-tax profit/(loss) Income tax expense: Net loss attributable to discontinued operation Net Loss on disposal of US operations is as follows: * Loss on disposal in MYOB US, Inc. Share options written off in MYOB Limited Total loss on disposal The major classes of assets and liabilities of the US business division measured at the lower of carrying amount and fair value less costs sold as at 5 December 2005 were as follows: Assets Prepayments Inventory Trade and other receivables Cash and Short term deposits Non-current assets classified as held for sale Liabilities Unearned revenue Liabilities directly associated with non-current assets classified as held for sale Net liabilities attributable to discontinued operations The net cash flows incurred by MYOB US, Inc. are as follows: Operating Investing Activities Net cash (outflow)/inflow Earnings per share (cents per share): - Basic from discontinued operation - Diluted from discontinued operation (0.27) (0.27) 133 (533) (400) (1,044) (1,044) (607) 67 126 170 74 437 (67) (78) (145) 2005 $’000 4,869 (5,186) (317) (674) 607 (538) (84) (1,006) (6) (1,012) MYOB Limited Annual Report 2006 > 59 Notes to the Financial Statements (continued) 8 Earnings per Share The following reflects the income and share data used in the total operations basic and diluted earnings per share computations: a) Earnings used in calculating earnings per share CONSOLIDATED For basic and diluted earnings per share Net profit after tax from continuing operations attributable to ordinary equity holders of the parent Loss attributable to discontinued operations Net profit attributable to ordinary equity holders of the parent b) Weighted average number of shares Weighted average number of ordinary shares for basic earnings per share Effect of dilution: Share options Weighted average number of ordinary shares adjusted to the effect of dilution 4,648,650 392,756,262 3,128,388 393,605,847 388,107,612 390,477,459 2006 $’000 17,445 17,445 2005 $’000 17,422 (1,012) 16,410 There are no instruments excluded from the calculation of diluted earnings per share that could potentially dilute basic earnings per share in the future because they are antidilutive for either of the periods presented. There have been no transactions involving ordinary shares or potential ordinary shares that would significantly change the number of ordinary shares or potential ordinary shares outstanding between the reporting date and the date of completion of these financial statements. 60 > MYOB Limited Annual Report 2006 9 Dividends Paid and Proposed CONSOLIDATED 2006 $’000 a) Recognised amounts Dividends declared and paid during the year: Dividends on ordinary shares: Final franked dividend for 2005 ($0.0275 per share) Final franked dividend for 2004 ($0.0225 per share) Special dividend for 2005: ($0.0125 per share) 10,791 4,905 8,747 10,791 4,905 8,747 2005 $’000 MYOB LIMITED 2006 $’000 2005 $’000 b) Unrecognised amounts Dividends on ordinary shares: Final franked dividend for 2006: ($0.0300 per share) (2005: $0.0275 per share) There will be no special dividend for 2006: (2005: $0.0125 per share) 4,905 4,905 11,559 10,791 11,559 10,791 After the Balance Sheet date, the above dividends were declared by the Board of MYOB. These amounts have not been recognised as a liability in 2006 but will be brought to account in 2007. Franking credit balance The amount of franking credits available for the subsequent financial year are: – – franking account balance as at the end of the financial year at 30% (2005: 30%) franking credits that will arise from the payment of income tax payable as at the end of the financial year 1,513 2,698 4,211 The amount of franking credits available for future reporting periods: – impact on the franking account of dividends proposed or declared before the financial report was authorised for issue but not recognised as a distribution to equity holders during the period 7,221 1,019 8,240 (4,954) (743) (6,727) 1,513 Note: Tax instalments payable to the tax year ended 30 June 2007 will ensure sufficient franking credits availability to fully frank the proposed dividend. The tax rate at which paid dividends have been franked is 30% (2005: 30%). Dividends proposed will be franked at the rate of 30% (2005: 30%). MYOB Limited Annual Report 2006 > 6 Notes to the Financial Statements (continued) 10 Cash and Cash Equivalents CONSOLIDATED 2006 $’000 Cash at bank and in hand Short-term deposits 24,978 1,031 26,009 2005 $’000 11,086 34,409 45,495 MYOB LIMITED 2006 $’000 12,613 1,017 13,630 2005 $’000 361 34,323 34,684 Cash at bank and in hand earns interest at floating rates based on daily bank deposit rates. The carrying amounts of cash and cash equivalents represent fair value. Short-term deposits have an average maturity of 31 days and earn interest at the respective short-term deposit rates. The deposits are convertible to cash within two working days. $1,905K of cash at bank (2005 - $1,531K) is funds held on behalf of customers of M-Powered Services. 62 > MYOB Limited Annual Report 2006 11 Trade and Other Receivables (current) CONSOLIDATED 2006 $’000 Current Trade receivables Provision for doubtful debts/returns 14,012 (576) 13,436 Other receivables Related party receivables: Wholly owned subsidiaries 14,672 Trade receivables are non-interest bearing and are generally on 30-day terms. 13,114 31,933 32,038 30,090 30,468 1,236 12,217 (602) 11,615 1,499 105 378 2005 $’000 MYOB LIMITED 2006 $’000 2005 $’000 12 Inventories Raw materials and stores (at cost) Finished goods (at cost) Provision for obsolescence 252 708 (88) 872 172 704 (83) 793 - 13 Other current assets Prepayments Withholding tax Other assets 2,996 4,843 589 8,428 3,126 2,286 725 6,137 1,020 3,169 327 4,516 665 2,279 551 3,495 14 Available-for-sale financial assets At fair value Shares in UBS Corporation Berhad - listed 3,284 - MYOB Limited Annual Report 2006 > 63 Notes to the Financial Statements (continued) 15 Other Financial Assets (non-current) CONSOLIDATED 2006 $’000 2005 $’000 MYOB LIMITED 2006 $’000 2005 $’000 Other receivables 607 617 607 585 16 Investments a) Investment in associates Investment in NetReturn Pty Ltd 6,303 6,048 6,303 6,048 MYOB Limited has a 32.4% interest in NetReturn Pty Ltd, which is the distributor of the NetSuite range of integrated on-demand mid-market ERP, CRM and eCommerce solutions in Australia and New Zealand. NetReturn Pty Ltd is a small proprietary company incorporated in Australia that is not listed on any public exchange and therefore there is no published quotation price for the fair value of this investment. The reporting date of NetReturn Pty Ltd is 30 June. In late December 2005 NetReturn Pty Ltd undertook a rights issue to raise further capital of $3m. On 31 January 2006, MYOB Limited took up its rights, subscribing a further $979,000 to the Company. In late July 2006 NetReturn Pty Ltd undertook a rights issue to raise further capital of $3m. On 2 August 2006, MYOB Limited took up its rights, subscribing a further $984,000 to the Company. MYOB’s investment in the above mentioned associate was not impaired during the year. (2005: $Nil) Movements in the carrying amount of the Group’s investment in associates CONSOLIDATED 2006 $’000 Balance as at 1 January Investment Share in loss after income tax Balance as at 31 December 6,048 1,963 (1,708) 6,303 2005 $’000 7,095 (1,047) 6,048 64 > MYOB Limited Annual Report 2006 16 Investments (continued) a) Investment in associates (continued) Summarised financial information The following table illustrates summarised information of the investment in NetReturn Pty Ltd: CONSOLIDATED 2006 $’000 Share of associate’s balance sheet: Current assets Non-current assets Current liabilities Non-current liabilities Net assets Share of associates’ revenue and profit: Revenue Loss before income tax Income tax Loss after income tax CONSOLIDATED 2006 $’000 b) Investment at cost Investment in subsidiaries (refer note 27) 327,955 307,181 2005 $’000 2,428 (1,708) (1,708) 1,378 (1,047) (1,047) 973 6,249 (919) 6,303 2,486 5,714 (1,554) (598) 6,048 2005 $’000 MYOB LIMITED 2006 $’000 2005 $’000 MYOB Limited Annual Report 2006 > 65 17 Property, Plant and Equipment CONSOLIDATED Leased Plant and plant and equipment equipment Total $’000 $’000 $’000 $’000 $’000 Leasehold Plant and Improvement equipment Total $’000 $’000 $’000 Capital works in progress Capital works in progress MYOB LIMITED Leasehold Improvement 66 > MYOB Limited Annual Report 2006 $’000 Year ended 3 December 2006 3,204 210 (8) 372 25 (703) 3,100 17,479 1,317 7,026 28,922 50 (9,241) (923) (10,867) (9) (162) (137) 6,206 (6,578) (685) 493 (74) (82) (19) (19) 201 201 6,027 31 8,485 14,753 228 14,541 2,209 5,119 25,073 59 950 1,009 228 (694) 543 At 1 January 2006, net of accumulated depreciation and impairment Additions Acquisition through business combination Disposals Assets written off Transfer in/(out) from WIP Net foreign currency movements arising from foreign operations Depreciation charge for the year At 31 December 2006, net of accumulated depreciation At  January 2006 7,435 (25,005) 14,541 2,209 5,119 (4,844) (34,080) 25,073 39,546 7,053 5,119 59,153 67 (8) 59 1,501 (551) 950 1,568 (559) 1,009 Notes to the Financial Statements (continued) Cost or fair value Accumulated depreciation and impairment 3,204 (4,231) Net carrying amount At 3 December 2006 8,021 (33,879) 17,479 1,317 (5,766) 51,358 7,083 7,026 7,026 73,488 (44,566) 28,922 67 (17) 50 1,729 (1,236) 493 1,796 (1,253) 543 Cost or fair value Accumulated depreciation and impairment 3,100 (4,921) Net carrying amount 17 Property, Plant and Equipment (continued) CONSOLIDATED Leased Plant and plant and equipment equipment Total $’000 $’000 $’000 $’000 $’000 Leasehold Plant and Improvement equipment Total $’000 $’000 $’000 Capital works in progress Capital works in progress MYOB LIMITED Leasehold Improvement $’000 Year ended 3 December 2005 At 1 January 2005, net of accumulated depreciation and impairment 4,233 488 186 (56) (3) (2) (5) (3) (59) 250 436 7,870 5,909 14,267 881 12,176 3,123 784 20,316 688 688 881 - Additions Acquisition through business combination Disposals Assets written off Net foreign currency movements arising from self sustaining foreign operations (37) (7,306) 1,502 14,541 2,209 5,119 25,073 (1,569) 67 59 (914) (9,894) (8) 67 3,204 54 (5) 12 - (551) 1,501 950 (1) (1,568) - (1) (559) 1,009 Depreciation charge for the year (1,674) Transfer in/(out) from WIP At 31 December 2005, net of accumulated depreciation At  January 2005 6,801 (17,607) 12,176 3,123 784 (3,930) 29,783 7,053 784 44,421 (24,105) 20,316 688 688 688 688 Cost or fair value Accumulated depreciation and impairment 4,233 (2,568) Net carrying amount At 3 December 2005 7,435 (25,005) 14,541 (4,844) 2,209 39,546 7,053 5,119 5,119 59,153 (34,080) 25,073 67 (8) 59 1,501 (551) 950 1,568 (559) 1,009 Cost or fair value Accumulated depreciation and impairment 3,204 (4,231) MYOB Limited Annual Report 2006 > 67 Net carrying amount Notes to the Financial Statements (continued) 18 Intangible Assets CONSOLIDATED Product Patents, Development trademarks costs and licences $’000 Year ended 3 December 2006 At 1 January 2006, net of accumulated amortisation Additions Acquisition of subsidiary Impairment Amortisation Currency At 31 December 2006, net of accumulated amortisation At  January 2006 Cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount At 3 December 2006 Cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount Year ended 3 December 2005 At 1 January 2005, net of accumulated amortisation Additions - costs Acquisition of subsidiary Amortisation Currency At 31 December 2005, net of accumulated amortisation At  January 2005 Cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount At 3 December 2005 Cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount 106,287 (66,627) 39,660 1,621 (995) 626 170,441 (3,448) 166,993 79,519 (43,521) 35,998 357,868 (114,591) 243,277 77,226 (53,005) 24,221 1,193 (565) 628 169,046 (3,448) 165,598 79,213 (34,168) 45,045 326,678 (91,186) 235,492 24,221 29,061 (13,622) 39,660 628 321 107 (430) 626 165,598 1,479 (84) 166,993 45,045 306 (9,353) 35,998 235,492 29,382 1,892 (23,405) (84) 243,277 141,469 (88,191) 53,278 5,295 (1,604) 3,691 176,730 (3,396) 173,334 81,451 (52,415) 29,036 404,945 (145,606) 259,339 106,287 (66,627) 39,660 1,621 (995) 626 170,441 (3,448) 166,993 79,519 (43,521) 35,998 357,868 (114,591) 243,277 39,660 35,203 (21,585) 53,278 626 143 3,444 (593) 71 3,691 166,993 6,204 (74) 211 173,334 35,998 1,832 (8,896) 102 29,036 243,277 35,346 11,480 (74) (31,074) 384 259,339 $’000 Intellectual Property $’000 MYOB LIMITED Goodwill $’000 Total $’000 Total $’000 68 > MYOB Limited Annual Report 2006 19 Trade and Other Payables CONSOLIDATED 2006 $’000 Current Trade creditors Sundry creditors Accrued expenses Wholly owned subsidiaries 3,031 5,387 10,564 18,982 Trade liabilities are normally settled on 30 day terms. 3,084 3,484 7,681 14,249 52 403 856 47,769 49,080 134 186 574 45,699 46,593 2005 $’000 MYOB LIMITED 2006 $’000 2005 $’000 20 Unearned Revenue Current Unearned revenue 33,990 29,723 - Revenue from customer support and maintenance is recognised over the life of the support and maintenance contract. Revenue not recognised in the income statement under this policy is classified as unearned revenue in the balance sheet. 21 Interest-bearing Loans and Borrowings Effective interest rate % Current Unsecured lease liability Unsecured bank loan Non-current Unsecured lease liability Unsecured bank loan 6.8 3.9 2008 2010 1,359 1,359 2,846 4,235 7,081 6.8 3.9 2008 2010 1,558 1,558 1,581 358 1,939 Maturity CONSOLIDATED 2006 $’000 2005 $’000 MYOB LIMITED 2006 $’000 2005 $’000 Performance under the lease liability is guaranteed by MYOB Limited. No deficiency of net assets exists in the controlled entity. Financing facilities available At the reporting date, the following financing facilities had been negotiated and were available: Total facilities – bank loans Facilities used at reporting date – bank loans 4,593 4,593 - MYOB Limited Annual Report 2006 > 69 Notes to the Financial Statements (continued) 22 Provisions Employee Entitlements $’000 CONSOLIDATED At  January 2006 Acquisition of subsidiary Arising during the year Utilised Reversal At 3 December 2006 6,640 10 2,863 (1,192) 8,321 877 (269) 608 3,261 2,262 (2,776) 2,747 930 1,202 (1,461) 671 3,053 212 (393) (1,209) 1,663 14,761 10 6,539 (6,091) (1,209) 14,010 Integration $’000 Property $’000 Profit share $’000 Others $’000 Total $’000 Current 2006 Non-current 2006 6,799 1,522 8,321 608 608 439 438 877 1,427 1,320 2,747 2,170 1,091 3,261 671 671 930 930 1,643 20 1,663 3,053 3,053 11,148 2,862 14,010 11,670 3,091 14,761 Current 2005 Non-current 2005 5,078 1,562 6,640 Employee Entitlements $’000 MYOB LIMITED At  January 2006 Arising during the year Utilised Reversal At 3 December 2006 525 1,047 (621) 950 Integration $’000 865 (259) 606 Property $’000 298 298 Profit share $’000 86 88 (124) 50 Others $’000 3,084 (427) (1,209) 1,448 Total $’000 4,560 1,433 (1,431) (1,209) 3,352 Current 2006 Non-current 2006 722 228 950 606 606 433 432 865 298 298 - 50 50 86 86 1,448 1,448 3,084 3,084 2,826 526 3,352 3,854 706 4,560 Current 2005 Non-current 2005 251 274 525 70 > MYOB Limited Annual Report 2006 22 Provisions (continued) Employee entitlements Provision is made for the Group’s liability for employee entitlements arising from services rendered by employees to balance date. Employee entitlements expected to be settled within one year together with entitlements arising from wages and salaries and annual leave which will be settled after one year, have been measured at their nominal amount. Other employee entitlements payable later than one year have been measured at the present value of the estimated future cash outflows to be made for those entitlements. Integration Provision has previously been made for the Group’s liability for integration costs arising from the merger with Solution 6 Holdings Ltd in August of 2004. Final costs of integration are anticipated to occur prior to December 2007. Property Provision is made for the Group’s liability for rent and dilapidation costs on property leases acquired through the merger with Solution 6 Holdings Ltd. Vacant property leases will reach completion in the UK by December 2009. Profit Share Provision is made for the Group’s liability for Profit Share payable to appropriately entitled employees. Profit Share is paid semi-annually. MYOB Limited Annual Report 2006 > 7 Notes to the Financial Statements (continued) 23 Contributed Equity CONSOLIDATED 2006 $’000 a) Issued and paid up capital 385,305,015 fully paid ordinary shares (2005: 392,384,818) 20,131,559 Issued options (2005: 21,333,300) 228,647 235,966 228,647 235,966 2005 $’000 MYOB LIMITED 2006 $’000 2005 $’000 228,647 235,966 228,647 235,966 - - - - Terms and conditions of contributed equity Ordinary shares have the right to receive dividends as declared and, in the event of a 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 on shares held. Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of the company. 2006 Number of shares b) Movement in ordinary shares on issue Beginning of the financial year Issued during the year - exercise of options - dividend reinvestment - MYOB share plan - acquisition of Dosh Software Ltd - MYOB share plan forfeitures - MYOB share buyback - Share buyback costs End of the financial year 1,788,800 169,307 249,686 (249,107) (9,038,489) 385,305,015 992 171 271 (186) (8,558) (9) 228,647 3,046,808 2,752,780 529,992 392,384,818 1,727 2,770 655 235,966 392,384,818 235,966 386,055,238 230,814 $’000 2005 Number of shares $’000 72 > MYOB Limited Annual Report 2006 24 Retained Earnings and Reserves a) Movements in retained earnings were as follows: CONSOLIDATED 2006 $’000 Balance 1 January Prior year tax adjustment Net Profit Dividends Balance 31 December b) Reserves CONSOLIDATED Employee Foreign equity currency benefit translation reserve $’000 At  January 2005 Gain/(loss) on translation of overseas controlled entities Share based payment At 3 December 2005 Gain/(loss) on translation of overseas controlled entities Share based payment At 3 December 2006 Foreign currency translation reserve The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign operations. Employee equity benefits reserve The employee equity benefits reserve is used to record the value of equity benefits provided to employees and directors as part of their compensation. Refer to note 29 for further details of these plans. 1,542 (385) 1,157 2,025 (483) $’000 1,473 1,590 3,063 924 3,987 MYOB LIMITED Employee equity benefit reserve $’000 1,473 1,590 3,063 924 3,987 29,860 17,445 (15,696) 31,609 2005 $’000 22,197 16,410 (8,747) 29,860 MYOB LIMITED 2006 $’000 (6,595) 695 21,723 (15,696) 127 2005 $’000 (7,433) 9,585 (8,747) (6,595) Total $’000 3,497 (483) 1,590 4,604 (385) 924 5,144 Capital Profits $’000 100,000 100,000 100,000 Total $’000 101,472 1,590 103,062 924 103,987 25 Minority interests CONSOLIDATED 2006 $’000 Contributed equity Retained profits Balance 31 December 1,492 (77) 1,415 2005 $’000 571 40 611 MYOB LIMITED 2006 $’000 2005 $’000 - MYOB Limited Annual Report 2006 > 73 Notes to the Financial Statements (continued) 26 Cash Flow Reconciliation CONSOLIDATED 2006 $’000 2005 $’000 MYOB LIMITED 2006 $’000 2005 $’000 Reconciliation of Net Profit after Income Tax with Cash Flow from Operations: Net profit for the period Cash flows excluded from operating profit attributable to operating activities: Non-cash flows in operating profit - Amortisation/depreciation - Options expense - Charges to provisions - Disposals: · Losses on sale of property, plant and equipment · Foreign exchange gain on dormant Solution 6 entities · Controlled entities (net liabilities) - Share of loss / impairment of investments - Minority interest - Gain on sale of UBS Changes in assets and liabilities, net of the effects of the purchase and disposal of subsidiaries: - Movement in trade and term debtors - Movement in prepayments / other assets - Movement in future income tax benefit - Movement in inventories - Movement in trade creditors and accruals - Movement in product development - Movement in income taxes payable - Movement in deferred taxes payable - Movement in unearned revenues Cash Flows from operations Non cash financing and investing activities: The Group issued $0.961 million of shares in Macquarie Outsource Holdings Pty Ltd (MOHPL) as part consideration for the acquisition of Macquarie Outsource Pty Ltd (MOPL) and Macquarie Outsource Sdn Bhd (MOSB). (803) (2,265) (8,079) (22) 4,229 (34,711) 2,790 8,642 2,982 30,612 2,026 (1,019) 705 (223) (1,079) (29,061) (19) 4,148 (2,926) 24,002 251 (1,036) (1,354) 392 1,903 (35) 23,963 (1,267) 341 375 (816) 2,190 37 15,674 1,708 (117) (2,488) 44 (1,526) 67 2,523 40 1,708 1,047 41,283 924 (906) 32,802 1,590 (500) 694 924 (1,207) 559 1,590 2,033 17,445 16,410 21,723 9,585 74 > MYOB Limited Annual Report 2006 27 Related Party Disclosure (a) The Consolidated Financial Statements at 31 December 2006 include the following controlled entities which are material to the Consolidated Entity: COUNTRY OF PERCENTAGE OWNED (%) 2006 Parent Entity: MYOB Limited Controlled entities of MYOB Limited: MYOB Australia Pty Ltd MYOB NZ Limited MYOB Technology Pty Ltd MYOB UK Limited MYOB US, Inc MYOB Asia Sdn Bhd MYOB Singapore Pte Limited MYOB Hong Kong Limited Solution 6 Holdings Pty Ltd Solution 6 Pty Ltd MYOB Ireland Ltd MYOB Software China Co., Ltd Exonet New Zealand Limited Australia New Zealand Australia United Kingdom United States of America Malaysia Singapore Hong Kong Australia Australia Ireland China New Zealand 100 100 100 100 100 100 100 100 100 100 100 95 75 100 100 100 100 100 100 100 100 100 100 100 95 75 Australia 2005 (b) Subsidiaries acquired Dosh Software Ltd: The Group paid $1.999 million to acquire a 100% interest in Dosh Software Ltd (2005: NIL). Macquarie Outsource Pty Ltd (MOPL) and Macquarie Outsource Sdn Bhd (MOSB): MYOB Limited set up a subsidiary, Macquarie Outsource Holdings Pty Ltd (MOHPL) to acquire MOPL and MOSB. MOHPL then acquired 100% ownership of MOPL and MOSB for $1.96 million in cash and shares. MYOB Ltd holds 51% ownership of MOHPL. (2005: NIL) (c) Associate NetReturn Pty Ltd: The Group has a 32.4% interest in NetReturn Pty Ltd (2005: 34.15%). (d) Ultimate Parent MYOB Limited is the ultimate Australian parent entity and the ultimate parent entity of the Group. MYOB Limited Annual Report 2006 > 75 Notes to the Financial Statements (continued) 27 Related Party Disclosure (continued) (e) Entities subject to class order relief Pursuant to Class Order 98/1418, relief has been granted to MYOB Australia Pty Ltd, MYOB Practice Systems Pty Ltd, MYOB Technology Pty Ltd and MYOB Technology 2 Pty Ltd from the Corporations Act 2001 requirements for preparation, audit and lodgement of their financial reports. As a condition of the Class Order, MYOB Limited, MYOB Australia Pty Ltd, MYOB Practice Systems Pty Ltd, MYOB Technology Pty Ltd and MYOB Technology 2 Pty Ltd (the “Closed Group”) entered into a Deed of Cross Guarantee on 21 October 2002. The effect of the deed is that MYOB Limited has guaranteed to pay any deficiency in the event of winding up of either controlled entity. The controlled entities have also given a similar guarantee in the event that MYOB Limited is wound up. The consolidated income statement and balance sheet of the entities which are members of the “Closed Group” are as follows: i) Consolidated income statement CLOSED GROUP 2006 $’000 Profit from ordinary activities before income tax Income tax expense relating to ordinary activities Net Profit from ordinary activities after income tax expense Retained profits at the beginning of the financial year Net Profit from ordinary activities after income tax expense Adjustments arising from adoption of new or revised accounting standards: Dividends provided for or paid Retained profits at the end of the financial year (15,696) 46,530 (8,747) 38,185 31,949 (7,908) 24,041 2005 $’000 28,659 (9,248) 19,411 38,185 24,041 27,521 19,411 76 > MYOB Limited Annual Report 2006 27 Related Party Disclosure (continued) (e) Entities subject to class order relief (continued) ii) Consolidated balance sheet CLOSED GROUP 2006 $’000 Current Assets Cash assets Trade and other receivables Inventories Other financial assets Other Total current assets Non-current assets Receivables Investments at cost Investments in associates Property, plant and equipment Tax assets Intangible assets Total non-current assets Total Assets Current liabilities Trade and other payables Unearned revenue Interest-bearing liabilities Tax liabilities Provisions Total current liabilities Non-current liabilities Payables Interest bearing liabilities Tax liabilities Provisions Total non-current liabilities Total Liabilities Net Assets Equity Contributed equity Reserves Retained profits Total Equity 228,646 3,990 46,530 279,166 236,384 3,062 38,185 277,631 48,870 1,359 17,930 1,908 70,067 121,488 279,166 51,134 2,846 10,099 1,562 65,641 110,428 277,631 9,878 26,962 1,558 3,013 10,010 51,421 8,129 23,131 1,581 1,109 10,837 44,787 37,147 227,955 6,303 24,842 12,299 59,267 367,813 400,654 49,250 207,181 6,048 21,439 4,885 47,506 336,309 388,059 4,420 8,230 461 13,630 6,100 32,841 1,512 8,378 400 34,684 6,776 51,750 2005 $’000 MYOB Limited Annual Report 2006 > 77 Notes to the Financial Statements (continued) 28 Key Management Personnel a) Details of Key Management Personnel (i) Directors Mr Simon McKeon Mr Graeme Pearson Mr Craig Winkler Mr John Stewart Mr Christopher Williams Mr Colin Henson Mr Chris Lee (ii) Executives Mr Matthew Critchley Mr Simon Martin Mr Tim Reed Mr Richard Allen Mr David Lowe Mr Robert Reside Mr Simon Crompton Mr Anthony Stevenson Ms Rebecca McGaw Mr Jason Noorman Chief Operating Officer Chief Financial Officer Managing Director, Australia Managing Director, Europe Group Manager, Product Management Company Secretary and Group Counsel General Manager, Accountants Division Europe Group Manager, Marketing Group Manager, IT Operations Group Manager, Product Development from 1 December 2006 Independent Chairman from 29 April 2006 Chairman until resignation from the Board on 28 April 2006 Chief Executive Officer Director (non-executive) Director (non-executive) Director (non-executive) Director (executive) b) Compensation of Key Management Personnel CONSOLIDATED 2006 $’000 Short-term employee benefits Post-employment benefits Other long-term benefits Share-based payment 3,279 198 263 3,740 2005 $’000 2,881 204 227 365 3,677 MYOB LIMITED 2006 $’000 1,713 136 207 2,056 2005 $’000 1,211 111 228 244 1,794 MYOB Limited has applied the option under Corporations Amendments Regulation 2006 to transfer key management personnel remuneration disclosures required by AASB 124 Related Party Disclosures paragraphs Aus 25.4 to Aus 25.7.2 to the Remuneration Report section of the Directors’ Report. These transferred disclosures have been audited. 78 > MYOB Limited Annual Report 2006 28 Key Management Personnel (continued) c) Option holdings of Key Management Personnel Vested at 31 December 2006 Total Exercisable Not Exercisable 31-Dec-06 Balance at beginning of period 01 Jan 06 Granted as Remuneration Options Exercised Net change Other Balance at end of period 31 Dec 06 (i) Directors (150,000) 120,000 120,000 120,000 2,300,000 2,300,000 1,100,000 1,200,000 - Mr Simon McKeon - Mr Craig Winkler 2,300,000 Mr John Stewart 120,000 Mr Christopher Williams - Mr Colin Henson - Mr Chris Lee 150,000 (ii) Executives 75,585 75,210 78,267 87,539 37,555 40,429 35,543 37,023 467,151 (386,000) (186,000) (50,000) 87,539 452,555 430,429 110,000 360,543 87,023 5,207,151 218,267 475,210 565,585 565,585 475,210 218,267 87,539 452,555 430,429 110,000 360,543 87,023 5,207,151 350,000 80,000 310,000 250,000 60,000 195,000 2,465,000 215,585 475,210 138,267 87,539 142,555 180,429 50,000 165,543 87,023 2,742,151 Mr Matthew Critchley 490,000 Mr Simon Martin 400,000 Mr Tim Reed 140,000 Mr Richard Allen - Mr David Lowe 465,000 Mr Robert Reside 390,000 Mr Simon Crompton 110,000 Mr Anthony Stevenson 511,000 Ms Rebecca McGaw 50,000 Mr Jason Noorman - MYOB Limited Annual Report 2006 > 79 Total 5,126,000 28 Key Management Personnel (continued) c) Option holdings of Key Management Personnel (continued) Vested at 31 December 2005 Total Exercisable Not Exercisable 80 > MYOB Limited Annual Report 2006 31-Dec-05 Balance at beginning of Granted as period 01 Jan 05 Remuneration Options Exercised Net change Other Balance at end of period 31 Dec 05 (i) Directors 1,800,000 65,000 400,000 60,000 50,000 70,000 70,000 80,000 40,000 50,000 2,685,000 (2,553,440) (210,000) (210,000) (53,340) 140,000 465,000 390,000 883,700 225,000 90,000 110,000 5,963,700 400,000 (100,000) 490,000 490,000 400,000 140,000 465,000 390,000 883,700 225,000 90,000 110,000 5,963,700 (566,700) 150,000 150,000 120,000 120,000 (1,833,400) 2,300,000 2,300,000 500,000 120,000 150,000 260,000 40,000 310,000 180,000 663,700 225,000 30,000 2,678,700 200,000 200,000 200,000 1,800,000 230,000 400,000 100,000 155,000 210,000 220,000 90,000 80,000 3,285,000 Mr Simon McKeon - Mr Graeme Pearson 200,000 Mr Craig Winkler 2,333,400 Mr John Stewart 120,000 Mr Christopher Williams - Mr Colin Henson - Mr Chris Lee 716,700 (ii) Executives - Mr Matthew Critchley 525,000 Mr Simon Martin - Notes to the Financial Statements (continued) Mr Tim Reed 80,000 Mr Richard Allen - Mr David Lowe 415,000 Mr Robert Reside 373,340 Mr Ken Lipnickey 813,700 Mr Barry Brott 355,000 Mr Owen Dullea 50,000 Mr Simon Crompton 60,000 Total 6,042,140 The company has applied the release available under ASIC CO 06/50, which exempts listed companies from providing remuneration disclosures in the annual financial report as required by paragraphs AUS 25.4 to AUS 25.7.2 of AASB 124 “Related Party Disclosures”. These remuneration disclosures are provided in the section entitled remuneration report of the Directors’ Report. 28 Key Management Personnel (continued) d) Share Holdings of Directors and Executives The relevant interest of each Director and executive and their personally related entities in ordinary shares of MYOB Ltd are: Balance at 01 January 2006 Granted as Remuneration On Exercise of Bought/(Sold) Balance at 31 Options During the Period December 2006 31-Dec-06 (i) Directors Mr Simon McKeon Mr Craig Winkler Mr John Stewart Mr Christopher Williams Mr Colin Henson Mr Chris Lee (ii) Executives Mr Matthew Critchley Mr Simon Martin Mr Tim Reed Mr Richard Allen Mr David Lowe Mr Robert Reside Mr Simon Crompton Mr Anthony Stevenson Ms Rebecca McGaw Mr Jason Noorman Total 202,236 78,045,003 302,913 123,684 98,349 4,599,444 - 150,000 169,307 30,179,041 (4,031,480) 371,543 108,224,044 302,913 123,684 98,349 717,964 107,590 100,754 1,264 168,551 226,556 205,645 84,181,989 - 50,000 186,000 386,000 (50,000) 7,000 (203,960) 26,069,908 107,590 100,754 1,264 175,551 226,556 187,685 110,637,897 MYOB Limited Annual Report 2006 > 8 Notes to the Financial Statements (continued) 28 Key Management Personnel (continued) d) Share Holdings of Directors and Executives (continued) Bought/(Sold) During the Period 31-Dec-05 Balance at 01 January 2005 Granted as Remuneration On Exercise of Options Balance at 31 December 2005 (i) Directors Mr Simon McKeon Mr Graeme Pearson Mr Craig Winkler Mr John Stewart Mr Christopher Williams Mr Colin Henson Mr Chris Lee (ii) Executives Mr Matthew Critchley Mr Simon Martin Mr Tim Reed Mr Richard Allen Mr David Lowe Mr Robert Reside Mr Ken Lipnickey Mr Barry Brott Mr Owen Dullea Mr Simon Crompton Total 4,974 190,199 1,264 101,743 3,434 1,685 91,127 226,556 96,493,920 166 3,468 545,549 100,000 53,340 2,553,440 2,450 (89,445) 10,000 (14,267,898) 107,590 100,754 1,264 168,551 3,434 1,685 91,127 226,556 85,325,011 202,236 1,041,033 82,211,603 365,322 20,000 12,032,744 207,626 137,591 98,349 98,349 1,833,400 566,700 3,762 (6,000,000) (200,000) 5,335 (8,000,000) 202,236 1,252,421 78,045,003 302,913 123,684 98,349 4,599,444 All equity transactions with key management personnel other than those arising from the exercise of remuneration options have been entered into under terms and conditions no more favourable than those the Group would have adopted if dealing at arm’s length. 82 > MYOB Limited Annual Report 2006 28 Key Management Personnel (continued) e) Related party transactions The following related party transactions occurred during the year: - MYOB Limited invested an additional $19.5 million in MYOB UK Limited. - MYOB Limited received dividends of $20.8 million from subsidiaries. - MYOB Limited received management fees of $11.4 million from subsidiaries. - MYOB Technology Pty Ltd received royalties of $51.6 million from other entities within the Group. All equity transactions with key management personnel other than those arising from the exercise of remuneration options have been entered into under terms and conditions no more favourable than those the Group would have adopted if dealing at arm’s length. f) Transactions with Director-related entities of MYOB Limited and the consolidated entity Lease payments amounting to $210,094 were paid to Bangarie Pty Ltd, an entity associated with Mr C Winkler representing payment of lease for Sydney fit-out from 1 January 2006 to 31 December 2006. The amount outstanding as at 31 December 2006 - $613,957 (Dec 2005 - $757,954). Chris Lee is a director of Sageworks Inc. The Group has a contract with Sageworks Inc in respect to a benchmarking product. No royalties / fees were paid during 2006. Simon McKeon is an executive officer of Macquarie Bank Ltd (MBL) of which Macquarie Equity Capital Markets Limited (MECML) is a subsidiary. 1) MYOB Australia Pty Ltd has a contract with MBL in respect of the MoneyController product; 2) During the year MYOB Limited engaged either MBL or MECML or both in: a) an advisory capacity in regard to a capital management initiative. Fees paid in relation to this advice were $50,000 plus $1,000 of out of pocket expenses, b) a corporate and financial advisory capacity in respect of a potential acquisition. This work was success based and as such no fees were paid in relation to this advice however $49,000 was paid in relation to out of pocket expenses incurred, and c) an advisory and executory capacity in regard to the on-market share buyback. Fees paid in relation to this advice were $10,000 plus a brokerage fee of 0.15% totalling $13,000 for the period. All transactions were entered into under terms and conditions no more favourable than those the Group would have adopted if dealing at arm’s length. g) Transactions with other related parties None during the year. h) Equity instruments of directors None during the year. MYOB Limited Annual Report 2006 > 83 Notes to the Financial Statements (continued) 29 Share-based Payment Plans a) Recognised share-based payment expenses The expense recognised for employee services received during the year is shown in the table below: CONSOLIDATED 2006 $’000 Expense arising from equity-settled share-based payment transactions 924 2005 $’000 1,590 MYOB LIMITED 2006 $’000 924 2005 $’000 1,590 The rules of the MYOB Executive Option Plan provide that the Board may, at its discretion, and subject to such vesting hurdles as it deems appropriate, grant options to selected executives and other employees. b) Details of options issued The following table summarises information about options granted by MYOB Limited to employees during the year ended 31 December 2006. Grant Date 2-May-06 2-May-06 Vesting Date 2-May-09 2-May-09 Expiry Date 2-May-10 2-May-10 Exercise Price No. of Options 908,617 * 2,195,431 * these options were granted with performance hurdles (refer Directors’ remuneration report for details) The following table summarises information about options granted by MYOB Limited to employees during the year ended 31 December 2005. Grant Date 22-Mar-05 24-May-05 10-Jun-05 c) Fair values of options The fair value of each option was estimated on the date of the grant using a modified Black-Scholes option pricing model. The assumptions used at each relevant valuation date were as follows: Grant date Dividend yield Expected volatility Historical volatility Risk-free interest rate Expected life of option (days) Tranche 1 Tranche 2 Tranche 3 1096 1096 1096 1096 465 830 1196 1096 2-May-06 2.55% 27.06% 27.06% 5.69% 10-Jun-05 2.14% 29.45% 29.45% 5.14% 24-May-05 2.14% 28.88% 28.88% 5.26% 22-Mar-05 2.14% 29.36% 29.36% 5.72% Vesting Date 22-Mar-08 1-Sep-06 10-Jun-08 Expiry Date 22-Mar-10 24-May-10 10-Jun-10 Exercise Price 1.08 1.24 1.06 No. of Options 5,268,500 1,800,000 400,000 84 > MYOB Limited Annual Report 2006 29 Share-based Payment Plans (continued) c) Fair values of options (continued) The dividend yield reflects the assumption that future dividend yields would reflect the current dividend yield at the grant date. The expected volatility reflects the assumption that the historical volatility is indicative of future volatility at the grant date. The risk-free interest rate was determined as the Commonwealth Bond rate for the expected life of the option at the grant date. The expected life of the options is the period from the grant date to the exercise date and does not reflect anticipated exercise patterns. d) Summary of options granted under MYOB Executive Share Option Plan During the year ended 31 December 2006, 1,788,800 options were exercised over ordinary shares, with a total cash consideration received by MYOB Limited of $992,000. The following table illustrates the number (No.) and weighted average exercise prices (WAEP) of share options issued under the MYOB Executive Share Option Plan. 2006 No. Outstanding at the beginning of the year Granted during the year Exercised during the year Cancelled during the year Outstanding at the end of the year Exercisable at the end of the year 1 2006 WAEP 1 2005 No. 17,743,308 1 2005 WAEP $1.12 $0.57 $1.86 1 21,333,300 3,104,048 (1,788,800) (2,516,989) 20,131,559 10,450,400 $0.00 $0.55 $1.37 1 7,468,500 (3,046,808) (831,700) 21,333,300 7,984,300 $0.00-1.37 $1.34 $0.57-1.86 $1.18 Included within this balance are options over 6,155,400 shares (2005: 7,984,300 shares) that have not been recognised in accordance with AASB 2 as the options were granted on or before 7 November 2002. These options have not been subsequently modified and therefore do not need to be accounted for in accordance with AASB 2. The weighted average contractual life for the share options outstanding as at 31 December 2006 is between one and five years (2005: one and five years). MYOB Limited Annual Report 2006 > 85 Notes to the Financial Statements (continued) 29 Share-based Payment Plans (continued) e) Movements in options on issue Share options issued under the MYOB Executive Share Option Plan and outstanding at the end of the year are as follows: Number on issue 31 Dec 05 586,700 2,187,200 969,200 40,000 348,300 28,000 326,700 659,000 16,500 50,000 16,500 50,000 80,000 160,000 30,000 600,000 1,086,200 30,000 30,000 15,000 25,000 500,000 150,000 2,076,000 2,549,500 1,000,000 20,000 200,000 50,000 5,253,500 1,800,000 400,000 21,333,300 Options in MYOB Limited are not quoted on the ASX. Number Issued this year 908,617 2,195,431 3,104,048 Number exercised this year 524,000 340,300 296,500 25,000 150,000 453,000 1,788,800 Number cancelled this year 20,000 18,700 28,000 30,600 107,000 30,000 175,000 53,800 30,000 198,000 578,000 200,000 902,000 30,891 114,998 2,516,989 Number on issue 31 Dec 06 62,700 1,846,900 949,200 40,000 329,600 296,100 552,000 16,500 50,000 16,500 50,000 80,000 160,000 425,000 735,900 30,000 15,000 500,000 1,425,000 1,971,500 800,000 20,000 200,000 50,000 4,351,500 1,800,000 400,000 877,726 2,080,433 20,131,559 Issue Date 2-Jul-99 2-Jul-99 30-Oct-99 27-Apr-00 28-Jun-00 28-Jun-00 26-Jul-00 18-Oct-00 22-Dec-00 22-Dec-00 22-Dec-00 22-Dec-00 30-Jan-01 30-Jan-01 2-Mar-01 1-Jan-01 17-Sep-01 14-Dec-01 17-Jan-02 9-Feb-02 7-May-02 28-Jun-02 28-Jun-02 2-May-03 24-Mar-04 30-Aug-04 15-Sep-04 15-Sep-04 15-Sep-04 22-Mar-05 24-May-05 10-Jun-05 2-May-06 2-May-06 Expiry Date 2-Jul-09 2-Jul-09 1-Nov-09 1-May-10 1-Nov-09 2-Jul-10 26-Jul-10 18-Oct-10 1-Feb-11 1-Nov-10 1-Feb-11 1-Nov-10 30-Jan-11 7-Feb-11 2-Mar-11 17-May-11 17-Sep-11 14-Dec-11 17-Jan-12 9-Feb-12 7-May-12 30-Jun-12 30-Jun-12 2-May-08 24-Mar-09 1-Jul-09 1-Jul-09 1-Jul-09 1-Jul-09 22-Mar-10 24-May-10 10-Jun-10 2-May-10 2-May-10 Exercise Price $0.50 $0.50 $1.73 $3.62 $1.98 $3.94 $3.58 $3.49 $1.73 $1.73 $1.98 $1.98 $2.98 $1.96 $1.81 $3.47 $0.46 $0.76 $0.75 $0.46 $0.75 $0.66 $0.66 $0.68 $1.20 $1.39 $1.39 $1.39 $1.39 $1.08 $1.24 $1.06 $0.00 $0.00 86 > MYOB Limited Annual Report 2006 30 Business Combination Per AASB 3 paragraph 70, MYOB is required to disclose the following information: - the revenue of any combined entity for the period as though the acquisition date for the business combination effected during the period had been at the beginning of that period; and - the profit or loss of any combined entity for the period as though the acquisition date for the business combination effected during the period had been at the beginning of the period. The disclosure of this information in these accounts is considered impracticable due to the number of acquisitions and the varying reporting timeframes. Where applicable Goodwill acquired in the entities below predominantly relates to the value of underlying earnings which is not reflected in the value of net assets at the time of acquisition. (a) Acquisition of Macquarie Outsource Pty Ltd (MOPL) and Macquarie Outsource Sdn Bhd (MOSB) On 30 March 2006, MYOB Limited set-up a subsidiary, Macquarie Outsource Holdings Pty Ltd (MOHPL) to acquire MOPL and MOSB. These companies specialise in outsourcing of compliance services for accountants. On 2 May 2006 MOHPL acquired 100% ownership of MOPL and MOSB for $1.96 million in cash and shares. After the transaction, MYOB Ltd holds 51% ownership of MOHPL. The fair value of the identifiable assets and liabilities of MOPL and MOSB as at the date of acquisition are: CONSOLIDATED Recognised on acquisition $’000 Cash on hand Trade debtors Deposits Fixed assets Loans payable Trade creditors Fair value of identifiable net assets Goodwill arising on acquisition 12 56 6 41 (347) (45) (277) 2,240 1,963 Carrying value $’000 12 56 6 41 (347) (45) (277) Cost of combination MOHPL shares issued at fair value Cash paid to former shareholders Cost associated with acquisition Total cost of combination 961 1,000 2 1,963 The cash outflow on acquisition is as follows: Net cash acquired with the subsidiary Cash paid Net cash outflow 12 (1,002) (990) During the year, the Macquarie group companies were renamed as follow: Macquarie Outsource Pty Ltd to Accountants Resourcing Pty Ltd (ARPL); Macquarie Outsource Sdn Bhd to Resourcing Services Sdn Bhd (RSSB); and Macquarie Outsource Holdings Pty Ltd to Accountants Resourcing Holdings Pty Ltd (ARHPL). MYOB Limited Annual Report 2006 > 87 Notes to the Financial Statements (continued) 30 Business Combination (continued) (b) Acquisitions of Conto Ltd and JumpStart Computer Accounting and Trainers Ltd On 31 January 2006, MYOB New Zealand Ltd, a subsidiary of MYOB Limited acquired the intellectual property of Conto Ltd a company based in New Zealand. The intellectual property facilitates the electronic data interchange of customer invoices and price books to MYOB accounting packages. The total cost of combination was a cash outlay of AUD $0.3 million. On 14 June 2006, MYOB New Zealand Ltd also acquired 100% ownership of the assets of JumpStart Computer Accounting and Trainers Ltd, a leading provider of MYOB Business Management software training in New Zealand. The total cost of this combination was a cash purchase of AUD $0.7 million. The fair value of the identifiable assets and liabilities of Conto Ltd and JumpStart Computer Accounting and Trainers Limited as at the date of acquisitions are: CONSOLIDATED Recognised on acquisition Carrying value $’000 $’000 Property, plant and equipment Fair value of net tangible assets Intellectual Property Goodwill arising on acquisitions 17 17 279 667 963 17 17 Consideration / cashflow: Cash paid Costs associated with the acquisitions Total cost of combination 949 14 963 (c) Acquisition of Innovate Pty Ltd On 1 August 2006, MYOB Australia Pty Ltd, a subsidiary of MYOB Limited acquired the intellectual property of Innovate Pty Ltd a company based in Australia. The Intellectual Property acquired included a market leading document management system. The total cost of combination was a cash outlay of AUD $0.419 million. CONSOLIDATED Recognised on acquisition Carrying value $’000 $’000 Property, plant and equipment Provisions for employee entitlements Fair value of net tangible assets Intellectual Property Goodwill arising on acquisition 30 (10) 20 375 24 419 30 (10) 20 Consideration / cashflow: Cash paid 419 88 > MYOB Limited Annual Report 2006 30 Business Combination (continued) (d) Acquisition of Comacc Limited On 16 August 2006, MYOB NZ Limited, a subsidiary of MYOB Limited acquired the net assets of Comacc Limited. Comacc Limited is based in New Zealand and has a range of successful products and services that complement MYOB’s existing solutions for employers. The total cost of combination was a cash outlay of AUD $5.8 million. The provisional fair value of the identifiable assets and liabilities of Comacc Ltd as at the date of acquisitions are: CONSOLIDATED Recognised on acquisition Carrying value $’000 $’000 Cash Trade debtors Finished goods Prepayments Property, plant and equipment Unearned revenue Fair value of net tangible assets Intellectual property Trademarks - customer lists Trademarks - marketing related intangibles Goodwill arising on acquisition 105 594 38 19 113 (1,285) (416) 1,082 1,581 998 2,596 5,841 Consideration / cashflow: Cash paid Costs associated with the acquisition Total cost of combination The cash outflow on acquisition is as follows: Net cash acquired with the subsidiary Cash paid Net cash outflow 105 (5,841) (5,736) 5,824 17 5,841 105 594 38 19 113 (1,285) (416) MYOB Limited Annual Report 2006 > 89 Notes to the Financial Statements (continued) 30 Business Combination (continued) (e) Acquisition of Dosh Software Ltd On 31 October 2006, MYOB UK Ltd, a subsidiary of MYOB Limited acquired ownership of Dosh Software Ltd, a company based in the United Kingdom. Dosh Software Limited is a long standing developer of small business accounting software. This acquisition boosts MYOB UK Ltd’s customer base, product line and distribution channels. The total cost of the combination was $1.999 million AUD and comprised an issue of equity instruments, the payment of cash and costs directly attributable to the business combination. As part of the consideration MYOB Limited issued 249,686 shares with a fair value of $1.086 each, based on the quoted price at the date of exchange. The provisional fair value of the identifiable assets and liabilities of Dosh Software Ltd as at the date of acquisition are: CONSOLIDATED Recognised on acquisition Carrying value $’000 Cash and cash equivalents Trade debtors Inventories Prepayments Trade creditors Other payables Fair value of net tangible assets Trademarks Intellectual property Goodwill arising on acquisition 367 33 24 20 (10) (73) 361 865 96 677 1,999 Cost of combination MYOB Limited shares issued at fair value Cash paid Direct cost related to acquisition Provision for additional consideration Total cost of combination The cash outflow on acquisition is as follows: Net cash acquired with the subsidiary Cash paid Net consolidated cash outflow 367 (1,579) (1,212) 271 1,579 28 121 1,999 $’000 367 33 24 20 (10) (73) 361 90 > MYOB Limited Annual Report 2006 30 Business Combination (continued) (f) Acquisition of Exonet On 31 October 2005, MYOB NZ Limited acquired an additional 45% of the voting shares of Exonet New Zealand Limited, a private company based in New Zealand and Australia specialising in highly configurable out-of-the-box business software solutions for medium and small businesses. This acquisition increased MYOB NZ Limited’s overall holding to 75%. In connection with the business combination, MYOB NZ Limited acquired 450 shares in Exonet New Zealand Limited from existing shareholders for $0.85 million NZD ($0.798 million AUD). If revenue for the 12 months to 30 June 2006 exceeds agreed levels then MYOB NZ Limited are obligated to pay an additional consideration of $0.15 million NZD (approx $0.135 million AUD). The fair value of the identifiable assets and liabilities of Exonet New Zealand Limited as at the date of acquisition are: CONSOLIDATED Recognised on acquisition Carrying value $’000 $’000 Property, plant and equipment Cash and cash equivalents Trade receivables Prepayments Intellectual Property Related party receivables Trade payables Unearned Income Related party payables Provisions Income tax liability Fair value of net assets 75% of fair value of net assets Foreign exchange movement Goodwill arising on acquisition 72 735 679 11 107 40 1,644 60 552 188 162 10 972 672 504 7 341 852 Consideration / cashflow: Cash for 450 shares acquired Costs associated with the acquisition Total consideration paid less: Net cash acquired with subsidiary Net cash (outflow) / inflow 798 54 852 735 (117) 72 735 679 11 107 40 1,644 60 552 188 162 10 972 672 MYOB Limited Annual Report 2006 > 9 Notes to the Financial Statements (continued) 30 Business Combination (continued) (g) China Joint Venture On 26 October 2005, MYOB Limited entered into a joint venture agreement with Chengdu Jin Qi Consultancy Company Ltd, to engage in the business of designing, developing, selling and maintaining business software, together with the provision of related training and services. MYOB Limited is investing approximately $7 million AUD to attain a 95% shareholding in MYOB Software China Co., Ltd, the joint venture company, while Chengdu Jin Qi Consultancy Company Ltd contributed fixed assets and intellectual property to the value of $0.4 million AUD to obtain the remaining 5% shareholding. The joint venture company agreed to pay Chengdu Jin Qi Consultancy Company Ltd approximately $2 million AUD, including approximately $1 million AUD in deferred consideration should performance hurdles be achieved over the two year period ending 31 December 2007, for consultancy services during the initial stages of forming the joint venture. The fair value of the identifiable assets and liabilities of Chengdu Jin Qi Consultancy Company Ltd injected into the joint venture as at the date of establishment for its 5% shareholding are: CONSOLIDATED Recognised on acquisition $’000 Carrying value $’000 Property, plant and equipment Patents and Trademarks Intellectual Property 110 107 199 416 110 107 199 416 Goodwill and cash flow on entering into the joint venture are as follows: Goodwill arising on acquisition 1,139 1,139 Consideration / cashflow: Cash paid to Chengdu Jin Qi Consultancy Company Ltd for consulting services to date Other costs associated with the acquisition Total consideration paid less: Net cash acquired with subsidiary Net cash (outflow) / inflow 738 401 1,139 (1,139) 92 > MYOB Limited Annual Report 2006 31 Fair Value and Interest Rate Risks The Group’s principal financial instruments comprise bank loans, finance leases, cash and short-term deposits. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial instruments such as trade debtors and trade creditors, which arise directly from its operations. The main risks arising from the Group’s financial instruments are interest rate risk, liquidity risk, foreign currency risk and credit risk. Senior management, in conjunction with the Board, reviews and agrees policies for managing each of these risks and they are summarised below. Fair values All assets and liabilities recognised in the balance sheet, whether they are carried at cost or at fair value are recognised at amounts that represent a reasonable approximation of fair value unless otherwise stated in applicable notes. Foreign currency risk As a result of investment operations in Europe, New Zealand, United States and Asia, the Group’s balance sheet can be affected by movements in the exchange rates. However, given the level of net assets held in local currencies, the level of exposure is limited. The Group also has transactional currency exposures. Such exposure arises from sales or purchases by an operating unit in currencies other than the unit’s functional currency. Approximately 33% of the Group’s sales are denominated in currencies other than the reporting currency of the Group. These revenues are partially hedged by local denominated expenses as well as product development costs in each jurisdiction that is paid in local currency. Credit risk It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is limited. There are no significant concentrations of credit risk within the Group. The Company minimises concentrations of credit risk in relation to trade accounts receivable by undertaking transactions with a large number of customers. However, the majority of customers are concentrated in Australia. Liquidity risk The Group minimises liquidity risk by maintaining a significant level of cash and equivalents as well as ensuring the Group has access to the use of credit facilities as required. Interest rate risk The Group has limited debt and therefore minimal exposure to interest rate risk in terms of liabilities. (Refer Note 21) The Group manages its interest rate risk by the use of fixed rate instruments (eg: finance leases) and by spreading the tenor of any debt to optimise the balance between costs of funds and liquidity. Similarly in terms of interest rate risk on cash and deposits the Group seeks to maximise the interest earned on these funds balanced against the length of investment and the impact on liquidity. MYOB Limited Annual Report 2006 > 93 94 > MYOB Limited Annual Report 2006 31 Fair Value and Interest Rate Risks (continued) a) Interest rate risk The consolidated entity’s exposure to interest rate risks and the effective interest rates of financial assets and financial liabilities, both recognised and unrecognised at the reporting date, are as follows: Weighted average effective Year ended 31 December 2006 <1year >1-<2 years >2-<3 years >3-<4 years >4-<5 years > 5 years Total interest rate $’000 $’000 $’000 $’000 $’000 $’000 $’000 % CONSOLIDATED FINANCIAL ASSETS 24,978 1,031 4.2% 5.4% Floating rate Cash assets 24,978 Short term deposits 1,031 Weighted average effective interest rate 4.2% FINANCIAL LIABILITIES 1,359 2,917 6.8% Floating rate Obligations under finance leases 1,558 Floating rate borrowings 6.8% - Weighted average effective interest rate 6.8% Notes to the Financial Statements (continued) MYOB LIMITED FINANCIAL ASSETS 12,613 1,017 4.1% 5.4% Floating rate Cash assets 12,613 Short term deposits 1,017 Weighted average effective interest rate 4.2% FINANCIAL LIABILITIES 0.0% Floating rate Obligations under finance leases Floating rate borrowings Weighted average effective interest rate 31 Fair Value and Interest Rate Risks (continued) a) Interest rate risk (continued) Year ended 31 December 2005 <1year $’000 >1-<2 years $’000 >2-<3 years $’000 >3-<4 years $’000 >4-<5 years $’000 > 5 years $’000 Total $’000 Weighted average effective interest rate % CONSOLIDATED FINANCIAL ASSETS Floating rate 3,312 34,409 3.3% 5.6% Cash assets 3,312 Short term deposits 34,409 Weighted average effective interest rate 5.4% FINANCIAL LIABILITIES Floating rate 1,455 716 5.3% 5.3% 3.9% 3.9% 1,073 1,073 1,373 1,391 4,427 4,593 6.8% 3.9% Obligations under finance leases 358 1,581 Floating rate borrowings Weighted average effective interest rate 5.3% MYOB Limited Annual Report 2006 > 95 31 Fair Value and Interest Rate Risks (continued) 96 > MYOB Limited Annual Report 2006 a) Interest rate risk (continued) Year ended 31 December 2005 <1year $’000 >1-<2 years $’000 >2-<3 years $’000 >3-<4 years $’000 >4-<5 years $’000 > 5 years $’000 Total $’000 Weighted average effective interest rate % MYOB LIMITED FINANCIAL ASSETS Floating rate 361 361 34,323 4.2% 5.6% Cash assets Short term deposits 34,323 Weighted average effective interest rate 5.6% FINANCIAL LIABILITIES Floating rate - Obligations under finance leases Notes to the Financial Statements (continued) Floating rate borrowings Weighted average effective interest rate 31 Fair Value and Interest Rate Risks (continued) b) Fair value The aggregate net fair values of financial assets and financial liabilities, both recognised and unrecognised at the reporting date, are as follows: CONSOLIDATED Total carrying amount as per the Aggregate net fair balance sheet value 2006 ($’000) (i) Financial assets Cash Receivables – trade and other Receivables – related parties Deposits Available-for-sale financial assets Other financial assets Total financial assets (ii) Financial liabilities Trade creditors and accruals Payables – related parties Interest-bearing loans and borrowings : Obligations under finance leases Floating rate borrowings Total financial liabilities 2,917 16,512 4,427 4,593 19,785 2,917 16,512 4,427 4,593 19,785 48,677 46,407 48,677 46,407 13,595 10,765 13,595 10,765 908 47,769 708 45,699 908 47,769 708 45,699 24,978 14,672 1,031 607 41,288 11,086 13,114 34,409 3,284 617 62,510 24,978 14,672 1,031 607 41,288 11,086 13,114 34,409 3,284 617 62,510 12,613 105 31,933 1,017 607 46,275 361 378 30,090 34,323 585 65,737 12,613 105 31,933 1,017 607 46,275 361 378 30,090 34,323 585 65,737 2005 ($’000) 2006 ($’000) 2005 ($’000) MYOB LIMITED Total carrying amount as per the Aggregate net fair balance sheet value 2006 ($’000) 2005 ($’000) 2006 ($’000) 2005 ($’000) The following methods and assumptions are used to determine the net fair values of financial assets and liabilities: Cash, cash equivalents and short-term deposits: the carrying amounts approximate fair value because of their short-term to maturity. Trade receivables and payables: the carrying amounts approximate fair value. MYOB Limited Annual Report 2006 > 97 Notes to the Financial Statements (continued) 32 Commitments and Contingencies Operating lease commitments – Group as lessee Future minimum rentals payable under non-cancellable operating leases as at 31 December are as follows: CONSOLIDATED 2006 $’000 Within one year After one year but not more than five years More than five years 6,929 16,452 5,174 28,555 2005 $’000 8,049 20,348 7,692 36,089 MYOB LIMITED 2006 $’000 1,852 7,408 3,704 12,965 2005 $’000 1,909 8,188 4,950 15,047 The consolidated entity has operating lease commitments in relation to commercial property leases with the majority including renewal options. There are no restrictions placed upon the lessee by entering into these leases. Finance lease and hire purchase commitments Future minimum lease payments under finance leases and hire purchase contracts together with the present value of the net minimum lease payments are as follows: 2006 Minimum payments $’000 CONSOLIDATED Within one year After one year but not more than five years Total minimum lease payments Less amounts representing finance charges Present value of minimum lease payments 1,671 1,406 3,077 (160) 2,917 2,917 1,558 1,359 1,875 3,172 5,047 (620) 4,427 4,427 1,581 2,846 Present value of payments $’000 Minimum payments $’000 2005 Present value of payments $’000 As at balance date the consolidated entity has finance leases for property fit-outs and plant and equipment with an average lease term of two years. The average discount rate implicit in the leases is 6.8%. Contingent Liabilities and Contingent Assets There are no Contingent Liabilities or Contingent Assets as at 31 December 2006. 98 > MYOB Limited Annual Report 2006 33 Impairment Testing of Intangible Assets with Indefinite Lives The only intangible asset with an indefinite life currently held by the Group is Goodwill. Goodwill acquired through business combinations has been allocated to individual cash generating units for impairment testing. The cash generating units have been identified as each of the following operations: • • • • • • • • • Australia New Zealand United Kingdom Hong Kong Ireland Malaysia China Singapore Exonet Group The recoverable amount of each operation has been determined on a “value in use” basis. To calculate this, pre-tax cash flow forecasts are derived from financial projections covering a 14 year period to 2020. The terminal value is calculated at the end of the 14 year period using a 4% growth rate applied to net cash flows. Whilst the terminal growth rate is below long-term average growth rates for the software market sector, and MYOB in particular, it is considered to be a prudent approach. Given the early stage nature of the China market, management has deemed it appropriate to use a terminal value growth rate of 5% in assessing the value of its China operation. This represents a change in methodology from 2005 in which the terminal value was calculated at the end of a five year forecast period at a rate of 4%. MYOB management determined that this approach was not reflective of expected growth rates and was incorrectly discounting terminal values for each operation. The discount rate applied to cash flow projections is 15.3% (2005: 14.8%). Cash flows modelled in the valuation are reviewed each year to ensure they are congruent with the risk implied in the discount rate used. MYOB Limited Annual Report 2006 > 99 33 Impairment Testing of Intangible Assets with Indefinite Lives (continued) CONSOLIDATED United Kingdom 2006 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 Malaysia Hong Kong Ireland Total Total MYOB LIMITED Carrying amount of goodwill, patents and licences Australia New Zealand 00 > MYOB Limited Annual Report 2006 2006 2005 2006 2005 $’000 $’000 $’000 $’000 Carrying amount of goodwill 63,679 (Note 18) 82,473 80,211 20,715 17,233 63,031 3,635 3,710 29 29 2,803 2,779 173,334 166,993 - - Key assumptions used in value in use calculation for 3 December 2005 and 3 December 2006 The following describes each key assumption on which management has based its cash flow projections to undertake impairment testing of goodwill. Notes to the Financial Statements (continued) Revenue forecasts are based on detailed plans for 2007 and growth projections based on the key drivers in the current business, including an assessment by operation of: • the number of new units expected to be sold/share of local new unit market, • level of upgrade penetration of existing customer base, • customer cover plan uptake, • introduction and growth of transactional services, and • likely growth in training, consulting and other services. Cost of sales and expenses are based on detailed knowledge of the business, historic activity and detailed plans for the 2007 year. This has been extrapolated in future years based on knowledge and assumptions around the growth in revenue and the level of expense required to support this. 34 Events after the Balance Sheet Date In early January 2007, MYOB NZ Ltd purchased from an outside party the remaining 25% of Exonet Pty Ltd for $3.0 million ($3.3 million NZD) and now holds 100% full equity ownership. This purchase forms part of MYOB’s enterprise solutions strategy. There are no other matters or circumstances that have arisen since the end of the period which significantly affected or may significantly affect the operations of the consolidated entity, the results of those operations or the state of affairs of the consolidated entity in subsequent financial years. 35 Auditor’s Remuneration CONSOLIDATED 2006 $ The auditor of MYOB Limited is Ernst & Young. Amounts received or due and receivable by Ernst & Young (Australia) for: • • an audit or review of the financial report of the entity and any other entity in the consolidated entity other services in relation to the entity and any other entity in the consolidated entity tax compliance assurance related special audits required by regulators 54,335 25,000 492,335 Amounts received or due and receivable by affiliates of Ernst & Young Australia for: • • • an audit or review of the financial report of subsidiary entities tax compliance others 170,500 23,500 620,000 54,335 267,335 170,500 383,500 2005 $ MYOB LIMITED 2006 $ 2005 $ 413,000 426,000 213,000 213,000 229,486 53,549 28,362 803,732 208,648 70,577 899,225 267,335 383,500 MYOB Limited Annual Report 2006 > 0 02 > MYOB Limited Annual Report 2006 MYOB Limited Annual Report 2006 > 03 Directors’ Declaration In accordance with a resolution of the Directors of MYOB Limited, I state that: 1. In the opinion of the Directors: (a) the financial statements and notes of the Company and of the consolidated entity are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Company’s and consolidated entity’s financial position as at 31 December 2006 and of their performance for the year ended on that date; and (ii) complying with Accounting Standards and Corporations Regulations 2001; and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. This declaration has been made after receiving the declaration required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the financial period ending 31 December 2006. 3. In the opinion of the Directors, as at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identified in note 27 will be able to meet any obligations or liabilities to which they are or may become subject, by virtue of the Deed of Cross Guarantee. On behalf of the Board SIMON MCKEON Chairman MYOB Limited CRAIG WINKLER Chief Executive Officer MYOB Limited Melbourne, 13 February 2007 04 > MYOB Limited Annual Report 2006 Shareholder Information Key Dates Books closing for final and special dividends Final dividend paid Annual General Meeting Half year end 2 April 2007 20 April 2007 27 April 2007 30 June 2007 Australian Stock Exchange listing MYOB Limited ordinary shares are quoted on the Australian Stock Exchange (ASX). The stock code under which the shares trade is ‘MYO’. Trading results are published in most large Australian daily newspapers. Communications Enquiries or notifications by shareholders regarding their shareholdings or their dividends should be directed to MYOB Limited’s share registry: Computershare Investor Services Pty Ltd Yarra Falls, 452 Johnston Street, Abbotsford 3067 Telephone: Facsimile: (within Australia) (outside Australia) Mailing: E-mail: Web: 1300 850 505 +61 3 9473 2500 +61 3 9415 4000 GPO Box 2975, Melbourne Victoria 3001 web.queries@computershare.com.au www.computershare.com.au Shareholders communicating with the share registry should advise them that the enquiry relates to MYOB Limited shares. When writing to the share registry, they should quote their Shareholder Reference Number as it appears on their share certificate(s) or the Holder Identification Number (HIN) as it appears on their Holding Statement, along with their current address. Registered Office 12 Wesley Court, Burwood East, Victoria, 3151 Tel: +61 3 9222 9797 Fax:+613 9222 9798 www.myob.com.au Company Secretary Robert Reside Voting Rights At meetings of shareholders (subject to the Constitution of MYOB Limited): i. Each shareholder entitled to vote may either vote in person, by proxy, by representative or by attorney; ii. On a show of hands, each shareholder present in person, by proxy, by representative or by attorney has one vote; and iii. On a poll, each shareholder present in person, by proxy, by representative or by attorney shall have one vote for every share held by that shareholder. In the case of joint holdings, only one joint holder may vote and, if both joint holders attend the meeting, only the first named in the register of shareholders may vote. MYOB Limited Annual Report 2006 > 05 Additional Information Substantial Shareholders Substantial Shareholders as at 13 February 2007 Shareholder Name Craig Winkler and his associated entities Galeen Pty Ltd * Guiness Peat Group Commonwealth Bank of Australia Schroder Investment Management Group AMP Ltd Morgan Stanley Investments Management Ltd Shares held 108,792,008 79,007,693 48,441,007 45,310,090 37,898,298 27,583.193 20,812,232 % Shares held 27.71 20.12 12.56 11.74 9.82 7.15 5.39 * Galeen Pty Ltd’s holding relates mainly to shares held through its interests in Solwood Lane Pty Ltd, an entity associated with Mr Winkler. Distribution of Shareholders as at 13 February 2007 Ranges 1-1,000 1,001–5,000 5,001–10,000 10,001–100,000 100,001 - max Number of Ordinary Shares 276,124 14,956,153 9,451,781 22,625,828 335,609,008 Number of Shareholders 5,046 6,233 1,312 938 78 Top 20 Shareholders as at 13 February 2007 Shareholder Solwood Lane Pty Ltd Silvara Pty Limited JP Morgan Nominees Australia Limited Bangarie Pty Ltd Citicorp Nominees Pty Limited National Nominees Limited Westpac Custodian Nominees Citicorp Nominees Pty Limited AMP Life Limited Citicorp Nominees Pty Limited Cogent Nominees Pty Limited Citicorp Nominees Pty Limited Cogent Nominees Pty Limited Citicorp Nominees Pty Limited Queensland Investment Corporation Ravere Pty Ltd Citicorp Nominees Pty Limited ANZ Nominees Limited Citicorp Nominees Pty Limited Craig Winkler Number of Shares 73,740,993 48,441,007 47,435,075 30,179,041 13,883,206 12,787,732 12,504,397 9,717,575 7,131,083 7,007,772 6,905,103 6,435,327 5,758,334 5,364,610 5,362,533 5,000,000 4,453,165 4,444,268 3,721,395 3,000,000 % 19.13 12.57 12.31 7.83 3.60 3.32 3.24 2.52 1.85 1.82 1.79 1.67 1.49 1.39 1.39 1.30 1.16 1.15 0.97 0.78 06 > MYOB Limited Annual Report 2006 Note to Shareholders Save your money by receiving shareholder updates and notices electronically We would like to remind shareholders that you can register to receive notifications about Company announcements, annual and periodic reports, and other Company information from MYOB Limited by email. By registering for this service, you can be kept up-to-date with significant Company announcements as they happen. Sending you information electronically means we can eliminate the cost of sending paper – good for shareholders (it saves money) and for the environment. Register today by visiting the share registry at www.computershare.com and follow these easy steps: 1. Click on ‘Securityholders’. 2. Click on ‘Register now’. 3. Type ‘MYOB Limited’ into the ‘Company Name’ box and enter your personal security information – Holder Identification Number (HIN) or Security Reference Number (SRN); postcode – and click ‘Submit’. 4. Follow the prompts to register, if you are already a registered member move on to Step 5. 5. On left hand side navigation menu under ‘Manage’ select ‘Email Address Update’. 6. Select which publication type you wish to receive electronically, enter your email address in the box provided and click ‘Submit’. You will be sent a confirmation email acknowledging your selections. When you receive it, just click ‘Reply’ to confirm your details, then ‘Send’. It’s as easy as that. Register now to receive future MYOB Company information by email. This service is run by our share registry, Computershare Investor Services Pty Limited. If you have any queries please contact the registry on 300 850 505. Conserve resources – consolidate your shareholding now If you currently hold separate shareholdings in MYOB Limited, you may also wish to consider consolidating your shareholdings into one account. This way, we can avoid sending you multiple copies of documentation in the future. To consolidate your shareholdings, you will simply need to visit our share registry at www.computershare.com and complete the following steps: 1. Click on ‘Download a form’. 2. Click and download the ‘Request to Consolidate Holdings’ form found under ‘Holder Amendments’. 3. Complete this form and return it to the share registry. Please contact Computershare on 300 850 505 if you have any queries about consolidating your shareholdings. MYOB Limited Annual Report 2006 > 07 Company Directory Directors Simon McKeon Independent Non-Executive Chairman Craig Winkler Chief Executive Officer Christopher Lee Executive Director John Stewart Independent Non-Executive Director Colin Henson Independent Non-Executive Director Christopher Williams Independent Non-Executive Director Company Secretary Robert Reside Registered Office 12 Wesley Court Burwood East VIC Australia 3151 Website www.myob.com Auditors Ernst & Young Ernst & Young Building 8 Exhibition Street Melbourne VIC Australia 3000 Share Registry Computershare Investor Services Pty Limited Yarra Falls 452 Johnston Street Abbotsford VIC Australia 3067 Notice of Annual General Meeting The Annual General Meeting of the Company will be held on Friday 27 April 2007 at MYOB Head Office: 12 Wesley Court Burwood East VIC Australia 3151. 08 > MYOB Limited Annual Report 2006 Our Clients Australia - Michael Wilson Diamond Jewellers Michael Wilson Diamond Jewellers has been designing, handcrafting and retailing distinctive and individual diamond, gold and silver jewellery for the last 30 years and has won every major diamond design award in Australia. The outcomes “When you’re dealing with such a valuable stock as diamonds, it is imperative that stock control is fully accurate,” explained Aaron. “MYOB RetailManager gives us the ability to effectively monitor and manage stock levels and therefore allows us to understand what we have in stock, what is selling well and what we need to continue designing.” Automation at the point-of-sale has also proven to be a major benefit at Michael Wilson as several different staff members tend to sales. Staff members have enjoyed the ease of operation of the software and appreciate the screen prompts each time they enter a sale. “We’ve used MYOB Technical Support when we’ve required support, especially at the start when installing MYOB RetailManager and we’ve found the service fantastic,” said Aaron. – Aaron Wilson, Michael Wilson Diamond Jewellers The key challenge In the past, Michael Wilson experienced many problems with industry-based point of sale systems that were too complicated and unreliable. “We needed a system that was simple, reliable and easy to use,” said Director, Aaron Wilson. Finding the right solution The company had experience with MYOB software and had been happy with the results. They were recommended MYOB RetailManager and felt it compared very favourably with industry-based point-of-sale systems, particularly in cost terms. This annual report is printed on stock that is made in Australia under the highest level of international environmental standards, ISO 14001. All pulps used in the production of this report are sourced from suppliers who practice sustainable management of forests. Pulps are also bleached using ECF (Elemental Chlorine Free) technology. Energy used in the manufacturing process of this stock is 92% renewable, sourced from hydroelectric and wind farm power. MK5111/0207