<p>Financial Advisor to the Board Cameron Partners Limited Lead Broker First NZ Capital Securities Limited Joint Organising Sponsors Cameron Partners Limited First NZ Capital Securities Limited 11 May 2007 Investment statement xero lIve lImIted share offer + prospectus x er o i n v es tm en t st a te m en t & p r o sp ec tu s x er o i n v es tm en t st a te m en t & p r o sp ec tu s choosing an investment When deciding whether to invest, consider carefully the answers to the following questions that can be found on the pages noted below: • What are my risks? (pages 76 to 77) • What sort of investment is this? (pages 72 to 73) • Who is involved in providing it for me? (page 74) • How much do I pay? (page 74) • What are the charges? (page 74) • What returns will I get? (page 75) • Can the investment be altered? (pages 77 to 78) • How do I cash in my investment? (page 78) • Who do I contact with enquiries about my investment? (page 78) • Is there anyone to whom I can complain if I have problems with the investment? (page 79) • What other information can I obtain about this investment? (page 79) In addition to the information in this document, important information can be found in the current registered prospectus for the investment. You are entitled to a copy of that prospectus on request.1 choosing an investment adviser You have the right to request from any investment adviser a written disclosure statement stating his or her experience and qualifications to give advice. That document will tell you: • Whether the adviser gives advice only about particular types of investments; • Whether the advice is limited to investments offered by 1 or more particular financial organisations; and • Whether the adviser will receive a commission or other benefit from advising you. You are strongly encouraged to request that statement. An investment adviser commits an offence if he or she does not provide you with a written disclosure statement within 5 working days of your request. You must make the request at the time the advice is given or within one month of receiving the advice. In addition: • If an investment adviser has any conviction for dishonesty or has been adjudged bankrupt, he or she must tell you this in writing; and • If an investment adviser receives any money or assets on your behalf, he or she must tell you in writing the methods employed for this purpose. Tell the adviser what the purpose of your investment is. This is important because different investments are suitable for different purposes. INveStMeNt deCISIoNS are very IMPortaNt. they often have long-term consequences. read all documents carefully. ask questIons. seek advIce before commIttIng yourself. the InformatIon In thIs sectIon Is requIred under the securItIes act 1978. IMPortaNt INForMatIoN important notice This Offer Document is for an offer of Shares in Xero Live Limited (“Xero”). It is a combined investment statement and prospectus for the purposes of the Securities Act and the Securities Regulations, and has been prepared as at, and is dated, 11 May 2007. The information required to be contained in an investment statement by the Securities Regulations 1983 is set out in the sections entitled “Important Information” (see above) and “Answers to Important Questions” (pages 72 to 79). The purpose of those sections of this Offer Document is to provide certain key information that is likely to assist a prudent but non-expert person to decide whether or not to acquire Shares in Xero under the Share Offer. However, investors should note that other important information about the Share Offer, the Shares and Xero is available in the other sections of this Offer Document and in the information available for inspection at the registered office of Xero (described further on page 79). registration of offer document A copy of this Offer Document duly signed, and having copies of the documents required by section 41 of the Securities Act attached, has been delivered to the Registrar of Companies for registration in accordance with section 42 of the Securities Act. The documents required by section 41 of the Securities Act to be attached to the copy of this Offer Document delivered to the Registrar of Companies for registration are: (a) the Auditor’s report in respect of certain financial information included in this Offer Document (set out on pages 70 to 71); (b) the signed consent of the Auditor to the Auditor’s report appearing in this Offer Document; (c) the signed consent of Ernst & Young to the inclusion in this Offer Document of results of independent research undertaken by it for Xero; (d) an acknowledgment from NZX to the effect that an application has been made to NZX for permission to list the Shares, and all the requirements of NZX for the listing of the Shares that can be complied with at that time have been duly complied with; and (e) copies of the material contracts referred to in clause 17 on page 84. new zealand exchange listing Application has been made to NZX for permission to list the Shares, and all the requirements of NZX relating thereto that can be complied with on or before the date of this Offer Document have been duly complied with. However, NZX accepts no responsibility for any statement in this Offer Document. Initial quotation of the Shares is expected to occur on 5 June 2007. NZX has authorised Primary Market Participants to act on the Share Offer. electronic offer document This Offer Document is available in electronic form at www.xero.com. The Offer constituted by this Offer Document in electronic form is available only to residents in New Zealand. The availability of this Offer Document on the website is for the purposes of the Offer in New Zealand. The distribution of the Offer Document in electronic form may be prohibited in certain jurisdictions, including the United States, Canada and the United Kingdom, and is not available to residents of such jurisdictions. Persons who access the electronic version of this Offer Document should ensure that they are entitled to do so under applicable laws and, if so, that they download and read the entire Offer Document. The New Zealand Securities Act prohibits the allotment of Shares to any applicant who did not receive a copy of this Offer Document before applying. Accordingly, no person may pass an Application Form on to another person unless it is attached to a hard copy of this Offer Document or the complete and unaltered electronic version of this Offer Document. overseas investors The Share Offer is only being made to members of the public in New Zealand. No person may offer, invite, sell or deliver any Shares or distribute any documents (including this Offer Document) to any person outside New Zealand. This Offer Document may not be sent into or distributed in the United States. Unless otherwise agreed with Xero, any person or entity applying for Shares under the Share Offer will, by virtue of such Application, be deemed to represent that he, she or it is not in a jurisdiction that does not permit the making of the Share Offer or an invitation of the kind contained in this Offer Document and is not acting for the account or benefit of a person within such a jurisdiction. Neither Xero, nor any of its Directors, officers, employees, consultants, agents, partners or advisers accepts any liability or responsibility to determine whether a person is able to participate in the Share Offer. no guarantee No person, Director or entity guarantees the Shares offered under this Offer Document. Only Xero undertakes any liability in respect of the Shares, and then only to the extent required by law. takeovers code The Takeovers Code, amongst other things, prohibits any person (together with their associates (as defined in the Takeovers Code)) from becoming the holder or controller of 20% or more of the voting rights in the Company other than in compliance with the requirements of the Takeovers Code. Investors are advised to seek legal advice in relation to any act, omission or circumstance which may result in that investor breaching any provision of the Takeovers Code. risk and suitability of an investment in xero Xero is an early stage software business and an investment in Xero is inherently risky. As such, it may not suit all investors. The Share Offer does not take into account each investor’s investment objectives, financial situation and particular needs. It is important that investors read this Offer Document in its entirety before deciding whether to apply to purchase any Shares. In particular, investors should consider the risk factors that could affect the performance of Xero (including those set out under the heading “What are my risks?” on pages 76 to 77), particularly with regard to their personal circumstances (including financial and taxation issues). Investors who are in any doubt as to the action they should take, should consult their stockbroker, solicitor, accountant or other financial adviser before deciding to invest. definitions Capitalised terms used in this Offer Document have a special meaning and are defined in the Glossary section of this Offer Document on pages 94 to 95 or in the relevant section in which the term is used. Unless otherwise indicated, $ or NZ$ refers to New Zealand Dollars. All references to time are to time in New Zealand. 1 this is the wording required by schedule 3d to the securities regulations 1983 which contemplates a separate investment statement and prospectus. for this share offer, the two documents have been combined and accordingly the prospectus available on request is this offer document. im p o r ta n t in fo r m a ti o n  CoNteNtS x er o i n v es tm en t st a te m en t & p r o sp ec tu s 4 offer statIstIcs and Important dates 6 Investment hIghlIghts 10 chaIrman’s letter 12 founders’ letters 16 detaIls of the share offer 22 market opportunIty & competItIve posItIonIng 28 about xero 38 xero’s dIrectors and management team 46 prospectIve fInancIal InformatIon 50 hIstorIc fInancIal InformatIon 72 answers to Important questIons 80 statutory InformatIon 86 applIcatIon InstructIons 94 glossary of terms 96 dIrectory   c o n te n ts oFFer StatIStICS aNd IMPortaNt dateS x er o i n v es tm en t st a te m en t & p r o sp ec tu s  x er o i n v es tm en t st a te m en t & p r o sp ec tu s important dates share offer summary This timetable is indicative only. Xero reserves the right to: (a) extend the Closing Date of the Share Offer or close the Share Offer early, in which case the dates referred to opposite will change accordingly; (b) withdraw the Share Offer at any time before the Allotment Date; and (c) accept late Applications, either generally or in individual cases. Issuer Xero Live Limited Shares being offered in the Share Offer 15,000,000 Oversubscriptions Up to 3,000,000 Total number of shares being offered Up to 18,000,000 Offer Price $1.00 Shares on issue if Share Offer is fully subscribed (excluding oversubscriptions) 55,000,000 Offer Document registered Friday, 11 May 2007 Share Offer opens Monday, 14 May 2007 Share Offer closes Wednesday, 30 May 2007 Allotment Date No later than Tuesday, 5 June 2007 Quotation and trading of shares expected to commence on the NZSX Tuesday, 5 June 2007 Allotment notices mailed Tuesday, 5 June 2007 FASTER statements mailed No later than Thursday, 7 June 2007 Refund cheques mailed (if applicable) No later than Friday, 8 June 2007  o ff er s ta ti st ic s & i m p o r ta n t d a te s INveStMeNt hIghLIghtS xero provIdes an onlIne accountIng solutIon for small and medIum sIzed enterprIses (smes), whIch typIcally have less than 20 employees. xero was Incorporated In July 2006 by rod drury, an experIenced new zealand based technology entrepreneur who has a record of buIldIng successful software busInesses, and hamIsh edwards, the owner of an sme accountIng busIness and a publIshed commentator on smes. theIr vIsIon Is to create a global software company from new zealand based on the delIvery over the Internet of accountIng software for smes. www.xero.com x er o i n v es tm en t st a te m en t & p r o sp ec tu s  Xero has recruited a high quality team, as at 30 April 2007 comprising 27 people including the founders, Rod Drury and Hamish Edwards. The management team is supported by an experienced board of Independent Directors comprising Phil Norman, Graham Shaw, Guy Haddleton and Sam Morgan. Xero currently intends to establish subsidiaries in the UK and Australia and recruit in-market staff to develop its business in these locations. Xero has been accepted into the New Zealand Trade and Enterprise (“NZTE”) Beachheads programme for the UK and has established a UK advisory board, comprising senior UK business people, to assist in the strategic development of the business there. 2 hIgh qualIty team 1 sIgnIfIcant market opportunIty SMEs are the most common form of business organisation. In all OECD countries, they constitute over 90% of all businesses by number. Unlike many other software systems, which are largely optional, accounting systems are all but a necessity for SMEs. The predominant accounting software applications that exist today for SMEs are installed on desktop computers. The Directors believe the time has arrived for SMEs to access software by using Internet technologies. They also believe there is an opportunity for a fast moving, well funded business, without a legacy business model, to address the expected migration by SMEs to online accounting. key Investment consIderatIons thIs share offer represents an opportunIty to Invest In an early stage new zealand technology busIness, wIth an InternatIonal strategy. the key features of thIs opportunIty are: in v es tm en t h ig h li g h ts  Xero is an early adopter of the web-based business model that is technically known as software as a service (“SaaS”). This model is ideally suited to the needs of the large and fragmented SME market. Rather than installing software on independent desktops or networks at each customer’s location, Xero’s software is made available online through a secure login. Importantly, the software does not require installation and therefore can be frequently modified and updated with minimal downtime for customers. Xero’s customers will pay a monthly subscription to use its web-based accounting system, rather than paying for an up-front software licence and then having to pay ongoing upgrade, maintenance and service charges. The Directors believe that the SaaS model will enable Xero to benefit from having a centralised operating environment with lower infrastructure costs and a predictable revenue stream. The SaaS model should also provide Xero with a significant opportunity for long term profitability. accepted new busIness model 5 Xero’s strategy is to become a leading provider of SME online accounting solutions in its target markets. It intends to use the experiences of the consumer software market (based on Internet technology) and apply these to the SME market to create an internationally scalable business. Key elements of its strategy include: • Building the brand and business in New Zealand initially and expanding into the UK and Australia. The aggregate target market is large – the number of SMEs in these regions is around 5.8 million, split: UK, 4.3 million; Australia, 1.2 million; and New Zealand, 322,000. • Focusing in each market on the key market segments which it believes, through its research and experience to date, are likely to be early adopters of its offering: technology companies, professional services firms (including accounting practices) and not-for-profit organisations. • Strengthening its market presence by establishing and expanding national partnerships and alliances. • Expanding its customer support capabilities which Xero believes will be a key differentiator for SMEs. strong busIness strategy 4 Xero’s accounting system is different to most installed SME accounting systems currently available in the marketplace in the following important ways: • It is easy to use – limited training is required and the product is customer friendly. • It is online – there is no software to install. Xero is accessible any time through any Internet connection in the world. Xero’s login is secure, and Xero has an internal security strategy to protect the Xero products from viruses and spyware. All data is automatically backed up daily. • Continuous innovation – Xero can be updated frequently with product enhancements as well as quickly responding to compliance changes. • It is cost effective – a pay as you go and pay as you grow pricing model. • It provides real time access for advisers – enables an SME to easily share information with its advisers. • It assists decision making – provides immediate visibility of important information for SMEs to run their businesses and make informed decisions. • It is easy to switch to Xero – there should be minimal cost for an SME to switch to Xero from another accounting system. xero’s product Is compellIng to smes 3 x er o i n v es tm en t st a te m en t & p r o sp ec tu s  Since its establishment, Xero has: • Raised capital of $2.8 million from the founders, Directors and selected employees of Xero. It has also received $100,000 in Government grants and has been awarded a further $750,000 of Government funding to be drawn down over the next five years to assist with R&D and UK market entry. The funding received to date has enabled Xero to get its initial product offering market ready. • Developed its core online accounting software product and the foundations for its operational systems and processes necessary to enable the business to scale internationally. • Tested the product with more than 140 users since November 2006. Since starting to sell the product (in a limited release) since April 2007 Xero has attracted over 100 paying customers. • Recruited a strong management team with the skills required to enable Xero to grow the business internationally. • Established some key partnering relationships with retail banks, chartered accountancy firms and other businesses to help accelerate its customer penetration and market success. • Been selected to represent New Zealand as a finalist in the worldwide Technium Challenge in Wales, UK in late May 2007. • Developed the Xero brand. xero has already achIeved momentum 6 The Directors believe that Xero can create a strong market position for itself in the online accounting software market if it captures the opportunity that exists here and now. Xero has already recruited an experienced team, has a compelling business model, a product available for full market release in the second half of 2007, a developing brand and some key business relationships to help it succeed. However, it needs to move quickly, with an appropriate level of capital, to establish its business in New Zealand and then credibly enter its targeted overseas markets. the opportunIty for xero Is now 7 the dIrectors have decIded to raIse the capItal needed for the further development of xero through a publIc offer because they belIeve It Is the most approprIate means of obtaInIng the fundIng requIred to enable xero to execute Its busIness plan. Another important benefit of Xero operating as a public company, with visible reporting and good governance structures, is that it should help instil confidence amongst Xero’s customers about Xero and its offering. This should help to further accelerate the implementation of Xero’s business plan. The Directors believe that if Xero were to remain a privately owned company based in New Zealand, without an appropriate level of funding and the profile and transparency which comes with being a public company, it would not be able to capitalise on the immediate international opportunity for Xero. Xero is an early stage software business with no specific track record of success for its business or operations. Accordingly, please read all the information in this Offer Document, and talk to a qualified adviser that you trust before deciding whether or not to subscribe for Shares in Xero under this Share Offer. The principal risks of investing in Xero are set out on pages 76 to 77. One of the main principles of investing money is to have a diversified portfolio of investments. Potential investors should carefully consider the size of their application relative to their other investments. in v es tm en t h ig h li g h ts  ChaIrMaN’S Letter 11 may 2007 phIl norman x er o i n v es tm en t st a te m en t & p r o sp ec tu s 0 From the outset Xero was established with the objective of growing internationally. It has a highly skilled team and an experienced board of directors. the Ceo and co-founder, rod drury, is an accomplished and well-respected entrepreneur. rod’s track record shows that he has the ability to detect fundamental shifts in the Information and Communications technology (“ICt”) industry and then create software products that utilise new technologies. In the past, rod has created businesses of significant value. his most recent success was the sale, in 2006, of his former email management software business, afterMail, to Quest Software of the USa. Xero has aspirations for international growth in targeted markets, but to realise its ambitions Xero needs the necessary capital resources to capture the market opportunity that exists for it right now. Xero considered seeking private venture capital funding, but the pool of such funding available to growing technology businesses in New Zealand is relatively small. accordingly, the directors have decided to raise capital for the development of Xero, via a public flotation of the Company. We believe that the capital raised and the profile created by a public offer will greatly assist in the acceleration of Xero’s business plan. We estimate around one third of the Shares being offered will be allocated to certain strategic parties including private investors, industry influencers, accountants, high net worth individuals and New Zealand institutions. the Independent directors of Xero, including myself intend to subscribe, in aggregate, for 1.35 million Shares at the offer Price. the balance of the Shares under the Share offer will be made available to clients of First NZ Capital and to any other applicants. this is an exciting opportunity to participate in a high-quality, entrepreneurial New Zealand software company that has the potential to become a significant participant in its chosen geographic markets. however, Xero is an early stage business, similar to a venture capital opportunity, and is, therefore, a high-risk investment. the directors see Xero as a growth opportunity and do not expect the Company to be profitable for at least three years. there are risks that may impede Xero from achieving its growth aspirations. that said, the directors and management of Xero are using their best endeavours to ensure that Xero’s business plan and its milestones and targets are carefully thought through and are realistically set. Full details of the Share offer are set out in this offer document and it should be read carefully in its entirety before making an investment decision. on behalf of the directors, I commend this Share offer to you and, if you do decide to invest, welcome you as a shareholder of Xero. yours sincerely phil norman chairman “thIs Is an excItIng opportunIty to partIcIpate In a hIgh-qualIty, entrepreneurIal new zealand software company that has the potentIal to become a sIgnIfIcant player In Its chosen geographIc markets.” dear Investor on behalf of the dIrectors of xero, I am pleased to present you wIth thIs opportunIty to Invest In a new zealand technology venture.  ch a ir m a n ’s l et te r rod drury hamIsh edwards FoUNderS’ LetterS 11 may 2007 x er o i n v es tm en t st a te m en t & p r o sp ec tu s 2 dear Investor as an owner of several small businesses myself, it was obvious to me that there was not an accounting product available in the market that provided a daily focus on cash flow with the ease of use that most small businesses need. In my businesses, I place a high value on the input of advisers. It frustrated me how difficult it was to share the numbers with my accountant, hamish edwards, who acted as the virtual CFo for afterMail. as a technologist, I have been watching new web development technologies evolve. the time is now right for a change that re-defines the economics of delivering business systems to small and medium sized enterprises. as an entrepreneur who has founded, built and sold a number of companies, I have been looking for an opportunity to build a long-term global business from New Zealand – a real example of New Zealand’s knowledge economy. Web based SMe accounting provides an opportunity to do this. the decision to proceed with an IPo at such an early stage is not a decision we have taken lightly. however, the opportunity for Xero has arrived. going public is the best path if we are going to credibly enter overseas markets with the resources it takes to be successful. I hope you will join us on our journey. yours sincerely rod drury founder and ceo dear Investor together, rod and I decided to set out to re-define the ways accounting can work for small and medium sized enterprises. these organisations make up a high percentage of the number of businesses operating in most countries, employing, in some instances, up to two-thirds of the workforce. typically, these businesses are privately owned (often by the founder, their family or a small group of investors) and are often sensitive to shifts in their balance sheet and cash flow. accordingly, the ability to monitor financial performance and plan is very important. Based on my own experience, businesses of this size generally do not have the tools or resources to tell them easily and quickly what they need to know about their financial position and performance. With Xero, we have developed an accounting system that is connected to the business in real-time and is, therefore, able to tell business owners what they most need to know, when they most need to know it – simply, effectively and economically. We believe we have developed an online accounting system that is versatile enough to be used by a range of businesses across the world. We have already received a strong response in New Zealand, not just directly from potential SMe customers, but also from accountancy firms and financial institutions, who we believe will become important advocates for Xero. We hope you will choose to invest in Xero and share our vision to create an international software company. We invite you to join us on this exciting journey. yours sincerely hamish edwards founder and cfo “the tIme Is now rIght for a change that re-defInes the economIcs of delIverIng busIness systems to small and medIum sIzed enterprIses.” “we have developed an accountIng system that Is connected to the busIness In real-tIme and Is, therefore, able to tell busIness owners what they most need to know.”  fo u n d er s’ l et te r s x er o i n v es tm en t st a te m en t & p r o sp ec tu s  advisers become proactive partners with access to customers’ real-time data, meaning less time collating data and more time to interpret and use the information. collaborate  Investors should also refer to the detaIled InformatIon outlIned In the sectIon headed “answers to Important questIons” on pages 72 to 79. the share offer Xero is offering for subscription 15.0 million Shares under the Share offer at an offer Price of $1.00 per Share with the ability to accept oversubscriptions of up to $3.0 million (representing a further 3 million Shares at the offer Price). accordingly, Xero is seeking to raise up to $18.0 million, inclusive of oversubscriptions. the Shares are being offered to New Zealand resident institutional, professional and retail investors. minimum offer amount the minimum amount which must be raised by Xero through the issue of new Shares under the Share offer is $10.0 million, being 10 million Shares at the offer Price. If valid acceptances for the minimum subscription amount are not received by the Closing date, Xero will withdraw and cancel this Share offer, in which case all application monies received will be refunded (with interest, if any) within six business days after the Closing date. share offer not underwritten the Share offer is not being underwritten. allocations approximately 5.0 million Shares (representing one third of the number of Shares being offered under the Share offer) have been reserved for allocation to certain private investors, industry influencers, accountants, high net worth individuals and New Zealand institutions. In addition, the Independent directors of Xero intend to subscribe, in aggregate, for 1.35 million Shares made under the Share offer at the offer Price. the Independent directors do not guarantee nor undertake any liability in respect of the Shares. the balance of the Shares under the Share offer, being approximately 8.65 million Shares, will be made available to clients of First NZ Capital and to any other applicants. the Joint organising Sponsors reserve the right to make further allocations at their discretion.  thIS oFFer doCUMeNt IS a CoMBINed INveStMeNt StateMeNt aNd ProSPeCtUS IN reSPeCt oF aN oFFer oF ShareS IN Xero LIve LIMIted. the FoLLoWINg SeCtIoN oUtLINeS the MaIN terMS oF the Share oFFer. detaILS oF the Share oFFer sectIon 1 x er o i n v es tm en t st a te m en t & p r o sp ec tu s  selling restrictions on existing shareholders each of the existing Shareholders in Xero is restricted from disposing of the legal or beneficial ownership of the Shares held or controlled by them as at the date of this offer document for a period of 12 months from the date that Xero’s Shares are first quoted on the NZSX. this restriction is contained in a deed of embargo entered into by each existing Shareholder and Xero. the deeds provide that the existing Shareholder may only dispose of their legal or beneficial ownership of those Shares within the 12 month embargo period with the approval of Xero (and in respect of Shares held, respectively, by trusts of rod drury and hamish edwards, with the approval of Xero and the Lead Broker) or to an offeror who has made a successful full or partial takeover offer to all Shareholders under the takeovers Code. reasons for the ipo the directors have decided to raise the capital needed for the further development of Xero’s business through a public offer because they believe it is the most appropriate means of obtaining the funding required to enable Xero to execute its business plan. this Share offer will: • Provide Xero with the funding required to grow its business in New Zealand and to gain initial market entry in the UK and australia. • Provide visible reporting which should show that Xero is a well capitalised company, with committed shareholders, and long-term growth ambitions as a public company. this should help instil confidence amongst Xero’s customers about its offering and help to further accelerate the implementation of Xero’s business plan. • Provide Xero with the ability to base its business in New Zealand and create an opportunity that is attractive to international talent, including high quality New Zealand It professionals. • allow Xero to utilise public company governance structures to create a high-quality reporting and control environment, and provide a good base from which Xero can pursue the international growth of its business. • Further raise Xero’s profile. the directors believe that if Xero were to remain a privately owned company based in New Zealand, without an appropriate level of funding and the profile and transparency which comes with being a public company, it would not be able to capitalise on the immediate international opportunity for Xero that exists right now. use of proceeds from the ipo the proceeds from this Share offer will be used by Xero over the next three years to: • grow customer numbers in New Zealand with the aim of firmly establishing Xero as New Zealand’s leading online accounting system provider to SMes. • recruit additional staff to grow the business, including personnel in the UK and australia. • Invest in the operational infrastructure required to scale the business. • Provide working capital to sustain the operations of the business while Xero builds monthly recurring revenue streams. although it is intended that the proceeds from the IPo will be used for the above purposes, the directors are aware that Xero, like any early stage company, needs to be flexible with its strategies, plans, targeted milestones, operations and affairs so that it can, quickly and at short notice, respond to change, such as changes in the accounting or software industries, its competitive environment and insights it gains about its operations, costs and investment requirements as the business grows. accordingly, Xero’s strategies, plans, targeted milestones, operations and affairs, as described in this offer document, are very much subject to change as Xero seeks to evolve from a start-up company into an established business. the directors believe that the amount raised under this Share offer will enable Xero to pursue its current business strategy. however, events such as a change in strategy, financial performance not meeting expectations or a desire to accelerate its expansion plans may require Xero to raise further capital in the future. summary of the share offer structure Opening and Closing Dates the opening date of the Share offer is 14 May 2007 and the Closing date is 30 May 2007. Xero may vary these dates at its discretion. Pricing the offer Price for the Shares is $1.00 per Share. How to Apply applications for Shares must be made on the application Form contained in or accompanying this offer document.  d et a il s o f th e sh a r e o ff er application Forms must be completed in full and submitted in accordance with the instructions set out below and on the page preceding the application Form. an application will constitute an irrevocable offer by the applicant to subscribe for the number of Shares specified in the application Form, or such lesser number of Shares as may be allocated to it, on the terms and conditions set out in this offer document and the application Form. By submitting an application Form, applicants agree to be bound by those terms and conditions and the Constitution of Xero. Minimum Applications applications under the Share offer must be made for a minimum of 1,000 Shares and, thereafter, in multiples of 500 Shares. Application Monies all applications must be accompanied by payment in full for the total number of Shares applied for at the offer Price. Cheques must be drawn on a registered New Zealand bank, must be crossed “Not transferable” and should be made payable to “Xero Share offer”. application monies will be banked upon receipt into a designated bank account and held on trust pending the allocation of Shares. the banking of such monies does not constitute confirmation of the allocation of any Shares to the successful applicants. applicants should ensure that sufficient funds are held in the relevant account to cover the cheque which accompanies their completed application Form. allocations of Shares will be made on the assumption that an applicant’s cheque will clear. If an applicant fails to make payment for the Shares under the Share offer, or an applicant’s cheque fails to clear, then the allocation of Shares to that applicant may be cancelled. Where and When to Lodge Applications applications must be received by Link Market Services Limited, Po Box 91976 auckland 1142 (Level 12, 120 albert Street, auckland) by 5.00pm on 30 May 2007. applications through the Lead Broker and other Primary Market Participants must be lodged with the Lead Broker or other Primary Market Participant, in sufficient time to reach Link Market Services by no later than 5.00pm on 30 May 2007. Xero may elect to close the Share offer early, or extend the Share offer, or accept late applications either generally or in particular cases. the Share offer may be closed at any earlier date and time, without further notice. applicants are, therefore, encouraged to submit their applications as early as possible. Allocation Policy the allocation of Shares to applicants will be at the discretion of Xero. Xero may, at its discretion, reject any application (in whole or part) without giving any reason. Notification of Allocations applicants should ascertain whether Shares have been allocated to them under this Share offer before trading in the Shares. applicants will be able to do so from 9.00am on 5 June 2007 by calling the Share registrar, Link Market Services, on (09) 375 5998. applicants will also be able to confirm their allocation (if any), through the Primary Market Participant from which they sought or received their allocation of Shares. applicants will be sent notices of allocation on 5 June 2007. any refunds for unsuccessful applications for Shares will be posted no later than 8 June 2007. an applicant does not have any interest in, or right to entitlement to, any Share under this Share offer unless and until, and then only to the extent that, Shares are allotted to that applicant by Xero. If you sell Shares before receiving an initial allotment notice, you do so at your own risk, even if you obtained details of your holding through the Share registrar or confirmed your allocation through a Primary Market Participant or otherwise. Neither Xero nor any of its directors, officers, employees, thIS IS aN IMPortaNt doCUMeNt. IF yoU are IN aNy doUBt aS to hoW to deaL WIth thIS oFFer doCUMeNt, PLeaSe IMMedIateLy CoNtaCt a PrIMary MarKet PartICIPaNt, aN aCCoUNtaNt, or a FINaNCIaL advISer. x er o i n v es tm en t st a te m en t & p r o sp ec tu s  consultants, agents, partners or advisers accepts any liability or responsibility should any person attempt to sell or otherwise deal with Shares before the allotment notice showing the number of Shares issued to the applicant is received by the applicant for those Shares. Refunds Money received in respect of applications that are declined in whole or in part will be refunded in whole or in part (as the case may be) without interest. refunds for unsuccessful applications will be posted within five days after the allotment date of the Shares. Selling Shares on the NZSX Xero will not issue Share certificates to successful applicants. Xero will instead participate in the FaSter system. FaSter is a comprehensive system for recording and completing the transfer of securities listed on the NZSX. FaSter provides for paperless settlement and full electronic transfer of securities. brokerage No brokerage or commission is payable by applicants for Shares issued to them under the Share offer. Xero will pay a fixed brokerage fee of $240,000 to First NZ Capital Securities Limited. No brokerage will be paid by Xero other than the brokerage fee payable to First NZ Capital Securities Limited. In addition, First NZ Capital Securities Limited will receive a management fee of $100,000 in respect of the Share offer by way of the issue of Shares by Xero under the Share offer. First NZ Capital Securities Limited does not guarantee or undertake any liability in respect of the Shares. new zealand exchange listing application has been made to NZX for permission to list the Shares, and all the requirements of NZX relating thereto that can be complied with on or before the date of this offer document have been duly complied with. however, NZX accepts no responsibility for any statement in this offer document. Initial quotation of the Shares is expected to occur on 5 June 2007. NZX has authorised Primary Market Participants to act on the Share offer. overseas investors the Share offer is only being made to members of the public in New Zealand. No person may offer, invite, sell or deliver any Shares or distribute any documents (including this offer document) to any person outside New Zealand. Unless otherwise agreed with Xero, any person or entity applying for Shares in the Share offer will, by virtue of such application, be deemed to represent that he, she or it is not in a jurisdiction that does not permit the making of the Share offer or an invitation of the kind contained in this offer document and is not acting for the account or benefit of a person within such a jurisdiction. Neither Xero nor any of its directors, officers, employees, consultants, agents, partners or advisers accepts any liability or responsibility to determine whether a person is able to participate in the Share offer. important document If you are in any doubt as to how to deal with this Offer Document, please immediately contact a Primary Market Participant, an accountant, or a financial adviser.  d et a il s o f th e sh a r e o ff er x er o i n v es tm en t st a te m en t & p r o sp ec tu s 20 xero is accessible any time through any internet connection in the world. xero’s login is secure and all data is automatically backed up. connected 2 sectIon 2 Xero’S MarKet oPPortUNIty & CoMPetItIve PoSItIoNINg “It IS treMeNdoUS to See a NeW ZeaLaNd CoMPaNy SUCh aS Xero BUILdINg a BUSINeSS oN NeW ZeaLaNd CreatIvIty aNd INgeNUIty, aNd WIth a BIg aSPIratIoN – to BeCoMe a ‘MULtI-NatIoNaL’ ” chrIs lIddell cfo – mIcrosoft x er o i n v es tm en t st a te m en t & p r o sp ec tu s 22 developments in technology innovation there are few industries where the dynamics change as quickly and as often as in the ICt industry. In the space of around 20 years, the ICt industry has moved from expensive mainframe computing, to mini computers, to PC’s, to the Internet. Software has migrated from central computing, to client server to now starting to become web-based. each major shift provides opportunities for those who identify the trends and deliver products to the market early. Xero should have an early mover advantage in the provision of Internet-based accounting systems if it moves now. the software as a service model (“SaaS”) that Xero has adopted provides an innovative means of supplying software to a large fragmented market. It is a model that is validated by international companies such as Salesforce.com with its customer relationship management (“CrM”) software, 37signals with its project coordination tool called Basecamp, and by Concur with its travel and expense management software. at the same time, the distributive power of the Internet has enabled global brands to develop in the consumer technology space that have attracted strong customer support. MySpace (social networking), youtube (video sharing), Skype (social networking, including voIP) and Flickr (photo sharing), all demonstrate how a large customer base can be developed at a low cost over the Internet through accelerated online and word of mouth marketing. the network effects of “group forming networks” and “user generated content” have seen rapid growth of simple applications over the Internet. the directors believe that the software needs of SMes are now moving closer to consumer software, and away from the traditional enterprise software and the existing SMe technology products generally available today. Consumer software requirements are simple – they are mass market by nature, have low customisation, are easy to implement, easy to use, easy to learn, easy to try and easy to buy. Xero believes that SMes don’t want to be concerned with technical issues such as backups, upgrades and configuration. Based on the observation of these trends, the directors believe Xero’s SaaS business model is appropriate for, and will be attractive to, SMes. this belief is supported by the findings of gartner Inc. (a leading international technology research company). gartner Inc. estimates that the SaaS market represented approximately 5% of business software in 2005, but by 2011, around 25% of new business software will be delivered through the SaaS model. gartner Inc. further estimates that while the worldwide SaaS market had reached US$6.3 billion in value in 2006, it is forecast to grow to US$19.3 billion by the end of 2011.2 Prior experiences in both consumer technology and the enterprise software sectors by various members of Xero’s management team have enabled Xero to tailor its product for SMes. xero’s significant online accounting market opportunity Xero represents an opportunity to invest in a company that intends to target selected international SMe markets. SMes are the most common form of business organisation. In oeCd countries, they constitute over 90% of all businesses by number.3 Unlike many other software systems, which are largely optional, accounting systems are almost a necessity for SMes. accounting systems should assist in making key business decisions and reducing the burden of administrative compliance. Xero’s initial strategic focus will be on three countries – New Zealand, the UK and australia. It is estimated that the number of SMes in these regions is around 5.8 million, split as follows: UK, 4.3 million4; australia, 1.2 million5; and New Zealand, 322,000.6 In each case, Xero’s initial focus will be on key market segments which it believes, through its research and experience to date, are likely to be early adopters of its offering: technology companies, professional services firms (including accounting practices) and not-for- profit organisations. In New Zealand the adoption of the Internet is gaining traction. In March 2007, around 1.9 million New Zealanders aged 15 or older used the Internet, viewing around 3.6 billion pages of content. the average Internet user went online every other day and spent a total of 20.4 hours online during the month.7 Xero commissioned ernst & young to undertake research into the finance and accounting systems market in New Zealand. Based on Xero’s knowledge, its own research and analysis, and the results of ernst & young’s research, Xero believes that the value of the market for finance and accounting systems by businesses in New Zealand with less than 100 employees is worth at least $260 million per annum. Xero also estimates that between 10% and 30% of such businesses do not currently have access to accounting systems. this equates to a market potentially worth up to $90 million. 2 source: news release by gartner inc., 3 october 2006. 3 source: oecd sme and entrepreneurship outlook – 2005 edition. 4 source: uk department of trade & industry, news release, 31 august 2006. the definition of smes in the uk refers to organisations with less than 50 employees. xero’s definition of smes for the new zealand and australian markets refers to organisations with less than 20 employees. 5 source: sme business forum 2007, australia. 6 source: nz ministry of economic development report – smes in new zealand: structure and dynamics, may 2006. 7 source: press release by comscore, 26 april 2007. 2 x er o ’s m a rk et o pp o r tu n it y & c o m pe ti ti v e po si ti o n in g there are estimated to be three times as many SMes in australia and over 13 times as many in the UK, as in New Zealand. the directors therefore believe that there is a significant market opportunity in these targeted markets. this belief is supported by the size of some of the larger competitors that address the accounting software market. competitive landscape the market for accounting systems for the SMe market is large, but fragmented. Whilst there are established providers of traditional accounting software packages in Xero’s target markets, the directors are not aware that any of the larger competitors to Xero have completely adopted a SaaS model. the directors believe that the products offered by Xero’s most likely potential competitors are predominantly focused on traditional methods of software delivery encompassing an up- front licence fee, software upgrades and ongoing maintenance and services charges. SaaS is a fundamental shift from how software is traditionally delivered; it requires new technology architectures and the nature of customer relationships are different. the directors believe that larger competitors are not as well placed to completely change their business models to the SaaS model which Xero offers. If so, this situation provides a good opportunity for Xero as a fast moving, unencumbered new entrant, operating from a low cost of sale environment to firmly establish itself in the marketplace. the leading providers of accounting software packages tend to be large international companies, including MyoB (in australia), Sage (in the UK) and Intuit (in the USa). these companies are listed on stock exchanges in their respective countries. Some of their financial metrics are as follows: Some further information on MyoB, Sage and Intuit follows9: MYOB – founded in 1991, MyoB is listed on the australian Stock exchange. It has operations in nine countries, including australia, New Zealand, asia and the UK. MyoB’s historic focus has been on offering accounting packages to businesses with less than 20 staff, but it has recently been expanding into the medium segment, targeting businesses employing between 20 and 200 staff. MyoB’s client base includes more than 500,000 businesses. MyoB’s acquisition, in 2004, of Solution 6, boosted its offering to include practice management software that is used by over 10,000 accounting firms. MyoB has established MyoB ondemand, which is the exclusive australasian distributor of the NetSuite, Inc. (“NetSuite”) range of online business applications. NetSuite is a USa based company providing hosted business management systems and has more than 9,000 customers worldwide. NetSuite’s applications include accounting, enterprise resource planning (“erP”), CrM and eCommerce solutions. the investors in MyoB ondemand include MyoB and some third parties. MyoB has adopted a strategy that includes growth by acquisition and since 2000 has completed 10 acquisitions. Sage – founded in 1981, Sage is listed on the London Stock exchange, forming part of the FtSe 100. originally focused on the UK market, Sage has replicated its model in a number of markets around the world, including New Zealand and australia. Sage’s product portfolio was initially focused on accounting software but as the business has grown, it has increased the scope of its offering to encompass other business solutions such as payroll, human resources, customer relationship management (“CrM”), merchant services and medical practice management software and services. Sage’s main focus is on the small and mid-market business software market, with companies that employ less than 100 staff, although it also has offerings for larger businesses. It has grown its customer base from around one million customers in 1998 to over five million customers in 2006. metrics of leading accounting software providers Market capitalisation Annual revenue recorded Company as at 1 May 2007 Balance date from last full year accounts8 MyoB a$473 million 31 december 2006 a$182.3m Sage £3.4 billion 30 September 2006 £935.6 million Intuit US$9.7 billion 31 July 2006 US$2.3 billion the software as a servIce model that xero has adopted provIdes an InnovatIve means of supplyIng solutIons to a large fragmented market. x er o i n v es tm en t st a te m en t & p r o sp ec tu s 2 the directors understand that Sage has released an online product, which is a hosted version of a Sage desktop product. this is accessed using Citrix software installed on the customer’s computer and therefore this offering does not completely adopt a SaaS model. Sage has adopted an acquisition strategy to expand its business outside the UK and has acquired 16 businesses in the last five years. Intuit – founded in 1983, Intuit is listed on NaSdaQ. It has offices in the USa, Canada, the UK, India and other locations. Intuit’s offering includes the provision of business and financial management solutions for SMes, financial institutions (including banks and credit unions), consumers and accounting professionals. Its products and services include QuickBooks, Quicken and turbotax software. there is an online version of the QuickBooks product. the directors understand that the software is installed on the customer’s computer and requires Microsoft Windows, Internet explorer and an activeX component download. Intuit has over 17 million customers worldwide. In New Zealand and australia, Intuit’s products are distributed by an australian company, reckon Limited. these products include Quicken, which is targeted at personal use customers and QuickBooks, which is Intuit’s product for SMes. Intuit Inc. has made 14 significant acquisitions since 2000. there are many other companies already providing a range of accounting software products in New Zealand, the UK and australia. however, many of these companies have legacy products with small installed customer bases. examples of private companies in New Zealand offering products to the marketplace include BankLink Limited, MoneyWorks NZ Limited and Plusfactor Solutions Limited. the directors are also aware that there are many other companies who could potentially compete with Xero in the SMe market. For example, SaP, oracle and Microsoft also offer accounting software packages to the international marketplace. however, the directors understand that the core focus of these companies is predominantly on businesses with more than 50 employees, although Microsoft already has an offering tailored to the SMe market in the USa. additionally, Xero may face competition from competitors of which the directors are not currently aware, or from new competitors in the future. the potential response of any of Xero’s competitors to Xero’s online offering is unknown and may impact on Xero’s business and growth prospects. xero’s competitive positioning the SaaS model adopted by Xero is a fundamental change from the existing providers of accounting software applications. this creates a good opportunity for Xero, as a fast moving, new entrant unencumbered with legacy applications and business models. the directors believe that Xero can create a strong market position for itself in the online accounting software sector if it captures the opportunity that currently exists. Xero has already recruited an experienced team, has a compelling business model, a product available for full market release in the second half of 2007, a developing brand and some key business relationships to help it succeed. however, it needs to move quickly with an appropriate level of capital to establish its business in New Zealand and then credibly enter its targeted overseas markets. In the markets that Xero proposes to target, the directors believe that Xero will be the first public company completely focused on a web based, SaaS offering for SMe accounting. 8 source: annual reports from each of myob, sage and intuit, based on their respective accounting policies. these may not be comparable to the accounting policies of xero. 9 information on myob, sage and intuit has primarily been sourced from their respective websites. 2 x er o ’s m a rk et o pp o r tu n it y & c o m pe ti ti v e po si ti o n in g x er o i n v es tm en t st a te m en t & p r o sp ec tu s 2 xero has been designed from the ground up with customers and their advisers in mind. it’s intuitive and it’s built to perform. sImplIcIty 2 accounting for success Xero provides an online accounting system that provides SMes with a clear picture of the money that flows in and out of their businesses, helping them maintain an accurate picture of their financial situation at all times via the Internet. Using Xero, SMes can import their bank transaction information, which saves significant time and moves SMes into real time accounting. as with online banking, Xero can be accessed through the Internet anywhere at any time. Xero’s product has been designed to output screen sized pages and work acceptably on broadband, dial up and mobile data speeds. the Xero system currently includes features such as bank transaction importing, a cashbook, a general ledger, invoicing, accounts receivable, accounts payable, gSt, financial reporting and management of expense claims. the system is currently targeted at businesses and organisations with less than 20 employees but, in due course, is intended to be able to support enterprises with up to 50 and more employees. there is an active roadmap of new features and product enhancements to be developed and released. Since November 2006, Xero initiated a pre-release phase with 140 live users to ensure that, as each feature of the software was completed, it met the requirements of SMes. Upon successful completion of this pre-release phase, Xero has admitted more than 100 paying customers since 1 april 2007 as part of a limited release while it builds further operational capability. Further paying customers will be accepted during the next few months. It is expected that sufficient operational capability, including sales, marketing and customer support, will be in place in august 2007 to enable an unconstrained formal launch of the product in New Zealand. With minimal marketing to date, Xero has developed a pipeline of potential customers and confirmed the operational capability of, and the demand for, the Xero product. xero’s product the pictures overleaf provide an illustration of Xero’s product. key benefits of xero’s product offering Xero’s accounting system is different to most installed SMe accounting systems currently available in the marketplace in the following important ways: • It is easy to use – limited training is required and the product is customer friendly. It is also built to save the SMe time so it can spend more time managing and running its business and less time on accounting matters. • It is available online – there is no software to install. as with online banking, Xero is accessible any time through any Internet connection in the world. Xero’s login is secure, it is insulated from viruses and spyware and all data is automatically backed up. • It is cost effective – a pay as you go and pay as you grow pricing model. It is comparatively inexpensive, requires no server, no backups, minimal training, low cost support, no data transfer delays or synchronisation issues, and provides automatic software upgrades for customers. • It maximises access to advisers – enables an SMe to easily share information with its advisers. an SMe’s bookkeeper, accountant, and other advisers can access information any time, anywhere to help provide real time advice. sectIon 3 aBoUt Xero x er o i n v es tm en t st a te m en t & p r o sp ec tu s 2 • It assists decision making – provides immediate visibility of important information (such as real time cash flow information) for SMes to run their businesses and make informed decisions. • Continuous innovation – Xero can continually innovate its software product and be driven by customer requirements and competitor movements. Innovations can be built into the system without having to rollout an upgrade or installation to users and without disrupting the customer’s use of the system. • It is easy to switch to Xero – there should be minimal cost for an SMe to switch to Xero from another accounting system. overall, Xero should improve an SMe’s business by assisting with the quality and timeliness of information and by providing best practice guidelines. For accountants, Xero allows greater efficiency so the adviser can handle more customers and build the ‘trusted adviser’ relationship, creating the opportunity to add value for its clients. “the xero product wIll change the way chartered accountants work wIth theIr clIents – whether It’s technIcal assIstance or busIness advIce. usIng xero, chartered accountants wIll have access to tImely and relevant InformatIon upon whIch they can buIld a relatIonshIp based around value to theIr clIents rather than beIng glorIfIed number crunchers.” robert cross dIrector – ‘bIg four’ accountIng fIrm 2 a b o u t x er o xero’s organisation structure as at 30 april 2007, Xero employed 27 staff (including its Founders and executive directors, rod drury and hamish edwards). as a company whose business is based on intellectual property, human capital is Xero’s most important asset. having owned and managed a number of successful businesses, the Founders of Xero have broader objectives than creating a team to build a successful business. these include: • a desire to create a sustainable and international business operating from New Zealand. • Investing up front in the management team to create the foundations for pursuing international success. • Providing New Zealand’s best It professionals with an opportunity to work in an international business based in New Zealand, as well as attracting new international talent – Xero can become an example of what New Zealand could offer as a centre of It excellence. With a track record for success, the founders have managed to attract excellent talent, both from New Zealand and overseas. Xero has established a UK advisory Board of senior UK executives to assist with Xero’s market entry strategy into the UK market. they are not directors of Xero. xero’s business model Xero’s adoption of the SaaS model provides a cost effective way to deliver an accounting system that is focused on the SMe market, is robust, is internationally scaleable and offers ongoing customer support. the SaaS model is becoming recognised internationally as a method of supplying otherwise expensive technology solutions to SMes. x er o i n v es tm en t st a te m en t & p r o sp ec tu s 0 SaaS suits the frequent legislative changes common in business environments. Such changes are a major issue currently on the agenda for businesses in australia. US-based salesforce.com, Inc. is perhaps the best- known international example of the SaaS model. It allows users to access its sales force automation software product in return for a fixed monthly fee. salesforce.com, Inc. was founded in 1999 and is listed on the New york Stock exchange. Its business model has helped it grow quickly; for the year ending 31 January 2007 it recorded revenues of $US497 million (an increase of over 60% from the previous corresponding period)10 and as at 1 May it had a market capitalisation of $US4.7 billion. While Xero’s offering is focused on online accounting software, rather than sales force automation software, the business models are similar. one of the advantages of the SaaS model i</p>