Annual Report for the Year Ended 31 March 1996 Trustees Mrs C. Melville (Chairperson), Mr R. Allan, Mrs N. Bamford, Mr G. Bell, Mr P. Gibson, Sir R. Gray, Hon. C. Matthewson, Mr R. McKnight, Dr J. Ng, Mr D. Pasley, Mr D. Polson and Mr R. Walls. Executive Director: Mr K. G. Ellwood. Registered Office: Skeggs House, 6066 Tennyson Street, Dunedin. Auditor: Taylor McLachlan, Dunedin. Solicitor: Anderson Lloyd, Dunedin. Investment Advisors: Frank Russell Limited, Auckland. Chairperson's Report On behalf of trustees I have much pleasure in presenting the eighth annual report of the trust. It has been another very exciting year both in terms of the continued diversification of the trust's investments as well as its increasing donation programme. Investment Managed Funds It was an excellent year for managed funds, which was important since it was the first full year that these funds have been operating and it is great to get off to a good start. Income earned was $8.25 million which represented a real return of 10.4 percent. This compares favourably with our long term benchmark real return of 6.2 percent. Managed funds continue to be invested both in New Zealand and overseas in cash deposits, bonds and shares, and are managed by highly regarded international funds managers. Our independent investment adviser Frank Russell Limited monitors the performance of the managers, on a regular basis. Trust Bank Shares As reported in previous years, following the float of trust bank on the New Zealand Stock Exchange in March 1994, this trust sold half of its shares in trust bank. Subsequent to balance date, it has agreed to sell its remaining shares to Westpac for approximately $70 million. As a result, this trust no longer owns shares in trust bank. It will retain the name ``trust bank'' because Westpac wishes to continue to operate retail activities using the name and understandably wishes to retain the strong community focus that ``trust bank'' conveys. To cut ownership ties with the bank was not a decision trustees took lightly. It was probably the most significant decision ever made since the trust was formed. In the end, the Westpac offer was simply too attractive to turn down. It has made possible full diversification of the trust investment portfolio of nearly $150 million which for prudential reasons has been a long term investment objective for trustees. It also secures firmly the long term strategic position of trust bank as a mainstream bank. Its competitive position, access to technology and expertise as well as funding opportunities are all strongly enhanced as a result. Our trustees have no doubt that as a major shareholder of the bank the decision to sell will make for a much stronger bank. Income from dividends during the year totalled $2.5 million. Donations As we mentioned last year our ability to donate as much as possible is linked to investment policy and investment performance. The very dramatic growth in donations has come about directly as a result of investment diversification. Selling shares in trust bank has unlocked the considerable wealth accumulated within the bank over several years, which can now be used to better assist today's beneficiaries, not just tomorrow's. The effect sees a significant shift in favour of income growth. Trustees continue to be excited by the enormous beneficial impact the trust can have upon the community as a result of increased income. They note however the increasing requests for assistance from groups and sectors of the community whose traditional funding sources are in many cases diminishing. It is of very real concern to observe that many paid and voluntary hours of work by community organisations are spent fundraising leaving less time to deliver the service they exist to provide. The trustees primary donation focus is twofold. Firstly, to continue to support community groups big or small who maintain their community activity or service. Secondly, to be able to make a difference to organisations who seek to complete major projects or programmes that have wide regional benefits. Donations made during the year totalled $3.1 million to nearly 1000 community organisations, an increase of 16 percent over the previous year. Since the trust commenced donations in 1991 a total of $10 million has been given to commnunity organisations. Trustees I wish to thank our trustees for their contribution to the success of the trust during the year. The weight of responsibility does become heavier as trustees come to terms with the fact that they manage $150 million of community assets. They meet more frequently than they used to; they travel more as well. Their commitment to the success of the trust is appreciated. I also wish to publicly acknowledge the work our staff do in meeting the needs of our clients and fulfilling their duties to the trustees in a very professional manner. CAROL MELVILLE, Chairperson. 5 June 1996. Consolidated Statement of Financial Performance for the Year Ended 31 March 1996 Note 1996$000 1995$000 Income From managed funds6 8,249 1,984 From other investments1 2,907 5,008 11,156 6,992 Expenditure Depreciation 11 Occupancy 18 3 Other operating 48 27 Professional fees2 25 73 Promotion 8 Public and statutory reporting 2 8 Staff 119 93 Trustees' fees 51 36 Trustees' expenses 13 12 295 252 Operating surplus 10,861 6,740 Investment revaluation5 13,920 35,937 13,920 35,937 Surplus for the period $24,781[teh][su'1'] $42,677 [qs][lr 6,5d,.5][ql] [su'1'] This has been allocated to:[ql] 1996$000 1995$000 Capital maintenance reserve 1,495 2,520 Investment revaluation reserve 13,920 35,937 Investment fluctuation reserve 6,012 493 Donations 3,101 2,672 Uncommitted surplus 253 1,055 $24,781 $42,677 The notes to these financial statements form part of and should be read in conjunction with this Consolidated Statement of Financial Performance. Consolidated Statement of Movement in Trust Funds for the Year Ended 31 March 1996 Note 1996$000 1995$000 Trust funds at start of period 113,759 73,754 Net surplus for the period 24,781 42,677 Less committed donations3 3,101 2,672 Trust funds at end of period $135,439 $113,759 The notes to these financial statements form part of and should be read in conjunction with this Consolidated Statement of Movement in Trust Funds Consolidated Statement of Financial Position as at 31 March 1996 Note 1996$000 1995$000 Source of funds Trust funds4 135,439 113,759 Liabilities Creditors 76 31 Committed donations3 1,402 638 1,478 669 $136,917 $114,428 Employment of funds Current assets Current account 185 312 Short term deposits 4,076 3,729 Debtors 65 37 Other assets 4,326 4,078 Investments Long term investment5,10 59,280 45,360 Managed funds6 73,289 64,984 132,569 110,344 Fixed assets7 22 6 $136,917 $114,428 Approved on behalf of the board: C. A. MELVILLE, Chairperson. R. M. GRAY, Trustee. The notes to these financial statements form part of and should be read in conjunction with this Consolidated Statement of Financial Position. Consolidated Statement of Cash Flows for the Year Ended 31 March 1996 1996$000 1995$000 Cash flows from operating activities Cash was provided from: Managed funds8,305 Dividends received2520 2,175 Interest received on investments329 2,898 Other30 11,184 5,073 Cash was disbursed on: Payment to suppliers and staff295 175 Fund management and advisory fees 59 Donations to voluntary organisations2,337 2,034 Managed funds reinvested8,305 10,937 2,268 Net cash inflow from operating activities 247 2,805 Cash flows from investing activities Cash was provided from: Net decrease in term deposits 63,000 Cash was disbursed on: Net increase in term deposits347 Purchase of investment 2,819 Purchase of managed funds 63,000 Purchase of fixed assets27 6 374 65,825 Net cash outflow from investing activities (374) (2,825) Net (decrease)/increase in cash held (127) (20) Add opening cash brought forward 312 332 Ending cash carried forward $185 $312 Ending cash comprises: Trust Bank Otago cheque accounts $185 $312 The notes to these financial statements form part of and should be read in conjunction with this Consolidated Statement of Cash Flows. Reconciliation of Reported Surplus to Net Cash Flow from Operating Activities 1996$000 1995$000 Surplus for the period 24,780 42,677 Add: Non-cash items: Depreciation 11 Less: Non-cash items: Investment revaluation13,920 35,937 Managed funds reinvested8,305 1,984 22,225 37,921 Committed donations3,101 2,672 25,326 40,593 (535) 2,084 Movements in working capital items: Increase in creditors46 18 Increase in committed donations764 638 Decrease in grant provision (15) Decrease/(increase) in debtors(28) 65 Decrease in other assets 15 782 721 Net cash flow from operating activities $247 $2,805 Notes to the Consolidated Financial Statements for the Year Ended 31 March 1996 Statement of Accounting Policies These are the consolidated financial statements of Trust Bank Otago Community Trust and Otago Community Charities Limited. The accounts have been prepared to comply with the Companies Act 1955 and the Financial Reporting Act 1993. The Trust Bank Otago Community Trust (the trust) was formed on 30 May 1988 through the creation of a trust deed in compliance with the Trustee Banks Restructuring Act 1988. Under the terms of the trust deed the trust was settled with 13 500 000 $1 fully paid ordinary shares in Trust Bank New Zealand Limited. With the restructuring of Trust Bank New Zealand Limited, bonus shares and a share split resulted in a final shareholding of 54 000 000 50 cent fully paid ordinary shares. In March 1994 30 000 000 shares were sold as part of the public flotation of Trust Bank New Zealand for $50,452,000. This formed part of the settlement in December 1994 of $63,000,000 to Otago Community Charities Limited, a charitable company owned by the trust. General Accounting Policies The measurement basis adopted is that of historical cost adjusted for the revaluation of certain assets. Reliance is placed on the fact that the Trust is a going concern. Accrual accounting is used to match income and expenditure. Particular Accounting Policies Income Income from managed funds includes both realised and unrealised income and is recorded net of fund management expenses. Dividends from Trust Bank New Zealand are recognised as income when they are received by the trust and exclude imputation tax credits. Interest is recognised on an accrual basis. Donations Donations are accounted for as they are distributed or committed to be distributed to eligible organisations as approved by the trustees. Foreign Currencies All amounts denominated in foreign currencies are converted to New Zealand dollars at balance date. All realised and unrealised gains and losses are recognised in income and expenditure for the period. Taxation The trust has been registered as exempt in New Zealand from interest and dividend PAYE and holds a current certificate of exemption, but may be liable to taxation on investment income in some overseas countries. Tax on overseas income is accounted for as a reduction of that income. The trust is not registered for Goods and Services Tax purposes. Accordingly, these financial statements are stated on a G.S.T. inclusive basis. Reserves For a 5 year period commencing in 1995 a reserve building programme has been implemented. The capital maintenance reserve represents the additional amount necessary to preserve the real value of the capital allowing for inflation as measured by the consumers' price index (CPI). The investment fluctuation reserve allows donations at a stable level from year to year even though investment income may fluctuate. If investment income, after necessary transfers to the capital maintenance reserve is more than the target donations level, the excess will be added to the investment fluctuation reserve. If it is less, the deficit will be transferred out of the investment fluctuation reserve. Investments The shares in Trust Bank New Zealand which are held as a long term investment are valued at year end market value. Any revaluation difference is transferred to an investment revaluation reserve. Hedging Instruments The trust through its investment managers enters into hedging instruments such as futures, options and forward exchange contracts. These are converted to the New Zealand dollar rate at balance date with all realised and unrealised gains and losses being recognised in income and expenditure as net income from managed funds. Statement of Cash Flows Cash comprises cash at bank and call deposits but does not include cash or deposits held by the fund managers. Changes in Accounting Policies There have been no material changes in accounting policies during this accounting period. 1996$000 1995$000 1. Income Dividends trust bank2,520 2,175 Interest357 2,833 Other30 $2,907 $5,008 2. Professional Fees Auditors: Audit fees1 1 Other professional services6 1 Community Trust Investments Limited6 4 Legal advisors12 8 Professional investment advisors 59 $25 $73 3. Donations For this year: Committed and disbursed1,699 2,034 Committed but not yet disbursed1,402 638 $3,101 $2,672 4. Trust Funds [tn,3]The trust funds balance comprises the following: [tn,3]The trust capital is the original value of the shares in Trust Bank New Zealand at the time they were settled on the trust in 1988. 1996$000 1995$000 Balance as at 31 March$21,202 $21,202 Capital maintenance reserve Balance as at 1 April2,520 Transfers during the period1,495 2,520 Balance as at 31 March$4,014 $2,520 Investment revaluation reserve Balance as at 1 April35,937 Net gain during the period13,920 35,937 Balance as at 31 March$49,857 $35,937 Investment fluctuation reserve Balance as at 1 April493 Allocation from surplus for the year6,012 493 Balance as at 31 March$6,505 $493 Uncommitted surplus Balance as at 1 April53,607 52,552 Allocation from surplus for the year253 1,055 Balance as at 31 March$53,860 $53,607 Balance of Funds at 31 March$135,438 $113,759 5. Long Term Investments Shares in Trust Bank New Zealand: Balance as at 1 April45,360 9,423 Revaluation to year end market value13,920 35,937 Balance as at 31 March$59,280 $45,360 Total number of shares held in TBNZ as at 31 March 1996 was 24 000 000 (1995 24 000 000). The market price at 31 March 1996 was $2.47 per share (31 March 1995 $1.89). In March 1994 the trust sold 55 percent of its shareholding in Trust Bank New Zealand Limited for a profit of $50,452,000. This was achieved in conjunction with a public offering of shares by Trust Bank New Zealand Limited to raise additional capital. 1996$000 1995$000 6. Managed Funds Managed by external managers: Balance 1 April64,984 Net income8,249 1,984 Add: Fees not yet charged to fund56 Deposits to funds 63,000 Balance as at 31 March$73,289 $64,984 Investments comprise: Cash, deposits and miscellaneous20,301 17,577 Bonds30,958 29,224 Equities22,030 18,183 Portfolio total$73,289 $64,984 Held in: New Zealand46,931 42,713 Offshore26,358 22,271 $73,289 $64,984 7. Fixed Assets 1995 1996 Accum. Book Book Cost Depn. Value Value $000 $000 $000 $000 Office equipment9 1 8 6 Furniture and fittings24 10 14 $33 $11 $22 $6 8. Financial Instruments The financial instruments are subject to an interest rate risk. The investment portfolios are treated as lump sum investments. The fund managers or custodians manage both the credit risk and foreign exchange risk. No comparison is provided between the carrying value and estimated fair value of financial instruments, due to the carrying value reflecting market price. 1996 $000 1995 $000 New Zealand Bonds and deposits44,116 40,608 Equities66,171 51,194 110,287 91,802 Overseas Bonds and deposits11,219 9,922 Equities15,139 12,350 26,358 22,272 Total Bonds and deposits55,335 50,530 Equities81,310 63,544 $136,645 $114,074 9. Contingent Liabilities There are no contingent liabilities at 31 March 1996 (1995 $nil). 10. Subsequent Events Subsequent to balance date the trust has agreed to sell its shares in TBNZ to Westpac for $2.92 per share. Audit Report To the Trustees of Trust Bank Otago Community Trust We have audited the consolidated financial statements. The consolidated financial statements provide information about the past consolidated financial performance of the trust and its consolidated financial position as at 31 March 1996. This information is stated in accordance with the accounting policies set out. Trustees' Responsibilities The trustees are responsible for the preparation of consolidated financial statements which give a true and fair view of the consolidated financial position of the trust as at 31 March 1996 and of the consolidated results of operations and cash flows for the year ended 31 March 1996. Auditors' Responsibilities It is our responsibility to express an independent opinion on the consolidated financial statements presented by the trustees and report our opinion to you. Basis of Opinion An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in the consolidated financial statements. It also includes assessing: the significant estimates and judgments made by the trustees in the preparation of the consolidated financial statements, and whether the accounting policies are appropriate to the trust's circumstances, consistently applied and adequately disclosed. We conducted our audit in accordance with generally accepted auditing standards in New Zealand. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the consolidated financial statements are free from material misstatements, whether caused by fraud or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the consolidated financial statements. Our firm carries out other assignments for the trust in the area of special consultancy projects. The firm has no other interests in the trust. Unqualified Opinion We have obtained all the information and explanations we have required. In our opinion the consolidated financial statements: comply with generally accepted accounting practice. give a true and fair view of the consolidated financial position of the trust as at 31 March 1996 and the consolidated results of its operations and cash flows for the year ended on that date. Our audit was completed on 5 June 1996 and our unqualified opinion is expressed as at that date. TAYLOR McLACHLAN. Dunedin. Schedule of Distributions of Income by Way of Donations for the Period Ended 31 March 1996 A full list covers a number of pages and is attached to the original of this document. A copy is available on request.