Trust Bank Otago Community Trust Inc. Trustee Banks Restructuring Act 1988 Directory for the Year Ended 31 March 1997 Trustees: Dr C. Matthewson (Chairperson), Mr R. Allan, Mrs N. Bamford, Mr G. Bell, Mr P. Gibson, Sir Robin Gray, Mr R. McKnight, Dr J. Ng, Mr D. Pasley, Mr D. Polson and Mr R. Walls. Executive Director: Mr K. 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 for the Year Ended 31 March 1997 It gives me much pleasure to present the ninth annual report of the Trust Bank Otago Community Trust. The trust is in an exciting period of growth and change, almost a metamorphosis. Nine years ago the trust was a worthy supporter of worthy activity, distributing the dividends arising from our ownership interest in Trust Bank New Zealand. Now we are an independently wealthy philanthropic trust, just starting to be able to make a real difference in the communities of Otago. What we donated in our first year would not represent our income from a reasonably good week. For most of the year under review Carol Melville was chairperson, as she had been since the trust's inception in 1988. While guiding the trust through the changes mentioned, I believe Carol presided over the development of sound precedents, good policies and effective operation. I express the thanks of trustees and the community. The trust has 2 activities; it manages the money that it holds and make distributions. I will comment on each activity and look briefly to the future. Investments As anticipated in last year's report, the trust sold its remaining shares in Trust Bank New Zealand to Westpac. This allowed us to take advantage of what we regarded as an attractive offer. At the same time, it allowed us to dully diversify our total investment so as to pursue our objective of obtaining maximum return at an acceptable level of risk. The trust reassessed its risk/return profile and its reserving policy. Our benchmark asset allocations are now: New Zealand cash15.0 percent New Zealand fixed interest27.5 percent New Zealand equities 7.5 percent Global fixed interest22.5 percent Global equities27.5 percent Our global fixed interest portfolio is 100 percent hedged to the New Zealand dollar, and our global equities are 70 percent hedged. We will be keeping our investment policies under constant review to ensure our objectives are met. The trust also reviewed its fund managers. This has resulted in recent decisions, after an appropriate interview process, to engage Fischer Francis Trees & Watts as our global fixed interest managers and Lazard Freres to manage our global equities. Our New Zealand held funds are managed by AMP. Trustees are responsible for these decisions and make them. However, they do so only after discussion with and analysis by our financial advisers, Frank Russell Co. For example, Russells provide the statistical analyses that guide our asset allocations and our reserving policy and provide also the shortlists of fund managers. These also recognise our overall conservative philosophy. Because the Trust Bank New Zealand share sale occurred during the year, and because of the delay in transferring funds to our new managers occasioned by the selection process, it is difficult to produce one single meaningful figure which described our return for the year. However, those funds that were under management for the full year produced a nominal return of 11.0 percent. This is good in terms of the trust's long term statistical expectation of 6.2 percent real, but could have been slightly better in terms of the potential offered by overseas markets in 199697. The trust has not paid any tax. However, we are required to carefully structure our activities in order for this to be the case. This represents wasted effort and expense. Donations In the year under review, trustees approved donations totalling $4.3 million. This compares with $3.1 million in the previous year. This is still very much below the level that can be sustained, and donations growth will be very strong in the years ahead. People might be surprised by how much we will be able to do in comparison with our past record. There are two reasons why there is a delay in reaching the stage where donations match average income. The first is that the trust must establish a level of reserves that provides adequate protection for both our capital and our donations stream when the inevitable bad year occurs. The second is that we want to achieve the maximum effect with our donations and we thus need to manage our growth while both the trust and the community get used to the new range of possibilities that exists. The trust has formally resolved that our traditional round of ``small'' donations will continue to be seen as highly important. These donations provide the lubrication that helps keep so many indispensable community organisations in good running order. At the same time, there is no doubt that larger amounts of money, well applied, can make a significant difference in the community. Perhaps we are now the organisation with the largest amount of discretionary funding available for dispersal in Otago. This presents considerable challenges and wonderful opportunities. We are excited by some of the projects already funded. A few examples are presented elsewhere in this document. The Trust The renaming of the trust and our imminent shift to our own premises are two outward manifestations of change and growth in progress, but there is much going on behind the scenes. The trust is currently engaged in the process of formally articulating its vision, objectives and policies in a strategic plan. We have ensured that our governance relationships are clear. We will not become bureaucratic or unduly formalise our processes, but we must continually evaluate our own performance and check our direction. We are thinking much more now about accountability. This works two ways. Increasingly we are requiring recipients of funds to demonstrate the benefits obtained and increasingly we ourselves want to be accountable for our stewardship. This will require us, as much as possible, to help people understand us and what we are doing. I would like to pay a tribute to my fellow trustees, who are busy people working in the community interest for a pathetic personal financial reward. Trustees fulfill a dual role, being both a board of directors and a source of collective judgment in decisions about donations. As chairperson I am fortunate to be able to work so easily together with such good people. The trust is also very lucky in the quality of its staff. Keith Ellwood is an exceptional executive director, and the appointment of Carol Melville as donations assessor has significantly added to our strength. Heather Wyatt and Fay Jackson are able and effective members of the team. We are looking forward to the year ahead, to being able to make a difference in the communities of our province. CLIVE MATTHEWSON. 3 July 1997. Consolidated Statement of Financial Performance for the Year Ended 31 March 1997 Note 1997$000 1996$000 Revenue1 24,787 11,373 Expenditure2 817 512 23,970 10,861 Investment revaluation 13,920 Surplus for the period 23,970 24,781 Less donations paid from income3 1,007 3,101 Trustee surplus for the period $22,963 $21,680 This surplus has been allocated to: Capital maintenance reserve 1,206 1,495 Investment revaluation reserve 13,920 Investment fluctuation reserve 6,012 Uncommitted surplus 21,757 253 $22,963 $21,680 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 1997 Note 1997$000 1996$000 Trust funds at start of period 135,439 113,759 Donations paid from capital3 513 134,926 113,759 Trustee surplus for the period 22,963 21,680 Trust funds at end of period $157,889 $135,439 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 1997 Note 1997$000 1996$000 Source of funds Trust funds4 157,889 135,439 Liabilities Creditors 131 76 Committed donations3 1,402 131 1,478 $158,020 $136,917 Employment of funds Current assets Current account 287 185 Short term deposits 51,403 4,076 Debtors 207 65 51,897 4,326 Investments Long term investment5 59,280 Managed funds6 106,093 73,289 106,093 132,569 Fixed assets7 30 22 $158,020 $136,917 Approved on behalf of the board: CLIVE MATTHEWSON, Chairperson. R. S. McKNIGHT, Trustee. 3 July 1997. 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 1997 1997$000 1996$000 Cash flows from operating activities Cash was provided from: Managed funds8,043 8,466 Dividends received1,680 2,520 Interest received on investments5,772 329 Other 30 15,495 11,345 Cash was disbursed on: Payment to suppliers and staff523 295 Fund management239 217 Donations to voluntary organisations2,922 2,337 Managed funds reinvested7,804 8,249 11,488 11,098 Net cash inflow from operating activities 4,007 247 Cash flows from investing activities Cash was provided from: Decrease in investment 68,439 Cash was disbursed on: Purchase of term deposits47,327 347 Purchase of managed funds25,000 Purchase of fixed assets17 27 72,344 374 Net cash outflow from investing activities (3,905[teh]) (374[teh]) Net increase/(decrease) in cash held 102 (127[teh]) Add opening cash brought forward 185 312 Ending cash carried forward $287 $185 Ending cash comprises: Trust Bank Otago cheque accounts $287 $185 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 1997$000 1996$000 Surplus for the period 22,963 21,680 Add: Non-cash items: Depreciation 9 11 Less: Non-cash items: Investment revaluation 13,921 Managed funds revaluation7,813 8,305 Gain on sale9,150 16,963 22,226 Donations paid from capital513 17,476 22,226 5,496 (535[teh]) Movements in working capital items: Increase in creditors55 46 Increase/(decrease) in committed donations(1,402[teh]) 764 Decrease in debtors(142[teh]) (28[teh]) 1,489 782 Net cash flow from operating activities $4,007 $247 Notes to the Consolidated Financial Statements for the Year Ended 31 March 1997 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. 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 gross of fund management expenses. Dividends from Trust Bank New Zealand were recognised as income when 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. 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 the statement of financial performance. Taxation Income tax is recognised on the surplus available for distribution before taxation, adjusting for differences between taxable and accounting 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. Capital Maintenance Reserve 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 (C.P.I.). Investments Investments are valued at year end market value. All realised and unrealised gains and losses are recognised in the statement of financial performance. 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 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 Donations are now accounted for on a cash basis (previously donations were accounted for when approved by trustees). Income from managed funds is now shown gross of investment management fees (1996 net). There have been no other material changes in accounting policies during this accounting period. 1997$000 1996$000 1. Revenue Dividend Trust Bank New Zealand1,680 2,520 Interest5,914 357 Managed funds8,043 8,466 Sale of Trust Bank New Zealand shares (Note 5)9,150 Other 30 $24,787 $11,373 2. Expenditure Depreciation9 11 Occupancy18 18 Other operating66 48 Professional fees409 242 Promotion72 8 Public and statutory reporting2 2 Staff142 119 Trustee fee7151 Trustee expenses28 13 $817 $512 Professional fees Taylor McLachlan: Audit fees3 1 Other professional fees5 6 Community Trust Investment Limited50 6 Legal advisors4 12 Investment management fee239 217 Professional investment advisers87 Other21 $409 $242 3. Donations Donations paid from income1,468 1,699 Donations paid from capital513 Committed but not yet disbursed 1,402 Effect of the change in accounting policy(461[teh]) $1,520 $3,101 For ease of presentation and for taxation reasons the accounting policy has been altered to show only donations paid during the period. Donations which the trust has conditionally approved but not yet paid are shown in the accounts as a contingent liability (see Note 9). 4. Trust Funds The trust funds balance comprises the following: 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. 1997$000 1996$000 Trust capital Balance as at 31 March 1997$21,202 $21,202 Capital maintenance reserve Balance as at 1 April 19964,014 2,520 Transfers during the period1,206 1,495 Balance as at 31 March 1997$5,220 $4,014 Investment revaluation reserve Balance as at 1 April 199649,857 35,937 Net gain during the period 13,920 Transfer to uncommitted surplus49,857 Balance as at 31 March 1997$ $49,857 Investment fluctuation reserve Balance as at 1 April 19966,505 493 Transfer to uncommitted surplus6,505 6,012 Balance as at 31 March 1997$ $6,505 Uncommitted surplus Balance as at 1 April 199653,860 53,607 Allocation from surplus for the year21,758 253 Transfer from investment fluctuation reserve49,857 Transfer from investment fluctuation reserve6,505 131,980 53,860 Less donation paid513 Balance as at 31 March 1997$131,467 $53,860 Balance of funds at 31 March 1997$157,889 $135,438 5. Long Term Investments Shares in Trust Bank New Zealand Balance as at 1 April 199659,280 45,360 Revaluation to year end market value 13,920 Sold during the year(68,430[teh]) Realised profit9,150 Balance as at 31 March 1997 $59,280 During the year the trust sold the remaining shares it held in TBNZ to Westpac, realising a profit above the book value of $9,150,000.[qp] 6. Managed Funds Managed by external managers Balance 1 April 199673,289 64,984 Gross income8,043 8,466 Add: fees not yet charged to fund 56 Less: management fees(239[teh]) (217[teh]) Deposits to funds25,000 Balance as at 31 March 1997$106,093 $73,289 Investments comprise: Cash, deposits and miscellaneous38,368 20,301 Bonds36,797 30,958 Equities30,928 22,030 Portfolio total$106,093 $73,289 Held in: New Zealand75,694 46,931 Offshore30,399 26,358 $106,093 $73,289 7. Fixed Assets 1997Cost$000 Accum.Depn.$000 BookValue$000 1996BookValue$000 Office equipment27 16 11 8 Furniture and fittings24 5 19 14 $51 $21 $30 $22 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. 1997$000 1996$000 New Zealand Bonds and deposits112,991 44,116 Equities14,106 66,171 127,097 110,287 Overseas Bonds and deposits12,617 11,219 Equities16,822 15,139 29,439 26,358 Total Bonds and deposits126,568 55,335 Equities30,928 81,310 $157,496 $136,645 9. Contingent Liabilities Contingent liabilities at 31 March 1997 consist of donations approved but not disbursed of $2.748 million (1996: $nil). 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 1997. 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 1997 and of the consolidated results of operations and cash flows for the year ended 31 March 1997. 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 interest in the trust. Unqualified Opinion We have obtained all the information and explanations we have required. In our opinion: Proper accounting records have been kept by the trust as far as appears from our examination of those records; and 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 1997 and the consolidated results of its operations and cash flows for the year ended on that date. Our audit was completed on 3 July 1997 and our unqualified opinion is expressed as at that date. TAYLOR McLACHLAN. Dunedin.