Trust Bank Otago Community Trust Inc. Annual Report for the Year Ended 31 March 1995 Trust Particulars The Trust Bank Otago Community Trust Inc. was incorporated as a charitable trust in accordance with the provisions of the Trustee Banks Restructuring Act 1988. The purpose of the trust is to provide charitable, cultural, philanthropic and recreational benefits to the community. Trustees Trustees are appointed by the Minister of Finance. While the initial term of appointment varies, replacement appointments are for a standard term of 4 years. The present trustees are: Mrs C. A. Melville, Chairperson, Mr R. R. Allan, Mrs N. Bamford, Mr G. R. Bell, Mr P. C. L. Gibson, Sir Robin Gray, Mr R. S. McKnight, Mr C. D. Matthewson, Dr J. Ng, Mr D. Pasley, Mr J. D. Polson and Mr R. F. Walls. Executive Director: Mr K. G. Ellwood, 6066 Tennyson Street, P.O. Box 5751, Dunedin. Bankers: Trust Bank Otago Limited. Solicitors: Anderson Lloyd. Auditors: Taylor McLachlan. Chairperson's Report It is with much pleasure that I submit the seventh annual report of the trust. It has been another year of considerable development as results of investment diversification begin to have significant impact on the income of the trust. This in turn will have a direct beneficial effect on the level of funds available for donations. Investment Policies Trustees have always been very conscious of their requirement to act prudently, not just conservatively, in respect of investment policy. This is well defined by the Trustee Amendment Act 1988. For some years trustees have felt a duty to diversify and not to have all investments in a single asset, in this case trust bank shares. Accordingly, following the sale of 30 million shares in March 1994, the proceeds, some $63 million, were placed with professional fund managers. In conjunction with appropriate professional advice the funds have been diversified across cash, bond and investments both in New Zealand and globally. Current policy is two fold. First, it is important to minimise the risk of loss of capital. Second, there is a need to build up reserves to a comfortable level to ensure that longer term, a stable level of donations may be paid notwithstanding fluctuating investment returns. Trustees continue to be extremely satisfied with the performance of Trust Bank New Zealand Limited, in which the trust holds 24 million shares or just over 5 percent of the issued capital of the bank. Notwithstanding that the trust now has less than half of the shares it owned prior to the float, it has still received a similar dividend amount as it did pre-float. This income, plus the returns from its managed funds has enabled income growth for the trust. Donations Policy Investment policy is linked to donations policy. Our policy is to donate as much to the community of Otago as possible bearing in mind the need to avoid losing capital and indeed to protect its real value. Donations policy aims to pay steady amounts each year, notwithstanding the volitility of investment returns. This should be achievable following a reserving period of about 5 years during which time a larger proportion of surplus income will be retained at the expense of donations. Therefore while donations are expected to increase over the next 5 years, because of the need to establish reserves during that period they will not increase at the same rate as income is expected to. Once reserves are fully established the percentage of donations paid relative to income received should increase. In anticipation of larger sums becoming available for donations, trustees will be making several policy changes designed to: (a) Increase the profile of the trust so more community groups become aware of its existence. (b) Upgrade assessment procedures for larger applications to ensure funds are donated in the most appropriate and effective way. (c) Increase general knowledge of overall community need always trying to reach an acceptable balance in donations policy across the categories of education, health, sport, recreation, community welfare, culture, heritage and the environment. (d) Increase the frequency of donations. Whereas in the past there has been a single annual donations round, two rounds will be introduced annually for applications less than $10,000. Larger applications will be accepted at any time during the year. The trust will become a source of increasing community funding. Its ability to assess and process applications as well as keep abreast of ongoing and changing community needs will make growing demands upon its resources. Trustees are determined the trust will respond to this exciting challenge and in so doing play its role in promoting community networks, sporting developments and welfare services throughout Otago. Administration In view of the increasing responsibilities that will be placed upon trustees consequent upon the expansion outlined above, a full time executive director was appointed to the trust in November 1995. Mr Keith Ellwood has assumed that position having formerly acted as secretary/treasurer to the trust. The trust appreciates the professionalism and commitment Keith has made to the organisation. In addition there are 2 part-time office staff. Short-term office facilities have been secured in Skeggs House, Tennyson Street, pending a decision about a long-term home for the trust. Trustees Currently there are 12 trustees appointed by the Minister of Finance. In addition to having skills and interests which enable them to react both sensitively and sensibly to donation requests from the community each of the trustees must live in the Otago area. The term of appointment of 2 trustees, Mrs Shirley Jones and Mrs Holly Russell ended during the year. Both were foundation trustees and it is appropriate to mention their significant contribution to the success of the trust since 1988. Mr John Edgecombe resigned following his shift out of the area. To each of these trustees the trust as a whole extends its grateful thanks. Their wisdom and advice contributed so much for which we are truly indebted. We warmly welcomed 1 new appointment from Balclutha, Mrs Nancy Bamford. Public Information The trust has a responsibility to the public under its trust deed. It is required to hold an annual meeting and to publish its annual accounts and donations list. In keeping with its growing capacity to serve the community the trust plans to create a greater public awareness of its activities in a number of different areas. The role of the trust and its relationship with its bank is not fully understood. They continue to be seen as the same organisation. The next several years however will witness a continuing emergence of the trust in its own right and a wider public recognition of its very major role in supporting community groups in Otago. CAROL MELVILLE, Chairperson. Consolidated Statement of Financial Performance for the Year Ended 31 March 1995 Note 1995$000 1994$000 Income From managed funds6 1,984 From other investments1 5,008 2,138 6,992 2,138 Expenditure Occupancy 3 Other operating 27 14 Professional fees2 73 10 Public and statutory reporting 8 4 Staff 93 59 Trustees' fees 36 30 Trustees' expenses 12 6 252 123 6,740 2,105 Operating surplus Investment revaaluuation5 35,937 Share sale proceeds5 50,452 35,937 50,452 Surplus for the period $42,677 $52,467 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 1995 Note 1995$000 1994$000 Uncommitted surplus at start of period 52,552 22,759 Net surplus for the period 42,677 52,567 95,2229 75,226 Allocation Committed donations3 2,672 1,472 Capital maintenance reserve 2,520 Investment revaluation reserve 35,937 Investment fluctuation reserve 493 Trust capital 21,202 Uncommitted surplus $53,607 $52,552 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 1995 Note 1995$000 1994$000 Source of funds Liabilities Creditors 31 13 Committed donations3 638 Undistributed grant provision 15 669 28 Trust funds Original capital4 21,202 21,202 Capital maintenance reserve4 2,520 Investment revaluation reserve4 35,937 Investment fluctuation reserve4 493 Uncommitted surplus 53,607 52,552 113,759 73,754 $114,428 $73,782 Employment of funds Current assets Current account 312 332 Short-term deposits 3,729 63,910 Debtors 37 102 Other assets 15 4,078 64,359 Investments Long-term investment5 45,360 9,423 Managed funds6 64,984 110,334 9,423 Fixed assets7 6 $114,428 $73,782 Approved on behaalf of the board: C. A. MELVILLE, Chairperson. R. S. McKNIGHT, 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 1995 1995$000 1994$000 Cash flows from operating activities Cash was provided from: Dividends received2,898 1,946 Interest received on investments2,898 1,946 5,073 2,047 Cash was disbursed to: Payment to suppliers and staff175 85 Fund management and advisory fees59 29 Donations to voluntary organisations2,034 1,471 2,268 1,585 Net cash flows from operating activities 2,805 462 Cash flows from investing activities Cash was provided from: Sale of shares 62,231 Decrease in term deposits63,000 62,231 63,000 62,231 Cash was disbursed on: Purchase of investment2,819 63,360 Purchase of managed funds63,000 Purchase of fixed assets6 65,825 63,360 Net cash outflow from investing activities (2,825) (1,129) Net (decrease)/increase in cash held (20) (667) Add opening cash brought forward 332 999 Ending cash carried forward $312 $332 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 Note 1995$000 1994$000 Surplus for the period 42,677 52,457 Less: Non-cash items: Investment revaluation 35,937 Managed funds reinvested 1,934 37,921 Proceeds from investment disposal 50,452 Committed donations 2,672 1,472 40,593 51,924 2,084 543 Movements in working capital items: Increase in creditors 18 9 Increase in committed donations 638 Decrease in grant provision (15) Decrease/(increase) in debtors 65 (90) Decrease in other assets 15 721 (81) Net cash flow from operating activities $2,805 $462 Notes to the Consolidated Financial Statements for the Year Ended 31 March 1995 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. 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 Trust Bank's 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 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 base adopted is the 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 Limited 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 rreduction 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. 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 Limited 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 Donations are now recorded on a commitment basis rather than a cash basis. This has increased the amount recorded as donations by $637,560. The investment in Trust Bank New Zealand Limited has been recorded at market value compared to cost in previous years. This has resulted in a revaluation of $35,936,731. There have been no other material changes in accounting policies during this accounting period. 1995$000 1994$000 1. Income Dividends trust bank2,175 1,946 Interest2,833 192 $5,008 $2,138 2. Professional Fees Auditors: Audit fees1 1 Other professional fees1 Community Trust Investment Limited4 9 Legal advisors8 Professional investment advisors59 $73 $10 3. Donations For this year: Committed and disbursed2,034 1,472 Committed but not yet disbursed638 $2,672 $1,472 4. Trust Capital and Reserves Balance as at 31 March$21,202 $21,202 The trust capital is the original value of the shares in Trust Bank New Zealand Limited at the time they were settled on the trust in 1988. 1995$000 1994$000 Capital maintenance reserve Balance as at 1 April Transfers during the period2,500 Balance as at 31 March$2,500 Investment revaluation reserve Balance as at 1 April Net gain/(loss) during the period35,937 Balance as at 31 March$35,937 Investment fluctuation reserve Balance as at 1 April Allocation from surplus for the year493 Balance as at March$493 5. Long-term Investments Shares in Trust Bank New Zealand Limited: Balance as at 1 April9,423 9,423 Revaluation to year end market value35,937 Balance as at 31 March$45,360 $9,423 Total number of shares held in TBNZ as at 31 March 1995 was 24 000 000 (1994 24 000 000). The market price at 31 March 1995 was $1.89 per share (31 March 1994 $2.30). The market price as at 31 March 1995 was $2.09 per share. 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 achived in conjunction with a public offering of shares by Trust Bank New Zealand Limited to raise additional capital. 6. Managed Funds Managed by external managers: Net income1,984 Deposits to funds63,000 Balance as at 31 March$64,984 Investment comprises: Cash, deposits and miscellaneous17,577 Bonds29,224 Equities18,183 Portfolio total$64,984 Held in: New Zealand42,713 Offshore22,271 $64,984 7. Fixed Assets 1995 Cost $000 Accumulative Depreciation $000 Book Value $000 Office equipment and furniture$6 $ $6 8. Financial Instruments The financial instruments are subject to an interest rate risk. There is no credit risk relating to the fund managers or the custodian. Because of the diversification of investments there are no significant concentrations of credit risk within the investment portfolios. Foreign currency hedges are taken out by the fund managers to minimise the exposure to foreign exchange fluctuations. No comparison is provided between the carrying value and estimated fair value of financial instruments, due to the carrying value reflecting market price. 1995 $000 1994 $000 New Zealand Bonds and deposits40,608 Equities51,194 91,802 Overseas Bonds and deposits9,922 Equities12,350 22,272 Total Bonds and deposits50,530 Equities63 $114,074 9. Contingent Liabilities There are no contingent liabilities at 31 March 1995 (1994 $nil). Auditor Report 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 1995. 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 1995 and of the consolidated results of operations and cash flows for the year ended 31 March 1995. 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 1995 and the consolidated results of its operations and cash flows for the year ended on that date. Our audit was completed on 8 June 1995 and our unqualified opinion is expressed as at that date. TAYLOR McLACHLAN & PARTNERS, Chartered Accountants. Dunedin. Schedule of Distributions of Income by Way of Donations for the Period Ended 31 March 1995 A full list covers a number of pages and is attached to the original of this document. A copy is available on request.