The Community Trust of Otago Directory for the Year Ended 31 March 1998 Trustees: Clive Matthewson (Chairperson), Dunedin; Ross Allan, Middlemarch; Nancy Bamford, Balclutha; Graeme Bell, Alexandra; Peter Gibson, Dunedin; Sir Robin Gray, Dunedin; Ele Ludemann, Oamaru, appointed September 1997; Richard McKnight, Dunedin; James Ng, Dunedin; David Pasley, Oamaru, retired March 1998; David Polson, Oamaru, retired May 1997; Gail Tipa, Dunedin, appointed September 1997; Richard Walls, Dunedin. Executive Director: Keith Ellwood Registered Office: Second Floor, Community Trust House, corner of Filleul Street and Moray Place, Dunedin. Auditor: Taylor McLachlan, Dunedin Solicitor: Anderson Lloyd, Dunedin. Investment Advisors: Frank Russell Limited, Auckland. Bankers: Westpac Trust, Dunedin. Custodian: Chase Manhattan Bank, Sydney. Chairperson's Report for the Year Ended 31 March 1998 It is a pleasure to present the tenth annual report of The Community Trust of Otago. The year past has seen significant milestones reached. The years ahead contain wonderful opportunities for us to really make a difference in the community of Otago. We are in the midst of a most exciting time. Highlights of the year included: achieving a gross income from investments of over $25 million, representing an 18.8 percent return, committing over $10 million in donations, compared with last year's $4.3 million, installing new fund managers, seeing some of our previously committed donations coming to effect, moving into our new building, thinking hard about the future, and seeing continued excellent working relationships within the trust. Trustees view themselves as accountable to the public for the wise exercise of their duties. This includes making effective donations, obviously, but first it requires the execution of a sound investment strategy. I would like to explain what lies behind our donations and investment policies so that people can more easily understand what we do. Investments The trust's investment objective is to obtain the maximum return for an acceptable degree of risk. All ``risk'' means is that we expect our income to be volatile, to vary from year to year. We don't want our donations budget to be unpredictable, so we must manage this risk. The strategy we have adopted is to set aside reserves to cope with a degree of risk that allows also a higher average income. Our asset allocations are still reasonably conservative for a long-term investor, our benchmark portfolio containing 35 percent in equity investments. Nevertheless, it is important to realise that we expect investment performance fluctuations perhaps twice as large as our donations budget. In practice, our reserving policy is quite sophisticated. The graph below shows the band within which our funds must stay unless we are to take corrective action of some sort. The boundaries represent overall fund levels where the statistical probability of either losing capital or retaining excessive reserves have reached a certain (still rather low) level of significance. Although trustees take full responsibility for choosing the overall strategy and the asset allocation and the fund managers, they do so only after obtaining advice from our investment advisors Frank Russell Limited. Russells also provide regular performance reports. As I reported last year, trustees selected new managers for both our overseas equities and overseas fixed interest portfolios. We became fully invested with both Lazard Freres and Fischer Francis Trees and Watts by August 1997. At the same time we engaged Chase Manhattan Bank to provide custodial services for our overseas securities. AMP manages our New Zealand balanced portfolio. The above discussion puts this year's performance in perspective. On the basis of our assets allocation, history, and average manager performance we are advised to expect an average gross nominal return of 8.3 percent. In fact we got 18.8 percent. We are delighted to report a very good year, but we expect both good and bad. Although the trust will continue to keep all aspects of its operations under constant review, we are satisfied for the present that we have in place a sound policy on investments. Donations The single most significant feature of the year for the trust was that we committed $10.2 million in donations. This eclipsed last year's total of $4.3 million, itself a record. Details of the donations, both large and small, are contained elsewhere in this report. We expect to continue donations at roughly the same level in the current year. As I have indicated, our average expected income is 8.3 percent of our capital. An estimated 2 percent must be added to our capital to maintain its real value, leaving 6.3 percent to spend. After deducting expenses, this leaves approximately $9.5 million for distribution. Our healthy reserves position has allowed trustees to set a budget for the coming year of $10 million. This is not a rigid figure. The trust is not yet experienced in managing this level of disbursement. We do not know how large or how volatile or of what quality will be the demand. We will need to be flexible while both the trust and the community become used to the level of donations that we can now make. The trust does not usually generate projects itself. Having money to distribute does not give us any special insights, and we do not wish to impose our ideas on the community. Thus, we generally prefer to foster self-reliance and to back projects that already have proven support. However, we do find ourselves in a position where we can see the big picture, where we can see the need to think strategically, and where sometimes we need to provide leadership. I mention some examples that demonstrate these points. During the year past, our very large support for the 150th anniversary celebrations broke new ground. The trust decided that the outcome of raised spirits, although not measurable, justified investment. The International Science Festival was an example where our risky entry at the very beginning paid off by allowing other support to be generated. We are moving more towards funding activities rather than infrastructure. Thus, for example, we might support the production of a play rather than new lighting for a theatre. Theatres are for productions, not lighting, and if the production is successful then the lighting can be bought, so long as it really is the top priority. Trustees monitor the distribution of donations, both by location and by category. Doing this has triggered 2 initiatives that promise much, for opposite reasons. The trust invests heavily in sport, and we need to do better than just respond to applications in an ad hoc way. We are working on providing an overall framework to maximise the effectiveness of this substantial investment. On the other hand, trustees observed that our donations to ``culture'' were consistently low. The trust has thus initiated a dialogue to help us understand why this is so and what we can do about it. We are pleased with the process and the outcome could be excellent. The trust now has the means to make a considerable difference in the life of the province. This requires a new level of thinking about both the opportunities and the risks of what we do, about vision and about philosophy. Trustees welcome that challenge. The Trust The year past has seen the trust established in its new premises, with which we are very pleased. We have no desire to advertise ourselves, and decline to provide what is normally understood by sponsorship. Nevertheless we want to be accountable. Thus, we are thinking about our communication with the public, in both directions. During the year we lost 2 trustees and gained 2. David Polson had been a leading member of the trust since its inception. His service was conspicuous when the trust moved from the position of holding ownership only in Trustbank New Zealand to what it is today. Dave Pasley has been missed for both his good company and his telling contribution. Gail Tipa and Ele Ludemann have both provided significant input since their appointments. The trust is very lucky to have such good staff. In Rugby parlance, I ``rate'' Chief Executive Keith Ellwood. Carol Melville has had a big first full year as donations assessor. She is more than a mere employee! Heather Wyatt and Fay Jackson are just great in the front office. Trustees have worked really well together. I thank them for what I believe has been a very good year. CLIVE MATTHEWSON, Chairperson. 1 July 1998. Consolidated Statement of Financial Performance for the Year Ended 31 March 1998 Note 1998$000 1997$000 Revenue1 25,493 24,787 Expenditure2 (1,268) (817) Surplus before donations 24,225 23,970 Donations paid from income4 (6,745) (1,007) Trustee surplus $17,480 $22,963 This surplus has been allocated to: Capital maintenance reserve 3,843 1,206 Uncommitted surplus 13,637 21,757 $17,480 $22,963 The notes to these financial statements form part of and should be read in conjuction with this consolidated statement of financial performance. Consolidated Statement of Movement in Trust Funds for the Year Ended 31 March 1998 Note 1998$000 1997$000 Opening trust funds 157,889 135,439 Donations paid from capital4 (446) (513) 157,443 134,926 Trustee surplus 17,480 22,963 Closing trust funds $174,923 $157,889 The notes to these financial statements form part of and should be read in conjuction with this consolidated statement of movement in trust funds. Consolidated Statement of Financial Position as at 31 March 1998 Note 1998$000 1997$000 Source of funds Trust funds3 174,923 157,889 Current liabilities Creditors 101 131 $175,024 $158,020 Employment of funds Current assets Current account Westpac Trust 260 287 Short term bank deposits 1,838 51,403 Debtors 207 2,098 51,897 Non current assets Managed funds5 171,499 106,093 Fixed assets6 1,427 30 172,926 106,123 $175,024 $158,020 Approved on behalf of the board: C. D. MATTHEWSON, Chairperson. R. S. McKNIGHT, Trustee. 2 July 1998. The notes to these financial statements form part of and should be read in conjuction with this consolidated statement of financial position. Consolidated Statement of Cash Flows for the Year Ended 31 March 1998 1998$000 1997$000 Cash flows from operating activities Cash was provided from: Managed funds24,046 8,043 Dividends received 1,680 Interest received on investments1,597 5,772 Other57 25,700 15,495 Cash was disbursed on: Payment to suppliers and staff713 523 Fund management528 239 Donations to voluntary organisations7,191 2,922 Managed funds reinvested23,456 7,804 31,888 11,488 Net cash inflow/(outflow) from operating activities (6,188) 4,007 Cash flows from investing activities Cash was provided from: Decrease in investment 68,439 68,439 Cash was disbursed on: Purchase of managed funds41,950 25,000 Purchase of fixed assets1,454 17 43,404 25,017 Net cash from investing activities (43,404) 43,422 Net increase/(decrease) in cash held (49,592) 47,429 Add opening cash brought forward 51,690 4,261 Ending cash carried forward $2,098 $51,690 Ending cash comprises: Cheque accounts 260 287 Term deposits 1,838 51,403 $2,098 $51,690 These notes to these financial statements form part of and should be read in conjuction with this consolidated statement of cash flows. Notes to the Consolidated Financial Statements for the Year Ended 31 March 1998 Basis of Preparation These are the consolidated financial statements of The Community Trust of Otago, Otago Community Charities Limited and Fillmor House Limited. The Community Trust of Otago was incorporated as a charitable trust in accordance with the provisions of the Trustee Banks Restructuring Act 1988. The financial statements have been prepared to comply with the Financial Reporting Act 1993 and comprise consolidated statements of the following: Financial performance, movement in trust funds, financial position, cash flows, as well as notes to these financial statements. The financial statements are prepared on the basis of historical cost, except for the revaluation of managed funds. Specific Accounting Policies Income Income from managed funds includes both realised and unrealised income and is recorded gross of fund management expenses. 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. Fixed Assets Fixed Assets are recorded at cost less accumulated depreciation. Depreciation Depreciation has been charged to the financial statement using rates, which will write off the cost of assets less their estimated residual value over their estimated economic lives. The depreciation rates used are: Buildings4 percent Office furniture and equipment1248 percent G.S.T. A subsidiary of The Community Trust of Otago, Fillmor House Limited, is registered for G.S.T. Accordingly its financial performance and financial position have been consolidated within the financial statements on a G.S.T. exclusive basis. Subject to the above, the trust is not registered for G.S.T. purposes and therefore the financial statements have been prepared 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 (CPI). 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 There have been no changes in accounting policies during this accounting period. Changes in Comparative Figures Where applicable, certain comparatives have been restated to comply with the accounting presentation adopted for the current period. 1998$000 1996$000 1. Revenue Interest1,390 5,914 Managed funds24,046 8,043 Dividend Trust Bank 1,680 Sale of Trust Bank shares 9,150 Other57 $25,493 $24,787 2. Expenditure Depreciation57 9 Fund managers fees528 239 Occupancy29 18 Other operating103 66 Professional fees118 170 Promotion37 72 Public and statutory reporting50 2 Staff218 142 Trustee fees103 71 Trustee expenses25 28 $1,268 $817 Professional fees Accountants Audit fees4 3 Other professional fees34 5 Community Trust Investment Limited 50 Legal advisors12 4 Professional investment advisers55 87 Other13 21 $118 $170 3. Trust Funds Trust Capital The trust capital represents the realised value of its original asset, being shares in Trust Bank. They were sold, partly in 1994 when Trust Bank listed on the New Zealand Stock Exchange and the balance in 1996 when Westpac took over Trust Bank. Opening balance21,202 21,202 Transfer from uncommitted surplus110,265 Closing balance$131,467 $21,202 Capital maintenance reserve Opening balance5,220 4,014 Transfers3,843 1,206 Closing balance$9,063 $5,220 Uncommitted surplus Opening balance131,467 53,860 Adjustment to reflect original capital(110,265) Donations to non profit bodies from trust capital(446) (513) Trustee surplus17,480 22,963 Transfer to capital maintenance reserve(3,843) (1,206) Transfer from investment fluctuation and revaluation reserves 56,362 Closing balance$34,393 $131,467 Total trust funds at 31 March 1998$174,923 $157,889 4. Donations Donations paid from income6,745 1,468 Donations paid from capital446 513 Effect of the change in accounting policy (461) $7,191 $1,520 In the prior year, for ease of presentation and for taxation reasons, the accounting policy was 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 8).[qp] 5. Managed Funds Managed by external managers Opening balance106,093 73,289 Gross income24,046 8,043 Fund managers fees(590) (239) Trust Bank share sale proceeds43,950 25,000 Withdrawals to fund donations (2,000) Closing balance$171,499 $106,093 Investments comprise: Cash, deposits and miscellaneous21,454 38,368 Bonds83,035 36,797 Equities67,010 30,928 Total managed funds$171,499 $106,093 Held in: New Zealand81,669 75,694 Offshore89,830 30,399 $171,499 $106,093 6. Fixed Assets 1998Cost$000 Accum. Depn.$000 BookValue$000 1997BookValue$000 Land432 432 Buildings906 40 866 Office furniture and equipment163 34 129 30 $1,501 $74 $1,427 $30 7. 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. 1998$000 1997$000 New Zealand Bonds and deposits68,568 113,277 Equities15,199 14,106 83,767 127,383 Overseas Bonds and deposits38,018 12,617 Equities51,812 17,783 89,830 30,400 Total Bonds and deposits106,586 126,855 Equities67,011 30,928 $173,597 $157,783 8. Contingent Liabilities Contingent liabilities at 31 March 1998 consist of donations approved but not disbursed of $5.702 million (1997: $2.748 million). 9. Taxation 1998$000 1997$000 Net surplus before taxation as per statement of financial performance 24,225 23,970 Less: Allocation of beneficiaries income4,333 5,944 Non assessable gains on sale of shares4,422 8,840 Charitable business exemption15,111 7,562 23,866 22,346 359 1,624 Plus: Non-deductible expenditure193 10 Imputation credits received242 827 435 837 Assessable income for tax purposes 794 2,461 Less losses carried forward (60) Taxable income 734 2,461 Taxation @ 33 cents 242 812 Less imputation credits (242) 827 Taxation payable (refund) (15) Losses brought forward 60 Losses incurred/(used) (60) 60 Losses carried forward 60 10. Reconciliation of Reported Surplus to Net Cash Flow From Operating Activities 1998$000 1997$000 Surplus for the period 17,480 22,963 Add: Non-cash items: Depreciation 57 9 Less: Non-cash items: Managed funds revaluation23,456 7,813 Gain on sale 9,150 23,456 16,963 Donations paid from capital446 513 23,902 17,476 (6,365) 5,496 Movements in working capital items: (Decrease)/increase in creditors(30) 55 Increase/(decrease) in committed donations (1,402) Decrease/(increase) in debtors207 (142) 177 1,489 Net cash flow from operating activities $(6,188) $4,007 Audit Report We have audited the consolidated financial statements. The consolidated financial statements provide information about the past consolidated financial performance of The Community Trust of Otago and its consolidated financial position as at 31 March 1998. 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 1998 and of the consolidated results of operations and cash flows for the year ended 31 March 1998. 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 1998 and the consolidated results of its operations and cash flows for the year ended on that date. Our audit was completed on 3 July 1998 and our unqualified opinion is expressed as at that date. TAYLOR McLACHLAN. Dunedin.