The Community Trust of Southland Trustee Banks Restructuring Act 1988 The Community Trust of Southland Auditors Report We have audited the attached financial statements. The financial statements provide information about the past financial performance and financial position of the trust and group as at 31 March 1998. This information is stated in accordance with the accounting policies set out in the notes to the financial statements. Trustee's Responsibilities The trustees are responsible for the preparation of financial statements which gives a true and fair view of the financial position of the trust and group as at 31 March 1998 and of the results of their operations and cash flows for the year ended on that date. Auditor's Responsibilities It is our responsibility to express an independent opinion on the 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 financial statements. It also includes assessing: the significant estimates and judgments made by the trustees in the preparation of the financial statements, and whether the accounting policies are appropriate to the trust's and group'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 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 financial statements. Other than in our capacity as auditors we have no relationship with or interests in the trust or its subsidiary. 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 financial statements audited: comply with generally accepted accounting practice; give a true and fair view of the financial position of the trust and group as at 31 March 1998 and the results of their operations and cash flows for the year ended on that date. Our audit was completed on 30 June 1998 and our unqualified opinion is expressed as at that date. Dated this 30th day of June 1998. WARD WILSON. Invercargill. Statement of Financial Performance for the Year Ended 31 March 1998 [tn3,2]Group[tn5,2]Trust Note 1998$ 1997$ 1998$ 1997$ Income: Dividend Trust Bank New Zealand (final)2 0 3,992,000 0 3,992,000 Other dividends 1,202,896 60,564 1,202,896 60,564 Interest 9,992,332 13,688,420 9,251,174 13,688,420 Revaluation of investments1 4,173,676 1,069,921 4,173,675 1,069,921 Total income 15,368,904 16,671,063 14,627,745 16,671,063 Less expenditure: Salaries and staff costs 273,894 153,171 273,894 153,171 Levies and subscriptions 0 118,519 0 118,519 Fund manager fees 374,596 0 374,596 0 Professional fees 103,167 132,940 101,358 132,940 Occupancy costs 17,658 6,700 17,658 6,700 Communications 14,621 16,723 14,621 16,723 Office expenses 12,967 26,385 12,967 26,385 Audit fees 5,400 6,558 5,400 6,558 General expenses 36,293 42,606 36,195 42,606 Vehicle expenses 14,054 4,923 14,054 4,923 Grants advertising and promotion 13,260 17,744 13,260 17,744 Trustees' fees10 94,080 53,750 94,080 53,750 Reporting and compliance expenses 45,348 30,524 45,348 30,524 Depreciation1 43,285 17,407 43,285 17,407 Total expenditure 1,048,623 627,950 1,046,716 627,950 Net surplus before taxation 14,320,281 16,043,113 13,581,029 16,043,113 Taxation11 0 0 0 0 Net surplus after taxation 14,320,281 16,043,113 13,581,029 16,043,113 Extraordinary items: Profit on sale of shares in Trust Bank New Zealand 0 138,322,993 0 138,322,993 $14,320,281 $154,366,106 $13,581,029 $154,366,106 Share of loss of Invest South Limited5 20,080 0 20,080 0 Net surplus for the year $14,300,201 $154,366,106 $13,560,949 $154,366,106 Statement of Movements in Equity for the Year Ended 31 March 1998 [tn2,2]Group[tn4,2]Trust 1998$ 1997$ 1998$ 1997$ Trust capital beginning of year177,047,078 29,580,133 177,047,078 29,580,133 Add this year's surplus14,300,201 154,366,106 13,560,949 154,366,106 Less Grants approved10,030,234 6,899,161 1,369,353 6,899,161 Transfer to Southland Community Trust Charities Limited0 0 23,368,928 0 Trust capital end of year$181,317,045 $177,047,078 $165,869,746 $177,047,078 Statement of Financial Position as at 31 March 1998 [tn3,2]Group[tn5,2]Trust Note 1998$ 1997$ 1998$ 1997$ Funds employed: Trust capital $181,317,045 $177,047,078 $165,869,746 $177,047,078 Liabilities: Accounts payable 197,763 42,064 197,763 42,064 Grants committed but not paid 8,561,572 5,039,340 3,249,058 5,039,340 Southland Community Trust Charities Limited 0 0 10,080,508 0 Total liabilities 8,759,335 5,081,404 13,527,329 5,081,404 Total capital and liabilities $190,076,380 $182,128,482 $179,397,075 $182,128,482 Assets: Current assets: WestpacTrust cheque account 281,919 609,377 349,760 609,377 Accounts receivable and interest accrued 257,926 2,109,236 210,778 2,109,236 Total current assets 539,845 2,718,613 560,538 2,718,613 Fixed assets3 1,112,077 108,869 1,112,077 108,869 Investment assets: WestpacTrust call account 2,271,997 151,000 2,071,997 151,000 Trading bank deposits 46,000,000 168,150,000 35,500,000 168,150,000 TeNZ fund 10 million units 11,600,000 11,000,000 11,600,000 11,000,000 Managed funds ANZ funds management4 42,337,526 0 42,337,526 0 Armstrong Jones4 42,857,206 0 42,857,206 0 Bankers Trust4 42,127,809 0 42,127,809 0 Southland Community Trust Charities Limited 0 0 2 0 Invest South Limited5 1,229,920 0 1,229,920 0 Total investment assets 188,424,458 179,301,000 177,724,460 179,301,000 Total assets $190,076,380 $182,128,482 $179,397,075 $182,128,482 Signed on behalf of the board of trustees: C. S. BALLANTYNE, Chairman. W. A. CAMBRIDGE, Trustee. Statement of Cash Flows for the Year Ended 31 March 1998 [tn3,2]Group[tn5,2]Trust Note 1998$ 1997$ 1998$ 1997$ Cash flows from operating activities Cash was provided by (applied to): Administration expenses 905,960 637,480 904,053 637,480 Grants to the community 6,508,002 3,400,601 3,159,635 3,400,601 Net cash flows from operating activities8 7,413,962 4,038,081 4,063,688 4,038,081 Cash flows from investing activities Cash was provided by (applied to): Sale of Trust Bank New Zealand shares 0 162,603,993 0 162,603,993 Proceeds from disposal of other investments 132,650,000 0 132,650,000 0 Interest and dividends 13,046,539 15,718,318 12,352,526 15,718,318 Investments 135,498,864 180,219,921 124,998,866 180,219,921 Fixed assets 990,172 111,187 990,172 111,187 Net cash flows from investing activities 9,207,503 2,008,797 19,013,488 2,008,797 Cash flows from financing activities Cash was provided by (applied to): Transfer to Southland Community Trust Charities Limited 0 0 13,288,420 0 Net cash flows from financing activities 0 0 13,288,420 0 Net increase (decrease) in cash held $1,793,541 $6,046,878 $1,661,380 $6,046,878 Cash reconciliation Cash held at beginning of year 760,377 6,807,255 760,377 6,807,255 Cash held at end of year 2,553,918 760,377 2,421,757 760,377 Net increase (decrease) in cash held $1,793,541 $6,046,878 $1,661,380 $6,046,878 Notes to the Financial Statements for the Year Ended 31 March 1998 1. Statement of Significant Accounting Policies General The financial statements presented here are for the reporting entity the Community Trust of Southland (the trust) and the Community Trust of Southland Group (the group). The group consists of the trust, its wholly owned company Southland Community Trust Charities Limited, and the trust's interests in associates. The Community Trust of Southland was formed under the Trustee Banks Restructuring Act 1988, while the trust is incorporated under the Charitable Trusts Act 1957. The financial statements are presented in accordance with the Financial Reporting Act 1993. The financial statements are prepared on the basis of historical cost except that investment assets are stated at valuation. The accounting policies have been consistently applied by the trust and the group, and are consistent with those of the previous year. Where appropriate, new accounting policies have been introduced to reflect the changes in the nature of activities, particularly investing activities, undertaken by the trust and the group. Consolidation The financial statements of the trust's wholly owned company Southland Community Trust Charities Limited are included in the group financial statements using the purchase method of consolidation. Associates Associates are entities in which the group has significant influence, but not control, over the operating and financial policies. The group financial statements include the group's share of the net deficit of associates on an equity accounted basis. Investments The Group states its equity in investments at market value, and reports gains or losses on holding these investments in the statement of financial performance. These gains or losses are shown in the statement of financial performance as income from revaluation of investments. The group intends to hold bank deposits until maturity and states these investments at cost. Fixed Assets Fixed assets are initially stated at cost and then depreciated on a straight line basis to allocate the cost of an asset, less any residual value, over its useful life. The estimated useful lives of fixed assets are as follows: Land indefinite Buildings 3040 years Furniture and fittings 315 years Office equipment 3 8 years Motor vehicles 5 8 years Accounts Receivable The group states these at expected realisable value. Grants The group brings these to account when approved by trustees. Unpaid grants are recorded as a liability. Income Tax The group provides for income tax on its net income after adjusting for tax accounting differences and any beneficiaries income determinations made pursuant to section OB1 (226) of the Income Tax Act. Goods and Services Tax The group is not registered for goods and services tax. The financial statements are prepared so that all components are stated inclusive of G.S.T. 2. Sale of Shares in Trust Bank New Zealand In May 1996 the trust sold its shares in Trust Bank New Zealand to Westpac Banking Corporation. The effective offer price, including a bonus issue and special fully imputed dividend amounted to $2.92 per share held before the offer. 3. Fixed Assets Group and Trust Cost$ Accum Depn$ 1998 Value$ 1997 Value$ Land457,419 Nil 457,419 Nil Buildings461,921 2,686 459,235 Nil Office equipment72,706 27,334 45,372 31,878 Furniture and fittings121,299 2,999 118,300 Nil Motor vehicles46,000 14,249 31,751 76,991 Totals$1,159,345 $47,268 $1,112,077 $108,869 4. Investments Managed By Fund Managers Group and Trust The group during the year placed investment funds with 3 institutional investment managers (fund managers), being ANZ Funds Management, Armstrong Jones (NZ) Limited, and B.T. Funds Management (NZ) Limited. Market values, and asset allocations, of these investments as at balance date were as follows: ANZ(NZ$m) ArmstrongJones (NZ$m) B.T.(NZ$m) 1997Value New Zealand equities5.44 7.31 7.79 Nil Foreign equities9.79 7.17 6.90 Nil New Zealand bonds17.73 10.97 9.37 Nil Foreign bonds8.61 9.80 10.59 Nil Cash0.76 7.60 7.47 Nil Totals$42.33m $42.85m $42.12m Nil Exposure to currency, interest rate and credit risk arises in the normal course of the fund managers' management of the group's investments. Derivative financial instruments are used by the fund managers as a means of reducing exposure to fluctuations in foreign exchange rates and interest rates. While these financial instruments are subject to the risk of market rates changing subsequent to acquisition, such changes would generally be offset by opposite effects on the items being hedged. 5. Investments in Associates Group and Trust The total investment in Invest South Limited comprises: 1998$ 1997$ Cost price of shares purchased1,250,000 Nil Share of operating deficit(20,080) Nil Equity accounted value of investment1,229,920 Nil 6. Income Tax On 30 June 1998 the trustees determined to pay $10,080,508 income as beneficiaries' income to Southland Community Trust Charities Limited, the income of which is exempt from income tax. Consequently the trust has made no provision for income tax. 7. Events Subsequent to Balance Date On 12 May 1998 NZ$45 million, previously invested in trading bank deposits, was invested with Morgan Stanley Asset Management Limited of London, pursuant to an investment management agreement dated 24 April 1998. Morgan Stanley as the managers of the investment have been given a mandate by the trustees to invest these funds in international equity investments. 8. Reconciliation With Operating Surplus [tn2,2]Group[tn4,2]Trust 1998$ 1997$ 1998$ 1997$ Net surplus14,300,201 154,366,106 13,560,949 154,366,106 Less grants(10,030,234) (6,899,161) (1,369,353) (6,899,161) 4,269,967 147,466,945 12,191,596 147,466,945 Add/(less) movement in working capital Increase (decrease) in liabilities3,677,931 3,529,560 (1,634,583) 3,529,560 (Increase) decrease in accounts receivable1,851,310 (2,080,603) 1,898,458 (2,080,603) 5,529,241 1,448,957 263,875 1,448,957 Add(less) movement in items classified as investing/financing Interest and dividend received(13,046,539) (15,718,318) (12,352,528) (15,718,318) Asset purchases(56,321) 0 (56,321) 0 Sale of Trust Bank New Zealand shares0 (138,322,993) 0 (138,322,993) (13,102,860) (154,041,311) (12,408,849) (154,041,311) Add(less) movement in non-cash items Revaluation of investments(4,153,595) 1,069,921 (4,153,595) 1,069,921 Depreciation43,285 17,407 43,285 17,407 (4,110,310) 1,087,328 (4,110,310) 1,087,328 Net cash provided by operating activities$(7,413,962) $(4,038,081) $(4,063,688) $(4,038,081) 9. Financial Instruments General The group states its investments at balance date at estimated market value, calculating accrued interest on bank deposits by reference to the contract rates. The trustees consider that the fair value of the financial assets is identical to the carrying value in the statement of financial position. Concentration of Credit Risk The group has significant funds in trading bank deposits, and in TeNZ Fund units. The group limits risk by spreading the deposits over several trading banks, and the TeNZ Fund's policy of selecting 10 investments in its portfolio also limits the risk. The group has not required collateral or other security to support its financial statements. The group further limits risk through its policy of placing investment funds with 3 separate fund managers, with each fund manager having an investment mandate which requires that they in turn diversify their investments on the group's behalf. The group has sought and obtained the advice of a professional financial adviser prior to making its investment allocation and placement decisions. Interest Rate Risk The bank deposits are sensitive to changes in interest rates, as are a proportion of the funds managed by the fund managers. 10. Trustee's Fees Meeting fees and honorariums were paid to trustees as follows: 1998$ 1997$ C. S. Ballantyne26,121 16,450 W. A. Cambridge10,059 4,970 F. G. Cardno7,513 4,650 P. Duffy7,402 4,390 G. A. Farry5,323 2,810 J. J. Grant5,273 2,610 C. A. McCulloch9,152 4,910 B. J. MacKay6,023 3,390 G. M. Neave8,382 4,060 D. J. Stronach8,832 5,510 Total$94,080 $53,750 11. Taxation [tn2,2]Group 1998$ 1997$ (a) Income tax expense Gross income per statement of financial performance15,368,904 16,671,063 Add imputation credits attached to dividends530,505 1,996,286 15,899,409 18,667,349 Less expenditure(1,048,623) (627,950) 14,850,786 18,039,399 Less beneficiary income(10,080,508) (13,288,420) Income subject to taxation 4,770,278 4,750,979 Prima facie income tax expense calculated at 33 percent1,574,192 1,567,823 Less tax effect of permanent differences(968,298) 353,074 605,894 1,920,897 Less imputation credits(605,894) (1,920,897) Total income tax expenseNil Nil (b) Imputation credits Balance at beginning of year75,389 Nil Imputation credits attached to dividends received530,505 1,996,286 Taxation expense(605,894) (1,920,897) Balance at end of yearNil 75,389