Australian Ethical Investment
Annual Report 2007

Plain-text annual report

Australian Ethical Investment Ltd Annual report to shareholders for year ending 30 June 2007 australianethical investment + superannuation R ® Registered trademark of Australian Ethical Investment Limited. for investors, society and the environment australianethical Financial summary to 30 June 2007 as at 30 June 2007 30 June 2006 30 June 2005 30 June 2004 5 174 4 879 2 293 76 7 684 1819.2 Current assets ($’000) Non-current assets ($’000) Current liabilities ($’000) Non-current liabilities ($’000) Net assets ($’000) 2000 1800 1600 1400 1200 1000 800 600 400 200 0 200 180 160 140 120 100 80 60 40 20 0 600 550 500 450 400 350 300 250 200 150 100 50 0 0 0 0 1 $ s t n e c n o i l l i m $ Profit after tax (NPAT) 1362.6 784.4 459.8 190.9 2003 2004 2005 2006 2007 Year ending 30 June Basic earnings per share 194.8 150.3 89.6 52.9 23.3 2003 2004 2005 2006 2007 Year ending 30 June Funds under management 552 417 311 267 213 2003 2004 2005 2006 2007 As at 30 June 5 176 3 103 1 928 77 6 274 5 833 701 1 456 31 5 047 5 074 517 974 75 4 542 13 12 11 10 9 8 7 6 5 4 3 2 1 0 30 27 24 21 18 15 12 9 6 3 0 200 180 160 140 120 100 80 60 40 20 0 Revenue 12.09 9.66 7.42 5.90 4.70 2003 2004 2005 2006 2007 Year ending 30 June Return on equity 26.1 24.1 16.4 10.4 5.3 2003 2004 2005 2006 2007 Year ending 30 June Dividends paid 192 85 72 52 22 2003 2004 2005 2006 2007 Year ending 30 June n o i l l i m $ % e r a h s r e p s t n e c 2005 fi gures in the above tables and graphs have been adjusted where necessary as for fi rst time adoption of Australian equivalents to International Financial Reporting Standards (AIFRS). D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 2 australianethical Contents Chair’s report Chief executive officer’s report Sustainability report Corporate governance statement 2007 Directors’ report Financial statements Shareholder information Corporate directory Corporate vision and mission 4 6 7 10 14 26 52 53 53 The Australian Ethical Charter The Company will order its affairs so as to provide for and to support: © a. the development of workers’ participation in the ownership and control of their work organisations and places; b. the production of high quality and properly presented products and services; c. the development of locally based ventures; d. the development of appropriate technological systems; e. the amelioration of wasteful or polluting practices; f. the development of sustainable land use and food production; g. the preservation of endangered eco-systems; h. activities which contribute to human happiness, dignity and education; the dignity and well being of non-human animals; i. j. The Company will also order its affairs so as to avoid activity which is considered to unnecessarily: i. pollute land, air or waters; ii. destroy or waste non-recurring resources; iii. extract, create, produce, manufacture, or market materials, products, goods or services which have a harmful effect on humans, non-human animals or the environment; iv. market, promote or advertise, products or services in a misleading or deceitful manner; v. create markets by the promotion or advertising of unwanted products or services; vi. acquire land or commodities primarily for the purpose of speculative gain; vii. create, encourage or perpetuate militarism or engage in the manufacture of armaments; the efficient use of human waste; viii. entice people into financial over-commitment; k. the alleviation of poverty in all its forms; l. the development and preservation of appropriate human buildings and landscapes. ix. exploit people through the payment of low wages or the provision of poor working conditions; x. discriminate by way of race, religion or sex in employment, marketing, or advertising practices; xi. contribute to the inhibition of human rights generally. A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 3 australianethical Chair’s report An excellent year and a sound outlook D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 4 The board is pleased to report that the Australian Ethical Investment group has had another strong year in terms of profit and growth in funds under management, with a record dividend declaration of $1.92 per share. The growth in return to our shareholders has been achieved without any compromise to our deep green investment strategy or our commitment to the Australian Ethical Charter. Our balance sheet remains strong with the ability to finance our change in superannuation administrator and to extend our marketing reach over 2008 as discussed below. Climate change In 2007 we have seen climate change become a mainstream concern. While overdue, this concern is positive for focusing consumer, government and corporate attention. Perhaps the Stern report of October 2006 created the tipping point in climate change awareness when it stated that ‘climate change is the greatest and widest ranging market failure ever seen’. More positively, it reports that the benefits of strong, early action considerably outweigh the costs. Australian Ethical has for a long time been a major investor in companies that are helping to prevent climate change. World Trust After many years with an unchanged product offering, we launched a new retail product, the Australian Ethical World Trust, in July. The World Trust aims to provide investors with long-term growth through investment in overseas companies which meet our Charter. The World Trust enables investors to support a wide range of socially and environmentally attractive activities that are not available for investment in Australia. Providing a specialised international product gives investors more choice in achieving an ethical and appropriately diversified investment strategy. The World Trust makes its investments through our new international wholesale trust, the Australian Ethical International Equities Trust. Staff and management worked very hard to launch the new products on time, and the board has been pleased with interest in the World Trust to date. Trevor Pearcey House In March 2007, we moved into our refurbished premises at Block E Trevor Pearcey House in the Canberra suburb of Bruce. The refurbishment is a significant statement to the commercial building sector of how energy and resource intensity can be significantly reduced with appropriate forethought. The fact that the building is a refurbishment rather than a new building demonstrates that the existing cohort of conventional commercial buildings can be reworked to produce better environmental and productivity outcomes. An application has been lodged with the Green Building Council of Australia for a Green Star rating. So far our building has won two prizes – a highly commended in the United Nations Association of Australia World Environment Day Awards and the Commercial Winner and Overall Winner in the Keep Australia Beautiful ACT Sustainable Cities Awards. Community grants Our company’s growing profits means greater returns to the community through our community grants program. The 2006–07 record profit translates into a grant of $225 000. In 2007, for the first time, a major project grant of $50 000 was made to The Australia Institute. The Institute will develop teaching materials on climate change for secondary schools. We chose to support this major project as it ties in with our charter commitment to education, the environment and to achieving long term positive change in society. Our commitment to supporting grass roots community groups also continues. In 2007 grants were made to 40 organisations involved in a wide range of conservation and charitable activities in Australia and overseas. Corporate governance The board has focused considerable effort in strengthening our company’s corporate governance. With the departure of Pauline Vamos to take on a full-time role at ASFA, we have initiated a major review of our corporate governance at board level, including: • • actively seeking at least one additional independent director; a skills audit of current and prospective directors; • • • performance assessments of current directors; investigating ways to improve board, committee and management function; a continuing commitment to our stated objective of achieving a majority of independent directors, assuming the availability of suitable candidates. Year ahead – strategic plans In March 2007, the board and senior management conducted a review of the Australian Ethical group’s strategy. As a result of this review, we are aiming to broaden our marketing reach beyond our traditional support base. Strategies are in place to target a more mainstream retail market and the associated adviser distribution channels. Greater resources will also be allocated to attracting institutional investment. This is a new direction in terms of our marketing effort, but not in terms of our commitment to being Australia’s most ethical and deep green fund manager. Grants to community organisations Major project grant The Australia Institute: teaching materials on climate change for Australian schools National Trust of Australia (ACT) – St John’s Church Heritage Conservation Fund: conservation of the Golden Sun Moth and its habitat Engineers Without Borders Friends of the Earth Australia: anti-nuclear campaigns 0 0 6 6 $ ACT Eden-Monaro Cancer Support Group Barefoot Economy Australian Marine Conservation Society Camp Quality Australians for Disability and Diversity Employment Pedal Power ACT WIRES (NSW Wildlife Information, Rescue and Education Service) Bicycle Federation of Australia NRMA CareFlight WaterAid Australia 0 0 0 0 5 $ 0 0 0 0 1 $ australianethical I am very much looking forward to my new role as chair. The staff, management and board of Australian Ethical are hard working, innovative and passionate about our group’s goals. It is an exciting time for the group as we push to implement our growth strategies. Wise use of the planet’s resources has never been more important, and by growing our customer base and our funds under management we will contribute positively to this goal. Naomi Edwards Chair 0 0 9 2 $ Aid/Watch Animal Liberation NSW Animals Asia Foundation (Australia) Asylum Seeker Resource Centre Australian Crohn’s & Colitis Association Australian Drug Foundation Canberra Environment and Sustainability Resource Centre Chrysalis Insight Incorporated Conservation Council south east region and Canberra Edgar’s Mission Fair Trade Association of Australia and New Zealand Head High Hepburn Wildlife Shelter HopeStreet Urban Compassion International Women’s Development Agency Kids Under Cover Mineral Policy Institute National Parks Association of New South Wales Rainforest Rescue Respite Care Bega Valley New Internationalist Publications Prison Fellowship Australia (Victoria) Vulcana Women’s Circus Darling Range Wildlife Shelter Marine Stewardship Council (Asia Pacific) The Friends of Oolong Wildlife Preservation Society of Queensland A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 5 australianethical Chief Executive Officer’s report Strong performance D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 6 The Australian Ethical Investment group continued to perform strongly in the second half of the 2006–07 financial year. I am very pleased to report a consolidated net profit of $1 819 177. This trading result represents an increase of 34% over the previous financial year’s net profit of $1 362 612. The result continues the group’s trend of an increased profit every year since 2003. Growth in funds under management was again strong with good investor inflow and positive returns from investments. At 30 June 2007, funds under management, after a distribution of $59 million, stood at $552 million. Increasing funds under management is essential for the company as it results in increased revenue and assists in building economies of scale. The company’s cost to income ratio continues to fall with a decrease from 77.4% in 2005–06 to 76.1% in 2006–07. This is a particularly pleasing result given the increased employment costs we have experienced. As a result of the improved profit, return on equity has increased from 24.1% to 26.1%. The continued success and growth of our business is dependant on the performance of the Australian Ethical trusts. 2006–07 saw solid returns across all of the Australian Ethical trusts. The Australian Ethical Equities Trust was the star performer with a return of 36.9%, buoyed by a strong performance from its small company investments. The other three Australian Ethical trusts also performed strongly against their peer groups. The Australian Ethical World Trust was launched in July 2007 and we have been pleased with the response to date. We remain committed to investing in quality companies taking into account ethical, governance and financial strength and ensuring our returns are commensurate with the risk profile of the individual trust. Historically the Australian Ethical Retail Superannuation Fund has experienced significant and steady growth. This strong growth continued during the financial year as people took advantage of choice of funds and recent changes to legislation. Last year the directors took the decision to retain some of the profits to invest in the future growth of the company and to rebuild liquidity following the purchase of Block E Trevor Pearcey House. These aims have now been achieved. Mindful of the significant franking credits held by the company, the directors have decided that shareholders will be paid a final dividend (fully franked) of $1.52 per ordinary share. Added to the interim dividend of 40 cents per share, the total dividend for the 2006–07 financial year will be $1.92 per share, an increase of 126% over the previous year. As many of you would be aware we refurbished Block E of Trevor Pearcey House to meet high standards of energy efficiency and to provide our staff with a comfortable and productive working environment. We are now well settled into our new home and I am pleased to advise it is everything we hoped for in terms of amenity and resource efficiency. Outlook As previously flagged, we are keen to attract increased non-retail investment and are working through strategies which will allow us to do this better. Rest assured this will not be at the expense of our existing retail customers who continue to be great supporters of the Australian Ethical trusts. The share market can be a volatile creature. This has been amply demonstrated in recent months by the reaction of global financial markets to the poor lending practices of American sub-prime mortgage providers. Australian Ethical does not invest in any sub-prime mortgage debt in our fixed interest portfolio. We have no obvious exposure to ‘at risk’ issuers of sub-prime mortgages. However, sharp movements in markets inevitably affect investor sentiment and it seems likely that we are yet to see the full extent of the fallout from these problems. Other challenges facing the company include keeping investors informed about how the volatility of markets affects their savings and finding and retaining talented staff in Canberra’s tight labour market. We have made considerable progress in attaining greater efficiencies in our business. The transfer of trust assets to a single custodian is largely complete. We plan to transition the administration of the superannuation fund to a new service provider in 2008. This move will have a significant impact in reducing the cost of that service in future years and enabling an improvement in service standards. Funds under management stood in excess of $600 million in early September 2007 but recent volatility has taken a toll on capital growth and it has not been as strong as we would have liked. Management and the board have put considerable effort into developing a marketing strategy to attract new inflows and we are hopeful this will produce long-term results. In the mean time I am cautiously optimistic about our outlook for the current year. I would like to thank all the staff for their work in achieving yet another great result. I would also like to thank you Sustainability report Australian Ethical is committed to conducting our own operations in accordance with the Australian Ethical Charter. During the year, there were a number of sustainability highlights, two of which are detailed below. Further information on Australian Ethical’s social, environmental and economic performance will be provided in the company’s 2007 sustainability report. Our new home In March 2007, Australian Ethical moved into its refurbished business premises, Block E of Trevor Pearcey House. The office refurbishment was undertaken within the ethos of the Australian Ethical Charter, and designed to achieve environmental benefits and resource efficiency as well as increased staff comfort and productivity. Here are some facts and figures about our new home: australianethical our shareholders for your on-going support and I look forward to seeing you at the annual general meeting on 22 November. Anne O’Donnell Chief Executive Officer • • • • • purchased strata title 2006, occupied March 2007 net lettable area: about 1000m2 we envisage it will be sufficient for about 65 staff designated parking spaces for small cars and motorbikes enclosed bicycle storage for staff and visitor bicycle racks. Project cost • • about $4 million in total including refurbishment $2.3 million for purchase of base building Staff health, comfort and control Four dimensions of the refurbishment reflect this aim: • better access to natural light • four internal ‘stacks’ with glass brick sides to allow natural light into (and to allow hot air to exit from) the middle of the first floor A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D Trevor Pearcey house The Building Block E, Trevor Pearcey House, Traeger Court, 34 Thynne Street, Bruce ACT 2617 • • part of the Fern Hill Technology Park, about 5km from the Canberra CBD one block in a complex of five near identical, square two storey blocks. Prior to refurbishment it was a standard 20-year-old commercial office building The kitchen, showing the internal ‘stacks’. • opened barrel vault roof, installed louvered windows and a cathedral ceiling 7 australianethical • limited internal office partitioning • better access to natural ventilation • openable windows – over 90% of the floor space is naturally ventilated • more comfortable feeling of warmth/‘coolth’ • • building is now heated by hydronic radiators downstairs the slab has been exposed and insulated to avoid the need for mechanical cooling • improved indoor air quality • • use of paints and sealants with low volatile organic compounds (VOC) low VOC emissions from reconditioned (post- consumer) carpet • very low formaldehyde (E0) composite wood products. Environmental savings Studies into green buildings have clearly shown their environmental benefits. These include a reduction in waste going to landfill through the reuse and recycling of materials, a reduction in energy and water consumption and lower greenhouse gas emissions. Occupants of green buildings benefit from improved air quality and a more natural office environment, translating into greater productivity, and less staff turnover. The reception area Ratings An application for a Green Star Office Design rating has been submitted. The Green Star rating system, an initiative of the Green Building Council of Australia, evaluates the environmental design and performance of Australian buildings based on a number of criteria, including energy and water efficiency, quality of indoor environments and resource conservation. D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 8 Keep Australia Beautiful 2007 ACT Sustainable Cities Award. Awards In June 2007, Australian Ethical received a ‘special commendation’ in the United Nations Association of Australia World Environment Day Awards 2007 – Szencorp Green Building Award. In August 2007, Australian Ethical was awarded ‘Overall Winner’ in the Keep Australia Beautiful 2007 ACT Sustainable Cities Awards. The award recognises the sustainable refurbishment of our Trevor Pearcey House premises. Refurbishment features Energy usage Features intended to save energy and reduce ongoing green house gas emissions: • • • • • • • passive cooling and ventilation combined with a wider thermal comfort band (19–26°C) reducing demand on mechanical systems double glazing external walls are reverse brick veneer – thermal mass on the inside is insulated (75mm) from the outside air temperature R5 insulation under the metal deck roof improvements to the shading panels exposing the ground floor slab evacuated tube solar water heating. australianethical Community grants program As prescribed in the company’s constitution, 10% of profit must be donated to charitable, benevolent and conservation purposes. Recipients of the grants are involved in a wide range of environmental, charitable and community activities, which the company seeks to support as an important contribution to a positive and sustainable society. In 2007 a record $224 964 has been paid to 41 organisations, an increase that is close to $55 000 from the previous year. The board has reviewed the structure of the grants for 2007 and future years. The grants now consist of two components – the payment of two major project grants per year and around 25 smaller grants. The large major project grants will typically be made to one social and one conservation project each year. However, as 2007 is the first year in which a major project grant is being paid, only one project has been selected and 40 organisations have received grants as outlined on page 5. As the company is increasingly able to support the community with larger grants, the board wants to ensure that it supports larger projects that have a lasting tangible impact. Significant projects that can be supported over a number of years are sought. A grant committee has been established to short list potential projects, and invite and review applications. The major project grant for 2007 is The Australia Institute’s ‘Teaching materials on climate change for Australian schools’ project, which involves the production and dissemination of a series of discrete teaching materials on the scientific, economic, political and ethical aspects of climate change for students in the early years of high school. The building is designed to be passively cooled in summer by a night purge. When the night temperature drops well below the internal temperature the windows open automatically to draw cool air into the building. Hot air is exhausted via the stacks and the louvered windows in the barrel vault. Water usage Water efficient features incorporated into the building: • • • • • taps upgraded to 4L per minute, showerheads to 5A fittings – 6L per minute upgrade of the existing single flush toilets to dual flush with a 9/4.5L system. urinals upgraded with a Sani-Sleeve low water use system reducing water use by 95% rainwater tanks collecting from the roof and plumbed for use in flushing the toilets garden drip irrigation with moisture sensor. Waste Some of the uses of recycled material: • • • • • • • • glass blocks used in the original structure were reused for the stacks and wall partition; 250m2 of carpet tiles were reused all ceiling tiles used were already on the site noise insulation in the ceiling from the old fit out was reused in partition walls metal shade structures were re-modelled and repainted, in some cases had new mesh installed floor tiles in the old computer room were painted and reused for wall decoration reused large quantities of v-jointed plasterboard, doors and some air conditioning ducting from original fit-out materials which could not be reused were, in general, sent to recycling. Recycling rate for the project of >80% by weight. Clive Hamilton of The Australia Institute, major project grant winner for 2007. A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 9 australianethical Corporate governance statement 2007 This statement discloses the extent to which Australian Ethical Investment Ltd has followed the best practice recommendations set down by the ASX Corporate Governance Council during the reporting period. The Council’s Principles of Good Corporate Governance and Best Practice Recommendations provide a framework for good governance set out in ten core principles and 28 specific recommendations. While the ASX Listing Rules only require exception reporting against the specific recommendations, Australian Ethical has provided information on its corporate governance practices against all recommendations. Lay solid foundations for management and oversight Australian Ethical has formalised the functions reserved to the board and those delegated to management. Responsibility for any function not delegated to management remains with the board. The primary responsibilities of the board include: • • • • • appointment and appraisal of the performance of the CEO; the approval of annual financial statements; the establishment of the goals of the company and strategic plans to achieve those goals; the review and adoption of annual budgets for the financial performance of the company and monitoring the results on a regular basis; and risk management, including ensuring that the company has implemented adequate systems of internal controls, together with appropriate monitoring of compliance activities. Structure the board to add value Independent directors The time in office, skills, experience and expertise of each director in office as at the date of this report is included in the directors’ report. The company regards an independent director as a director who is not a member of management (that is, a non- executive director) and who: 1. is not a substantial shareholder1 of the company or an officer of, or otherwise associated directly with, a substantial shareholder of the company; 1 As defined in section 9 of the Corporations Act 2001 2. 3. 4. 5. 6. 7. has not within the last three years been employed in an executive capacity by the company or another group member, or been a director after ceasing to hold any such employment; within the last three years has not been a principal or employee of a material professional adviser or a material consultant to the company or another group member, or an employee materially associated with the service provided; is not a material supplier or customer of the company or other group member, or an officer of or otherwise associated directly or indirectly with a material supplier or customer; has no material contractual relationship with the company or another group member other than as a director of the company; has not served on the board for a period which could, or could reasonably be perceived to, materially interfere with the director’s ability to act in the best interests of the company; is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director’s ability to act in the best interests of the company. Unless there are specific qualitative factors relevant to the relationship, the board is generally of the view that a quantitative materiality threshold arises at 10% of the relevant amount – considered from both the company’s perspective and that of the other party. The board of Australian Ethical did not comprise a majority of independent directors during the reporting period. For five months of the reporting period, the board comprised a majority of executive directors (three out of five directors on the board). For the remaining months of the reporting period, the board comprised an equal number of independent and executive directors (three of each). Pauline Vamos has resigned effective 31 August 2007. With Pauline’s resignation the board comprises three executive directors and two independent directors. The independent directors are Naomi Edwards and Justine Hickey. Howard Pender, Caroline Le Couteur and James Thier are the executive directors. This board composition is a result of the way in which the company has developed, the long-standing commitment of the executive directors and the contribution that they make to board deliberations. In particular, the executive directors have a strong understanding of the Australian Ethical Charter and the implementation of the Charter over a long period. The executive directors play a pivotal role in pursing the aims of the Charter at all levels of the business. Since listing on the Australian Securities Exchange, the board has undergone change in its composition and structure. D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 10 australianethical Decisions on future board composition will be guided by whether the board considers it has the right balance of director competencies for governance, for furtherance of the Australian Ethical Charter and for assisting with and monitoring company performance. Over time, and assuming the availability of suitable candidates, the board expects to move towards a majority of independent directors. The board carries out its responsibilities according to its Constitution, regulatory requirements, and an overall mandate, including the following: • • • • • • the board must comprise at least three and not more then ten directors; the board is bound by the Australian Ethical Charter that is set out in the Australian Ethical Constitution. The Charter sets out 23 ethical principles to be applied to the operations and activities of the company; each director is committed to the Australian Ethical Code of Conduct that governs the conduct of employees and directors. The code is consistent with the recommendations that form part of the Corporate Governance Council’s Principles 3 and 10; all available information on items to be discussed at a board meeting is provided to each director prior to that meeting; the board has adopted a policy for the management of conflicts of interest; with the prior approval of the chair, each director has the right to seek independent legal and other professional advice at the company’s expense on any aspect of the company’s operations or undertakings in order to fulfil their duties and responsibilities as directors. Chair of the board The company’s chair was an independent director throughout the reporting period. Nomination committee During the period the company had no nomination committee. The board does not intend to establish such a committee because such a move would be inefficient, given the company’s size. The functions normally performed by a nomination committee will be performed by the board as a whole, or will be delegated to the chair of the board. Promote ethical and responsible decision making Code of conduct The company has a code of conduct which applies to all staff. It is available on the company’s website. Share trading The company’s code of conduct covers share trading. It requires that as a general rule ‘staff and directors should not buy or sell AEI shares between the close of the financial year or half-year and the publication of the company’s results’. In accordance with the Corporations Act 2001 and the ASX Listing Rules, directors must advise the ASX of any transactions conducted by them in securities of the company which they own or in which they have a relevant interest. Directors, employees and their associates must not engage in insider trading, nor the disclosing of inside information to third parties. The company periodically conducts seminars about its share trading policy and educates staff about the offence of insider trading. Safeguard integrity in financial reporting CEO and CFO sign-off of financial reports The company requires the chief executive officer and the chief financial officer to state in writing to the board that the company’s financial reports present a true and fair view, in all material respects, of the company’s financial condition and operating results and are in accordance with relevant accounting standards. Audit committee Throughout the period, the board had an audit committee consisting of two non-executive directors and the company secretary. The qualifications of those appointed to the audit committee are provided in the directors’ report, as are the number of meetings of the committee and attendances at those meetings. The audit committee does not consist of only non-executive directors (the company secretary being a member and not a director). The chair of the committee is Naomi Edwards. The audit committee provides a forum for effective communication between the board and the external auditors. The role of the committee is to advise the board on the maintenance of an appropriate framework of financial internal control and appropriate discharge of ‘trading company’ fiduciary obligations for the company and its subsidiary, Australian Ethical Superannuation Pty Ltd. A charter for the audit committee appears on the company’s website. The board is of the view that notwithstanding that the audit committee does not comply with all the Corporate Governance recommendations on membership, it is nonetheless able to perform its functions with independence and diligence. In particular: • the committee includes the company secretary who is responsible to the chair of the board and the board generally on governance matters; A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 11 australianethical • at a number of meetings the committee speaks directly to the external auditor in the absence of executive management. • to review on a quarterly basis the company’s risk registers and recommend to the board any changes to those risk registers. The audit committee considers the performance and independence of the external auditor over the course of a reporting period. In selecting an external auditor the board seeks competence, industry experience, integrity and independence. In normal circumstances, appointment of the external auditor will typically continue for a significant number of years. Rotation of external audit engagement partners will occur in accordance with the rotation requirements of the Corporations Act 2001. Make timely and balanced disclosure The company has established a formal ‘Statement on Risk Management’, together with supporting documents, ‘AEI Guide for Risk Management’ and section risk registers, that document the major risks facing the company and the way in which these risks are to be managed. The risk registers are updated regularly and the criteria and working standards set out in the guide are periodically reviewed. A description of the company’s risk management policy and internal compliance and control systems is on the company’s website. The company has written policies and procedures designed to ensure compliance with the ASX Listing Rule disclosure requirements. The disclosure policy appears on the company’s website. The chief executive officer and chief financial officer certify to the board that the integrity of the financial statements are founded on a sound system of risk management and internal compliance and control. Respect the rights of shareholders The company maintains a comprehensive and informative ‘shareholder centre’ on its website which provides shareholders (and others) with up to date information about the corporate activities of the company. The website also provides shareholders with guidance on a range of issues concerning the management of their shareholdings. Australian Ethical produces a newsletter, Aim High, for trust and superannuation investors, and since listing the company has introduced a shareholder newsletter. It has revised its annual general meeting arrangements to promote participation and dissemination of information and has ensured access to the external auditor at these meetings. Australian Ethical also produces a sustainability report for shareholders and other stakeholders on the triple bottom line performance of Australian Ethical (available on the company’s website). The company complies with the corporate governance guidelines for notices of meeting. Recognise and manage risk The board is responsible for the company’s system of internal controls. The board monitors the operational and financial aspects of the company’s activities and, through the audit committee, the board considers the recommendations and advice of external auditors and other external advisers on the operational and financial risks that face the company. The board monitors that appropriate actions are taken to ensure the company has an appropriate internal control environment in place to manage the key risks identified. Recently the board has delegated to its Compliance and Risk Committee the responsibility: • to oversee and monitor the implementation of the company’s risk management systems; The chief executive officer, risk management officer and compliance officer certify to the board that its internal control and risk management systems are operating efficiently and effectively throughout the group. Encourage enhanced performance Board and director evaluation The directors undertake an annual self-assessment of their collective and individual performance and seek specific feedback from the senior management team. An assessment was undertaken in the relevant period. A questionnaire concerning board and individual performance is completed by each director in respect of themselves and for each other director and the results collected by the board chair. The board as a whole then considers and discusses the results of the questionnaire at a board meeting. The board chair also talks to each director individually about their performance and generally on the evaluation and comments received from their peers. The results of the questionnaire are examined from both a qualitative and quantitative perspective. Where discussed at a board meeting, results and any action plans are documented in board minutes. Key executive evaluation The performance of executives is evaluated in accordance with the company’s annual performance review guidelines. For the chief executive officer, the review is conducted by the board chair. For other executives, the review is undertaken by the chief executive officer. The process is as follows: • • receive 360° comments from staff (and directors if applicable); review comments once received and incorporate into the annual review as considered appropriate. Emphasis is on themes or perceptions rather than specific comments; D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 12 australianethical • • • • complete a draft of the annual performance review and provide to the executive for discussion; discuss the annual performance review with the executive – cover key responsibilities, overall performance, key behaviours, review achievements against previous year’s objectives, discuss objectives for the coming year, discuss aspirations and areas for improvement; review competencies and qualifications to ensure they remain applicable to the position. If not, a training program must be developed to bring the executive to the appropriate level; and investigate what specific training may be suitable and available. In respect of the chief executive officer, the chair presents the results of the review to the board, the board has an opportunity to provide feedback to the chief executive officer, and to consider recommendations from the chair on the chief executive officer’s remuneration package. Remunerate fairly and responsibly Remuneration policy Australian Ethical’s remuneration policy is designed to accord with the principles of the Australian Ethical Charter, as set out in the constitution of the company. It is designed to ensure Australian Ethical does not ‘exploit people through the payment of low wages or the provision of poor working conditions’ and to facilitate: ‘the development of workers participation in the ownership and control of their work organisations and places’ Australian Ethical’s fundamental remuneration policy is to treat all staff in an equitable fashion and not to have special remuneration arrangements for particular staff. All permanent staff (including the chief executive officer and executive directors) receive a cash salary and participate in the staff bonus and employee share ownership scheme. Remuneration is not subject to set performance hurdles. All permanent staff are eligible to participate in the staff bonus which is determined by the constitution. Each year the bonus is set with reference to the profit of the company. Each full-time staff member receives the same amount, part-time staff receive a pro-rata amount. The constitution provides that the bonus can be (and often has been) satisfied by the issue of shares. Under the employee share ownership plan a pool of options, which would if exercised, amount to 5% of the existing ordinary share capital is issued to staff. All permanent staff are eligible to participate in the plan. The price at which the options can be exercised is set 10% in excess of the market price of the shares. The number of options received by an individual staff member depends on their salary level. Options are not exercisable for a period of three years from their date of grant. Australian Ethical has a mix of full-time and part-time staff and endeavours to provide flexible employment arrangements within business needs. Australian Ethical monitors employee’s salaries against the wider market and reviews salary levels annually. The company adopts an in-principle guideline of paying individual staff a total fixed remuneration based on 80% to 120% range of the 50th percentile identified in a biennial salary survey, with an unweighted average of 95–105% and with appropriate macro economic indexation of comparator benchmarks over time. The guideline would not be implemented in such a way that salaries would reduce where there was a market crash in relevant salaries. Remuneration committee The board has a remuneration committee. The members of the remuneration committee at the end of the reporting period were Naomi Edwards and Pauline Vamos. The charter for the remuneration committee is available on the company’s website. Details of remuneration Details of remuneration paid to directors and executives during the reporting period is set out in the directors’ report. The reporting distinguishes between the structure of non- executive director remuneration and that of executive directors. Equity-based remuneration Equity-based remuneration for executive directors has previously been approved by shareholders. The employee share ownership plan was approved by shareholders at the annual general meeting held in November 2005. Recognise the legitimate interests of stakeholders The proper purpose of Australian Ethical is to promote ethical/socially responsible investment. By the very nature of Australian Ethical, the board is committed to the highest standards of conduct and ethical practices in guiding the business activities of Australian Ethical and its subsidiary. This includes transparency in the way in which it does business and clarity of communication to its members and other stakeholders. Its code of conduct, as mentioned earlier in this report, expects this of each employee and each director. The company has developed a corporate governance section on its website. The board has directed that detailed and comprehensive information on the company’s corporate governance arrangements and copies of relevant policies and charters are to be placed on that website. It welcomes comments and suggestions from stakeholders on any element of its corporate governance program. A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 13 australianethical Directors’ report (The directors’ report and financial statements were lodged with the Australian Securities Exchange on 31 August 2007). Other than as described, there were no other significant changes in the nature of the controlling entities activities during the year. The directors of Australian Ethical Investment Ltd, the controlling entity, present their report on the company and its controlled entity for the financial year ended 30 June 2007. In compliance with the Corporations Act 2001, the directors report as follows: Directors The name of each person who has been a director during the year ended 30 June 2007 and to the date of this report are: Name Time in office George Pooley 5 years Resigned 13 October 2006 Caroline Le Couteur 16 years James Thier Howard Pender Naomi Edwards Pauline Vamos 16 years 16 years 2 years 1 year Justine Hickey <1 year Notice of resignation, effective 31 August 2007 Appointed 1 March 2007 Directors have been in office since the start of the financial year to the date of this report unless otherwise stated. Company secretaries The name of each person who was a company secretary of the company as at the end of the financial year are: Name Philip George Principal activities The principal activity of the controlling entity during the financial year was to manage four public offer ethical investment trusts (registered managed investment schemes). The controlling entity’s wholly owned subsidiary, Australian Ethical Superannuation Pty Ltd, was trustee of the Australian Ethical Retail Superannuation Fund during the financial year. During the course of the year, the controlling entity established two further registered managed investment schemes – the Australian Ethical International Equities Trust and the Australian Ethical World Trust. The International Equities Trust is a wholesale trust which aims to offer exposure to high quality companies listed on global share markets and aims to provide long- term growth through such investments. The World Trust is a public offer trust that will hold units in the International Equities Trust. Operating results The consolidated entity (Australian Ethical Investment Ltd and its wholly owned subsidiary, Australian Ethical Superannuation Pty Ltd) has recorded a consolidated net profit after income tax expense for the year ending 30 June 2007 of $1 819 177. This result is a 34% increase on the result of $1 362 612 for the previous financial year. Review of operations The 2007 result continues a trend of excellent results. The company has continued to experience growth in funds under management and as a consequence improved revenue and profitability. As at 30 June 2007, funds under management totalled $552M (ex. distribution). This compares with funds under management of $417M (ex. distribution) as at 30 June 2006. The aggregate distribution amount paid for the current period was $59M, compared to a distribution the previous year of $41M. The costs to income ratio1 has reduced from 78% in the previous year to 76% this year and return on equity has increased from 24.1% to 26.1%. The superannuation business (Australian Ethical Superannuation Pty Ltd) again contributed significantly to the excellent result and superannuation continues to be a growth engine of the business. The June 2007 inflow for the Australian Ethical Retail Superannuation Fund was over five times the average monthly inflow experienced for the 11 months to May 2007. The company continues to apply the principles of the Australian Ethical Charter in its investment and business activities. As required under the company’s constitution, an amount of $224 964 has been provisioned as tithe for this year and will be donated to a number of non-profit organisations for useful charitable, benevolent or conservation purposes. Except as described under Principal activities above, during the 2006–07 financial year the company did not make any significant changes to its core funds management operations. Gary Leckie replaced Mark Bateman as chief financial officer in February 2007. There were no other significant changes in management or organisational structure. During the year the company relocated to Block E, Trevor Pearcey House, Traeger Court, 34 Thynne Street, Bruce ACT 2617. The relocation followed an environmentally exemplary refurbishment of the premises at Trevor Pearcey House. Refurbishment costs including fit-out totalled $1.8M. 1Tithes expense is not included in costs when calculating this ratio. D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 14 australianethical Other than the refurbishment of the building and the inflows into the superannuation fund in June 2007, there were no unusual events or transactions which affected the financial result for the period ended 30 June 2007. ordinary share paid in March 2007. The total dividend for the year will be $1.92 per share, an increase of 126% over the 85 cents per ordinary share paid in respect of the previous financial year. Financial position The company’s capital structure and policies remain relatively simple. The company currently has no debt and capital not required for working purposes is held as an investment in Trevor Pearcey House and an investment portfolio comprising triple A securities, senior bank debt and corporate rated debt. Maintenance of a certain level of capital is a condition of the company’s Australian Financial Services Licence. The company currently meets the $5M capital requirement above which no extra capital is required as a result of increased funds under management. The company has a comprehensive risk management process designed to deal with significant operational risks as identified by management and the directors. Business strategies, future prospects and likely developments To date a significant portion of the investment in the Australian Ethical trusts has come from retail clients. Following a review of strategic options in early 2007 the directors have taken the decision to put resources into broadening the appeal of the Australian Ethical products. Expenditure related to this expansion of focus is likely to impact on our cost to income ratio given the expected time lag between work carried out and the inflow of funds. We can expect some deviation from the downward trend which the costs to income ratio has experienced over the past three years. The company will continue to focus on building and servicing its clients and streamlining its processes, ensuring scalability of operations and seeking cost efficiencies. The company reviews its product offerings annually and this analysis forms the basis of decisions regarding product offerings. At this time the company has no plans to make any significant changes to its core operations in the coming financial year. Other information relating to business strategies and likely developments has not been disclosed because it may cause unreasonable prejudice to those activities. Events subsequent to balance date Pauline Vamos has advised the company that she will resign from all positions with the company with effect from 31 August 2007, to take up full-time employment. The directors have declared that a final dividend of $1.52 per ordinary share (fully franked) be paid to shareholders. This is in addition to the interim dividend of 40 cents per The board notes that the declaration and quantum of any future dividend will depend on the company’s ongoing performance and capital requirements. In particular, no inference should be drawn about the quantum of any future dividend based on the quantum of 2006–07 dividend, or on the dividend payout ratio for the 2006–07 year. No other matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of Australian Ethical Investment Ltd and its controlled entity, the results of those operations or the state of affairs of Australian Ethical Investment Ltd in financial years subsequent to the financial year ended 30 June 2007, other than as outlined in this report. Directors’ indemnification The constitution of the controlling entity provides a general indemnity for officers of the company against liabilities incurred in that capacity, including costs and expenses in successfully defending legal proceedings. During the financial year, the company paid a premium in respect of a contract insuring the directors of the company (as named above), the company secretary, and all officers of the company and of any related body corporate against a liability incurred as such a director, secretary or officer to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. During the year the company entered into deeds of indemnity, insurance and access with directors and officers which provides a general indemnity against liabilities incurred in that capacity to the extent permitted by the Corporations Act 2001. The deed obligates the company to use its reasonable endeavours to obtain and maintain insurance for the benefit of a director or officer of the company and any subsidiary, to the extent that such coverage is available in the market on terms which the company reasonably considers financially prudent and on terms consistent with the practice of comparable companies operating in similar markets. The deed also provides that the company will pay on behalf of the director or officer or lend to the director or officer the amount necessary to pay the reasonable legal costs incurred by the director or officer in defending an action for a liability incurred as a director or officer of the company or a subsidiary on such terms as the company reasonably determines. The director or officer must repay to the company such legal costs if they become legal costs for which the company was not permitted by law to indemnify the director or officer. The company need not pay or provide a loan to the director or officer to the extent that the director A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 15 australianethical or officer is actually reimbursed for legal costs as they fall due under an insurance policy or otherwise. Howard Pender B.A.(Hons) Executive Director The company has not otherwise, during or since the financial year, indemnified or agreed to indemnify a director, officer or auditor of the company or of any related body corporate against a liability incurred as such director, officer or auditor. Directors’ particulars Qualifications, experience and special responsibilities Caroline Le Couteur B.Ec., B.Bus., Grad.Dip.(Env. & Dev. Man.), FAICD Executive Director Caroline has been committed to environmental conservation and social justice throughout her life. She is a member of the national council of the Australian Conservation Foundation and has been a candidate for the Greens in both ACT and Federal elections. Caroline has held senior government positions in information management. She is the company’s information technology manager and, until September 2002, was also the funds administrator. James Thier B.Sc.(Hons) Executive Director James has had academic experience as a researcher and has taught in the faculties of economics, environmental studies and geography at the University of NSW. He has held senior positions in local government and within peak bodies of the credit union movement. James is the company’s business development manager. James is also a director of Australian Ethical Superannuation Pty Ltd and is on the investment and compliance committees. James has recently undertaken a Churchill Fellowship to examine the mechanisms of shareholder advocacy. Howard received a university medal in economics from the Australian National University. He worked at the Commonwealth Treasury and then as Senior Economist at Bankers Trust in Sydney. From 1992 to 1997, he was a Visiting Fellow in the Centre for International and Public Law at the Australian National University. Howard has been a director of two other ASX listed companies. Howard is a director of Australian Ethical Superannuation Pty Ltd and is a member of the finance and investment committees. Naomi Edwards B.Sc. (Hons) FIA FIAA FNZSA Non-Executive Director Naomi is a Fellow of the Institute of Acturies and has a high level of financial experience with practical conservation and environmental links. Naomi was Partner in charge of the financial services industry group within Deloitte Touche Tohmatsu in Sydney and leader of the financial services practice for Trowbridge Consulting for many years. She has recently undertaken pro bono work providing actuarial assistance for environmental and social organisations. Naomi is a director of Australian Ethical Superannuation Pty Ltd, chairs the audit committee and is a member of the investment and remuneration committee. Pauline Vamos B.A. LLB AACI Non-Executive Chairperson Pauline is a qualified lawyer and an Associate of the Australasian Compliance Institute. She has over 20 years experience in the financial services industry, in particular financial planning, superannuation, funds management and both life and general insurance. For D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 16 australianethical the six years prior to March 2004, Pauline was with ASIC and played key roles in relation to the implementation of the Managed Investments legislation and Financial Services Reform. Pauline currently provides strategic compliance solutions for various clients. Pauline is a director of Australian Ethical Superannuation Pty Ltd, the controlled entity of AEI, is chair of the compliance committee, chair of the remuneration committee and is a member of the audit and finance committees. Justine Hickey B.Com. GAICD SAFin ASIP(UK) Non-Executive Director Justine has over 15 years experience in investment and funds management, as an equities portfolio manager and in senior management. She was Head of Equities at Suncorp Investment Management in Brisbane until 2004 and previously a Portfolio Manager at Flemings Investment Management (now JP Morgan) in the UK. Justine is a director of Hyperion Flagship Investments Ltd and chairs the Youth Enterprise Trust Foundation – which supports disadvantaged youth. She also is a member of the investment committees of Dalton Nicol Reid and the University of Melbourne. Justine chairs the investment committee. Directors’ meetings The number of directors’ meetings (including meetings of committees of directors of which not all directors are members) and number of meetings attended by each of the directors of the controlling entity during the financial year are: Board meetings Audit committee Finance committee Investment committee Remuneration committee Compliance committee No. eligible to attend No. attended No. eligible to attend No. attended No. eligible to attend No. attended No. eligible to attend No. attended No. eligible to attend No. attended No. eligible to attend No. attended George Pooley Caroline Le Couteur James Thier Howard Pender Naomi Edwards Pauline Vamos Justine Hickey 2 8 8 8 8 8 2 2 8 6 8 6 8 2 1 - - - 3 2 - 1 - - - 3 2 - 1 - - 7 - 5 - 1 - - 7 - 5 - - - 5 5 - - 2 - - 3 5 - - 2 1 2 - - 3 1 - 1 2 - - 3 1 - - - 4 - - 4 - - - 3 - - 3 - Directorships held in other listed entities in the last three years Name Entity Howard Pender SoftLaw Corporation Limited Pauline Vamos Plan B Group Holdings Limited Justine Hickey Hyperion Flagship Investments Limited A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 17 australianethical Remuneration report The information which follows through to the end of the section titled Employment contracts of directors and senior executives is subject to audit by the external auditor. Names and positions of key management personnel (directors and named executives) at any time during the financial year Parent entity directors Name Position George Pooley Chairperson, non- executive Resigned 13 October 2006 Caroline Le Couteur James Thier Howard Pender Naomi Edwards Pauline Vamos Justine Hickey Director, executive Director, executive Director, executive Director, non-executive Chairperson, non- executive Director, non- executive Appointed 1 March 2007 Executives Name Position Anne O’Donnell David Ferris Mark Bateman Philip George Ruth Medd Gary Leckie Chief executive officer Investment manager Chief financial officer Company secretary/ legal counsel Director of wholly- owned entity Resigned 2 February 2007 Chief financial officer Appointed 2 February 2007 AASB 124 ‘Related Party Disclosures’ requires disclosure of compensation of key management personnel. Key management personnel is defined as persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity. The Corporations Act 2001 requires disclosure of the remuneration of: 1. each director of the company; and 2. 3. each of the five named company executives who receive the highest remuneration for that year; if consolidated financial statements are required – each of the five named relevant group executives who receive the highest remuneration for that year. With the exception of Ruth Medd, the above named directors and executives are key management personnel of the company. Ruth Medd is a group executive. Remuneration policy Directors The aggregate amount of remuneration payable to directors for the performance of their duties as directors is set by the company in general meeting from time to time. In proposing any motions on director remuneration to a general meeting, the board has regard to market rates for directorships in similar companies operating in similar industries. It also has regard to recommendations from its Remuneration Committee. Within the approved aggregate amount, fees paid to individual directors for services as a director are determined by the board. Currently, the chair receives a higher amount, with other directors receiving an equal amount. Under the constitution, directors are also entitled to be paid reasonable expenses, remuneration for extra services, retirement benefits and superannuation contributions. There are currently no arrangements to pay any director a retirement benefit. Secretaries, senior managers, executive directors and group executives The company’s fundamental remuneration policy is to treat all staff (including secretaries, senior mangers, executive directors and group executives) in an equitable fashion and not to have special remuneration arrangements (including individual performance-based arrangements) for particular staff. All permanent staff (including the CEO, executive directors and secretaries) receive a cash salary and participate in a staff bonus and employee share ownership scheme. These arrangements do not apply to non-executive directors. Remuneration policy also accords with the Australian Ethical Charter, as set out in the constitution of the company. It is designed to ensure the company does not ‘exploit people through the payment of low wages or the provision of poor working conditions’ D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 18 australianethical Details of options issued under the employee share ownership plan are set out under remuneration policy above. Options are performance based in two ways. Firstly, in most cases, staff must remain an employee for three years from the date of grant of the options to be entitled to exercise them. Option value can only be realised if an employee contributes a significant further period of service to the company. Secondly, option value can only be realised if the market value of the underlying shares increase by 10% between the period of grant and the period when the options can be exercised. The remuneration policy discussed above has broadly been in place for the current and the previous five financial years. Dividends through the same period have increased from a dividend out of the profits of the 2001–02 year of 20 cents per share to a dividend out of the 2005–06 year profits of 85 cents per share. The dividend declared by the directors for the 2006–07 year is 192 cents per share.4 The company’s shares have traded on the ASX since 17 December 2002. Movements in closing share price at the beginning and end of financial years since listing are as follows: Date 17 December 2002 30 June 2003 30 June 2004 30 June 2005 30 June 2006 30 June 2007 Closing daily price5 $12.50 $11.30 $13.00 $17.20 $28.50 $48.00 The company’s earnings over the last five years are as follows: Year 2002–03 2003–04 Adoption of AIFRS 2004–05 2005–06 2006–07 Earnings $190 921 $459 761 $784 419 $1 362 612 $1 819 177 and to facilitate: ‘the development of workers participation in the ownership and control of their work organisations and places.’ The company reviews individual remuneration annually and externally benchmarks remuneration levels every two years. Individual staff remuneration is then considered with reference to the benchmarks and in accordance with guidelines approved by the board. The board aims to remunerate responsibly and fairly, with reference to the market. All permanent staff are eligible to participate in an annual staff bonus. Under the company’s constitution, before the directors recommend any dividend to be paid out of profits of any one year, they must pay a bonus2 to current employees which is set by reference to the profit of the company for that year. Each full-time staff member receives the same bonus amount and part-time staff (or those not employed full-time through the full year) receive a pro- rata amount. The company’s constitution provides that the bonus can be (and often has been) satisfied by the issue of shares, under the employee share ownership scheme. Also under the employee share ownership scheme, a pool of options which would, if exercised, amount to 5% of the company’s existing ordinary share capital is issued to staff. All permanent, non-probationary staff are eligible to participate in the plan. The options3 are issued for nil consideration and the price at which the options can be exercised is set at 10% in excess of the market price of the shares as at the date of grant. The number of options received by an individual staff member depends on their remuneration. Options are not exercisable for a period of three years from their date of grant. At the end of the three year period, options must be exercised within a three month exercise window or they lapse. During the three month exercise window, options can also be sold once, with the transferee then needing to exercise during the three month window, or the options lapse. In most circumstances, options will also lapse where an employee’s employment ceases before the options are exercisable. The options confer no voting or dividend rights. Performance-based remuneration and company performance The payment of the staff bonus is set by reference to the profit of the company for a relevant year. Higher company profits in a year correspondingly increase the aggregate amount that directors could determine be paid to current employees as a bonus. 2See Note 1(k) in the attached financial report 3See Note 25 in the attached financial report 4An interim dividend of 40 cents per share was paid in March 2007, so the final payment to shareholders will be 152 cents per share. 5Where shares were not traded on the day specified, the price quoted is the closing daily price when trades did occur on the day earlier than and closest to the date specified. A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 19 australianethical D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A Remuneration details for the year ended 30 June 2007 Parent entity directors’ remuneration Short-term employee benefits Post employment benefits Other long-term benefits Termination benefits Share-based payment Cash salary and fees $ Bonus cash $ Other Super $ $ $ $ Bonus shares $ Options Total $ $ 2007 George Pooley 19,749 - Caroline Le Couteur 142,449 5,500 James Thier Howard Pender Naomi Edwards* Pauline Vamos Justine Hickey* 143,516 - 138,954 3,575 39,300 52,223 17,314 - - - Total 553,505 9,075 - - - - - - - - - 12,017 11,804 11,633 3,150 4,205 741 - 3,431 2,016 2,089 - - - 43,550 7,536 - - - - - - - - - - - 19,749 7,907 171,304 3,759 5,928 167,023 - - - - 6,082 162,333 - - - 42,450 56,428 18,055 3,759 19,917 637,342 *Naomi Edwards had a one off contract with the company to assist in establishing a product profitability model. Justine Hickey had a one off contract with the company to provide consulting service on an integrated IFSA project. The terms and conditions of these contracts are no more favourable than those that is reasonable to expect the entity would have adopted if dealing at arm’s length with an unrelated individual. Naomi Edwards also received sponsorship money totalling $2,500 in relation to a conservation and social justice event. 2006 George Pooley Ray De Lucia 57,188 3,259 Caroline Le Couteur 131,882 - - - James Thier Howard Pender Naomi Edwards Total 124,586 2,153 113,237 28,420 - - 458,572 2,153 - - - - - - - - - 11,484 10,300 10,291 2,558 34,633 - - 3,196 1,638 1,791 - 6,625 Named executives remuneration (including other key management personnel) - - - - - - - - - 4,300 1,000 1,613 - - - 57,188 3,259 7,536 158,398 6,048 145,725 3,128 130,060 - 30,978 6,913 16,712 525,608 Short-term employee benefits Post employment benefits Other long-term benefits Termination benefits Share-based payment Cash salary and fees $ Bonus cash $ Other Super $ $ $ $ Bonus shares $ Options Total $ $ 2007 Anne O’Donnell 190,804 5,500 David Ferris Mark Bateman Philip George Ruth Medd Gary Leckie Total 2006 Anne O’Donnell David Ferris Mark Bateman Philip George Ruth Medd 20 Total 158,681 140,481 162,880 28,500 - 5,500 5,500 - 118,374 5,500 799,720 22,000 172,147 134,878 113,643 140,622 24,710 - - 4,300 2,718 - 586,000 7,018 - - - - - - - - - - - - - 17,259 13,843 7,076 14,088 1,800 10,257 64,323 15,225 11,764 10,008 12,330 1,459 50,786 5,659 5,046 - 3,503 - 2,849 17,057 4,817 3,044 3,287 2,926 - 14,074 - - - - - - - - - - - - - - 12,043 231,265 5,290 - - - - 9,307 7,916 9,754 192,167 160,973 195,725 - 30,300 5,974 142,954 5,290 44,994 953,384 4,300 10,100 206,589 4,135 - - - 8,773 7,076 5,208 162,594 138,314 163,804 - 26,169 8,435 31,157 697,470 australianethical Cash bonus compensation benefits Details of cash bonuses paid to key management personal are included in the remuneration tables set out above. The bonuses were paid on 22 September 2006. The nature of the cash bonuses and the criteria used to determine the payment of the bonuses are detailed in the remuneration policy and in the discussion on performance-based remuneration and company performance. Options granted as remuneration – disclosures required under AASB 124 Vested no. Granted no.(a) Grant date Value per option at grant date(b) $ Exercise price $ First exercise date Last exercise/ expiry date Parent entity directors George Pooley Caroline Le Couteur James Thier Howard Pender Naomi Edwards Pauline Vamos Justine Hickey 2,646 2,074 857 - - - - 1,910 1,432 1,469 - - - - - 22.09.2006 22.09.2006 22.09.2006 - - - 5,577 4,811 Named executives (including other key management personnel) Anne O’Donnell David Ferris Mark Bateman Philip George Ruth Medd Gary Leckie 2,802 2,498 1,962 - - 2,909 2,248 1,912 2,356 22.09.2006 22.09.2006 22.09.2006 22.09.2006 - - 819 1,443 22.09.2006 8,081 10,868 - 4.14 4.14 4.14 - - - 4.14 4.14 4.14 4.14 - 4.14 - 32.50 32.50 32.50 - - - 32.50 32.50 32.50 32.50 - - - 22.09.2009 22.12.2009 22.09.2009 22.12.2009 22.09.2009 22.12.2009 - - - - - - 22.09.2009 22.12.2009 22.09.2009 22.12.2009 22.09.2009 22.12.2009 22.09.2009 22.12.2009 - - 32.50 22.09.2009 22.12.2009 (a) Each option above is granted by Australian Ethical Investment Ltd (AEI) and is for one ordinary share in AEI. (b) Options were granted as part of remuneration and the recipient did not otherwise pay for the grant of the options. . i n g a p m a c d a ’ n e e r g p e e d ‘ t s e t a l r u O Investments which unclog your arteries and unclog the roads? Invest with us in industries, healthy for you and the planet. 1800 021 227 (cid:129) austethical.com.au australianethical investment + superannuation Units in the trusts are offered and issued by Australian Ethical Investment Ltd (‘AEI’) ABN 47 003 188 930, AFSL 229949. Interests in the superannuation fund are offered by AEI and issued by the trustee of the fund, Australian Ethical Superannuation Pty Ltd ABN 43 079 259 733 RSEL L0001441. Product disclosure statements are available from our website or by calling us and should be considered before deciding whether to acquire, or continue to hold, units in the trusts or interests in the fund. Australian Ethical® is a registered trademark of AEI. 21 A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D australianethical Details of shareholdings – changes to shareholdings, including as a result of the exercise of options granted as compensation Balance 01.07.06 Share in lieu of cash bonus Options exercised/ shares issued(1) Net change other(2) Balance 30.06.07(3)&(4) Parent entity directors George Pooley Caroline Le Couteur James Thier Howard Pender Naomi Edwards Pauline Vamos Justine Hickey 44,277 60,154 51,178 - - - - 127 - - - - - - Named executives (including other key management personnel) Anne O’Donnell David Ferris Mark Bateman Philip George Ruth Medd Gary Leckie Total 3,315 2,762 982 375 - - 179 - - - - - 163,043 306 - 2,646 2,074 857 - - - - - 2,802 2,498 1,962 819 13,658 - - (200) (370) 700 - - - - (1,962) - - (819) (2,651) - 46,923 62,155 51,665 - - 700 6,117 5,439 982 375 - - 174,356 (1) The amount paid for shares issued on exercise of options is $14.11 in all cases. (2) Net change other refers to shares purchased or sold during the financial year. (3) Shares issued are fully paid. (4) Balance represents shareholdings by directors and named executives including their related parties as required by AASB 124 Related Party Disclosures. Relevant interests required by the Corporations Act 2001 would result in the balance changing for James Thier to 47,681, Howard Pender to 49,634 and Philip George to 250. Explanation of relative proportions of elements of remuneration that are related to performance Non-executive directors receive their total remuneration as cash or superannuation contributions. No element is dependent on performance. The remuneration of executive directors, secretaries and senior managers is not subject to individual performance conditions. People holding these positions are entitled to participate in the staff bonus and employee share ownership scheme described above. Options granted during the financial year, when valued using a Black-Scholes valuation methodology as at grant date, make up a very small proportion of the overall remuneration of people holding these positions. Employment contracts of directors and senior executives For each individual whose remuneration has been disclosed in this report and is employed under an employment contract, the details of the employment contract are as follows: Name Duration of contract Period of termination notice required Termination payment provided for under the contract As per minimum requirements under the Workplace Relations Act 1996 None except for accrued leave and any payment in lieu of notice Caroline Le Couteur Ongoing James Thier Howard Pender Anne O’Donnell David Ferris Gary Leckie Philip George D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 22 australianethical Options granted as remuneration – disclosures required under the Corporations Act 2001 Granted no. Grant date Value per option at grant date $ Granted as part of remuneration(1) $ Option remuneration as a % of total remuneration Value of options exercised in fin year(2) $ Value of options lapsed in fin year(3) $ Total value(4) $ Parent entity directors George Pooley - - Caroline Le Couteur 1,910 22.09.2006 James Thier Howard Pender Naomi Edwards Pauline Vamos Justine Hickey 1,432 22.09.2006 1,469 22.09.2006 - - - 4,811 - - - - 4.14 4.14 4.14 - - - Named executives (including other key management personnel) Anne O’Donnell David Ferris Mark Bateman Philip George Ruth Medd Gary Leckie 2,909 22.09.2006 2,248 22.09.2006 1,912 22.09.2006 2,356 22.09.2006 - - 1,443 22.09.2006 10,868 4.14 4.14 4.14 4.14 - 4.14 - 7,907 5,928 6,082 - - - 19,917 12,043 9,307 7,916 9,754 - 5,974 44,994 - 5% 4% 4% - - - 5% 5% 5% 5% - 4% - 81,735 64,066 14,046 - - - 159,847 45,925 40,942 32,157 - - 13,423 - - - - - - - - - - - 89,642 69,994 20,128 - - - 179,764 57,968 50,249 128,501 168,574 - - - 9,754 - 19,397 305,942 132,447 128,501 (1) Values are based on a valuation performed on the options at grant date using the Black-Scholes model. None of the value of the options granted was paid to the key management personnel in the financial year. Key management personnel may realise value from this option grant in the 2009–10 year when the options are exercisable. (2) Values are based on the number of options exercised by Directors/ Executives multiplied by the difference between the share price at exercise date and the exercise price. Under the terms of the share based payment arrangement exercise date and therefore share price can vary between option holders. (3) Mark Bateman forfeited 100% of options granted, upon leaving the employment of Australian Ethical Investment Ltd. The amounts listed in this column do not represent remuneration paid to Director/ Executives. (4) This column is required by s300A1(e)(v) of the Corporations Act 2001. It requires the aggregation of amounts in the above table notwithstanding that one amount is a Black-Scholes estimation of value received, one amount is the difference between share sale price and option exercise price, and one amount is a Black-Scholes estimate of value forgone as at date of an employees cessation of employment. Our latest mainstream ad campaign. Ethical investment is... healthy. Our investment portfolio will have you feeling better in no time: • Sonic Healthcare (Australia) • Celesio (Germany) • • Getinge (Sweden) • William Demant Holding (Denmark) • 1800 021 227 (cid:129) austethical.com.au australianethical investment + superannuation Units in the trusts are offered and issued by Australian Ethical Investment Ltd (‘AEI’) ABN 47 003 188 930, AFSL 229949. Interests in the superannuation fund are offered by AEI and issued by the trustee of the fund, Australian Ethical Superannuation Pty Ltd ABN 43 079 259 733 RSEL L0001441. Product disclosure statements are available from our website or by calling 1800 021 227 and should be considered before deciding whether to acquire, or continue to hold, units in the trusts or interests in the fund. Australian Ethical® is a registered trademark of AEI. A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 23 australianethical Estimates of the maximum and minimum possible total value of option grants 2007–08 2008–09 2009–10 Max $ Min $ Max $ Min $ Max $ Min $ Parent entity directors George Pooley Caroline Le Couteur James Thier Howard Pender Naomi Edwards Pauline Vamos Justine Hickey 3,141 2,573 1,076 - - - - - - - - - - - Named executives (including other key management personnel) Anne O’Donnell David Ferris Mark Bateman Philip George Ruth Medd Gary Leckie 3,581 3,189 - - - 1,594 - - - - - - - - - - - - 7,536 6,048 3,128 10,100 8,773 5,208 4,660 - - - - - - - - - - - - - 7,907 5,928 6,082 - - - - - 12,043 9,307 9,754 5,974 - - - - - - - - - - - - Maximum amounts are calculated using Black-Scholes estimation as at option grant date in respect of options exercisable in future years. Holdings in registered schemes made available by the company Caroline Le Couteur holds 828.6873 units in the Australian Ethical Balanced Trust. Naomi Edwards holds 17,877.9573 units in the Australian Ethical Equities Trust and 15,475.9946 units in the Australian Ethical Large Companies Share Trust. Issue of shares and options to executive directors – ASX Listing Rule 10.14 The number of shares and options issued to executive directors under the employee share ownership plan is detailed in this Report. Shareholder approval for the issue of shares and options to executive directors was obtained under ASX listing rule 10.14 at the Annual General Meeting held in November 2006. Company secretary particulars Philip George (BSc LLB) Philip has experience in commercial law, corporate governance and project management. He has been a company secretary and legal counsel for listed companies for over six years. He was a senior associate at the national law firm Minter Ellison and conducted a commercial legal practice in partnership for two years. Options as at the date of this report Options over unissued shares as at the date of this report are as follows: Options reference Number of options on issue AEFAI 34,506 AEFAQ 41,558 AEFAS 41,396 Totals 117,460 Exercise period 23.9.07 to 22.12.07 21.9.08 to 20.12.08 22.09.09 to 21.12.09 Exercise price $16.28 $24.82 $32.50 All options are over unissued shares in the company. Unexercised options expire at the end of the exercise period. No option holder has any right under the options to participate in any other share issue of the company or of any other entity. Shares issued upon the exercise of options The following ordinary shares of the company were issued during the year ended 30 June 2007 on the exercise of options granted under the company’s employee share ownership plan. No further shares have been issued since that date to the date of this report. No amounts are unpaid on any of the shares. D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 24 australianethical Shares issued upon exercise of options Amount paid per share 33,778 $14.11 Other specific information Other specific information has been disclosed in the attached financial report as referenced in the table below: Auditor’s declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 forms part of this report and follows at the end of the report. Non-audit services The directors, in accordance with advice from the audit committee, are satisfied that the provision of the non-audit services by the auditor during the year is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the services disclosed in the financial report did not compromise the external auditor’s independence because the provision of non-audit services is minor and in most cases is ancillary or related to audit activities. The directors are not aware of any circumstances that would prevent the external auditor from exercising objective and impartial judgement in relation to the conduct of the audit. Details of non-audit services provided by the auditor are set out in Note 2 of the attached financial report. Disclosure Dividends Options – issued during the financial year and since the end of the financial year6 Financial statement reference Note 5 Note 25 Signed in accordance with a resolution of the Board of Directors. Howard Pender Director Dated: 31 August 2007 6The financial statements show options issued during the financial year. No options have been issued since the end of the financial year to the date of this report. Auditor’s independence declaration under section 307c of the Corporations Act 2001 I declare that, to the best of my knowledge and belief, during the year ended 30 June 2007 there have been: no contraventions of the auditor independence requirements as set out in the i. Corporations Act 2001 in relation to the audit; and ii. no contraventions of any applicable code of professional conduct in relation to the audit. THOMAS DAVIS & CO. Date 31 August 2007 Liability limited by a scheme approved under Professional Standards Legislation P.L. WHITEMAN PARTNER A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 25 australianethical Financial statements for year ended 30 June 2007 Balance Sheet as at 30 June 2007 Notes Consolidated entity Parent entity 2007 $ 2006 $ 2007 $ 2006 $ 7 8 9 10 11 9 12 13 15 14 15 16 16 16 1,672,464 1,487,185 1,830,430 183,644 1,479,234 1,038,994 2,518,405 139,708 643,525 1,379,251 1,830,430 162,275 373,231 1,042,972 2,518,405 94,243 5,173,723 5,176,341 4,015,481 4,028,851 4,328,138 2,613,153 4,328,138 2,613,153 158,000 392,435 174,484 315,246 474,000 391,385 490,484 309,396 4,878,573 3,102,883 5,193,523 3,413,033 10,052,296 8,279,224 9,209,004 7,441,884 1,681,284 1,352,010 1,869,901 1,433,154 279,307 331,953 356,008 219,970 279,307 331,953 356,008 219,970 2,292,544 1,927,988 2,481,161 2,009,132 33,248 42,371 75,619 30,896 46,557 77,453 33,248 42,371 75,619 30,896 46,557 77,453 2,368,163 2,005,441 2,556,780 2,086,585 7,684,133 6,273,783 6,652,224 5,355,299 4,949,532 4,628,423 4,949,532 4,628,423 200,687 2,533,914 7,684,133 93,948 1,551,412 6,273,783 200,687 1,502,005 6,652,224 93,948 632,928 5,355,299 Current assets Cash and cash equivalents Trade and other receivables Financial assets Other current assets Total current assets Non-current assets Property, plant & equipment Financial assets Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Current tax liabilities Short-term provisions Total current liabilities Non-current liabilities Deferred tax liabilities Other long-term provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity The accompanying notes form part of these financial statements. D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 26 australianethical Income Statement for the year ended 30 June 2007 Notes Consolidated entity Parent entity 2007 $ 2006 $ 2007 $ 2006 $ Revenue 3 12,086,455 9,661,723 9,870,632 7,768,390 Commissions paid to advisers External services Employee benefits expense Depreciation Occupancy costs Communication costs Other expenses (260,467) (271,327) (61,390) (2,422,346) (2,018,108) (1,077,421) (101,281) (913,490) (4,976,651) (3,986,460) (4,956,578) (3,972,997) (225,320) (316,447) (597,178) (407,195) (143,407) (280,710) (456,324) (347,044) (225,320) (310,894) (543,537) (380,558) (143,407) (275,792) (426,969) (296,154) Profit before tithe and income tax expense 2,880,851 2,158,343 2,314,934 1,638,300 Tithes expense 1 (k) (224,964) (170,132) (224,964) (170,132) Profit before income tax 2,655,887 1,988,211 2,089,970 1,468,168 Income tax expense Profit for the year Profit attributable to members of the parent entity Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 4 16 6 6 (836,710) (625,599) (384,218) (393,144) 1,819,177 1,362,612 1,705,752 1,075,024 1,819,177 1,362,612 1,705,752 1,075,024 194.8 185.6 150.3 145.1 The accompanying notes form part of these financial statements. Ethical investment is... smart. Wise up to ethical investment. Our smart portfolio includes: • Fairfax Media (Australia) • Scholastic Corporation (USA) • • Benesse Corporation (Japan) • Pearson (UK) • 1800 021 227 (cid:129) austethical.com.au australianethical investment + superannuation Units in the trusts are offered and issued by Australian Ethical Investment Ltd (‘AEI’) ABN 47 003 188 930, AFSL 229949. Interests in the superannuation fund are offered by AEI and issued by the trustee of the fund, Australian Ethical Superannuation Pty Ltd ABN 43 079 259 733 RSEL L0001441. Product disclosure statements are available from our website or by calling 1800 021 227 and should be considered before deciding whether to acquire, or continue to hold, units in the trusts or interests in the fund. Australian Ethical® is a registered trademark of AEI. A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 27 australianethical Statement of changes in equity for the year ended 30 June 2007 Notes Consolidated entity Parent entity 2007 $ 2006 $ 2007 $ 2006 $ Total equity at beginning of financial period 6,273,783 5,046,886 5,355,299 4,415,990 Available-for-sale investments: Valuation gains/(losses) taken to equity Transferred to profit or loss on sale Employee share options Income tax on items taken directly to or transferred directly from equity 3,811 7,464 96,607 (1,143) (6,632) - 59,961 1,989 3,811 7,464 96,607 (1,143) (6,632) - 59,961 1,989 Net income recognised directly in equity 106,739 55,318 106,739 55,318 Profit for the financial year 1,819,177 1,362,612 1,705,752 1,075,024 Total recognised income and expense for the period Transactions with equity holders in their capacity as equity holders: Contribution of equity, net of transaction costs Dividends provided for or paid 1,925,916 1,417,930 1,812,491 1,130,342 321,109 514,717 321,109 514,717 (836,675) (705,750) (515,566) (191,033) (836,675) (515,566) (705,750) (191,033) Total equity at the end of the financial period 16 7,684,133 6,273,783 6,652,224 5,355,299 Total recognised income and expense for the financial year is attributable to: Equity holders of the parent 1,925,916 1,417,930 1,812,491 1,130,342 1,925,916 1,417,930 1,812,491 1,130,342 The accompanying notes form part of these financial statements. Ethical investment is... global. Find out more about our World Trust – ethical on a global scale. 1800 021 227 (cid:129) austethical.com.au Units in the trusts are offered and issued by Australian Ethical Investment Ltd (‘AEI’) ABN 47 003 188 930, AFSL 229949. Interests in the superannuation fund are offered by AEI and issued by the trustee of the fund, Australian Ethical Superannuation Pty Ltd ABN 43 079 259 733 RSEL L0001441. Product disclosure statements are available from our website or by calling 1800 021 227 and should be considered before deciding whether to acquire, or continue to hold, units in the trusts or interests in the fund. Australian Ethical® is a registered trademark of AEI. australianethical investment + superannuation D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 28 australianethical Cash flow statement for the year ended 30 June 2007 Notes Consolidated entity Parent entity 2007 $ 2006 $ 2007 $ 2006 $ Cash flows from operating activities Receipts from operations 12,535,315 10,066,362 9,679,684 8,009,981 Payment to suppliers & employees (9,467,091) (7,706,749) (7,770,366) (6,350,434) Dividends received Interest/ distributions received Income tax paid Bonus Tithe Net cash provided by (used in) operating activities Cash flows from investing activities - 286,760 (992,589) (192,285) (173,132) - 279,928 (643,963) (108,998) (98,227) 942,248 232,674 (644,781) (192,285) (173,132) 254,660 233,391 (449,319) (108,998) (98,227) 22 (b) 1,996,978 1,788,353 2,074,042 1,491,054 Proceeds from sale of investments 1,192,683 2,971,130 1,192,683 2,971,130 Purchase of property, plant & equipment Purchase of investments Repayment of loans Net cash provided by (used in) investing activities Cash flows from financing activities Proceeds from share issue Share buy-back payment Dividends paid Net cash provided by (used in) financing activities (1,974,986) (2,446,806) (1,974,986) (2,446,806) (500,000) (2,443,421) (500,000) (2,443,421) 15,070 11,657 15,070 11,657 (1,267,233) (1,907,440) (1,267,233) (1,907,440) 392,921 (92,761) (836,675) (536,515) 479,325 - (705,750) (226,425) 392,921 (92,761) (836,675) (536,515) 479,325 - (705,750) (226,425) Net increase (decrease) in cash held 193,230 (345,512) 270,294 (642,811) Cash at beginning of financial year 1,479,234 1,824,746 373,231 1,016,042 Cash at end of financial year 22 (a) 1,672,464 1,479,234 643,525 373,231 The accompanying notes form part of these financial statements. A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 29 australianethical Notes to the financial statements for the year ended 30 June 2007 Note 1 – Statement of significant accounting policies The financial report is a general purpose financial report that has been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. The financial report covers the consolidated entity of Australian Ethical Investment Ltd and its wholly owned entity Australian Ethical Superannuation Pty Ltd and Australian Ethical Investment Ltd as an individual parent entity. Australian Ethical Investment Ltd is a listed public company and both the parent and wholly owned entity are incorporated and domiciled in Australia. The nature of the operations and principal activities of the consolidated entity are described at note 19. The financial report of Australian Ethical Investment Ltd and its wholly owned entity, and Australian Ethical Investment Ltd as an individual parent entity comply with all Australian equivalents to International Financial Reporting Standards (AIFRS) in their entirety. The following is a summary of the material accounting policies adopted by the consolidated entity in the preparation of the financial report. The accounting policies have been consistently applied, unless otherwise stated. Basis of preparation The financial report has been prepared on an accruals basis and is based on historical costs modified by the revaluation of selected financial assets for which the fair value basis of accounting has been applied. Accounting policies a) Principles of consolidation A controlled entity is any entity Australian Ethical Investment Ltd has the power to control the financial and operating policies of so as to obtain benefits from its activities. All controlled entities have a June financial year-end. All inter-company balances and transactions between entities in the consolidated entity, including any unrealised profits or losses, have been eliminated on consolidation. Accounting policies of controlled entities have been changed where necessary to ensure consistencies with those policies applied by the parent entity. The consolidated financial statements comprise the financial statements of Australian Ethical Investment Ltd and its wholly owned entity Australian Ethical Superannuation Pty Ltd. b) Income tax The charge for current income tax expenses is based on the profit for the year adjusted for any non-assessable or disallowed items. It is calculated using tax rates that have been enacted or are substantively enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. No deferred income tax will be recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or liability is settled. Deferred tax is credited in the income statement except where it relates to items that may be credited directly to equity, in which case the deferred tax is adjusted directly against equity. Deferred income tax assets are recognised to the extent that it is probable that future tax profits will be available against which deductible temporary differences can be utilised. The amount of benefits brought to account or which may be realised in the future is based on the assumption that no adverse change will occur in income taxation legislation and the anticipation that the consolidated entity will derive sufficient future assessable income to enable the benefit to be realised and comply with the conditions of deductibility imposed by the law. Australian Ethical Investment Ltd and its wholly owned entity Australian Ethical Superannuation Pty Ltd have formed an income tax consolidated group under the Tax Consolidation System. Australian Ethical Investment Ltd is responsible for recognising the current and deferred tax assets and liabilities for the tax consolidated group. The group notified the Australian Taxation Office (ATO) on 24 March 2004 that it had formed an income tax consolidated group to apply from 1 July 2002. The tax consolidated group has entered a tax sharing agreement whereby each company in the group contributes to the income tax payable in proportion to their contribution to the net profit before tax of the tax consolidated group. Under the tax sharing agreement Australian Ethical Superannuation Pty Ltd agrees to pay its share of the income tax payable to Australian Ethical Investment Ltd on the same day that Australian Ethical Investment Ltd pays the ATO for group tax liabilities. D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 30 australianethical Notes to the financial statements for the year ended 30 June 2007 Note 1 – Statement of significant accounting policies – continued c) Property, plant and equipment d) Financial instruments Each class of property, plant and equipment is carried at cost or fair value less, where applicable, any accumulated depreciation and impairment losses. Property Leasehold land and buildings are shown at cost less any accumulated depreciation and any accumulated impairment losses. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the re-valued amount of the asset. Plant and equipment Plant and equipment are measured on the cost basis less depreciation and impairment losses. The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows that will be received from the assets employment and subsequent disposal. The expected net cash flows have been discounted to their present values in determining recoverable amounts. Depreciation The depreciable amount of all fixed assets including buildings, is depreciated over their estimated useful lives to the consolidated entity commencing from the time the asset is held ready for use. The depreciation rates used for each class of assets are: Class of fixed asset Depreciation rates Depreciation basis Buildings 2.5–20% Straight line Furniture, fittings and equipment 10% to 37.5% Software 18.75% to 40% Straight line/ diminishing value Straight line/ diminishing value The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains and losses are included in the income statement. When re- valued assets are sold, amounts included in the revaluation reserve relating to that asset are transferred to retained earnings. Recognition Financial instruments are initially measured at cost on trade date, which includes transaction costs, when the related contractual rights or obligations exist. Subsequent to initial recognition these instruments are measured as set out below. Available-for-sale financial assets The consolidated entity holds only available for sale financial assets. Available for sale financial assets are assets not classified as financial assets at fair value through profit and loss, loans and receivables, or held-to-maturity investments. Available-for-sale financial assets are reflected at fair value. Unrealised gains and losses arising from changes in fair value are taken directly to equity. Fair value Fair value is determined based on current bid prices for all quoted investments. Valuation techniques are applied to determine the fair value for all unlisted securities, including recent arm’s length transactions, reference to similar instruments and option pricing models. Impairment At each reporting date, the group assess whether there is objective evidence that a financial instrument has been impaired. In the case of available-for sale financial instruments, a prolonged decline in the value of the instrument is considered to determine whether an impairment has arisen. Impairment losses are recognised in the income statement. e) Impairment of assets At each reporting date, the group reviews the carrying values of its tangible and intangible assets to determine whether there is any indication that those assets have been impaired. If such an indication exists, the recoverable amount of the asset, being the higher of the asset’s fair value less costs to sell and value in use, is compared to the asset’s carrying value. Any excess of the asset’s carrying value over it recoverable amount is expensed to the income statement. Where it is not possible to estimate the recoverable amount of an individual asset, the group estimates the recoverable amount of the cash-generating unit to which the asset belongs. f) Employee benefits Provision is made for the company’s liability for employee benefits arising from services rendered by employees to balance date. Employee benefits that are expected to be settled within one year have been measured at the amounts expected to be paid when the liability is settled, plus related A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 31 australianethical Notes to the financial statements for the year ended 30 June 2007 Note 1 – Statement of significant accounting policies – continued on-costs. Employee benefits payable later than one year have been measured at the present value of the estimated future cash outflows to be made for those benefits. Share options Share based compensation benefits are provided to employees via the Australian Ethical Investment Ltd employee share ownership plan. Share options have been granted annually to employees and details are disclosed in the annual financial report. Share options granted before 7 November 2002 and/ or vested before 1 January 2005 No expense is recognised in respect of these options. The shares are recognised when the options are exercised and the proceeds received allocated to share capital. Share options granted on or after 7 November 2002 and vested after 1 January 2005 The fair value of options granted under the Australian Ethical Investment Ltd employee share ownership plan is recognised as an employee benefit expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the vesting period. At each balance sheet date, the entity revises its estimate of the number of options that are expected to become exercisable. The employee benefit expense recognised each period takes into account the most recent estimate. Upon the exercise of options, the balance of the options reserve relating to those options is transferred to share capital and the proceeds received, net of any directly attributable transaction costs, are credited to share capital. Employee bonus The group recognises a liability and an expense for bonuses and profit-sharing based on a formula that takes into consideration the profit attributable to the company’s shareholders after certain adjustments. The group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. g) Provisions Provisions are recognised when the group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will results and that outflow can be reliably measured. h) Cash and cash equivalents Cash and cash equivalents include cash on hand and deposits held at call with banks. i) Revenue Revenue from the rendering of a service is recognised upon the delivery of the service to the customers. Interest revenue is recognised on a proportional basis taking into account the interest rates applicable to the financial assets. All revenue is stated net of the amount of goods and services tax (GST). j) Goods and services tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the ATO. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the balance sheet are shown inclusive of GST. Cash flows are presented in the cash flow statement on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. k) Tithes expense The Company’s Constitution states that ‘the directors before recommending or declaring any dividend to be paid out of the profits of any one year must have first: i. ii. paid or provisioned for payment to current employees, or other persons performing work for the company, a work related bonus or incentive payment, set at the discretion of the directors, but to be no more than 30 percent (30%) of what the profit for that year would have been had not the bonus or incentive payment been deducted’ gifted or provisioned for gifting an amount equivalent to ten percent (10%) of what the profit for that year would have been had not the above mentioned bonus and amount gifted been deducted’. l) Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the company, by the weighted average number of ordinary shares outstanding during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of the interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 32 Notes to the financial statements for the year ended 30 June 2007 Note 1 – Statement of significant accounting policies – continued assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Key estimates – annual leave and long service leave provision australianethical m) Comparative figures Where required comparative figures have been adjusted to conform with changes in presentation for the current financial year. Critical accounting estimates and judgements The directors evaluate estimates and judgments incorporated into the financial report based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based on current trends and economic data, obtained both externally and within the group. Note 2 – Auditors’ remuneration Remuneration of the auditors for: Audit services Auditing the financial report Auditing the Australian Ethical Superannuation Fund Auditing the sustainability report Non-audit services Tax and other accounting advice Internal control and risk review Note 3 – Revenue Operating activities Management fees net of rebates Entry fees Other fees Dividend from wholly owned subsidiary Interest/ distributions Wholly owned entity fee Other revenue Non-operating activities Gain on disposal of financial assets Future average salary increases have been estimated at 4%. This increase has been incorporated into the annual leave and long service leave provision. Key judgements Australian Ethical Investment Ltd has a loan receivable from the Centre for Australian Ethical Research recorded as an asset on its balance sheet for $173 272. The directors have determined that no provision for doubtful debt is required for this loan. Consolidated entity Parent entity 2007 $ 2006 $ 2007 $ 2006 $ 30,500 - 4,600 52,400 16,500 8,600 27,000 46,900 - - 4,600 8,600 3,450 16,500 5,500 15,000 3,000 15,000 5,100 15,000 9,429,699 7,274,591 4,935,178 4,020,460 1,837,914 1,508,963 484,170 509,935 453,283 457,117 453,283 457,117 - - 942,248 254,660 275,292 309,873 221,205 263,337 - - 2,752,623 2,163,664 90,267 109,312 81,925 97,350 12,086,455 9,659,856 9,870,632 7,766,523 - - 1,867 1,867 - - 1,867 1,867 Total revenue 12,086,455 9,661,723 9,870,632 7,768,390 A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 33 australianethical Notes to the financial statements for the year ended 30 June 2007 Note 4 – Income tax expense D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A a) The components of tax expense comprise: Current tax Deferred tax b) The prima facie tax payable on profit from ordinary activities before income tax is reconciled to the income tax expense as follows: Prima facie tax payable on profit from ordinary activities before income tax at 30% (2006:30%) Consolidated entity Parent entity Other members of the income tax consolidated group net of intercompany transactions Add: tax effect of: Other non-allowable items Share options expensed during year Under provision for income tax in prior year Less: tax effect of: Rebateable fully franked dividends Non-assessable income Franking and foreign tax credits Consolidated entity Parent entity 2007 $ 2006 $ 2007 $ 2006 $ 915,888 690,357 468,196 452,052 (79,178) (64,758) (83,978) (58,908) 836,710 625,599 384,218 393,144 796,766 596,463 - - - - - - 626,991 440,450 452,641 232,455 1,455 28,982 11,119 860 17,988 12,237 1,413 28,982 11,119 816 17,988 12,237 838,322 627,548 1,121,146 703,946 - (738) (874) - (282,675) (76,398) (635) (1,314) (738) (874) (635) (1,314) Income tax expense attributable to entity 836,710 625,599 836,859 625,599 Allocation of income tax expense to wholly owned entity under the tax sharing agreement - - (452,641) (232,455) Income tax expense attributable to entity 836,710 625,599 384,218 393,144 The applicable weighted average effective tax rates are as follows: 32% 31% 18% 27% The decrease in the weighted average effective tax rate for 2007 for the parent entity is a result of the wholly owned entity paying a large fully franked dividend to the parent . Ethical investment is... moving people effi ciently. Get moving with our efficient transport investments: • Shimano (Japan) • Accell (The Netherlands) • • Stagecoach (UK) • SMRT Corp (Singapore) • 1800 021 227 (cid:129) austethical.com.au australianethical investment + superannuation Units in the trusts are offered and issued by Australian Ethical Investment Ltd (‘AEI’) ABN 47 003 188 930, AFSL 229949. Interests in the superannuation fund are offered by AEI and issued by the trustee of the fund, Australian Ethical Superannuation Pty Ltd ABN 43 079 259 733 RSEL L0001441. Product disclosure statements are available from our website or by calling 1800 021 227 and should be considered before deciding whether to acquire, or continue to hold, units in the trusts or interests in the fund. Australian Ethical® is a registered trademark of AEI. 34 Notes to the financial statements for the year ended 30 June 2007 Note 5 – Dividends australianethical Distributions paid Final fully franked dividend of 50 (2006: 42) cents per share franked at the tax rate of 30% (2006:30%) Interim fully franked dividend of 40 (2006: 35) cents per share franked at the tax rate of 30% (2006:30%) Declared final fully franked dividend of 152 (2006: 50) cents per share franked at the tax rate of 30% (2006: 30%) Balance of franking account at year end adjusted for franking credits which will arise from income tax payments in the following year. Subsequent to year-end, the franking account would be reduced by the declared dividend reflected above as follows: Consolidated entity Parent entity 2007 $ 2006 $ 2007 $ 2006 $ 458,631 384,955 458,631 384,955 378,044 320,795 378,044 320,795 836,675 705,750 836,675 705,750 1,436,566 458,280 1,436,566 458,280 1,543,029 983,028 615,671 196,406 927,358 786,622 Note 6 – Earnings per share (a) Earnings used to calculate basic EPS and dilutive EPS 1,819,177 1,362,612 (b) Weighted average number of ordinary shares outstanding during the year used in calculation of basic EPS Weighted average number of options outstanding Weighted average number of ordinary shares outstanding during the year used in calculation of dilutive EPS 934,002 906,720 45,960 32,291 979,962 939,011 Note 7 – Cash and cash equivalents Cash on hand Cash at bank Deposits at call 300 300 32,114 16,534 300 3,165 300 115 1,640,050 1,462,400 640,060 372,816 1,672,464 1,479,234 643,525 373,231 Cash at bank earns interest at floating rates based on daily bank deposit rates. Deposits at call is money invested in high interest bank account. Interest is calculated daily based on daily bank deposit rates. Note 8 – Trade and other receivables Trade receivables Other 1,446,758 988,512 1,114,818 833,799 40,427 50,482 40,427 50,482 Amounts receivable – wholly owned entity - - 224,006 158,691 1,487,185 1,038,994 1,379,251 1,042,972 A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 35 australianethical Notes to the financial statements for the year ended 30 June 2007 Note 9 – Financial assets Available-for-sale financial assets Loans Less non-current portion Current portion a. Available-for-sale financial assets comprise: Money market deposit at cost Mortgage backed security at fair value Bank note at fair value Corporate bond at fair value Units in unit trust at fair value Shares in wholly owned entity at cost Consolidated entity Parent entity 2007 $ 2006 $ 2007 $ 2006 $ 1,815,158 2,504,546 2,131,158 2,820,546 173,272 188,343 173,272 188,343 1,988,430 2,692,889 2,304,430 3,008,889 158,000 174,484 474,000 490,484 1,830,430 2,518,405 1,830,430 2,518,405 500,000 408,502 502,030 - 404,626 - 500,000 501,765 504,145 603,054 395,582 500,000 500,000 408,502 501,765 502,030 504,145 - 603,054 404,626 395,582 - 316,000 316,000 1,815,158 2,504,546 2,131,158 2,820,546 The money market deposit is at a fixed interest rate of 6.45%, has a maturity date of 21 August 2007 and is investment grade rated by S&P. The mortgage backed security is at a floating interest rate of BBSW + 0.39, has a maturity date of 26 October 2009 and is investment grade rated by S&P. The bank note is at a floating interest rate of BBSW + 0.70, has a maturity date of 20 May 2008 and is investment grade rated by S&P. b. Loans comprise Loan to other entity The loan is provided to an independent entity. The loan is at a fixed interest rate of 9.0% and matures 1 August 2015. 173,272 173,272 188,343 188,343 173,272 188,343 173,272 188,343 Note 10 – Other current assets Other Prepayments 22,160 161,484 183,644 2,843 136,865 139,708 22,160 140,115 162,275 2,843 91,400 94,243 Ethical investment is... clean energy. Clean energy is a breeze with our investment portfolio: • Vestas Wind Systems (Denmark) • Conergy (Germany) • • Geodynamics (Australia) • Ceramic Fuel Cells (Australia) • 1800 021 227 (cid:129) austethical.com.au Units in the trusts are offered and issued by Australian Ethical Investment Ltd (‘AEI’) ABN 47 003 188 930, AFSL 229949. Interests in the superannuation fund are offered by AEI and issued by the trustee of the fund, Australian Ethical Superannuation Pty Ltd ABN 43 079 259 733 RSEL L0001441. Product disclosure statements are available from our website or by calling 1800 021 227 and should be considered before deciding whether to acquire, or continue to hold, units in the trusts or interests in the fund. Australian Ethical® is a registered trademark of AEI. australianethical investment + superannuation D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 36 Notes to the financial statements for the year ended 30 June 2007 Note 11 – Property, plant and equipment australianethical Land and buildings Leasehold land At cost Total land Buildings At cost Accumulated depreciation Total buildings Consolidated entity Parent entity 2007 $ 2006 $ 2007 $ 2006 $ 230,000 230,000 230,000 230,000 230,000 230,000 230,000 230,000 2,784,117 2,079,077 2,784,117 2,079,077 (83,191) (22,642) (83,191) (22,642) 2,700,926 2,056,435 2,700,926 2,056,435 Total land and buildings 2,930,926 2,286,435 2,930,926 2,286,435 Plant and equipment At cost Accumulated depreciation Total plant and equipment 1,991,339 850,546 1,991,339 850,546 (594,127) (523,828) (594,127) (523,828) 1,397,212 326,718 1,397,212 326,718 Total property, plant and equipment 4,328,138 2,613,153 4,328,138 2,613,153 Movements in carrying amounts Land Balance at the beginning of year 230,000 - 230,000 - Additions Disposals 230,000 - - 230,000 - - Carrying amount at the end of year 230,000 230,000 230,000 230,000 Buildings Balance at the beginning of year Additions Disposals Depreciation expense 2,056,435 - 2,056,435 - 705,040 2,079,077 705,040 2,079,077 - - - - (60,549) (22,642) (60,549) (22,642) Carrying amount at the end of year 2,700,926 2,056,435 2,700,926 2,056,435 Plant and equipment Balance at the beginning of year Additions Disposals Depreciation expense 326,718 282,903 326,718 282,903 1,244,747 166,732 1,244,747 166,732 (9,482) (2,152) (9,482) (2,152) (164,771) (120,765) (164,771) (120,765) Carrying amount at the end of year 1,397,212 326,718 1,397,212 326,718 Total 4,328,138 2,613,153 4,328,138 2,613,153 A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 37 australianethical Notes to the financial statements for the year ended 30 June 2007 Note 12 – Deferred tax assets The balance comprises temporary differences attributable to: Amounts recognised in profit or loss Employee benefits Tithe Audit fees Amounts recognised directly in equity Financial asset revaluations Movements Opening balance at 1 July Credited (charged) to the income statement Credited (charged) to equity Closing balance at 30 June Note 13 – Trade and other payables Trade payables Sundry payables and accrued expenses Employee bonus Consolidated entity Parent entity 2007 $ 2006 $ 2007 $ 2006 $ 313,517 246,048 313,517 246,048 67,488 11,430 51,939 15,270 67,488 10,380 51,939 9,420 392,435 313,257 391,385 307,407 - 1,989 - 1,989 392,435 315,246 391,385 309,396 315,246 217,603 309,396 217,603 79,178 (1,989) 95,654 1,989 83,978 (1,989) 89,804 1,989 392,435 315,246 391,385 309,396 300,249 1,143,015 238,020 242,383 896,393 213,234 195,764 121,841 974,252 790,688 238,020 213,234 Amounts payable to wholly owned entity - - 461,865 307,391 1,681,284 1,352,010 1,869,901 1,433,154 Note 14 – Deferred tax liabilities The balance comprises temporary differences attributable to: Amounts recognised in profit or loss Stamp duty on leasehold property Amounts recognised in equity Available-for-sale financial assets Movements Opening balance at 1 July Credited/ (charged) to the income statement Credited/ (charged) to equity Closing balance at 30 June 30,896 30,896 30,896 30,896 2,352 33,248 - 30,896 2,352 33,248 - 30,896 30,896 - 30,896 - - 30,896 - 30,896 2,352 33,248 - 30,896 2,352 33,248 - 30,896 D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 38 Notes to the financial statements for the year ended 30 June 2007 Note 15 – Provisions australianethical Consolidated entity Parent entity 2007 $ 2006 $ 2007 $ 2006 $ 331,953 331,953 219,970 219,970 331,953 219,970 331,953 219,970 42,371 42,371 46,557 46,557 42,371 42,371 46,557 46,557 Current Employee benefits – long service leave Non-current Employee benefits – long service leave Note 16 – Movements in equity Issued capital Ordinary shares Fully paid ordinary shares at the beginning of the financial year 916,559 (2006 – 888,746) shares 4,628,423 4,113,706 4,628,423 4,113,706 Issue of share capital Shares issued during the year under the employee share ownership plan: 703 on 22 September 2006 (share bonus) 24,146 on 31 October 2006 (options exercised) 2,781 on 28 November 2006 (options exercised) 6,851 on 15 January 2007 (option exercised) 1,563 on 21 September 2005 (share bonus) 17,275 on 31 October 2005 (options exercised) 8,975 on 29 November 2005 (options exercised) Shares bought back during the year 5,931 on 31 October 2006 Balance 30 June 945,109 (2006 - 916,559) shares 20,949 340,700 39,240 96,667 - - - - 20,949 340,700 39,240 96,667 - - - - - - - 35,392 315,442 163,883 - - - 35,392 315,442 163,883 (176,447) - (176,447) - 4,949,532 4,628,423 4,949,532 4,628,423 At 30 June 2007 there were 945 109 fully paid ordinary shares which have no par value. For detailed information relating to the Australian Ethical Investment Ltd employee share ownership plan, including details of options issued, exercised and lapsed during the financial year and the options outstanding at year-end, refer to note 25 Share-based payments. For information related to share options issued to key management personnel during the financial year refer to the remuneration report contained within the Directors’ report. Ordinary shares participate in dividends and the proceeds on winding up of the parent entity in proportion to the number of shares held. At the shareholders meeting each ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands. A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 39 australianethical Notes to the financial statements for the year ended 30 June 2007 Note 16 – Movements in equity – continued Reserves Available-for-sale financial assets revaluation reserve Balance 1 July Gross gains/ (losses) Revaluation – gross Deferred tax Balance 30 June Share-based payments reserve Balance 1 July Option expense Balance 30 June Total Reserves Consolidated entity Parent entity 2007 $ 2006 $ 2007 $ 2006 $ (4,643) 7,464 3,811 (1,143) 5,489 - (4,643) - (6,632) 1,989 (4,643) 7,464 3,811 (1,143) (6,632) 1,989 5,489 (4,643) 98,591 96,607 195,198 38,630 59,961 98,591 98,591 96,607 195,198 38,630 59,961 98,591 200,687 93,948 200,687 93,948 The “Available-for-sale financial assets revaluation reserve” records revaluations to fair value of available for sale financial assets. The “Share-based payments reserve” records items recognised as expenses on valuation of employee share options. Retained earnings Balance 1 July Profit for the period Total for the period Dividends Balance 30 June Total Equity 1,551,412 894,550 632,928 263,654 1,819,177 1,362,612 1,705,752 1,075,024 1,819,177 1,362,612 1,705,752 1,075,024 (836,675) (705,750) (836,675) (705,750) 2,533,914 1,551,412 1,502,005 632,928 7,684,133 6,273,783 6,652,224 5,355,299 Note 17 – Events after the balance sheet date Since the end of the financial year, no material events that may have an impact on these financial statements have occurred. The financial report was authorised for issue on the directors’ declaration date by the board of directors. Note 18 – Economic dependence The consolidated entity is dependent upon management fees received in its capacity as responsible entity of the Australian Ethical Trusts and as trustee of the Australian Ethical Retail Superannuation Fund. Note 19 – Segment reporting The company was established in 1986 and is the responsible entity of the Australian Ethical Trusts. The company’s subsidiary is trustee of the Australian Ethical Retail Superannuation Fund. D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 40 Notes to the financial statements for the year ended 30 June 2007 Note 20 – Capital commitments australianethical Premises Rental licence commitments Payable – not later than 12 months Consolidated entity Parent entity 2007 $ - - 2006 $ 65,028 65,028 2007 $ - - 2006 $ 65,028 65,028 The licence agreement provides for 4 months for termination. The comparative amount represents 4 months rent. Note 21 – Contingent liabilities Liabilties and assets of trusts and superannuation fund Liabilities of the trusts and superannuation fund for which the consolidated entity and parent entity are responsible entity and trustee but not shown in the financial statements of the consolidated entity or parent entity were: Current liabilities Payables Provisions Total liabilities Rights of indemnities for liabilities incurred by the consolidated entity and parent entity not recorded in the financial statements were: 4,556,376 3,321,381 3,790,889 2,824,216 64,692,694 43,712,715 58,707,157 40,954,235 69,249,070 47,034,096 62,498,046 43,778,451 69,249,070 47,034,096 62,498,046 43,778,451 The trusts and superannuation fund hold sufficient assets to meet these liabilities as and when they fall due. The assets of the trusts and superannuation fund are not available to meet any liabilities of the consolidated entity or parent entity acting in their own right. Note 22 – Cash flow information (a) Reconciliation of cash Cash at the end of the financial year as shown in the cash flow statement is reconciled to the related items in the balance sheet as follows: Cash on hand Cash at bank Deposits at call 300 300 32,114 16,534 1,640,050 1,462,400 1,672,464 1,479,234 300 3,165 640,060 643,525 300 115 372,816 373,231 (b) Reconciliation of cash flow from operations with net profit from ordinary activities after income tax expense Net profit from ordinary activities after income tax expense 1,819,177 1,362,612 1,705,752 1,075,024 Non-cash flows in operating profit Depreciation Provisions (Profit) loss on sale of property, plant & equipment (Profit) loss on sale of investment Share options expensed Staff bonus paid in shares 225,320 107,797 9,442 11,178 96,607 20,949 143,407 65,288 2,152 (1,867) 59,961 35,392 225,320 107,797 9,442 11,178 96,607 20,949 143,407 65,288 2,152 (1,867) 59,961 35,392 A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 41 australianethical Notes to the financial statements for the year ended 30 June 2007 Note 22 – Cash flow information – continued Consolidated entity Parent entity 2007 $ 2006 $ 2007 $ 2006 $ Changes in assets and liabilities (Increase) decrease in trade & other receivables (448,190) (225,499) (236,395) (219,782) (Increase) decrease in prepayments & other assets (Increase) decrease in deferred tax assets Increase (decrease) in trade & other payables Increase (decrease) in current tax liability Increase (decrease) in deferred tax liability (43,936) 18,136 (79,178) (95,653) 354,513 347,135 (76,701) - 46,393 30,896 (68,032) (81,989) 461,987 (176,585) (1,989) 17,161 (89,803) 370,493 2,732 30,896 Net cash provided by (used in) operating activities 1,996,978 1,788,353 2,074,042 1,491,054 (c) Non-cash financing and investing activities Shares in Australian Ethical Investment Ltd, to the value of $20 949 (2006: $35 392) were issued in lieu of staff bonus. Note 23 – Related party transactions Australian Ethical Investment Ltd is the ultimate parent entity and owns 100% of Australian Ethical Superannuation Pty Ltd. Australian Ethical Investment Ltd acts as the responsible entity for the Australian Ethical Trusts (Australian Ethical Balanced Trust, Australian Ethical Equities Trust, Australian Ethical Income Trust, Australian Ethical Large Companies Share Trust, Australian Ethical International Equities Trust and Australian Ethical World Trust). Australian Ethical Superannuation Pty Ltd acts as trustee for the Australian Ethical Retail Superannuation Fund. Transactions between related parties are on commercial terms and conditions no more favourable than those available to other parties unless otherwise stated. Australian Ethical Superannuation Pty Ltd a) Transactions between Australian Ethical Investment Ltd and its wholly owned entity, Australian Ethical Superannuation Pty Ltd during the financial year consisted of: (i) Transactions whereby Australian Ethical Investment Ltd provides management services to the wholly owned entity on a cost recovery basis (ii) Transactions between Australian Ethical Investment Ltd and its wholly owned entity under the tax consolidation and related tax sharing agreement referred to in note 1(b). (iii) Transactions whereby Australian Ethical Investment Ltd collects management fee income on behalf of wholly owned entity and on-pays this management fee income to the wholly owned entity on a monthly basis. (iv) Transactions whereby Australian Ethical Investment Ltd receives a dividend from the wholly owned entity referred to in note 3. - - - - - - - - 2,752,622 2,163,664 452,641 232,453 4,521,499 3,285,781 942,248 254,660 D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 42 Notes to the financial statements for the year ended 30 June 2007 Note 23 – Related party transactions – continued australianethical b) Outstanding balances at balance date: Amounts receivable from wholly owned entity: Management services Taxation Amounts payable to wholly owned entity: Management fee income Consolidated entity Parent entity 2007 $ 2006 $ 2007 $ 2006 $ - - - - - - - 34,568 224,006 124,122 461,865 307,391 Australian Ethical Trusts a) Transactions between Australian Ethical Investment Ltd, as responsible entity, and the Australian Ethical Trusts during the financial year consisted of: (i) Transactions whereby Australian Ethical Investment Ltd provides investment services to the Australian Ethical Trusts in accordance with the Trust Deed. Australian Ethical Balanced Trust Australian Ethical Equities Trust Australian Ethical Income Trust 3,980,112 3,132,193 3,980,112 3,132,193 3,062,362 2,407,875 3,062,362 2,407,875 242,336 199,962 242,336 199,962 Australian Ethical Large Companies Shares Trust 2,309,552 1,668,138 2,309,552 1,668,138 Australian Ethical International Equities Trust 11,081 - 11,081 - (ii) Transactions whereby Australian Ethical Investment Ltd provides accounting services to the Australian Ethical Trusts in accordance with the Trust Deed. Australian Ethical Balanced Trust Australian Ethical Equities Trust Australian Ethical Income Trust Australian Ethical Large Companies Shares Trust Australian Ethical International Equities Trust 109,596 109,596 109,596 109,596 87,684 39,468 61,392 - 87,684 39,468 61,392 - 87,684 39,468 61,392 - 87,684 39,468 61,392 - (iii) Transactions whereby Australian Ethical Investment Ltd seeks expense reimbursement from the Australian Ethical Trusts in accordance with the Trust Deed. Australian Ethical Balanced Trust Australian Ethical Equities Trust Australian Ethical Income Trust Australian Ethical Large Companies Shares Trust Australian Ethical International Equities Trust 53,633 51,031 4,077 43,916 14 53,644 50,198 4,418 37,367 - 53,633 51,031 4,077 43,916 14 53,644 50,198 4,418 37,367 - (iv) Transaction whereby Australian Ethical Investment Ltd purchased units in the Australian Ethical Balanced Trust - 400,000 - 400,000 (v) Transaction whereby Australian Ethical Investment Ltd received a distribution payment from the Australian Ethical Balanced Trust 6,237 6,564 6,237 6,564 (vi) Transactions whereby Australian Ethical Investment Ltd sold interest bearing securities to the Australian Ethical Balanced Trust - 2,066,913 - 2,066,913 A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 43 australianethical Notes to the financial statements for the year ended 30 June 2007 Note 23 – Related party transactions – continued D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A Consolidated entity Parent entity 2007 $ 2006 $ 2007 $ 2006 $ b) Outstanding balances at balance date: Amounts receivable from the Australian Ethical Trusts in relation to investment services, accounting services and reimbursable expenses: Australian Ethical Balanced Trust Australian Ethical Equities Trust Australian Ethical Income Trust 412,430 354,366 27,400 334,290 244,126 24,435 412,430 354,366 27,400 334,290 244,126 24,435 Australian Ethical Large Companies Shares Trust 258,332 184,589 258,332 184,589 Australian Ethical International Equities Trust 12,204 - 12,204 - Value of units held by Australian Ethical Investment Ltd in the Australian Ethical Balanced Trust 404,626 395,582 404,626 395,582 Distribution receivable from AEBT 26,591 32,914 26,591 32,914 Australian Ethical Retail Superannuation Fund a) Transactions between the consolidated entity and the Australian Ethical Retail Superannuation Fund during the financial year consisted of: (i) Transactions between Australian Ethical Superannuation Pty Ltd and the Australian Ethical Retail Superannuation Fund related to the rebate of investment services. 26,978 31,651 Outstanding balances at balance date: Amounts payable to the Australian Ethical Retail Superannuation Fund: Rebate of investment services fee 1,332 6,119 - - - - Terms and conditions No provision for doubtful debts have been raised in relation to any outstanding balances and no expense has been recognised in respect of bad or doubtful debts due from related parties. Outstanding balances are unsecured and are repayable in cash. Note 24 – Key management personnel compensation a) Key management personnel Names and positions of key management personnel (directors and named executives) at any time during the financial year Parent entity directors Name George Pooley Pauline Vamos Caroline Le Couteur James Thier Howard Pender Naomi Edwards Justine Hickey Position Chairperson, non-executive Chairperson, non-executive Director, executive Director, executive Director, executive Director, non-executive Director, non-executive Resigned 13 October 2006 Appointed as non-executive 1 July 06, and as Chairperson 13 October 2006 Appointed 1 March 2007 Subsequent to year end Pauline Vamos has resigned as Chairperson and as a director of the company with effect from 31 August 2007. 44 Notes to the financial statements for the year ended 30 June 2007 Note 24 – Key management personnel compensation – continued australianethical a) Key management personnel – continued Other key management personnel Name Anne O’Donnell David Ferris Mark Bateman Gary Leckie Philip George Position Chief executive officer Investment manager Chief financial officer Chief financial officer Company secretary/ legal counsel b) Key management personnel compensation Resigned 2 February 2007 Appointed 2 February 2007 Consolidated entity Parent entity 2007 $ 2006 $ 2007 $ 2006 $ Short term employment benefits 1,355,800 1,029,033 1,264,631 957,025 Post-employment benefits Other long-term benefits Termination benefits Share-based payments Total compensation 106,073 24,593 - 83,960 20,699 - 98,873 24,593 - 79,148 20,699 - 73,960 63,217 73,960 63,217 1,560,426 1,196,909 1,462,057 1,120,089 The company has taken advantage of Schedule 5B of the Corporations Regulations 2001 and has transferred details required by AASB 124: Related Party Disclosures paragraphs Aus25.4 to Aus 25.7.2 to the remuneration report contained in the directors’ report. c) Equity instrument disclosures relating to key management personnel Option Holdings Number of options held by key management personnel. Balance 01.07.06 Granted as remuneration Options exercised Net change other Balance 30.06.07 Total vested 30.06.07 Total exercisable 30.06.07 Total unexercisable 30.06.07 Parent entity directors George Pooley Caroline Le Couteur James Thier Howard Pender Naomi Edwards Pauline Vamos Justine Hickey 7,402 5,932 2,649 - - - - 1,910 1,432 1,469 - - - - - (2,646) (2,074) (857) - - - Named executives (including other key management personnel) Anne O’Donnell David Ferris Mark Bateman Philip George Ruth Medd Gary Leckie Total 8,673 7,660 6,066 1,550 - 3,481 43,413 2,909 2,248 1,912 2,356 - (2,802) (2,498) - - 1,443 (819) (1,962) (6,016) 15,679 (13,658) (6,016) 39,418 - - - - - - - - - - - - 6,666 5,290 3,261 - - - - 8,780 7,410 - - 3,906 4,105 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 6,666 5,290 3,261 - - - 8,780 7,410 3,906 - - 4,105 39,418 A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 45 australianethical Notes to the financial statements for the year ended 30 June 2007 Note 24 – Key management personnel compensation – continued c) Equity instrument disclosures relating to key management personnel – continued Shareholdings Number of shares held by key management personnel. Balance 01.07.06 Share in lieu of cash bonus Options exercised/ shares issued1 Net change other2 Balance 30.06.073&4 Parent entity directors George Pooley Caroline Le Couteur James Thier Howard Pender Naomi Edwards Pauline Vamos Justine Hickey 44,277 60,154 51,178 - - - - 127 - - - - - - Named executives (including other key management personnel) Anne O’Donnell David Ferris Mark Bateman Philip George Ruth Medd Gary Leckie Total 3,315 2,762 982 375 - - 179 - - - - - 163,043 306 - - - - - - 2,646 2,074 857 2,802 2,498 1,962 819 13,658 - - (200) (370) 700 - - - - (1,962) - - (819) (2,651) 46,923 62,155 51,665 700 6,117 5,439 982 375 - - - - - 174,356 1The amount paid for shares issued on exercise of options is $14.11 in all cases. 2Net change other refers to shares purchased or sold during the financial year. 3Shares issued are fully paid. 4Balance represents shareholdings by key management personnel including their related parties as required by AASB 124: Related Party Disclosures. Note 25 – Share based payments The following share-based payment arrangements existed at 30 June 2007: On 23 September 2004, 39 173 share options were granted to non-probationary employees under the Australian Ethical Investment Ltd employee share ownership plan. The options were issued for nil consideration, are not exercisable for 3 years from the date of issue, have an exercise price of $16.28 each and a 3 month window in which to be exercised, and in most circumstances will lapse if the holder is no longer an employee of Australian Ethical Investment Ltd. The options hold no voting or dividend rights. On 21 September 2005, 43 664 share options were granted to non-probationary employees under the Australian Ethical Investment Ltd employee share ownership plan. The options were issued for nil consideration, are not exercisable for 3 years from the date of issue, have an exercise price of $24.82 each and a 3 month window in which to be exercised, and in most circumstances will lapse if the holder is no longer an employee of Australian Ethical Investment Ltd. The options hold no voting or dividend rights. On 22 September 2006, 45 825 share options were granted to non-probationary employees under the Australian Ethical Investment Ltd employee share ownership plan. The options were issued for nil consideration, are not exercisable for 3 years from the date of issue, have an exercise price of $32.50 each and a 3 month window in which to be exercised, and in most circumstances will lapse if the holder is no longer an employee of Australian Ethical Investment Ltd. The options hold no voting or dividend rights. On 22 September 2006, 703 ordinary shares were issued under the employee share ownership plan. The shares carry full dividend and voting rights and are not transferable for a period of 3 years, or until an employee leaves the company’s employment whichever first occurs (In the comparative year 1,563 ordinary shares, with the same terms, were granted on 21 September 2005). D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 46 Notes to the financial statements for the year ended 30 June 2007 Note 25 – Share based payments – continued australianethical Consolidated entity Parent entity 2007 2006 2007 2006 Number of options Weighted average exercise price $ Number of options Weighted average exercise price $ Number of options Weighted average exercise price $ Number of options Weighted average exercise price $ 113,946 18.91 101,865 16.13 113,946 18.91 101,865 16.13 Outstanding at the beginning of the year Granted Forfeited Exercised Expired Outstanding at year-end 118,995 Exercisable at year-end - - 45,825 (6,998) (33,778) 32.50 25.56 14.11 43,664 (2,297) (26,250) (3,036) 24.82 16.12 18.26 18.26 18.91 45,825 (6,998) (33,778) 32.50 25.56 14.11 118,995 - - 43,664 (2,297) (26,250) (3,036) 24.82 16.12 18.26 18.26 18.91 25.11 113,946 25.11 113,946 - - - - - - There were 33 778 options exercised during the year ended 30 June 2007. The weighted average share price calculated as at exercise dates of these options was $33.73. The options outstanding at 30 June 2007 had a weighted average exercise price of $25.11 and a weighted average remaining contractual life of 1.55 years. Exercise prices range from $16.28 to $32.50 in respect of options outstanding at 30 June 2007. The weighted average fair value of the options granted during the year was $4.14. This price was calculated by using the Black Scholes option pricing model applying the following inputs: Weighted average exercise price Weighted average life of the option Underlying share price Expected share price volatility Risk free interest rate $32.50 3.25 years $29.00 22.50% 5.69% Included under employee benefits expense in the income statement is: $20 949 (2006: $35 392) relating to equity-settled share-based payment transactions for staff bonus; and $96 607 (2006: $59 961) relating to options issued under the employee share ownership plan. Note 26 – Financial instruments (a) Financial risk management The consolidated entity’s financial instruments consist of cash and cash equivalents (note 7), trade and other receivables (note 8), financial assets (note 9) and trade and other payables (note 13). The main purpose of these financial instruments is to finance the consolidated entity’s operations. The consolidated entity’s has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. (b) Interest rate risk The consolidated entity’s exposure to interest rate risk, which is the risk that a financial instrument’s value will fluctuate as a result of changes in market interest rates and the effective weighted average interest rates on classes of financial assets and financial liabilities is as follows: A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 47 australianethical Notes to the financial statements for the year ended 30 June 2007 Note 27 – Financial instruments – continued (b) Interest rate risk – continued D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A Weighted average effective interest rate Floating interest rate Fixed interest rate within 1 year 2007 % 6 7 2006 % 5 7 2007 $ 2006 $ 2007 $ 1,672,164 1,478,934 - - 1,815,158 2,504,546 3,487,322 3,983,480 15,272 15,272 - - - - 2006 $ - - 13,859 13,859 - - - - - - Fixed interest rate within 1 to 5 years 2007 $ 2006 $ - - - 158,000 158,000 174,484 174,484 - - - - Non-interest bearing Total 2007 $ 300 2006 $ 2007 $ 2006 $ 300 1,672,464 1,479,234 1,487,185 1,038,994 1,487,185 1,038,994 - - 1,988,430 2,692,889 1,487,485 1,039,294 5,148,079 5,211,117 1,681,284 1,352,010 1,681,284 1,352,010 1,681,284 1,352,010 1,681,284 1,352,010 Cash and cash equivalents Trade and other receivables Financial assets Total financial assets Trade and other payables Total financial liabilities Cash Trade and other receivables Financial assets Total financial assets Trade and other payables Total financial liabilities (c) Credit risk The maximum exposure to credit risk, excluding the value of any collateral or other security, at balance date to recognised financial assets is the carrying amount, net of any provisions for doubtful debts of those assets, as disclosed in the balance sheet and notes to the financial statements. (d) Net fair values For other assets and other liabilities the net fair value approximates their carrying value. Note 27 – Change in accounting policy The following Australian Accounting Standards issued or amended, which are applicable to Australian Ethical Investment Ltd, but are not yet effective and have not been adopted in preparation of the financial statements at reporting date are: AASB Amendment 2005-10 Standard Affected AASB 139: Financial Instruments: Recognition and management Nature of change in accounting policy and impact Application date of the standard Application date of the company No change, no impact 1-Jan-07 1-Jul-07 AASB 101: Presentation of Financial Statements No change, no impact 1-Jan-07 1-Jul-07 AASB 114: Segment Reporting No change, no impact 1-Jan-07 1-Jul-07 AASB 117: Leases AASB 132: Financial Instruments: Disclosure and Presentation No change, no impact 1-Jan-07 1-Jul-07 No change, no impact 1-Jan-07 1-Jul-07 AASB 133: Earnings per Share No change, no impact 1-Jan-07 1-Jul-07 AASB 1: First-time Adoption of AIFRS No change, no impact 1-Jan-07 1-Jul-07 AASB 4: Insurance Contracts No change, no impact 1-Jan-07 1-Jul-07 AASB 1023: General Insurance Contracts No change, no impact 1-Jan-07 1-Jul-07 AASB 1038: Life Insurance Contracts No change, no impact 1-Jan-07 1-Jul-07 48 New Standard AASB 7: Financial Instruments: Disclosure No change, no impact 1-Jan-07 1-Jul-07 australianethical Directors’ declaration The Directors of Austalian Ethical Investment Ltd declare that: 1. the financial statements and notes, as set out on pages 26 to 48 and the additional disclosures included in the directors’ report designated as audited are in accordance with the Corporations Act 2001: a. comply with accounting standards and the Corporations Regulations 2001; and b. give a true and fair view of the financial position as at 30 June 2007 and of the performance for the year ended on that date of the company and consolidated entity; 2. the Chief Executive Officer and Chief Finance Officer have each declared: a. the financial records of the company for the financial year have been properly maintained in section 286 of the Corporations Act 2001; b. the financial statements and notes for the financial year comply with the Accounting Standards; and c. the financial statements and notes for the financial year give a true and fair view. 3. in the directors’ opinion there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. This declaration is made in accordance with a resolution of the Board of Directors. Howard Pender Director Dated this 31 August 2007 A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 49 australianethical Independant auditor’s report to the members of Australian Ethical Investment Limited We have audited the accompanying financial report of Australian Ethical Investment Limited (the company) and Australian Ethical Investment Limited and controlled entity (the consolidated entity), which comprises the balance sheet as at 30 June 2007, and the income statement, statement of changes in equity and cash flow statement for the year ended on that date, a summary of significant accounting policies and other explanatory notes and the directors’ declaration of the consolidated entity comprising the Company and the entity it controlled at the year’s end or from to time during the financial year. As permitted by the Corporations Regulations 2001, the company has disclosed information about the remuneration of directors and executives (remunerations disclosures), required by Accounting Standard AASB 124: Related Party Disclosures, under the heading ‘Remuneration Report’ in pages 18 to 24 of the directors’ report and not in the financial report. Director’s Responsibility for the Financial Report The Directors of the Company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal controls relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101: Presentation of Financial Statements, that compliance with the Australian equivalents to International Financial Reporting Standards ensures that the financial report, comprising the financial statements and notes, complies with International Financial Reporting Standards. The directors also are responsible for preparation and presentation of the remuneration disclosures contained in the directors’ report in accordance with the Corporations Regulations 2001. Auditor’s Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement and that the remuneration disclosures in the directors’ report comply with Accounting Standard AASB 124. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report and the remuneration disclosures in the directors’ report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 50 australianethical Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditors Opinion In our opinion: a. the financial report of Australian Ethical Investment Limited and Australian Ethical Investment Limited and Controlled Entity is in accordance with the Corporations Act 2001, including: i. ii. giving a true and fair view of the Company’s and Consolidated Entity’s financial position as at 30 June, 2007 and of their performance for the year ended on that date; and complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001. b. the financial report also complies with International Financial Reporting Standards as disclosed in Note 1; and c. the remuneration disclosures that are contained on pages 18 to 24 in the directors’ report comply with Accounting Standard AASB 124. THOMAS DAVIS & CO. P.L. WHITEMAN PARTNER Chartered Accountants Sydney, 31 August 2007 Liability limited by a scheme approved under Professional Standards Legislation A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 51 australianethical Shareholder information The shareholder information set out below was current as at 21 September 2007. Twenty largest shareholders Substantial shareholders Substantial shareholders of ordinary shares are specified in the table of the top twenty shareholders set out below. Ordinary shares Name Percentage % Substantial shareholder Number of ordinary shares Voting rights Ordinary shares The voting rights attaching to ordinary shares are fully set out in the company’s Constitution. In brief, at meetings of members each member entitled to vote may vote in person or by proxy or attorney, and: • • on a show of hands has 1 vote; and on a poll has 1 vote for every share held. Options No voting rights attach to any options on issue. Distribution of shareholdings Ordinary shares Range 1 – 1000 1001 – 5000 5001 – 10 000 10 001 – 100 000 100 000 – over Totals Non-marketable parcel Holders Units % 632 76 12 14 1 735 1 165 483 168 922 88 167 389 275 133 262 17.509 17.873 9.329 41.188 14.100 945 109 100.000 7 Options issued under the employee options scheme Range 1 – 1000 1001 – 5000 5001 – 10 000 10 001 – 100 000 100 000 – over Totals Holders Units % 5 29 5 0 0 2527 80 748 34 185 0 0 2.151 68.745 29.104 0.000 0.000 39 117 460 100.000 SMF Funds Management Ltd 160 060 16.94 Mr Howard Pender 49 634 47 681 5.25 5.05 Yes Yes Yes Gang-Gang Pty Ltd 23 310 17 216 2.47 1.82 James Andrew Thier Caroline Margaret Le Couteur Mr Trevor Roland Lee Mrs Judith Margaret Burton Ms Judith Clark Mr Bruce Allan McGregor & Mrs Ann Marion McGregor HB Sarjeant & Assoc Pty Ltd Dr Edward Arthur Iceton Daisy Thier Denholm Investments Pty Ltd Mr Peter Alexander Anderson Mr Michel Beuchat & Mrs Ann Beuchat Mr Philip Julian Eriksen & Mr Julian Hans Eriksen Mrs Jane Frances Hickling Ms Susie Edwards Mr Alistair David Clark Est Mrs Hanneliese Claire Graf 46 923 4.96 39 174 4.14 33 683 3.56 24 912 24 447 2.64 2.59 16 500 1.75 14 474 13 690 1.53 1.45 10 833 1.15 9 667 1.02 9 292 0.98 9 000 0.95 7 941 7 622 0.84 0.81 7 347 0.78 D T L T N E M T S E V N I L A C I H T E N A I L A R T S U A 52 australianethical Corporate directory Australian Ethical Investment Ltd ABN 47 003 188 930 Company secretary Philip George Telephone: Facsimile: Email: 02 6201 1994 02 6201 1987 pgeorge@austethical.com.au Postal address GPO Box 2435 Canberra ACT 2601 Registered office / place of business Trevor Pearcey House (Block E) Traeger Court 34 Thynne Street Bruce ACT 2617 www.austethical.com.au Share registry Registries Limited ABN 14 003 209 836 Street: Level 2, 28 Margaret Street Sydney NSW 2000 Telephone: Facsimile: Mail: Email: 02 9290 9600 02 9279 0664 PO Box R67 Royal Exchange Sydney NSW 1223 registries@registriesltd.com.au www.registriesltd.com.au Using the Registries Ltd website, shareholders are able to view balances, transaction history and recent dividend payments. They can also view and update email addresses, annual report elections and tax file numbers. Various forms are also available for download to assist in the management of shareholdings. Stock exchange listing Australian Securities Exchange ASX code: AEF Corporate vision and mission Australian Ethical’s vision By its operations Australian Ethical will promote a sea- change in community-wide practice such that all investment will be undertaken with an ethical purpose as well as in pursuit of competitive return for chosen risk. Australian Ethical’s mission Australian Ethical’s mission is to provide those investors who share our social and environmental aims (as set out in our charter) with the means to earn a competitive return for chosen risk whilst at the same time contributing to a just and sustainable human society and the protection of the natural environment. In order to fulfil our mission our goals are: • • to select every investment with which we are involved in accord with the Australian Ethical Charter; • to earn a competitive return for the chosen level of risk upon every portfolio with which we are involved; • to conduct our own operations in accord with the items of the Australian Ethical Charter, in particular we seek to: • • • • • nurture staff participation and control of Australian Ethical; achieve a high standard of administrative service for investors in our products; ameliorate wasteful or polluting practices in our own business operations; envourage, care for and provide educational opportunity for our fellow workers, respect their individual needs, aspirations and idiosyncrasies; and ensure our promotional material is comprehensive, transparent and readily understood. to generate and disseminate information regarding standards of corporate behaviour and to engage in dialogue with the corporate sector in terms of the items set out in the Australian Ethical Charter. A U S T R A L I A N E T H I C A L I N V E S T M E N T L T D 53 

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