Australian Ethical Investment
Annual Report 2008

Plain-text annual report

australianethical ANNUAL REPORT TO SHAREHOLDERS Year ended 30 June 2008 1800 021 227 • www.austethical.com.au australianethical investment + superannuation R Financial summary to 30 June 2008 as at 30 June 2008 30 June 2007 30 June 2006 30 June 2005 Current assets ($’000) Non-current assets ($’000) Current liabilities ($’000) Non-current liabilities ($’000) Net assets ($’000) 6 362 11 152 2 658 113 8 381 5 174 4 879 2 293 76 7 684 5 176 3 103 1 928 77 6 274 5 833 701 1 456 31 5 047 2000 1800 1600 1400 1200 1000 800 600 400 200 0 0 0 0 1 $ 200 180 160 140 120 100 80 60 40 20 0 s t n e c n o i l l i m $ 650 600 550 500 450 400 350 300 250 200 150 100 50 0 Profit after tax (NPAT) 1819.2 1651.8 1362.6 784.4 459.8 2004 2005 2006 2007 2008 Year ending 30 June Basic earnings per share 194.8 170.3 150.3 89.6 52.9 2004 2005 2006 2007 2008 Year ending 30 June Funds under management (ex distribution) 552 562 417 311 267 2004 2005 2006 2007 2008 As at 30 June n o i l l i m $ % 13 14 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 e r a h s r e p s t n e c 200 180 160 140 120 100 80 60 40 20 0 Revenue 14.06 12.47 9.66 7.42 5.90 2004 2005 2006 2007 2008 Year ending 30 June Return on equity 26.1 24.1 20.6 16.4 10.4 2004 2005 2006 2007 2008 Year ending 30 June Dividends paid 192 165 85 72 52 2004 2005 2006 2007 2008 Year ending 30 June 2005 figures in the above tables and graphs have been adjusted where necessary as for first time adoption of Australian equivalents to International Financial Reporting Standards (AIFRS). AUSTRALIAN ETHICAL INVESTMENT LTD Contents Chair’s report Chief executive officer’s report Sustainability report Corporate governance statement 2008 Directors’ report Financial statements Shareholder information Corporate directory Corporate vision and mission 4 5 7 10 14 27 58 59 59 Charter The Company will order its affairs so as to provide for and to support: the development of workers’ participation in the ownership and control of their work organisations and places; a. b. The Company will also order its affairs so as to avoid activity which is considered to unnecessarily: i. pollute land, air or waters; the production of high quality and properly presented products and services; ii. destroy or waste non-recurring resources; c. the development of locally based ventures; d. the development of appropriate technological systems; 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; e. the amelioration of wasteful or polluting practices; iv. market, promote or advertise, products or services in a misleading or deceitful manner; 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; 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; the dignity and well being of non-human animals; 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; i. j. 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; AUSTRALIAN ETHICAL INVESTMENT LTD Chair’s report A sound year during troubled times The board is pleased to report that Australian Ethical Investment Ltd has had another sound year in terms of profit and return on equity, with a dividend declaration of $1.65 per share and a return on equity of 20.6%. While both these figures are somewhat lower than our 2007 record returns, they are very good in light of the market turbulence experienced over the past six months. Our balance sheet remains strong with the ability to finance our strategic initiatives discussed below. With market volatility at record levels, it is worthwhile to review the fundamental growth prospects of our industry. The board is confident that our growth prospects remain strong, despite the market downturn. Our trusts have held up well relative to the market through the downturn. Our Equity Trust and Large Companies Share Trust in particular have outperformed their respective benchmarks strongly during the last few rocky months. While the overall ethical market in Australia is still quite small - about $17 billion - it is growing very fast. Investments that systematically take environmental, social and governance issues into account outgrew mainstream investing by more than double in the year to June 2007. They grew by 43%, from $12 billion to $17 billion, compared to 20% growth in the managed investments industry overall. Within this high growth stream, Australian Ethical has a brand which is true to form, strong, and the envy of many others in the area. However, our brand recognition lags behind where it could be, partly because we have not had the capacity for large scale marketing expenditure and partly because we have focused on deep green niche target markets. We are currently in the middle of a two year project to address this, including: • • the development of marketing messages that are tangible and more accessible than the principles of the Charter close work with asset consultants and rating agencies to improve their understanding of our products. We are confident that this will bear fruit in the next two years. Our retail superannuation business has steadily grown as a percentage of our total business over the last five years, and now represents well over 50% of our funds under management. This business is much less sensitive to market fluctuations than our managed investments AUSTRALIAN ETHICAL INVESTMENT LTD 4 business and we are confident that this part of our business will continue to grow strongly. The board is mindful of recent statements by the government regarding the high cost of retail superannuation funds and has a strategy in place to minimise the impact of any government intervention in this area. We are pleased to advise shareholders that our search for high quality non-executive directors has borne fruit this year, with the appointment of Andre Morony and Les Coleman to the board. Non-executive directors, Justine Hickey and Andre Morony bring to our board wide external funds management experience, while Les Coleman has deep risk management expertise. Caroline Le Couteur has indicated that she will not be standing for re-election to the board this year meaning that the board will shortly comprise a majority of non-executive directors. I would personally like to thank Caroline for her significant contribution to the board of Australian Ethical over the last 17 years and for her commitment over that time to our Charter. We continue our 2007 strategy of broadening our marketing reach beyond our traditional support base. A 2008 strategy meeting also identified the need for a review of our internal IT systems, and this is now underway to ensure our systems are robust to deal with future growth. I have enjoyed my first year as chair and can personally attest to the qualities of Anne O’Donnell as CEO and managing director of Australian Ethical. While many boards are changing CEO during these troubled times, I have full confidence in Anne to deliver shareholder returns in a sustainable way. Anne has recruited a strong team around her, including Martin Halloran, our new chief investment officer and Paul Harding-Davis, our new head of distribution. I believe this team will take the best of Australian Ethical, which is our people, our ethical investment processes and our Charter, and use them in new and exciting ways which will grow our company into the future. Naomi Edwards Chair 0 0 0 0 6 $ 0 0 0 0 5 $ 5 4 9 7 $ 0 0 0 5 $ Grants to community organisations Bluegreen Films - ‘Sustainability & Co’ a three part documentary series on corporate sustainability and governance will be produced by Bluegreen Films. MSAP - University of NSW Medical Students’ Aid Project will stock a community store with school and household essentials, purchase a motorised canoe, fuel and one year’s salary for a canoe pilot to transport the products to remote riverside markets. Barefoot Economy Engineers Without Borders - Tonle Sap Lake Project Australian Marine Conservation Society WaterAid Australia ACT Eden Monaro Cancer Support Group New Internationalist Publications Edmund Rice Centre for Justice and Community Education Pedal Power ACT Fair Trade Association of Australia and New Zealand Animals Asia Foundation (Australia) Child Wise Rainforest Rescue Royal Institute for Deaf and Blind Children Sustainable Maleny The Qld. Society for Crippled Children Asian Women at Work Bush Heritage Australia Clean Ocean Foundation Romero Centre Trees For Life Broken Hill & District Hearing Resource Centre Kuusa Services Centre The Australian Conservation Foundation 0 0 0 3 $ A full description of all the grant recipients is available on the website www.austethical.com.au/cg Chief Executive’s report The financial year ended 30 June 2008 reflects a year of two halves. The Australian Ethical Investment group performed strongly in the first half of the year however the full year result reflects the volatility and uncertainly that has been experienced in global financial markets. The Australian Ethical trusts had no direct exposure to any ‘sub-prime’ investments, however we have experienced the impact of falling asset prices and depressed investor sentiment. The company recorded a consolidated net profit of $1.65 million. This trading result represents a decrease on the previous financial year’s excellent result of $1.82m. Whilst it is disappointing to record a decrease in year on year profit, given the difficult circumstances experienced in the financial markets I consider this a good result. The company achieved strong growth in funds under management during the first half of the financial year with funds peaking at $645m. This growth and the revenue generated cushioned the impact of downward market movements which occurred in the second half of the financial year. As at 30 June 2008, funds under management totalled $562m (ex distribution). This compares with funds under management of $552m (ex distribution) as at 30 June 2007. The relative flatness in funds under management, combined with some increased costs and additional expenditure on business development, resulted in the cost to income ratio increasing from 76% in 2007 to 80%. This increase is in contrast with the steadily declining trend experienced in the past four financial years. Return on equity was also impacted falling from 26.1% to 20.6%. The Australian Ethical Trusts performed credibly in a year of poorly performing financial markets with the returns for three of our five trusts exceeding their benchmarks. This was a good result and important as the success and growth of our business is dependant on the performance of the Australian Ethical trusts. We remain committed to investing in quality companies taking into account ethical and financial strength and ensuring our returns are commensurate with the risk profile of an individual trust. The Australian Ethical Retail Superannuation Fund has continued to experience steady inflow of funds in line with expectations. On 1 April 2008 we transited the administration of our superannuation fund to a new service provider. This process has not been without its difficulties and we have incurred one-off costs as part of this process. Despite these transitional problems it is apparent the move will result in a more robust administration of the superannuation fund. In the past the fee structure of the administrator was linked to funds 5 AUSTRALIAN ETHICAL INVESTMENT LTD loyal customer base. Whilst we are mindful of the need to monitor our costs closely, we do not intend to undertake any radical changes to our business model at this time. As previously flagged we are keen to attract increased non-retail investment. We continue to implement strategies which will allow us to tap into the growing commercial interest in sustainable investment. We also believe the rise in shareholder activism offers some exciting opportunities which complement our expertise and have the potential to expand our customer base. We are currently exploring the possibility of bringing to market a product which will tap into this trend. All the staff at Australian Ethical have been working hard in what has been a very difficult financial market. I would like to thank them for their diligence and commitment. I would also like to thank you, our shareholders, for your ongoing support and I look forward to seeing you at the annual general meeting on 27 November. Anne O’Donnell Chief executive officer and managing director Chief Executive’s report under management. The new structure is not linked to funds under management and we estimate this new arrangement will result in savings greater than half a million dollars in the current financial year. When considering the level of dividend the directors are mindful of the significant franking credits held by the company and the need to ensure we have sufficient capital to provide prudent reinvestment into the business. The directors have decided that shareholders will be paid a final dividend (fully franked) of $1.20 per ordinary share. Added to the interim dividend of 0.45 cents per share, the total dividend for the 2007–08 financial year will be $1.65 per share. The Australian Ethical Retail Superannuation Fund was awarded the inaugural Infinity Award at the Conference of Major Super Funds (CMSF) in March 2008. The award signifies the Fund as Australia’s most environmentally and socially conscious fund and a leader in sustainable investment and sustainable business practices. Trevor Pearcey House continues to meet high standards of energy efficiency and to provide our employees with a comfortable and productive working environment. Interest in the building continues to be strong and this has been very useful in raising the profile of Australian Ethical generally. In July this year, our refurbishment won the Banksia Environmental Foundation award for the Built Environment. The Prime Minister is the Chief Patron of the awards and the win comes on the 20 year anniversary of the awards. Outlook A significant portion of investment in the Australian Ethical trusts comes from retail clients. This money has traditionally been ‘sticky’ in times of market downturn and historically the trusts have not experienced significant outflows. However, Australian Ethical is not immune to market volatility and negative investor sentiment. It is highly likely we will see the impact of these factors in our funds under management and revenue numbers during the 2008−09 financial year. A decline in revenue has the potential to impact company profitability. Offsetting potential declines in revenue are savings which will flow from changes we have made to our custodian and superannuation administration providers. The company will continue to focus on building and servicing its clients and streamlining its processes, ensuring scalability and efficiency of operations. During challenging financial periods it is tempting to take the easy option and cut costs dramatically and potentially endanger future growth opportunities. Australian Ethical is fortunate in that we have a unique product offering and a very AUSTRALIAN ETHICAL INVESTMENT LTD 6 Sustainability Report Australian Ethical remains committed to conducting our own operations in accordance with the Australian Ethical Charter. Below are some of this year’s sustainability highlights. Further information on Australian Ethical’s social, environmental and economic performance will be provided in the company’s 2008 sustainability report. Awards Australian Ethical won a number of sustainability awards this year. Keep Australia Beautiful 2007 ACT Sustainable Cities Awards - August 2007 Australian Ethical Investment 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. Resource Recovery Award - October 2007 Australian Ethical Investment won the Resource Recovery Award as part of the national Australian Sustainable Cities Awards. Six-star Green Star Certified Rating by the Green Building Council of Australia - October 2007 Trevor Pearcey House was awarded the ‘world leadership’ rating of 6 stars by the Green Building Council of Australia – the third building in Australia to receive such a rating. 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. First runner up for Best SME Report at the CR Reporting Awards 2007 - March, 2008 Australian Ethical Investment’s 2006 Sustainability Report was awarded first runner up for Best SME Report at the CR Reporting Awards 2007. Global and independent, the CR Reporting Awards identify and acknowledge the best in corporate non-financial reporting. The CR Reporting Awards are managed by CorporateRegister.com - the world’s largest online directory of corporate responsibility and sustainability reports. Infinity Award presented to the Australian Ethical Retail Superannuation Fund for the most environmentally and socially conscious fund – March 2008 Banksia Built Environment Award received for Trevor Pearcey House from the Banksia Environmental Foundation Awards – July 2008 Trevor Pearcey House won the Banksia Environmental Foundation award for the Built Environment. The Banksia Environmental national Awards, now in its 20th year, are regarded as the most prestigious environmental awards in Australia. The Prime minister, Kevin Rudd, is the Chief Patron of the awards. Deputy Prime Minister, Julia Gillard and the Minister for the Environment, Heritage and the Arts, Peter Garret attended the awards evening. AUSTRALIAN ETHICAL INVESTMENT LTD Trevor Pearcey House – First full financial year of performance data! The 2007–08 year was Australian Ethical’s first full financial year in our refurbished business premises, Block E of Trevor Pearcey House. So how did it perform? Energy use During 2007–08 (our first full year in Trevor Pearcey House), Australian Ethical used 346 247 MJ or 380 MJ/sqm of energy (69 150 kWh of electricity and 97 306 MJ of gas). On a per square metre basis, this represents a 48 per cent reduction on our 2006–07 energy use (8 months in the Downer offices and 4 months in Trevor Pearcey House) and a 63 per cent reduction on our 2005–06 energy use (our last full year at the Downer offices). Electricity use per square metre fell by 29 per cent, from 107 kWh/sqm in 2006–07 to 76 kWh/sqm in 2007–08. When compared to 2005–06, our last full year in the Downer offices, the decrease was 39 per cent. Gas use per square metre fell from 339 MJ/sqm in 2006–07 to 107 MJ/sqm in 2007–08, representing a decrease of 68 per cent. Compared to 2005–06, the decrease was 82 per cent. To neutralise the greenhouse gas impact of our energy use, Australian Ethical purchased 100 per cent accredited Green Power from ActewAGL and purchased carbon credits from Climate Friendly https://climatefriendly.com/. If we had not done this, greenhouse gas emissions from energy use at Trevor Pearcey House during 2007–08 would have totalled 79.65 tonnes CO2-e or 0.087 tonnes CO2-e/sqm. This is still 72 per cent lower than the greenhouse gas emissions from an average Canberra office building and highlights the environmental benefits that can be achieved by refurbishing and fitting out an existing office block according to green building design principles. The refurbishment was undertaken using a conventional budget and used accepted, conventional and low-technology design principals. Further information on the Trevor Pearcey House refurbishment can be found on Australian Ethical’s website. AUSTRALIAN ETHICAL INVESTMENT LTD Water use During 2007–08, Australian Ethical used 99 kL or 0.11kL/ sqm of mains water. This is 85 per cent less than the median Canberra office water consumption benchmark of 0.72 kL/sqm. On a per square metre basis, water use in 2007–08 was 66 per cent lower than in 2006–07 and 73 per cent lower than in 2005–06. This is an exceptional result and highlights the benefits of incorporating water efficient features in the refurbishment of Trevor Pearcey House. These features include: • • • • • 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 Climate change and the associated reduction in rainfall in south eastern Australia has resulted in significantly lower runoff into our streams and rivers. This, combined with the over-allocation and inefficient use of water has placed immense pressure on our river systems and water supplies. The installation of water efficient features in all existing and new commercial buildings would result in significant savings of our most precious resource. Energy use for the financial years 2005–06, 2006–07 and 2007–08* Energy Use Financial year Energy MJ** Energy MJ/sqm Electricity kWh Electricity kWh/sqm Gas MJ Gas MJ/sqm GHG emissions (tonnes CO2-e) GHG emissions (tonnes CO2-e/sqm) 2005–06 669 113 1 037 79 644 124 382 393 593 107.86 0.167 2006–07 505 271 725 76 248 107 230 779 339 93.46 0.133 * 2007–08 unaudited results. ** Sum of total gas and electricity usage, where 1 kWh = 3.6 MJ. Community Grants Scheme As prescribed in Australian Ethical’s constitution, 10 per cent of our profit is donated to charitable, benevolent and conservation purposes as part of our contribution to a positive and sustainable society. In 2008 Australian Ethical paid $200,891 to 25 organisations involved in a wide range of environmental, charitable and community activities. The grants consist of two components – two major project grants and a number of smaller grants. The large major project grants are typically made to one social and one conservation project that have a lasting tangible impact. The major project grants for 2008 were awarded to Bluegreen Films and Medical Students Aid Project. Bluegreen Films is …. Bluegreen Films’ grant will enable production of a half hour television program focussing on corporate sustainability and governance issues. The program will examine examples of corporate behaviour where business as usual may not be the way to go. Medical Students’ Aid Project (MSAP) is an aid organisation based at University of New South Wales which aims to provide targeted assistance to communities and hospitals in the developing world. MSAP will collaborate with ‘HandUp Congo’ www.handupcongo.org to support the Congolese women’s NGO ‘Fondation Lucie Otaenga’ in Lotumbe, a remote regional health hub in the Democratic Republic of Congo’s Equatorial Province. MASP’s grant will be used to stock a community store with school and household essentials, purchase a motorised canoe, petrol and one year’s salary for a canoe pilot to allow Fondation Lucie Otaenga to sell these products at riverside markets and at the same time help medical workers access isolated communities. Profits will be used to purchase and distribute nets to combat malaria, the leading cause of infant mortality in the Democratic Republic of Congo. Organisations awarded grants under Australian Ethical’s community grants program 2008 are listed right. Further information on our Community Grants scheme, including application guidelines and selection criteria, can be found on the company website. Organisation Bluegreen Films Medical Students Aid Project Barefoot Economy Ltd Engineers Without Borders - Tonle Sap Lake Project Australian Marine Conservation Society WaterAid Australia ACT Eden Monaro Cancer Support Group Inc New Internationalist Publications Pty Ltd Edmund Rice Centre for Justice and Community Education Pedal Power ACT Fair Trade Association of Australia and New Zealand Inc. Animals Asia Foundation (Australia) Limited Child Wise Rainforest Rescue Royal Institute for Deaf and Blind Children Sustainable Maleny The Qld. Society for Crippled Children (known as) MontroseAccess Asian Women at Work Inc Bush Heritage Australia Clean Ocean Foundation Romero Centre Trees For Life Incorporated Broken Hill & District Hearing Resource Centre Inc Kuusa Services Centre The Australian Conservation Foundation Inc. 2007–08 346,247 380 69 150 76 97 306 107 79.65 0.087 Amount $60,000 $50,000 $7,900 $7,900 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 Total AUSTRALIAN ETHICAL INVESTMENT LTD $200,891 Corporate governance statement 2008 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. This statement has been prepared with reference to the first edition of the Council’s Principles of Good Corporate Governance and Best Practice Recommendations. Australian Ethical will report against the second edition of the Principles in its 2009 annual report. 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 (i.e. a non-executive director) and who: 1. 2. is not a substantial shareholder of the company or an officer of, or otherwise associated directly with, a substantial shareholder of the company; 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; 3. 4. 5. 6. 7. 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 two months of the reporting period, the board comprised an equal number of executive directors and independent directors (three out of six directors on the board). For the remaining months of the reporting period, the board comprised a majority of executive directors. Pauline Vamos (independent) resigned from the board effective 31 August 2007. Anne O’Donnell (executive director) was appointed by the board on 29 May 2008. On 1July 2008 the Board appointed Dr Les Coleman and André Morony to the board. Both Dr Coleman and Mr Morony are non-executive directors. Mr Morony is an independent director. Dr Coleman serves on the Investment Policy Committee of United Funds Management Ltd, a wholly owned subsidiary of SMF Funds Management Limited, which is a substantial shareholder. As Dr Coleman is associated with a substantial shareholder (albeit in a limited way), the board does not classify Dr Coleman as an independent director. Caroline Le Couteur has advised the board that she will not stand for re-election at the forthcoming Annual General Meeting. It is therefore anticipated that at the conclusion of the upcoming Annual General Meeting, the board will consist of four non-executive directors (three of whom will be regarded as independent) and three executive directors. The board’s view is that this composition represents a good long term balance between executive and non-executive / independent directors, with the right mix of independence, AUSTRALIAN ETHICAL INVESTMENT LTD 10 competence and alignment with the Australian Ethical Charter. 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, will be delegated to the chair or will be performed by one or more delegated directors. During the reporting period, the board delegated responsibility to Justine Hickey (independent) and Howard Pender (executive) to undertake a search for further directors, which lead to the appointments of Dr Coleman and Mr Morony. 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. During the reporting period, the code of conduct required 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’. 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 three members. Up to 31 August 2007, the audit committee consisted of independent directors and the company secretary. From 31 August, the audit committee consisted of one independent director (Ms Naomi Edwards), one external member (Ms Ruth Medd) and the company secretary. Ms Medd is chair of the company’s subsidiary, Australian Ethical Superannuation Pty Ltd. 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 (it has one external member (Ms Medd) and the company secretary is also a member). Ms Medd chairs the committee. 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; at a number of meetings the committee speaks directly to the external auditor in the absence of executive management. In accordance with the Corporations Act 2001 and the The audit committee considers the performance and 11 AUSTRALIAN ETHICAL INVESTMENT LTD 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 written policies and procedures designed to ensure compliance with the ASX Listing Rule disclosure requirements. The disclosure policy appears on the company’s website. 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. 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 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. The chief executive officer and risk management 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. 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 sustainability report is produced using the Global Reporting Initiative guidelines. 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. 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; to review on a quarterly basis the company’s risk registers and recommend to the board any changes to those risk registers. The company has established an ‘AEI Guide for Risk Management’ and sectional 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 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; 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 AUSTRALIAN ETHICAL INVESTMENT LTD 12 • 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” During the relevant period Australian Ethical sought to apply remuneration policy for all staff in an equitable fashion. During the reporting period, remuneration for one senior manager included an ‘at risk’ component linked to performance criteria. The performance criteria required the manager to achieve business development objectives on: funds under management; engagement with asset consultants, ratings agencies and institutional clients; and development of marketing strategies / collateral. These performance conditions were chosen to align the manager’s objectives with those set out in the company’s strategic plan. The chief executive officer was responsible for assessing whether the performance conditions were met. The chief executive officer was able to assess both the quantitative and qualitative aspects of the performance criteria. The company may consider performance based incentive arrangements for other staff in the future. All permanent staff (including the chief executive officer and executive directors) received a cash salary and participated in the staff bonus and employee share ownership plan. Except for the senior manager described above, cash remuneration was 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, have amounted to 5% of the existing ordinary share capital was issued to staff. All permanent, non probationary staff as at 30 June of the relevant year were eligible to participate in the plan. The exercise price of the options was set at 10% in excess of the market price of the shares. The number of options received by an individual staff member depended on their salary level. The options are not exercisable for a period of three years from their date of grant. In most circumstances, options will lapse where an employee’s employment ceases before the options are exercisable. The options confer no voting or dividend rights. 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 Justine Hickey. 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. 13 AUSTRALIAN ETHICAL INVESTMENT LTD Directors’ report The directors of Australian Ethical Investment Limited, the controlling entity, present their report on the company and its controlled entity for the financial year ended 30 June 2008. 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 2008 and to the date of this report are: Name Time in Office Caroline Le Couteur 17 years James Thier Howard Pender Naomi Edwards Pauline Vamos Justine Hickey Anne O’Donnell Dr Les Coleman André Morony 17 years 17 years 3 years 1 years 1 years < 1 years < 1 years < 1 years Resigned 31 August 2007 Appointed 29 May 2008 Appointed 1 July 2008 Appointed 1 July 2008 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 six public offer ethical investment trusts (registered managed investment schemes). The controlling entity’s wholly owned subsidiary, Australian Ethical Superannuation Pty Limited, was trustee of the Australian Ethical Retail Superannuation Fund during the financial year. Other than as described, there were no other significant changes in the nature of the controlling entities activities during the year. Operating results The consolidated entity (Australian Ethical Investment Limited 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 2008 of $1,651,790. This result is a 9% decrease on the result of $1,819,177 for the previous financial year. Review of operations The 2008 result reflects the volatility and uncertainly that has been experienced in global financial markets following the “sub-prime’ crisis in the USA. Whilst the Australian Ethical trusts had no direct exposure to any of these financial instruments the trusts have experienced the impact of falling asset prices and depressed investor sentiment. The company experienced strong growth in funds under management during the first half of the financial year with funds under management peaking at $645M. This growth and the AUSTRALIAN ETHICAL INVESTMENT LTD 14 revenue generated cushioned the impact of downward market movements and a decline in investor confidence which occurred in the second half of the financial year. As at 30 June 2008, funds under management totalled $562M (ex. distribution). This compares with funds under management of $552M (ex. distribution) as at 30 June 2007. The aggregate distribution amount paid for the current period was $9M, compared to a distribution the previous year of $59M. The flatness in funds under management, combined with some increased costs and additional expenditure on business development resulted in an increase in the costs to income ratio - increasing from 76% in 2007 to 80%. This increase is in contrast with the steadily declining trend experienced in the past 4 financial years. Return on equity was also impacted falling from 26.1% to 20.6% The superannuation business (Australian Ethical Superannuation Pty Ltd) again contributed significantly to the group result and superannuation continues to be a growth engine of the business. The 2007/2008 financial year results include one-off costs incurred in transitioning the administration of the superannuation fund to a new administration provider. As required under the company’s constitution, an amount of $200,891 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 2007/2008 financial year the company did not make any significant changes to its core funds management operations. Mr David Ferris resigned as Chief Investment Officer early in 2008. Mr James Jordan undertook the role until it was filled in August 2008. Mr Paul Harding-Davis was appointed as Head of Distribution in January 2008. The appointment of Mr Harding- Davis supports the company’s stated strategy of broadening our reach beyond our direct retail customer base. There were no other significant changes in management or organisational structure. The company continues to apply the principles of the Australian Ethical Charter in its investment and business activities. 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 in an investment portfolio comprising triple A rated (or equivalent) 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 $5.0M 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 A significant portion of investment in the Australian Ethical trusts comes from retail clients. The company’s retail investors have traditionally been “sticky” in times of market downturn and historically the trusts have not experienced significant outflows at these times. However, Australian Ethical is not immune to market volatility and negative investor sentiment. It is highly likely that these factors will impact FUM, revenue and profitability during the 2008/2009 financial year. Offsetting these impacts are savings which the company expects will flow from recent changes to custodian and superannuation administration providers. The company will continue to focus on building and servicing its clients and streamlining its processes, ensuring scalability and efficiency of operations. The company reviews its product offerings annually and this analysis forms the basis of decisions regarding product offerings. The company believes that the rise in shareholder activism offers some exciting opportunities to leverage its expertise and to expand its customer base. The company is currently exploring the possibility of bringing to market a product which will take advantage of this trend. administrator. AES believes that United has failed to provide the contracted services and that it has valid claims for damages against United. United is seeking payment of monies invoiced to AES for the service in the reporting period (approximately $250,000). Notwithstanding the dispute, and without any prejudice to AES’ claims, AES has recognised as expenses the disputed invoices in its 2008 financial statements consistent with a conservative accounting approach. Similarly, a liability for the disputed amount will be included on the AES balance sheet. The approach of AES is reflected in the consolidated financial statements. AES and United continue to discuss the claims and disputed invoices. 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 2008, other than as outlined in this report. 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. 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. Events subsequent to balance date Dr Les Coleman and Mr André Morony were appointed to the Board effective 1 July 2008. Mr Martin Halloran has been appointed as the company’s Chief Investment Officer. He will take up his role in late August 2008. The directors have declared that a final dividend of $1.20 per ordinary share (fully franked) be paid to shareholders. This is in addition to the interim dividend of 45 cents per ordinary share paid in March 2008. The total dividend for the year will be $1.65 per share. 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 2007-08 dividend, or on the dividend payout ratio for the 2007-08 year. On 27 August 2008 the board authorised the grant of 49,200 options to staff. The terms and conditions attached to the options are as set under the employee share ownership scheme approved at the 2005 annual general meeting, except that the board has decided to include two additional terms. The additional terms relate to vesting due to a change of control and a first right of refusal to buy-back shares issued upon the exercise of the options where the company has an employee share buy-back in place. As these terms were not included in the scheme approved at the 2005 annual general meeting, the issue of these options will count towards the 15% limit imposed under Listing Rule 7.1 of the Australian Securities Exchange. The board intends to seek member approval under Listing Rule 7.4 for the grant of these options at the 2008 annual general meeting. If approval is obtained, the issue of the options will no longer count towards the 15% limit. Australian Ethical Superannuation Pty Ltd (‘AES’) is in dispute with United Funds Management Limited (United), its former fund 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 or officer is actually reimbursed for legal costs as they fall due under an insurance policy or otherwise. 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. 15 AUSTRALIAN ETHICAL INVESTMENT LTD Directors’ particulars Qualifications, experience and special responsibilities Caroline Le Couteur B.Ec., B.Bus., Grad.Dip.(Env. & Dev. Man.), FAICD Executive Director Howard Pender B.A.(Hons) 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. 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. James Thier B.Sc.(Hons) Executive Director Naomi Edwards BSc (Hons) FIA FIAA FNZSA Non-Executive Chair 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. In 2007 James, undertook a Churchill Fellowship to examine the mechanisms of shareholder advocacy. Naomi is a Fellow of the Institute of Actuaries 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 undertaken pro bono work providing actuarial assistance for environmental and social organisations. Naomi chairs the remuneration committee and is a member of the audit, investment and compliance and risk committees. Naomi is also a director of Australian Ethical Superannuation Pty Ltd. AUSTRALIAN ETHICAL INVESTMENT LTD 16 Justine Hickey BCom GAICD SAFin ASIP(UK) Non-Executive Director Dr Les Coleman B.Eng.(Hons), B.Sc.(Hons), M.Ec., PhD 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 was recently appointed a director of the Rio Tinto Staff Fund Pty Ltd . Justine chairs the investment committee and is a member of the finance and remuneration committees. Les has been a trustee of two superannuation funds, a director of ten companies involved in finance, retail and distribution and has over 20 years experience in senior management positions. Since 2004, Les has been a Senior Lecturer at the Finance Department of the University of Melbourne and has published many articles and papers, particularly in the area of risk management. For four years Les was a weekly columnist with The Australian newspaper. Anne O’Donnell BA MBA FAICD Managing Director André Morony B.Ec.(Hons), M.Ec. Non-Executive Director Prior to joining Australian Ethical, Anne held a senior management position with the ANZ Bank and has extensive knowledge of the finance industry. Whilst at ANZ, Anne was a staff elected director of the ANZ Staff Superannuation Fund, which managed $1B on behalf of 24,000 members. Anne is the chair of the finance committee, and attends meetings of the company’s investment, compliance and risk, and remuneration committees. She is also a director of the Community CPS Australia Credit Union. André started his 30 years in the finance sector at the Commonwealth Treasury, representing Australia at the Organisation for Economic Cooperation and Development before taking various roles at Bankers Trust (BT) including as Chief Economist and Chief Investment Officer. From 2001- 2006, André was Chief Investment Officer at ARIA, and he currently sits on the boards of ABN AMRO Investments Australia, Challenger LBC Terminals Jersey Limited and Steam Packet Group. He is also on the Catholic Superannuation Fund investment committee. 17 AUSTRALIAN ETHICAL INVESTMENT LTD 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. attended No. eligible to attend No. eligible to attend No. attended No. eligible to attend No. attended No. attended No. eligible to attend No. eligible to attend No. attended No. eligible to attend No. attended Caroline Le Couteur James Thier Howard Pender Naomi Edwards Pauline Vamos Justine Hickey Anne O’Donnell 7 7 7 7 1 7 2 7 7 7 7 1 7 2 - - - 3 1 - - - - - 3 1 - - -- - 9 - 1 9 1 - - 9 - 1 8 1 - 4 4 4 - 4 - - 4 4 4 - 4 - - - - 2 - 2 - - - - 2 - 2 - - 4 - 3 1 - - - 4 - 3 1 - - Directorships held in other listed entities in the last three years Name Pauline Vamos Justine Hickey André Morony Entity Plan B Group Holdings Limited Hyperion Flagship Investments Limited Macquarie Private Capital Group Limited Directors’ relevant interests in securities of the company Parent Entity Directors Fully paid ordinary shares numbers Share option numbers Caroline Le Couteur James Thier Howard Pender Justine Hickey Anne O’Donnell 49,436 49,739 49,712 700 8,982 5,944 4,749 3,913 - 8,940 Directors’ holdings in registered schemes made available by the company Caroline Le Couteur holds 918.6569 units in the Australian Ethical Balanced Trust. Anne O’Donnell holds 4061.8233 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. 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. AUSTRALIAN ETHICAL INVESTMENT LTD 18 Board meetings Audit committee Finance committee Investment committee Remuneration committee Compliance committee No. No. No. No. No. No. No. No. No. No. No. No. eligible attended eligible attended eligible attended eligible attended eligible attended eligible attended to attend to attend to attend to attend to attend to attend Caroline Le Couteur James Thier Howard Pender Naomi Edwards Pauline Vamos Justine Hickey Anne O’Donnell 7 7 7 7 1 7 2 7 7 7 7 1 7 2 - - - 3 1 - - - - - 3 1 - - -- - 9 - 1 9 1 - - 9 - 1 8 1 - 4 4 4 - 4 - - 4 4 4 - 4 - - - - 2 - 2 - - - - 2 - 2 - - 4 - 3 1 - - - 4 - 3 1 - - Names and positions of key management personnel (directors and named executives) at any time during the financial year Parent entity directors Name Position Share option numbers Caroline Le Couteur Director, executive James Thier Director, executive Howard Pender Director, executive Naomi Edwards Chairperson, non-executive Pauline Vamos Justine Hickey Chairperson, non-executive Resigned 31 August 2007 Director, non-executive Anne O’Donnell Managing Director, executive Appointed 29 May 2008 Les Coleman André Morony Executives Name David Ferris Philip George Ruth Medd Gary Leckie Director, non-executive Appointed 1 July 2008 Director, non-executive Appointed 1 July 2008 Position Investment manager Resigned 27 March 2008 Company secretary / legal counsel Director of wholly-owned entity Chief financial officer Paul Harding Davis Head of Distribution Appointed 14 January 2008 Tim Xirakis Finance Investment Manager The Corporations Act 2001 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 also requires disclosure of the remuneration of: 1. 2. each of the 5 named company executives who receive the highest remuneration for that year; and if consolidated financial statements are required—each of the 5 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. In particular, directors are paid for serving on board committees. There are currently no arrangements to pay any director a retirement benefit. Secretaries, senior managers, executive directors and group executives During the reporting period, the company’s remuneration policy was to treat all staff (including secretaries, senior mangers, 19 AUSTRALIAN ETHICAL INVESTMENT LTD executive directors and group executives) in an equitable fashion. During the reporting period, remuneration for one senior manager included an ‘at risk’ component linked to performance criteria. All permanent staff (including secretaries, senior mangers, executive directors) received a cash salary and participated in a staff bonus and employee share ownership scheme. The arrangements did not apply to non executive directors. For the one senior manager with an at risk component, the performance conditions required the manager to achieve business development objectives on: funds under management; engagement with asset consultants, ratings agencies and institutional clients; and development of marketing strategies / collateral. These performance conditions were chosen to align the manager’s objectives with those set out in the company’s strategic plan. The managing director was responsible for assessing whether the performance conditions were met. The managing director was able to assess both the quantitative and qualitative aspects of the performance criteria. The company’s general 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” 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. As part of this process it benchmarks its remuneration levels and its policies on employee benefits and work / life balance. Individual staff remuneration is 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 bonus 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 an employee share ownership scheme which operated during the reporting period, a pool of options which would, if exercised, amount to 5% of the company’s existing ordinary share capital were issued to staff. All permanent, non- probationary staff were eligible to participate in the plan. The options were issued for nil consideration and the price at which the options are exercisable was 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 depended 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 AUSTRALIAN ETHICAL INVESTMENT LTD 20 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. 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, except that an individual performance based element was introduced for one senior manager during the reporting period. Dividends through the same period have increased from a dividend out of the profits of the 2001/2002 year of 20 cents per share to a dividend out of the 2006/2007 year profits of 192 cents per share. The dividend declared by the directors for the 2007/2008 year is 165 cents per share. 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 30 June 2008 Closing Daily Price $12.50 $11.30 $13.00 $17.20 $28.50 $48.00 $34.00 The company’s earnings over the last five years are as follows: Year 2003/2004 Adoption of AIFRS 2004/2005 2005/2006 2006/2007 2007/2008 Earnings $459,761 $784,419 $1,362,612 $1,819,177 $1,651,790 Remuneration details for the year ended 30 June 2008 Parent entity directors’ remuneration S hort-term em ployee benefits 2008 C as h S alary S T I O th er P os t E m - ploym ent benefits S u p er O ther T erm ination S hare-bas ed P aym ent S 300A (1)(e) S 300A (1)(e)(vi) Long-term B enefits B enefits P ro p o rtio n o f V alu e o f o p tio n s rem u n eratio n as p ro p o rtio n o f B o n u s O p tio n s T o tal p erfo rm an c e rem u n eratio n % an d F ees $ c as h b o n u s $ $ $ C aroline Le C outeur Jam es T hier H oward Pender N aom i Edwards Pauline Vam os Justine H ickey Anne O 'D onnell T otal G eorge Pooley C aroline Le C outeur Jam es T hier H oward Pender N aom i Edwards Pauline Vam os Justine H ickey * T otal 2007 142,503 157,324 159,245 58,416 9,249 26,651 213,858 767,246 19,749 142,449 143,516 138,954 39,300 52,223 17,314 553,505 6,000 4,800 3,900 6,000 20,700 5,500 3,575 9,075 - - - - - - - - - - - - - - - - - - - - - - - - 13,230 13,566 13,420 5,257 750 2,408 18,760 67,391 - 12,017 11,804 11,633 3,150 4,205 741 43,550 $ 3,544 3,191 3,171 6,250 16,156 3,431 2,016 2,089 7,536 - - - - - - - $ S h ares $ - - - - - - - - - - - - - - 3,759 - - - - - - - - - - - - - - - $ 15,044 12,743 12,709 25,410 65,906 7,907 5,928 6,082 - - - - - - - $ 180,321 191,624 192,445 63,673 9,999 29,059 270,278 937,399 19,749 171,304 167,023 162,333 42,450 56,428 18,055 related % - - - - - - - - - - - - - - 8.3 6.6 6.6 9.4 4.6 3.5 3.7 - - - - - - - 3,759 19,917 637,342 Named executives remuneration (including other key management personnel) O ther T erm ination S hare-bas ed P aym ent S 300A (1)(e) S 300A (1)(e)(vi) S hort-term em ployee benefits C as h S alary an d F ees S T I O th er c as h b o n u s P os t E m - ploym ent benefits S u p er Long-term B enefits B enefits $ $ $ $ $ $ 2008 2007 D avid F erris Philip G eorge R uth M edd G ary Leckie T im Xirakis Paul H arding D avis T otal Anne O 'D onnell D avid F erris M ark Batem an Philip G eorge R uth M edd G ary Leckie T otal 165,939 177,416 35,488 152,178 160,430 91,566 783,017 190,804 158,681 140,481 162,880 28,500 118,374 799,720 - - - - 6,000 6,000 6,000 16,000 34,000 5,500 5,500 5,500 5,500 22,000 - - - - - - - - - - - - 10,938 15,365 3,194 13,594 15,381 8,950 67,422 17,259 13,843 7,076 14,088 1,800 10,257 64,323 - - - - 3,643 4,572 3,515 1,749 13,479 5,659 5,046 3,503 2,849 17,057 P ro p o rtio n o f V alu e o f o p tio n s rem u n eratio n as p ro p o rtio n o f O p tio n s T o tal p erfo rm an c e rem u n eratio n % $ $ related % 20,378 20,740 14,843 14,918 70,879 12,043 9,307 7,916 9,754 5,974 - - - 203,140 223,164 38,682 191,187 200,244 118,265 974,682 231,265 192,167 160,973 195,725 30,300 142,954 - - - - - 13.5 - - - - - - 10.0 9.3 7.8 7.5 - - 5.2 4.8 4.9 5.0 - 4.2 B o n u s S h ares $ 5,885 - - - - - - - - - - 5,885 5,290 5,290 44,994 953,384 - - - - - - - - - - - - - - Cash bonus compensation benefits Details of cash bonuses paid to key management personal are included in the remuneration tables set out above. The annual staff cash bonuses were paid on 24 September 2007. The cash bonus for Mr Harding-Davis was paid on 13 June 2008. The nature of the cash bonuses and the criteria used to determine the amount of the payments are detailed in the remuneration policy and in the discussion on performance based remuneration and company performance. Analysis of bonuses included in remuneration The vesting profile of short term-incentive bonuses are detailed below. No amounts vest in future financial years in respect of the short term-incentive bonuses for the 2008 year. 21 AUSTRALIAN ETHICAL INVESTMENT LTD S hort term incentive bonus C as h bonus (1) P erform ance bonus ($) % ves ted in year % forfeited in year (2) P arent E ntity Directors Caroline Le Couteur James Thier Howard Pender Anne O'Donnell Nam ed executives (including other key m anagem ent pers onnel) Philip George Gary Leckie Tim Xirakis Paul Harding Davis 6000 4800 3900 6000 6000 6000 6000 - - - - - - - - 16000 100% 100% 100% 100% 100% 100% 100% 69% - - - - - - - 31% (1) Details of cash and performance bonus have been provided in the director's report under remuneration policy (2) The amounts forfeited are due to the performance or service criteria not being met in relation to the current financial year Equity based remuneration Equity based remuneration consists of grants of options under the company’s employee share ownership plan. Details of the employee share ownership plan (including the service and performance criteria) are provided in the section on remuneration policy above and in Note 24 of the attached financial report. Options over ordinary shares granted as compensation during reporting period P arent E ntity Direc tors Caroline Le Couteur James Thier Howard Pender Naomi Edwards Pauline Vamos Justine Hickey Anne O'Donnell Number of options ves ted during 2008 Number of options granted during 2008 (1) 2,513 2,058 861 - - - 2,865 8,297 1,791 1,517 1,513 - - - 3,025 7,846 G rant date 24/09/2007 24/09/2007 24/09/2007 24/09/2007 Named exec utives (inc luding other key management pers onnel) David Ferris Philip George Ruth Medd Gary Leckie Tim Xirakis Paul Harding Davis 2,551 - - 1,275 - - 3,826 2,426 2,469 - 1,767 1,776 - 8,438 24/09/2007 24/09/2007 - 24/09/2007 24/09/2007 - Fair value per option at grant date (2) ($) E xerc is e pric e per option ($) Firs t exerc is e /expiry date Las t exerc is e /expiry date 8.40 8.40 8.40 - - - 8.40 8.40 8.40 - 8.40 8.40 - 57.57 57.57 57.57 - - - 57.57 57.57 57.57 - 57.57 57.57 - 24/09/2010 23/12/2010 24/09/2010 23/12/2010 24/09/2010 23/12/2010 - - - 24/09/2010 23/12/2010 - - - 24/09/2010 23/12/2010 24/09/2010 23/12/2010 - 24/09/2010 23/12/2010 24/09/2010 23/12/2010 - - - (1) Each option above is granted by Australian Ethical Investment Limited (AEI) and is for one ordinary share in AEI. (2) Options were granted as part of remuneration and the recipient did not otherwise pay for the grant of the options. Exercise of options during the reporting period During the reporting period the following shares were issued on the exercise of options previously granted as compensation. There are no amounts unpaid on the shares. AUSTRALIAN ETHICAL INVESTMENT LTD 22 P arent E ntity Directors Num ber of s hares Caroline Le Couteur James Thier Howard Pender Anne O'Donnell Nam ed executives (including other key m anagem ent pers onnel) David Ferris Gary Leckie 2513 2058 861 2865 2551 1275 A m ount paid $ /s hare 16.28 16.28 16.28 16.28 16.28 16.28 Analysis of options over ordinary shares granted as compensation Details of vesting profiles of options granted as compensation are detailed below: P arent E ntity Directors O ptions granted % ves ted in year % forfeited in year Caroline Le Couteur James Thier Howard Pender Anne O'Donnell O ption S eries AEFAI AEFAQ AEFAS AEFAT AEFAI AEFAQ AEFAS AEFAT AEFAI AEFAQ AEFAS AEFAT AEFAI AEFAQ AEFAS AEFAT Num ber 2513 2243 1910 1791 2058 1800 1432 1517 861 931 1469 1513 2865 3006 2909 3025 Nam ed executives (including other key m anagem ent pers onnel) David Ferris Philip George Gary Leckie Tim Xirakis AEFAI AEFAQ AEFAS AEFAT AEFAQ AEFAS AEFAT AEFAI AEFAQ AEFAS AEFAT AEFAS AEFAT 2551 2611 2248 2426 1550 2356 2469 1275 1387 1443 1767 1387 1776 Date 23/09/2004 21/09/2005 22/09/2006 24/09/2007 23/09/2004 21/09/2005 22/09/2006 24/09/2007 23/09/2004 21/09/2005 22/09/2006 24/09/2007 23/09/2004 21/09/2005 22/09/2006 24/09/2007 23/09/2004 21/09/2005 22/09/2006 24/09/2007 21/09/2005 22/09/2006 24/09/2007 23/09/2004 21/09/2005 22/09/2006 24/09/2007 22/09/2006 24/09/2007 F inancial years in w hich grant ves ts 23/09/2007 21/09/2008 22/09/2009 24/09/2010 23/09/2007 21/09/2008 22/09/2009 24/09/2010 23/09/2007 21/09/2008 22/09/2009 24/09/2010 23/09/2007 21/09/2008 22/09/2009 24/09/2010 - - - - - - - - - - - - - - - - - 100% 100% 100% - - - - - - - - - 23/09/2007 21/09/2008 22/09/2009 24/09/2010 21/09/2008 22/09/2009 24/09/2010 23/09/2007 21/09/2008 22/09/2009 24/09/2010 22/09/2009 24/09/2010 100% - - - 100% - - - 100% - - - 100% - - - 100% - - - - - - 100% - - - - - Modification of terms of options Terms of options issued under the employee share ownership plan were not altered or modified during the reporting period. Analysis of movements in options The movement in options during the reporting period (by value) is set out below: 23 AUSTRALIAN ETHICAL INVESTMENT LTD G ranted as part of R emuner- ation (1) $ V alue of Options ex- erc is ed in Fin Y ear (2) $ V alue of Options Laps ed in Fin Y ear (3) $ P arent E ntity Direc tors Caroline Le Couteur James Thier Howard Pender Naomi Edwards Pauline Vamos Justine Hickey Anne O'Donnell 15,044 12,743 12,709 - - - 25,410 65,906 Named exec utives (inc luding other key management pers onnel) David Ferris Philip George Ruth Medd Gary Leckie Tim Xirakis Paul Harding Davis 20,378 20,740 - 14,843 14,918 - 70,879 94,790 77,628 30,755 - - - 108,068 311,241 91,122 - - 45,543 - - 136,665 - - - - - - - - 47,588 - - - - - 47,588 (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 2010/11 year when the options are exercisable. (2) Values are based on the number of options excercised 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) David Ferris 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 Hedging policy On 27 August 2008, the board introduced a policy whereby directors and executives participating in the company’s equity- based plans are prohibited from entering into any transaction which would have the effect of hedging or otherwise transferring to any other person the risk of any fluctuation in the value of any unvested entitlement in the company’s securities. 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. Except as discussed below, 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. For one senior manager, the performance related component of their remuneration accounted for 13.5% of their total remuneration. 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: AUSTRALIAN ETHICAL INVESTMENT LTD 24 Name Duration of contract Period of termination notice required Termination payment provided for under the contract Caroline Le Couteur Ongoing James Thier Howard Pender Anne O’Donnell Gary Leckie Philip George Paul Harding Davis Tim Xirakis Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing 4 weeks 2 weeks 12 weeks 12 weeks 2 weeks 12 weeks 12 weeks 4 weeks None except for accrued leave and any payment in lieu of notice. Non-director committee members and company secretary particulars Name Qualifications Experience Ruth Medd B.Sc., Dip Comp Science, CPA, MAICD, Non-Executive Chairper- son Philip George BSc LLB Ruth is currently on the board of the NFAW Ltd (National Foundation for Australian Women), WOB Pty Ltd and the Infants Home, Ashfield. Ruth is Chair of the company’s wholly-owned subsidiary Australian Ethical Superannuation Pty Ltd. Ruth also Chair’s the company’s audit and compliance and risk committees. Ruth started in IT in the 1970s. Since then she has been a senior public servant, a broadcasting regulator, the inaugural Company Secretary at Telstra and the Executive Director of an industry association. 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 asso- ciate 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 Exercise Period Exercise Price AEFAQ AEFAS AEFAT Totals 36,080 36,357 41,837 114,274 21/9/08 to 20/12/08 22/9/09 to 21/12/09 24/9/10 to 23/12/10 $24.82 $32.50 $57.57 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 2008 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. Shares issued upon exercise of options Amount paid per share 34,506 $16.28 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 25 AUSTRALIAN ETHICAL INVESTMENT LTD 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. Other specific information Other specific information has been disclosed in the attached financial report as referenced in the table below: Disclosure Dividends Options – issued during the financial year and since the end of the financial year Financial Statement Reference Note 5 Note 24 Signed in accordance with a resolution of the Board of Directors. Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Howard Pender Director Dated: 26 September 2008 AUDITOR’S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT 2001 AUIDTOR’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 2008 there have been: (i) no contraventions of the auditor independence requirements as set out in the 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. P.L. WHITEMAN PARTNER Date 26 September 2008 Liability limited by a scheme approved under Professional Standards Legislation AUSTRALIAN ETHICAL INVESTMENT LTD 26 Date 26 September 2008 Liability limited by a scheme approved under Professional Standards Legislation 16 Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Financial statements for year ended 30 June 2008 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 Balance Sheet as at 30 June 2008 Notes Consolidated Entity Parent Entity 2008 $ 2007 $ 2008 $ 2007 $ 7 8 9 10 11 9 12 13 15 14 15 2,552,238 1,812,410 1,748,774 248,491 1,672,464 1,487,185 1,830,430 183,644 1,049,089 1,246,646 1,748,774 204,245 643,525 1,379,251 1,830,430 162,275 6,361,913 5,173,723 4,248,754 4,015,481 4,205,801 94,744 489,784 4,328,138 158,000 392,435 4,205,801 410,744 485,584 4,328,138 474,000 391,385 4,790,329 4,878,573 5,102,129 5,193,523 11,152,242 10,052,296 9,350,883 9,209,004 2,115,330 110,702 432,097 1,681,284 279,307 331,953 2,048,476 110,702 432,097 1,869,901 279,307 331,953 2,658,129 2,292,544 2,591,275 2,481,161 33,285 79,338 33,248 42,371 33,285 79,338 33,248 42,371 112,623 75,619 112,623 75,619 2,770,752 2,368,163 2,703,898 2,556,780 8,381,490 7,684,133 6,646,985 6,652,224 16 16 16 5,740,791 334,821 2,305,878 4,949,532 200,687 2,533,914 5,740,791 334,821 571,373 4,949,532 200,687 1,502,005 8,381,490 7,684,133 6,646,985 6,652,224 The accompanying notes form part of these financial statements 17 27 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Income Statement for the year ended 30 June 2008 Notes Consolidated Entity Parent Entity 2008 $ 2007 $ 2008 $ 2007 $ Revenue 3 14,064,371 12,467,148 10,618,566 9,870,632 Commissions paid to advisers ( 284,450) ( 260,467) ( 75,477) ( 61,390) External services ( 2,981,077) ( 2,803,039) ( 1,066,833) ( 1,077,421) Employee benefits expense ( 6,257,080) ( 4,976,651) ( 6,241,118) ( 4,956,578) Depreciation Occupancy costs Communication costs Other expenses ( 285,736) ( 225,320) ( 285,736) ( 225,320) ( 196,340) ( 316,447) ( 187,013) ( 310,894) ( 839,144) ( 597,178) ( 789,496) ( 543,537) ( 568,428) ( 407,195) ( 538,793) ( 380,558) Profit before tithe and income tax expense 2,652,116 2,880,851 1,434,100 2,314,934 Tithes expense 1 (k) ( 200,891) ( 224,964) ( 200,891) ( 224,964) Profit before income tax 2,451,225 2,655,887 1,233,209 2,089,970 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 The accompanying notes form part of these financial statements ( 799,435) ( 836,710) ( 284,015) ( 384,218) 1,651,790 1,819,177 949,194 1,705,752 1,651,790 1,819,177 949,194 1,705,752 170.3 165.4 194.8 185.6 AUSTRALIAN ETHICAL INVESTMENT LTD 28 18 Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Statement of Changes in Equity for the year ended 30 June 2008 Notes Consolidated Entity Parent Entity 2008 $ 2007 $ 2008 $ 2007 $ Total equity at beginning of financial period 7,684,133 6,273,783 6,652,224 5,355,299 Available-for-sale investments: Valuation gains/(losses) taken to equity Transferred to profit or loss on sale ( 60,166) - 3,811 7,464 ( 60,166) - 3,811 7,464 Employee share options 176,266 96,607 176,266 96,607 Income tax on items taken directly to or transferred directly from equity 18,034 ( 1,143) 18,034 ( 1,143) Net income recognised directly in equity 134,134 106,739 134,134 106,739 Profit for the financial year 1,651,790 1,819,177 949,194 1,705,752 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 Total equity at the end of the financial period Total recognised income and expense for the financial year is attributable to: Equity holders of the parent 1,785,924 1,925,916 1,083,328 1,812,491 791,259 ( 1,879,826) ( 1,088,567) 321,109 ( 836,675) ( 515,566) 791,259 ( 1,879,826) ( 1,088,567) 321,109 ( 836,675) ( 515,566) 16 8,381,490 7,684,133 6,646,985 6,652,224 1,785,924 1,785,924 1,925,916 1,925,916 1,083,328 1,083,328 1,812,491 1,812,491 The accompanying notes form part of these financial statements 19 29 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Cash flow statement for the year ended 30 June 2008 Notes Consolidated Entity Parent Entity 2008 $ 2007 $ 2008 $ 2007 $ 14,899,240 ( 11,606,829) - 285,547 ( 1,047,296) ( 221,168) ( 224,964) 12,535,315 ( 9,467,091) - 286,760 ( 992,589) ( 192,285) ( 173,132) 11,173,592 ( 9,389,198) 500,000 195,822 ( 423,764) ( 221,168) ( 224,964) 9,679,684 ( 7,770,366) 942,248 232,674 ( 644,781) ( 192,285) ( 173,132) 21 (b) 2,084,530 1,996,978 1,610,320 2,074,042 1,117,397 ( 184,139) ( 1,100,000) 66,438 1,192,683 ( 1,974,986) ( 500,000) 15,070 1,117,397 ( 184,139) ( 1,100,000) 66,438 1,192,683 ( 1,974,986) ( 500,000) 15,070 Cash flows from operating activities Receipts from operations Payment to suppliers & employees Dividends received Interest/distributions received Income tax paid Bonus Tithe Net cash provided by (used in) operating activities Cash flows from investing activities Proceeds from sale of investments Purchase of property, plant & equipment Purchase of investments Repayment of loans Net cash provided by (used in) investing activities ( 100,304) ( 1,267,233) ( 100,304) ( 1,267,233) Cash flows from financing activities Proceeds from share issue Share buy-back payment Dividends paid 954,328 ( 178,954) ( 1,879,826) 392,921 ( 92,761) ( 836,675) 954,328 ( 178,954) ( 1,879,826) 392,921 ( 92,761) ( 836,675) Net cash provided by (used in) financing activities ( 1,104,452) ( 536,515) ( 1,104,452) ( 536,515) Net increase (decrease) in cash held 879,774 193,230 405,564 270,294 Cash at beginning of financial year 1,672,464 1,479,234 643,525 373,231 Cash at end of financial year 21 (a) 2,552,238 1,672,464 1,049,089 643,525 The accompanying notes form part of these Financial Statements AUSTRALIAN ETHICAL INVESTMENT LTD 30 20 Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2008 Notes to the financial statements for the year ended 30 June 2008 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 Limited and its wholly owned entity Australian Ethical Superannuation Pty Ltd and Australian Ethical Investment Limited as an individual parent entity. Australian Ethical Investment Limited 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 Limited and its wholly owned entity, and Australian Ethical Investment Limited 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 Limited 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 Limited and its wholly owned entity Australian Ethical Superannuation Pty Limited. 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. 21 31 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2008 Note 1 - Statement of significant accounting policies - continued b) Income tax - continued 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 Limited 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 Limited is responsible for recognising the current and deferred tax assets and liabilities for the tax consolidated group. The group notified the Australian Tax 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 Limited on the same day that Australian Ethical Investment Limited pays the ATO for group tax liabilities. c) Property, plant and equipment 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. 1The 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 22 AUSTRALIAN ETHICAL INVESTMENT LTD 32 Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2008 Note 1 - Statement of significant accounting policies - continued c) Property, plant and equipment - continued 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 Furniture, fittings and equipment Software Straight line 2.5%-20% 10% to 37.5% Straight line/Diminishing value 18.75% to 40% 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. d) Financial instruments 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. 23 33 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2008 Note 1 - Statement of significant accounting policies – continued d) Financial instruments– continued 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 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 Limited 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 Limited 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. AUSTRALIAN ETHICAL INVESTMENT LTD 34 24 Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2008 Note 1 - Statement of significant accounting policies – continued f) Employee benefits - continued 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 result 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 Australian Tax Office. 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". 25 35 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2008 Note 1 - Statement of significant accounting policies - continued 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 assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. 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. Key estimates – annual leave and long service leave provision Future average salary increases have been estimated at 5%. This increase has been incorporated into the annual leave and long service leave provision. Key judgements Australian Ethical Investment Limited has a loan receivable from the Centre for Australian Ethical Research recorded as an asset on its balance sheet for $105,946. The directors have determined that no provision for impairment is required for this loan. 26 AUSTRALIAN ETHICAL INVESTMENT LTD 36 Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2008 Note 2 - Auditors' remuneration Remuneration of the auditors for: Audit services - Auditing the financial report - Auditing the Custodian transition - Auditing the Administrator transition - 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 - Member & Withdrawal Fees - Other fees - Dividend from wholly owned subsidiary - Interest/distributions - Wholly owned entity fee - Other revenue Consolidated Entity Parent Entity 2008 $ 2007 $ 2008 $ 2007 $ 34,000 5,000 10,000 5,000 30,500 - - 4,600 30,000 2,500 - 5,000 27,000 - - 4,600 3,000 7,000 3,450 16,500 3,000 7,000 3,000 15,000 10,737,924 1,861,872 444,513 653,080 - 272,819 - 94,163 14,064,371 9,429,699 1,837,914 380,693 453,283 - 275,292 - 90,267 12,467,148 5,127,584 501,215 - 653,080 500,000 183,095 3,563,238 90,354 10,618,566 4,935,178 484,170 - 453,283 942,248 221,205 2,752,623 81,925 9,870,632 Total revenue 14,064,371 12,467,148 10,618,566 9,870,632 27 37 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2008 Note 4 - Income tax expense 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% (2007:30%) - 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 2008 $ 2007 $ 2008 $ 2007 $ 878,691 (79,256) 799,435 915,888 (79,178) 836,710 360,121 (76,106) 284,015 468,196 (83,978) 384,218 735,368 - 796,766 - - 369,963 - 626,991 - - 515,420 452,641 1,077 52,879 10,616 799,940 1,455 28,982 11,119 838,322 1,062 52,879 10,616 949,940 1,413 28,982 11,119 1,121,146 - - ( 505 ) - ( 738 ) ( 874 ) ( 150,000 ) - ( 505 ) ( 282,675) ( 738) ( 874) Income tax expense attributable to entity 799,435 836,710 799,435 836,859 Allocation of income tax expense to wholly owned entity under the tax sharing agreement - - ( 515,420) ( 452,641) Income tax expense attributable to entity 799,435 836,710 284,015 384,218 The applicable weighted average effective tax rates are as follows: 33% 32% 23% 18% AUSTRALIAN ETHICAL INVESTMENT LTD 28 38 Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2008 Note 5 - Dividends Distributions paid Final fully franked dividend of 152 (2007: 50) cents per share franked at the tax rate of 30% (2007:30%) Interim fully franked dividend of 45 (2007: 40) cents per share franked at the tax rate of 30% (2007:30%) Declared final fully franked dividend of 120 (2007: 152) cents per share franked at the tax rate of 30% (2007: 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: Note 6 - Earnings per share (a) Earnings used to calculate basic EPS and dilutive EPS (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 Note 7 - Cash and cash equivalents Cash on hand Cash at bank Deposits at call Consolidated Entity Parent Entity 2008 $ 2007 $ 2008 $ 2007 $ 1,437,025 458,631 1,437,025 458,631 442,801 1,879,826 378,044 836,675 - 442,801 1,879,826 378,044 836,675 1,180,804 1,436,566 1,180,804 1,436,566 1,616,777 1,543,029 506,059 1,110,718 615,671 927,358 1,651,790 1,819,177 970,020 934,002 28,745 45,960 998,765 979,962 300 222,476 2,329,462 2,552,238 300 32,114 1,640,050 1,672,464 300 4,793 1,043,996 1,049,089 300 3,165 640,060 643,525 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. 29 39 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2008 Note 8 - Trade and other receivables Trade receivables Other Amounts receivable - wholly owned entity 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 - Units in unit trust at fair value - Shares in wholly owned entity at cost Consolidated Entity Parent Entity 2008 $ 2007 $ 2008 $ 2007 $ 1,785,510 26,900 - 1,812,410 1,446,758 40,427 - 1,487,184 1,100,702 26,900 119,044 1,246,646 1,114,818 40,427 224,006 1,379,251 1,737,572 105,946 1,843,518 94,744 1,748,774 1,815,158 173,272 1,988,430 158,000 1,830,430 2,053,572 105,946 2,159,518 410,744 1,748,774 2,131,158 173,272 2,304,430 474,000 1,830,430 1,100,000 287,681 - 349,891 - 1,737,572 500,000 408,502 502,030 404,626 - 1,815,158 1,100,000 287,681 - 349,891 316,000 2,053,572 500,000 408,502 502,030 404,626 316,000 2,131,158 The money market deposits are at fixed interest rates of 8% and 8.13% with maturity dates of 25 November 2008 and 24 September 2008. They are investment grades rated by S&P. The mortgage backed security is at a floating interest rate of BBSW + 0.39, has a maturity date of 24 October 2009 and is investment grade rated by S&P. b. Loans comprise - Loan to other entity 105,946 105,946 173,272 173,272 105,946 105,946 173,272 173,272 The loan is provided to an independent entity. The loan is at a fixed interest rate of 9.0% and matures 1 August 2015. Note 10 - Other current assets Other Prepayments 6,102 242,389 248,491 22,160 161,484 183,644 6,102 198,143 204,245 22,160 140,115 162,275 AUSTRALIAN ETHICAL INVESTMENT LTD 30 40 Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2008 Note 11 - Property, plant and equipment Consolidated Entity Parent Entity 2008 $ 2007 $ 2008 $ 2007 $ Land and buildings Leasehold land At cost Total land Buildings At cost Accumulated depreciation Total buildings Total land and buildings Plant and equipment At cost Accumulated depreciation Total plant and equipment 230,000 230,000 230,000 230,000 230,000 230,000 230,000 230,000 2,784,117 ( 157,503 ) 2,626,614 2,784,117 ( 83,191 ) 2,700,926 2,784,117 ( 157,503) 2,626,614 2,784,117 ( 83,191) 2,700,926 2,856,614 2,930,926 2,856,614 2,930,926 2,075,929 ( 726,742) 1,349,187 1,991,339 ( 594,127) 1,397,212 2,075,929 ( 726,742) 1,349,187 1,991,339 ( 594,127) 1,397,212 Total property, plant and equipment 4,205,801 4,328,138 4,205,801 4,328,138 Movements in carrying amounts Land Balance at the beginning of year Additions Disposals Carrying amount at the end of year Buildings Balance at the beginning of year Additions Disposals Depreciation expense Carrying amount at the end of year Plant and equipment Balance at the beginning of year Additions Disposals Depreciation expense Carrying amount at the end of year 230,000 - - 230,000 230,000 - - 230,000 230,000 - - 230,000 230,000 - - 230,000 2,700,926 - ( 74,312) 2,626,614 2,056,435 705,040 - ( 60,549) 2,700,926 2,700,926 - ( 74,312) 2,626,614 2,056,435 705,040 - ( 60,549) 2,700,926 1,397,212 176,524 ( 13,125) ( 211,424) 1,349,187 326,718 1,244,747 ( 9,482) ( 164,771) 1,397,212 1,397,212 176,524 ( 13,125) ( 211,424) 1,349,187 326,718 1,244,747 ( 9,482) ( 164,771) 1,397,212 Total 4,205,801 4,328,138 4,205,801 4,328,138 31 41 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2008 Consolidated Entity Parent Entity 2008 $ 2007 $ 2008 $ 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 Amounts payable to wholly owned entity Note 14 - Deferred tax liabilities The balance comprises temporary differences attributable to: Amounts recognised in profit or loss: Stamp duty on leasehold property: Tax deferred income 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 398,213 60,267 15,600 474,080 313,517 67,488 11,430 392,435 398,213 60,267 11,400 469,880 313,517 67,488 10,380 391,385 15,704 - 15,704 - 489,784 392,435 485,584 391,385 392,435 81,645 15,704 489,784 315,246 79,178 ( 1,989) 392,435 391,385 78,495 15,704 485,584 309,396 83,978 ( 1,989) 391,385 288,131 1,532,119 295,080 - 2,115,330 300,249 1,143,015 238,020 - 1,681,284 173,630 1,131,715 295,080 448,051 2,048,476 195,764 974,252 238,020 461,865 1,869,901 30,896 2,389 33,285 33,248 2,389 ( 2,352) 33,285 30,896 - 2,352 33,248 30,896 - 2,352 33,248 30,896 2,389 33,285 33,248 2,389 ( 2,352) 33,285 30,896 - 2,352 33,248 30,896 2,352 33,248 AUSTRALIAN ETHICAL INVESTMENT LTD 32 42 Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2008 Note 15 - Provisions 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 945,109 (2007 - 916,559) shares Issue of share capital Shares issued during the year under the employee share ownership plan: 302 on 24 September 2007 (share bonus) 24,644 on 9 November 2007 (options exercised) 8,413 on 30 November 2007 (options exercised) 1,449 on 18 December 2007 (option exercised) 703 on 22 September 2006 (share bonus) 24,146 on 31 October 2006 (options excercised) 2,781 on 28 November 2006 (options exercised) 6,851 on 15 January 2007 (option exercised) 2,798 on 5 October 2007 (dividend reinvestment plan) 4,711 on 19 October 2007 (dividend reinvestment plan) Shares bought back during the year 3,423 on 17 October 2007 5,931 on 31 October 2006 Balance 30 June 984,003 (2007 - 945,109) shares Consolidated Entity Parent Entity 2008 $ 2007 $ 2008 $ 2007 $ 432,097 432,097 331,953 331,953 432,097 432,097 331,953 331,953 79,338 79,338 42,371 42,371 79,338 79,338 42,371 42,371 4,949,532 4,628,423 4,949,532 4,628,423 - - - - 20,949 340,700 39,240 96,667 15,885 401,204 136,964 23,590 - - - - 146,279 246,291 - - - - 20,949 340,700 39,240 96,667 15,885 401,204 136,964 23,590 - - - - 146,279 246,291 ( 178,954) - ( 176,447) ( 178,954) - ( 176,447) 5,740,791 4,949,532 5,740,791 4,949,532 33 43 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2008 Consolidated Entity Parent Entity 2008 $ 2007 $ 2008 $ 2007 $ Note 16 - Movements in equity - continued At 30 June 2008 there were 984,003 fully paid ordinary shares which have no par value. For detailed information relating to the Australian Ethical Investment Limited 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 24 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, othewise each shareholder has one vote on a show of hands. 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 in an investment portfolio comprising triple A securities, senior bank debt and corporate rated debt. Detail provided in Note 9 and 11. Management effectively manages the group's capital by assessing the group's financial risks and adjusting its capital structure in response to changes in these risks and in the market. These responses include the management of distributions to shareholders and share issues. Maintenance of a certain level of capital is a condition of the company’s Australian Financial Services Licence. The company currently meets the $5.0M capital requirement above which no extra capital is required as a result of increased funds under management. Reserves Available-for-sale financial assets revaluation reserve Balance 1 July Gross gains/ (losses) Revaluation - gross Deferred tax Balance 30 June $ 5,489 - ( 60,166) 18,034 ( 36,643) ( 4,643) 7,464 3,811 ( 1,143) 5,489 5,489 - ( 60,166) 18,034 ( 36,643) ( 4,643) 7,464 3,811 ( 1,143) 5,489 Share-based payments reserve Balance 1 July Option expense Balance 30 June 195,198 176,266 371,464 98,591 96,607 195,198 195,198 176,266 371,464 98,591 96,607 195,198 Total Reserves 334,821 200,687 334,821 200,687 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 2,533,914 1,651,790 1,651,790 ( 1,879,826) 2,305,878 1,551,412 1,819,177 1,819,177 ( 836,675) 2,533,914 1,502,005 949,194 949,194 ( 1,879,826) 571,373 632,928 1,705,752 1,705,752 ( 836,675) 1,502,005 8,381,490 7,684,133 6,646,985 6,652,224 AUSTRALIAN ETHICAL INVESTMENT LTD 34 44 Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2008 Consolidated Entity Parent Entity 2008 $ 2007 $ 2008 $ 2007 $ 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 Consolidated Entity operated within one business segment (Investment Management) which represents its primary segment reporting format and one geographical segment. Note 20 - Contingencies Superannuation Administrator Transition The wholly owned entity, Australian Ethical Superannuation Pty Ltd (AES) is in dispute with United Funds Management Limited (United), its former fund administrator. AES believes that United has failed to provide the contracted service and that it has valid claims for damages against United. United is seeking payment of monies invoiced to AES for the service in the reporting period (approximately $250,000). Notwithstanding the dispute, and without any prejudice to AES’ claims, AES has decided to recognise as expenses the disputed invoices in its 2008 financial statements consistent with a conservative accounting approach. Similarly, a liability for the disputed amount will be included on the AES balance sheet. The approach of AES will be reflected in Australian Ethical’s consolidated financial statements. AES and United continue to discuss the claims and disputed invoices. Should the dispute be resolved in AES' favour there may be a positive impact on future income statements. There is also the potential for future costs arising from issues related to the superannuation administration transition. 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 6,740,858 10,702,251 17,443,109 4,588,418 64,692,694 69,281,112 1,392,523 9,127,716 10,520,239 3,790,889 58,707,157 62,498,046 Rights of indemnities for liabilities incurred by the Consolidated Entity and parent entity not recorded in the financial statements were: 17,443,109 69,281,112 10,520,239 62,498,046 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. 35 45 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2008 Consolidated Entity Parent Entity 2008 $ 2007 $ 2008 $ 2007 $ Note 21 - 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 300 222,476 2,329,462 2,552,238 300 32,114 1,640,050 1,672,464 300 4,793 1,043,996 1,049,089 300 3,165 640,060 643,525 (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 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 Changes in assets and liabilities (Increase) decrease in trade & other receivables (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 1,651,790 1,819,177 949,194 1,705,752 285,736 137,111 13,125 - 176,266 15,885 225,320 107,797 9,442 11,178 96,607 20,949 285,736 137,111 13,125 - 176,266 15,885 225,320 107,797 9,442 11,178 96,607 20,949 ( 324,337) ( 64,846) ( 79,256) 441,661 ( 168,605) - ( 448,190) ( 43,936) ( 79,178) 354,513 ( 76,701) - 28,531 ( 41,970) ( 78,495) 186,191 ( 63,643) 2,389 ( 236,395) ( 68,032) ( 81,989) 461,987 ( 176,585) ( 1,989) Net cash provided by (used in) operating activities 2,084,530 1,996,978 1,610,320 2,074,042 (c) Non-cash financing and investing activities Shares in Australian Ethical Investment Limited, to the value of $15,885 (2007: $20,949) were issued in lieu of staff bonus. AUSTRALIAN ETHICAL INVESTMENT LTD 36 46 Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2008 Consolidated Entity Parent Entity 2008 $ 2007 $ 2008 $ 2007 $ Note 22 – Related party transactions Australian Ethical Investment Limited is the ultimate parent entity and owns 100% of Australian Ethical Superannuation Pty Ltd. Australian Ethical Investment Limited 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 Limited and its wholly owned entity, Australian Ethical Superannuation Pty Ltd during the financial year consisted of: (i) Transactions whereby Australian Ethical Investment Limited provides management services to the wholly owned entity on a cost recovery basis (ii) Transactions between Australian Ethical Investment Limited 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 Limited 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 Limited receives a dividend from the wholly owned entity referred to in note 3. b) Outstanding balances at balance date: Amounts receivable from wholly owned entity: Management services Taxation Amounts payable to wholly owned entity: Management fee income - - - - - - - - - - - - - - 3,563,238 2,752,622 515,420 452,641 5,580,164 4,521,499 500,000 942,248 - 119,045 - 224,006 448,051 461,865 37 47 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2008 Consolidated Entity Parent Entity 2008 $ 2007 $ 2008 $ 2007 $ Note 22 – Related party transactions - continued Australian Ethical Trusts a) Transactions between Australian Ethical Investment Limited, as Responsible Entity, and the Australian Ethical Trusts during the financial year consisted of: (i) Transactions whereby Australian Ethical Investment Limited 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 - Australian Ethical Large Companies Shares Trust - Australian Ethical International Equities Trust - Australian Ethical World Trust (ii) Transactions whereby Australian Ethical Investment Limited 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 - Australian Ethical World Trust (iii) Transactions whereby Australian Ethical Investment Limited 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 - Australian Ethical World Trust (iv) Transaction whereby Australian Ethical Investment Limited received a distribution payment from the Australian Ethical Balanced Trust b) Outstanding balances at balance date: 4,085,481 3,612,192 280,875 2,578,524 353,350 27,055 3,980,112 3,062,362 242,336 2,309,552 11,081 - 4,085,481 3,612,192 280,875 2,578,524 353,350 27,055 3,980,112 3,062,362 242,336 2,309,552 11,081 - 155,976 123,000 49,074 77,646 56,112 21,576 109,596 87,684 39,468 61,392 - - 155,976 123,000 49,074 77,646 56,112 21,576 109,596 87,684 39,468 61,392 - - 54,023 57,610 4,717 46,028 376 5,442 53,633 51,031 4,077 43,916 14 - 54,023 57,610 4,717 46,028 376 5,442 53,633 51,031 4,077 43,916 14 - 7,311 6,237 7,311 6,237 AUSTRALIAN ETHICAL INVESTMENT LTD 38 48 Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2008 Consolidated Entity Parent Entity 2008 $ 2007 $ 2008 $ 2007 $ Note 22 – Related party transactions - continued 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 - Australian Ethical Large Companies Shares Trust - Australian Ethical International Equities Trust - Australian Ethical World Trust Value of units held by Australian Ethical Investment Limited in the Australian Ethical Balanced Trust Distribution receivable from AEBT 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 Limited and the Australian Ethical Retail Superannuation Fund related to investment services/ (rebate of investment services). Outstanding balances at balance date: Amounts receivable from/ (payable to ) the Australian Ethical Retail Superannuation Fund: Investment services/ (rebate of investment services fee). 358,820 338,548 31,780 218,099 48,120 5,386 412,430 354,366 27,400 258,332 12,204 - 358,820 338,548 31,780 218,099 48,120 5,386 412,430 354,366 27,400 258,332 12,204 - 348,891 7,400 404,626 26,591 349,891 7,400 404,626 26,591 30,175 ( 26,978) 21,284 ( 1,465) - - - - 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. 39 49 AUSTRALIAN ETHICAL INVESTMENT LTD AUSTRALIAN ETHICAL INVESTMENT LIMITED A.B.N. 47 003 188 930 AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2008 Note 23 - 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 Pauline Vamos Caroline Le Couteur James Thier Howard Pender Naomi Edwards Justine Hickey Anne O Donnell Position Chairperson, non-executive Director, executive Director, executive Director, executive Chairperson, non-executive Director, non-executive Managing Director ,executive Other key management personnel Name David Ferris Gary Leckie Tim XIrakis Philip George Paul Harding Davis Position Investment manager Chief financial officer Finance Investment Manager Company secretary / legal counsel Head of Distribution b) Key management personnel compensation Resigned 31 August 2007 Appointed 29 May 2008 Resigned 28 March 2008 Short term employment benefits Post-employment benefits Other long-term benefits Termination benefits Share-based payments Total compensation Economic Entity 2008 $ 2007 $ 1,569,475 131,619 29,635 - 142,670 1,873,399 1,355,800 106,073 24,593 - 73,960 1,560,426 Parent Entity 2008 $ 2007 $ 1,474,892 123,519 29,635 - 142,670 1,770,716 1,264,631 98,873 24,593 - 73,960 1,462,057 Further key management personnel remuneration details are included in the Remuneration Report section of the Directors' Report. c) Equity instrument disclosures relating to key management personne Option Holdings Number of options held by key management personnel. Granted as Remun- eration Balance 01.07.07 Options Exercised Net Change Other Balance 30.06.08 Total Vested 30.06.08 Total Exer- cisable 30.06.08 Total Unexer- cisable 30.06.08 Parent Entity Directors Caroline Le Couteur James Thier Howard Pender Naomi Edwards Pauline Vamos Justine Hickey Anne O'Donnell 6,666 5,290 3,261 - - - 8,780 1,791 1,517 1,513 - - - 3,025 Named executives (including other key management personnel David Ferris Philip George Ruth Medd Gary Leckie Tim Xirakis Paul Harding Davis Total 7,410 3,906 - 4,105 1,387 - 40,805 2,426 2,469 - 1,767 1,776 - 16,284 ( 2,513) ( 2,058) ( 861) - - - ( 2,865) ( 2,551) - - ( 1,275) - - ( 12,123) - - - - - - - ( 7,285) - - - - - ( 7,285) 5,944 4,749 3,913 - - - 8,940 - - - - 6,375 - 4,597 3,163 - 37,681 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 5,944 4,749 3,913 - - - 8,940 - 6,375 - 4,597 3,163 - 37,681 AUSTRALIAN ETHICAL INVESTMENT LTD 5050 40 AUSTRALIAN ETHICAL INVESTMENT LIMITED A.B.N. 47 003 188 930 AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2008 Note 23 - Key management personnel compensation - continued Shareholdings Number of Shares held by key management personnel. Share in lieu of Cash Bonus Options Exercised/ Shares Issued (1) Net Change Other (2) Balance 30.06.08 (3)&(4) - - - - - - - - - - - - - - 2,513 2,058 861 - - - 2,865 2,551 - - 1,275 - - 12,123 - 5 ( 783) - - - - ( 888) 6 - ( 1,275) - - ( 2,935) 49,436 64,218 51,743 - - 700 8,982 7,102 381 - - - - 182,562 Parent Entity Directors Caroline Le Couteur James Thier Howard Pender Naomi Edwards Pauline Vamos Justine Hickey Anne O'Donnell Balance 01.07.07 46,923 62,155 51,665 - - 700 6,117 Named executives (including other key management personnel David Ferris Philip George Ruth Medd Gary Leckie Tim Xirakis Paul Harding Davis Total 5,439 375 - - - - 173,374 (1) The amount paid for shares issued on exercise of options is $16.28 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 key management personal including their related parties as required by AASB 124 Related Party Disclosures. Note 24 - Share based payments The following share-based payment arrangements existed at 30 June 2008: On 21 September 2005, 43,664 share options were granted to non-probationary employees under the Australian Ethical Investment Limited 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 Limited. 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 Limited 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 Limited. The options hold no voting or dividend rights. On 24 September 2007, 47,255 share options were granted to non-probationary employees under the Australian Ethical Investment Limited 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 $57.57 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 Limited. The options hold no voting or dividend rights. On 24 September 2007, 302 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 703 ordinary shares, with the same terms, were granted on 22 September 2006). During October 2007 Australian Ethical Investment Limited issued 7,509 new shares at an issue price of $52.28, under the company's Dividend Reinvestment Plan in respect of the dividend payable. 5151 AUSTRALIAN ETHICAL INVESTMENT LTD 41 AUSTRALIAN ETHICAL INVESTMENT LIMITED A.B.N. 47 003 188 930 AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2008 Note 24 - Share based payments - continued Outstanding at the beginning of the financial year Granted Forfeited Exercised Expired Outstanding at year-end Number of Options 118,995 47,255 ( 14,991) ( 34,506) - 116,753 Consolidated Entity 2008 2007 Parent Entity 2008 2007 Weighted Average Exercise Price $ Weighted Average Exercise Price $ Number of Options Number of Options Weighted Average Exercise Price $ Weighted Average Exercise Price $ Number of Options 25.11 57.57 37.17 52.57 113,946 18.91 118,995 25.11 113,946 18.91 45,825 ( 6,998) ( 33,778) 32.50 25.56 14.11 47,255 ( 14,991) ( 34,506) 57.57 37.17 52.57 45,825 ( 6,998) ( 33,778) 32.50 25.56 14.11 39.31 118,995 25.11 116,753 39.31 118,995 25.11 Exercisable at year-end - - - - - - - - There were 34,506 options exercised during the year ended 30 June 2008. The weighted average share price calculated as at exercise dates of these options was $52.57. The options outstanding at 30 June 2008 had a weighted average exercise price of $39.31 and a weighted average remaining contractual life of 1.53 years. Exercise prices range from $24.82 to $57.57 in respect of options outstanding at 30 June 2008 The weighted average fair value of the options granted during the year was $8.40 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 $52.00 22.50% 6.35% 3.25 years $57.57 Included under employee benefits expense in the income statement is : $15,885 (2007: $20,949) relating to equity-settled share-based payment transactions for staff bonus; and $176,266 (2007: $96,607) relating to options issued under the employee share ownership plan. AUSTRALIAN ETHICAL INVESTMENT LTD 52 42 AUSTRALIAN ETHICAL INVESTMENT LIMITED A.B.N. 47 003 188 930 AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2008 Note 25 - 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 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: Weighted average effective interest rate 2008 % 2007 % Floating interest rate 2008 $ 2007 $ Fixed interest rate within 1 year 2008 2007 $ $ 7 8 6 7 2,551,938 637,572 1,672,164 - 1,815,158 - - 1,111,202 - - 515,272 3,189,510 3,487,322 1,111,202 515,272 - - - - - - - - Fixed interest rate within 1 to 5 years 2008 $ 2007 $ Non-interest bearing Total 2008 $ 2007 $ 2008 2007 $ $ - - 94,744 94,744 - - - - 158,000 300 1,812,410 - 300 1,487,185 - 2,552,238 1,812,410 1,843,518 1,672,464 1,487,185 1,988,430 158,000 1,812,710 1,487,485 6,208,166 5,148,079 - - 2,115,330 1,681,284 2,115,330 1,681,284 2,115,330 1,681,284 2,115,330 1,681,284 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 impairment of those assets, as disclosed in the balance sheet and notes to the financial statements. Quantitative details related to financial assets is contained in note 9. In relation to the financial asset – loan to independent entity – disclosed at note 9, the loan agreement between the parent entity and the independent entity provides for the parent to enforce a security over the independent entity’s assets should a default in loan payments occur. The independent entity has not defaulted in loan payments over the six years o the loan. Consideration of credit risk in relation to financial assets is incorporated into the finance committee risk considerations mentioned earlier in this note. The defined investment parameters governing the approval of financial asset investments incorporates a sliding scale of risk exposure as follows: - The maximum exposure to any one issuer is to be no greater than twenty five per cent of the portfolio; - Minimum amount to be held in cash, AAA securities or senior bank debt is fifty per cent of the portfolio; and - Minimum amount to be held in cash, AAA securities, senior bank debt, rated corporate debt or subordinated bank debt to be eighty per cent of the portfolio. (d) Liquidity risk The group carries no borrowing debt on the balance sheet and has sufficient reserves of cash, cash equivalents and liquid investments to assess the liquidity risk as low. The cash position and cash flows are reviewed by the finance committee to ensure regulatory and future operational requirements are catered for. Trade and other payables are expected to be paid as follows: Less than 6 months 6 months to 1 year 1 to 5 years (e) Net Fair Values Consolidated Entity 2008 $ 2007 $ Parent Entity 2008 $ 2007 $ 1,423,862 691,468 - 2,115,330 1,248,572 432,712 - 1,681,284 1,527,614 520,862 - 2,048,476 1,437,189 432,712 - 1,869,901 For other assets and other liabilities the net fair value approximates their carrying value. 53 AUSTRALIAN ETHICAL INVESTMENT LTD 43 AUSTRALIAN ETHICAL INVESTMENT LIMITED A.B.N. 47 003 188 930 AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2008 Note 25 - Financial risk management - continued (f) Sensitivity analysis The group has performed a sensitivity analysis relating to its exposure to interest rate risk. This sensitivity analysis demonstrates the effect on the current year results and equity which could result from a change in the interest rate (all other variables remaining constant). The sensitivity analysis is based only on cash and investments subject to a floating interest rate. Change in profit - Increase in interest rate by 2% - Decrease in interest rate by 2% Change in equity - Increase in interest rate by 2% - Decrease in interest rate by 2% Note 26 - Change in accounting policy Consolidated Entity 2008 $ 63,790 (63,790) 2007 $ 59,746 (59,746) Parent Entity 2008 $ 2007 $ 33,733 (33,733) 39,174 (39,174) 63,790 (63,790) 59,746 (59,746) 33,733 (33,733) 39,174 (39,174) The following Australian Accounting Standards issued or amended, which are applicable to Australian Ethical Investment Limited, but are not yet effective and have not been adopted in preparation of the financial statements statements at reporting date are: AASB Amendment 2007-3 B Standard Affected AASB 107: Cash Flow Statements AASB 119: Employee Benefits AASB 127: Consolidated and Separate Financial Statements AASB 134: Interim Financial Reporting AASB 136: Impairment of Assets New Standard AASB 8: Operating Segments 2007-8 AASB 101: Presentation of Financial Statements Nature of Change in Accounting Policy and Impact Application Application Date of the Date of the Company Standard 1-Jan-09 1-Jan-09 1-Jan-09 1-Jul-09 1-Jul-09 1-Jul-09 1-Jan-09 1-Jan-09 1-Jul-09 1-Jul-09 1-Jan-09 1-Jul-09 1-Jan-09 1-Jul-09 These amendments are necessitated by the issuance of AASB 8 Operating Segments. The amendments are mainly to ensure that terminology and references related to AASB 8 are updated in the standards affected and there will be little impact on future financial reports. There will be changes to segment information (more comprehensive) in the interim financial report. The group will provide more comprehensive explicit information related to its investment management segment and its superannuation segment per the new standard. This information is implicit with this current financial report. The revised AASB 101: Presentation of Financial Statements issued in September 2007 requires the presentation of a statement of comprehensive income and makes changes to the statement of changes in equity AASB 101 AASB 101: Presentation of Financial Statements As above 1-Jan-09 1-Jul-09 2008-1 AASB 2: Share Based Payments 1-Jan-09 1-Jul-09 These amendments clarify that vesting conditions comprise service conditions and performance conditions only and that other features of a share-based payment transaction are not vesting conditions. They also specify that all cancellations, whether by the entity or by other parties, should the same accounting treatment. No impact on future financial reports. AUSTRALIAN ETHICAL INVESTMENT LTD 54 44 AUSTRALIAN ETHICAL INVESTMENT LIMITED A.B.N. 47 003 188 930 AND CONTROLLED ENTITY DIRECTORS' DECLARATION The Directors of Austalian Ethical Investment Limited declare that: 1. the financial statements and notes, as set out on pages 17 to 44 and the additional disclosures the directors' report designated as audited are in accordance with the Corporations Act 2001: 27 54 (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 2008 and of the performance for year ended on that date of the company and consolidated entity; 2. the Chief Executive Officer and Chief Finance Officer have each declared that: (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; (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 debts as and when they become due and payable. This declaration is made in accordance with a resolution of the Board of Directors. Director Dated this 26 September 2008 55 AUSTRALIAN ETHICAL INVESTMENT LTD 45 Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF AUSTRALIAN ETHICAL INVESTMENT LIMITED Report on the Financial Report 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 2008, 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. Directors' 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 In Note 1, the directors also state, in accordance with Accounting Standard AASB circumstances. 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. 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 is free from material misstatement. to obtain reasonable assurance whether the financial report In making those risk assessments, 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. 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. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. AUSTRALIAN ETHICAL INVESTMENT LTD 4656 Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001 Auditor's 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) giving a true and fair view of the Company's and Consolidated Entity's financial position as at 30 June, 2008 and of their performance for the year ended on that date; and (ii) 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 as disclosed in Note 1. Report on the Remuneration Report We have audited the Remuneration Report included in (pages 7 to 14) of the directors' report for the year ended 30 June, 2008. The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. 18 to 25 Auditor's Opinion In our opinion the Remuneration Report of Australian Ethical Investment Limited for the year ended 30 June 2008, complies with section 300A of the Corporations Act 2001. THOMAS DAVIS & CO. P.L. WHITEMAN PARTNER Chartered Accountants SYDNEY, 26 September, 2008 Liability limited by a scheme approved under Professional Standards Legislation 57 47 AUSTRALIAN ETHICAL INVESTMENT LTD Shareholder information The shareholder information set out below was current as at 24 September 2008. Twenty largest shareholders Ordinary shares Name SMF Funds Management Ltd Mr Howard Pender % Number of ordinary shares Substantial shareholders 194,021 19.70% Yes 49,821 5.06% Yes James Andrew Thier 49,767 49,436 5.05% 5.02% Yes Yes Caroline Margaret Le Couteur Mr Trevor Roland Lee Mrs Judith Margaret Burton Ms Judith Ingrouille Ajani Mr Bruce Allan Mc- Gregor & Mrs Ann Marion McGregor Gang - Gang Pty Ltd HB Sarjeant & assoc Pty Ltd Dr Edward Arthur Iceton Daisy Thier Denholm Invest- ments Pty Ltd Mr Peter Alexander Anderson Mr Philip Julian Eriksen & Mr Julian Hans Erkisen Mr Michel Beuchat & Mrs Ann Beuchat Ms Anne Maree O’Donnell Ms Susie Edwards Est Mrs Hanneliese Claire Graf Mr Rodney Matthew Myer 36,933 3.75% 33,683 3.42% 24,662 2.50% 24,447 2.48% 23,310 2.37% 19,142 1.94% 16,500 1.68% 14,479 13,690 1.47% 1.39% 10,833 1.10% 10,562 1.07% 9,667 0.98% 9,150 0.93% 7,941 7,347 0.81% 0.75% 7,332 0.74% Substantial shareholders Substantial shareholders of ordinary shares are specified in the table of the top twenty shareholders set out right. 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 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,000 – over Totals Non-marketable parcel Holders Units % 692 173,855 17.656 79 9 16 1 797 15 173,120 17.582 66,407 6.744 429,357 43.604 141,924 14.413 984,663 100.000 141 Options issued under the Employee Options Scheme Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,000 – over Totals Holders 9 27 4 0 0 Units 4,939 % 4.322 81,740 71.530 27,595 24.148 0 0 0.000 0.000 40 114,274 100.000 AUSTRALIAN ETHICAL INVESTMENT LTD 58 Corporate directory Australian Ethical Investment Ltd ABN 47 003 188 930 Company secretary Philip George Telephone: 02 6201 1994 Facsimile: 02 6201 1987 Email: 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: 02 9290 9600 02 9279 0664 PO Box R67 Royal Exchange Sydney NSW 1223 registries@registriesltd.com.au Email: 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 • to conduct our own operations in accord with the items of the Australian Ethical Charter, in particular we seek to: 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; • • • • • 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. AUSTRALIAN ETHICAL INVESTMENT LTD AUSTRALIAN ETHICAL INVESTMENT LTD australianethical investment + superannuation R 

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