Australian Ethical Investment Annual Report 2010

Plain-text annual report

australianethical ANNUAL REPORT TO SHAREHOLDERS Year ended 30 June 2010 1800 021 227 • www.australianethical.com.au australianethical investment + superannuation ® Contents Chair and Managing Director’s report Results overview Sustainability Report Corporate governance statement 2010 Directors’ report Directors’ particulars Directors’ meetings Financial statements Shareholder information Corporate directory Corporate vision and mission Charter 2 4 6 8 13 15 19 33 67 68 68 The Company will order its affairs so as to provide for and to support: a. the development of workers’ participation in the ownership and control of their work organisations and places The Company will also order its affairs so as to avoid activity which is considered to unnecessarily: i. pollute land, air or water b. the production of high quality and properly presented products and services c. the development of locally based ventures d. the development of appropriate technological systems e. the amelioration of wasteful or polluting practices ii. destroy or waste non-recurring resources iii. extract, create, produce, manufacture, or market materials, products, goods or services which have a harmful effect on humans, non-human animals or the environment iv. market, promote or advertise, products or services in a misleading or deceitful manner f. the development of sustainable land use and food production v. create markets by the promotion or advertising of unwanted products or services g. the preservation of endangered eco-systems h. activities which contribute to human happiness, dignity and education vi. acquire land or commodities primarily for the purpose of speculative gain vii. create, encourage or perpetuate militarism or engage in the manufacture of armaments i. the dignity and well being of non-human animals viii. entice people into ﬁ nancial over-commitment j. the efﬁ cient use of human waste k. the alleviation of poverty in all its forms l. the development and preservation of appropriate human buildings and landscape ix. exploit people through the payment of low wages or the provision of poor working conditions x. discriminate by way of race, religion or sex in employment, marketing, or advertising practices xi. contribute to the inhibition of human rights generally 2 AUSTRALIAN ETHICAL INVESTMENT LTD Financial summary to 30 June 2010 as at 30 June 2010 30 June 2009 30 June 2008 30 June 2007 Current assets ($’000) Non-current assets ($’000) Current liabilities ($’000) Non-current liabilities ($’000) Net assets ($’000) 6,303 4,797 2,946 98 8,056 6,362 4,790 2,658 113 8,381 5,174 4,879 2,293 76 7,684 Revenue 14.06 14.07 13.13 12.47 6,369 4,686 2,519 83 8,453 9.66 2006 2007 2008 2009 2010 Year ending 30 June Dividends paid 192 165 200 147 85 2006 2007 2008 2009 2010 Funds under management 610 572 547 614 458 2006 2007 2008 2009 2010 As at 30 June Profit after tax (NPAT) 1819.2 1651.8 1362.6 1202.8 1022.6 2006 2007 2008 2009 2010 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 200 180 160 140 120 100 80 60 40 20 0 n o i l l i m $ e r a h s r e p s t n e c Year ending 30 June Year ending 30 June Basic earnings per share 194.8 170.3 150.3 121.6 103.0 % 2006 2007 2008 2009 2010 30 27 24 21 18 15 12 9 6 3 0 Return on equity 26.1 24.1 20.6 14.8 12.5 2006 2007 2008 2009 2010 Year ending 30 June Year ending 30 June AUSTRALIAN ETHICAL INVESTMENT LTD 1 n o i l l i m $ 0 0 0 $ s t n e c 700 600 500 400 300 200 100 0 2000 1800 1600 1400 1200 1000 800 600 400 200 0 200 180 160 140 120 100 80 60 40 20 0 Chair and Managing Director’s report Naomi Edwards - Chair Phillip Vernon - Managing Director Dear Shareholder Operating environment The year under review has been characterised by an improved but still volatile operating environment in world markets and the ﬁ nalisation of a number of regulatory reviews into ﬁ nancial services which will lead to quite a changed landscape. Financial results and dividends Our net proﬁ t after tax was $1,022,555 down by 15% from the previous year. However, after taking into account some one-off adjustments (explained in detail in the annual accounts) our underlying net proﬁ t increased by 51%. Funds under management were $613.8 million, an increase of 12% over the previous year. The directors declared a total dividend of $2.00 for the year, an increase of 36% over the previous year. This comprised an interim dividend of $0.50 plus a ﬁ nal standard dividend of $0.50. A special dividend of $1.00 was declared after taking into account the capital needs of the business and other factors. A detailed explanation of the results is available in the full company annual report on our website. Community grants The company’s constitution requires 10% of operating proﬁ t (after notional tax) be provisioned for charitable and conservation purposes. In 2010 grants of $124,941 will be made. This sees our total contribution over the years of our community grants surpass $1 million. We are proud of this important milestone in our commitment to the community. Our revenues are reliant on the state of the share markets. Over the past year the market has risen from a low in March 2009 to reach a high in March 2010. This has had a positive impact on our revenues and has led to our underlying proﬁ ts increasing signiﬁ cantly compared to the previous year. However, the volatile state of the markets over the past few years have caused many investors to avoid share market investments altogether. Performance of our funds Our investment funds have continued to perform well over the longer-term. Our Smaller Companies Trust achieved 4.9% in the past year compared to 10.3% achieved by its benchmark (the S&P/ASX Small Industrials); however over three years it outperformed by 14.4% (its return was negative 3.7% compared to negative 18.1% for the benchmark). The nature of our investment style is such that our funds are less volatile than the market as a whole and will tend not to fall as far when the market is going down, but also will not necessarily perform as well when the market goes up. We remain conﬁ dent that our investment processes developed over more than 22 years will continue to provide competitive long-term investment performance to our clients. In September 2009 our Smaller Companies Trust was upgraded by Lonsec (one of the leading managed funds rating agencies) from Investment Grade to Recommended. This conﬁ rmed the steady progress we are making in strengthening our investment processes and performance. 2 AUSTRALIAN ETHICAL INVESTMENT LTD Product development Outlook, strategy and focus During the year we made some changes to our product suite to better reﬂ ect the needs of our clients. Climate Advocacy Fund The new Climate Advocacy Fund broadens our product range with a fund structured to engage with companies and put resolutions at annual general meetings. The fund aims to encourage better climate performance, especially around carbon disclosure. As an index fund, it is also an alternative to the active management of our existing product range. Global Smart Energy We also re-positioned our International Equities Trust with the theme globalsmartenergy. The International Equities Trust now targets investment in companies involved in global sustainable energy supply and demand. This dual focus on both the supply and demand side of energy use will allow it to beneﬁ t from the opportunities presented in combating and managing the impact of climate change. Property Trust The Property Trust was launched in response to demand from investors looking for an opportunity to invest in sustainable property and an alternative to the volatility of the share market. The fund’s foundation investment is the 64 Allara Street commercial building in the Canberra central business district. Superannuation options We have restructured our superannuation options to make the choices for members simpler and more aligned with offerings in the market. Two new options were introduced - the Conservative and the Climate Advocacy. Other initiatives Improved client service We have strong loyalty amongst our clients and a strong afﬁ nity with our network of advisers who support us. Our clients and advisers expect more from us than a purely transactional experience. During the year we embarked on a program to signiﬁ cantly improve our capacity to provide a better service experience. New portfolio management system A project to replace our existing portfolio management system is scheduled for completion by the end of this calendar year and is aimed at reducing risk while improving efﬁ ciency and functionality. The investment market outlook continues to be extremely uncertain. However, we believe that our investment style offers our investors consistent returns over the long-term with less volatility than the broader investment market. We have a ﬁ rm belief that our style ‘suits the times.’ Within the socially responsible investment sector, we have a strong reputation and brand built on our pioneering heritage and strong conviction to selecting ethical investments. As mainstream organisations increasingly compete with us in this sector, for our clients we continue to stand apart in commitment to sustainable investment. Our key areas of focus over the coming year are: (cid:129) (cid:129) (cid:129) investment in and continued improvement of our client service experience to encourage our clients to remain with us over the full cycle of their investing life a continued focus of marketing effort on the retail direct channel in which we have a distinct point of difference amongst our core client base, and to increase the number of default employers contributing to our super fund a continued development of our relationship with, and products for, the adviser market to take advantage of opportunities where advisers are repositioning their businesses to respond to increasing demand for true-to-label responsible investments. We thank all of our shareholders for your continued support and look forward to the coming year with strong focus and optimism. Naomi Edwards Chair Phillip Vernon Managing Director AUSTRALIAN ETHICAL INVESTMENT LTD 3 Results overview Key points: (cid:129) (cid:129) (cid:129) (cid:129) Net proﬁ t after tax (NPAT) was $1.0 million (15% lower than the previous ﬁ nancial year) Funds under management were $613.8 million (before distribution) at 30 June 2010 (an increase of 12.1% over the previous year) Revenues were $14.1 million (an increase of 7.1% over the previous year) Expenses were $12.5 million (an increase of 10.2% over the previous year) (cid:129) Return on equity with reference to NPAT (RoE) for the year is 12.5% (down from 14.8% for 2008-09). The result should be read in light of the following one-off events during the year that impacted the results, namely: (cid:129) (cid:129) Senior staff departure expenses of $482,000; and Adjustments in respect of fee errors related to the prior year but adjusted in the current year of $261,000. After taking these items into account, the result is an increase in underlying NPAT of 51% with an RoE of 18.9%. These results are summarised in the table below. 2009 2010 Change Funds under management $547.4 million $613.8 million 12% Revenue Expenses Operating proﬁ t Community grants EBITDA Depreciation/amortisation/options/rights Tax Net proﬁ t after tax Underlying proﬁ t Adjustments (gross) –Fee revenue error –Add back senior staff departure cost Tax on adjustments Net underlying proﬁ t after tax Dividend payment The Board has adopted a dividend payment policy that will target a dividend payout ratio of between 80% and 100% of net proﬁ t after tax in a given year subject to the capital requirements of the business. The Board has determined that a ﬁ nal dividend of $0.50 per share be declared resulting in a full year dividend of $1.00 per share. In addition, following a review of the balance sheet, the future capital requirements of the business and other issues, the Board has determined that a special dividend of $1.00 per share is appropriate and therefore declared. In declaring this special dividend the Board considered: (cid:129) (cid:129) (cid:129) regulatory requirements; internal operational and strategic requirements; franking account balance and value to the shareholder; 4 AUSTRALIAN ETHICAL INVESTMENT LTD $000 13,131 (10,639) $000 14,068 (11,661) 2,493 (141) 2,352 (529) (620) 1,203 (261) – 78 1,020 2,407 (125) 2,282 (676) (583) 1,023 261 482 (223) 1,543 7% (10%) (3%) 11% (3%) (28%) 6% (15%) 51% (cid:129) timing considerations including historical issues affecting the balance sheet such as the purchase of Trevor Pearcey House, the global ﬁ nancial crises and the maturity of the business; and (cid:129) the strong positive cash ﬂ ow position of the company. The dividend reinvestment plan (DRP) will not operate in respect of these payments. A summary of dividend payments related to the past two years is as follows: 2009 2010 Change Interim (cents per share) Final (cents per share) Special (cents per share) Total (cents per share) Dividend paid ($m) 15 132 - 147 1.5 50 50 100 200 2.0 % of net proﬁ t after tax 120% 197% 36% 36% 65% Comments on ﬁ nancial results (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Underlying net proﬁ t after tax improved to similar levels achieved prior to the onset of the global ﬁ nancial crisis. This is reﬂ ective of the partial recovery of global markets from a very low base reached in March 2009 to higher, yet still volatile, levels (our revenues are primarily based on funds under management and therefore sensitive to movements in the market as a whole). Funds under management increased by $66.4 million up by 12.1% over the previous year. Approximately $29.5 million of this increase was due to net inﬂ ows for the year whilst $36.9 million was due to market movements and other factors. Our net inﬂ ows were achieved in the context of a difﬁ cult market environment in which many investors were cautious and were either not investing or were withdrawing their investment from managed funds. Revenues increased by $1.0 million representing an increase of 7% over the previous year. A signiﬁ cant impact on revenue for the year were fee errors related to the prior year but adjusted in the current year amounting to $261,000. After adjusting current and prior year revenue numbers for these errors, revenue growth was 11%, roughly in-line with the growth in funds under management. Revenue margins reduced slightly due to fee discounting on entry fees due to industry trends and an increasing proportion of our business coming from the lower revenue margin wholesale market. Operating expenses increased by $1.0 million, an increase of 10% over the previous year. Expenses were signiﬁ cantly impacted by costs associated with the departure of senior staff during the year amounting to $482,000. After taking this item into account operating expense growth is 5.1% over the previous year. After adjusting for the one-off costs associated with senior staff leaving, employment costs increased by 7%. A signiﬁ cant part of this increase is attributable to non cash share-based payments expense associated with the introduction of the new employee share ownership plan aligning packages with industry norms. Superannuation administration costs increased by 8%. This reﬂ ects a 5% increase in average member numbers, and increased per member administration charges under the contract. The administration charges were increased from 1 April 2010 and reﬂ ect CPI increases. Other increases in expenses reﬂ ect increased investment in information technology to more efﬁ ciently perform our investment management and client service functions. Increased spending in sales and marketing, consulting fees and product development have also impacted on the result. Receivables are higher than the prior year with the balance relating predominantly to receivables from the managed investment schemes (concerning management fees and reimbursable expenses). This year also includes a receivable from the managed investment schemes related to the implementation costs of the new portfolio administration platform. A signiﬁ cant portion of the receivables balance has been paid in July 2010. Other comments on the year under review (cid:129) (cid:129) (cid:129) During the year Ms Anne O’Donnell stepped down from her role as Chief Executive Ofﬁ cer (CEO) of the company. Ms O’Donnell had been with Australian Ethical for nine years and through that time had both grown the company and positioned it well for the next stage of its growth. Following a comprehensive recruitment process the board was pleased to announce the appointment of Mr Phillip Vernon as the new CEO. Mr Vernon has 25 years experience in ﬁ nancial services covering funds management, capital markets and superannuation. Our Chief Investment Ofﬁ cer (CIO), Martin Halloran resigned in May 2010 to take up a senior role in the Australian Public Service. He was replaced by James Jordan, previously our Head of Research. As a result of these changes and subsequent management restructuring, some of our funds were placed on Fund Watch or Hold pending a review of the changes. The rating of the Smaller and Larger Companies Trusts were recently reinstated to Recommended and Investment grade respectively. As has been widely commented upon, there have been numerous reviews into the regulation of the ﬁ nancial services industry leading to a signiﬁ cantly changed landscape in the coming years. Although there is some uncertainty with the current political situation we are potentially looking at a changed remuneration environment for ﬁ nancial advisers, enhanced ﬁ duciary duties of advisers and superannuation trustees, the introduction of a low cost, single investment option superannuation strategy for mandatory contributions and initiatives to streamline the operations of the superannuation industry. We are supportive of measures that improve the efﬁ ciency, transparency and simplicity of products for consumers. We have been a strong advocate for paying adviser service fees over trailing commissions for many years with our systems and processes already established to cater for this trend. We have also recently introduced the low cost Climate Advocacy Fund and associated superannuation investment option. In general, we are monitoring the development of these changes closely and will further adapt our business as appropriate. AUSTRALIAN ETHICAL INVESTMENT LTD 5 Sustainability Report australianethical remains committed to conducting our operations in accordance with the Australian Ethical Charter. Below are some of the year’s sustainability highlights. Further information on our social, environmental and economic performance will be provided in the company’s 2010 sustainability report. Awards australianethical was a ﬁ nalist in two sustainability awards this year. Finalist in the ASFA Comms 09 Awards – July 2009 australianethical Superannuation was a ﬁ nalist in The Green Campaign award category at the Association of Superannuation Funds of Australia (ASFA) Comms 09 Awards. The Green Campaign category highlighted integrated campaigns that best demonstrated green initiatives. Finalist in the Sustainability Reporting category at the 2010 Australasian Reporting Awards (ARA) – June 2010 australianethical Investment’s 2009 Sustainability Report was a ﬁ nalist in the Sustainability Reporting category at the Australasian Reporting Awards (ARA). The ARA aims to promote excellence in reporting through the publication of informative and factual reports. Grants to community organisations As prescribed in australianethical’s constitution, 10 per cent of our proﬁ t is donated to charitable, benevolent and conservation purposes as part of our contribution to a positive and sustainable society. In 2010, $124,941 was paid to organisations involved in a wide range of environmental, charitable and community activities. Since the inception of our community grants, over $1 million has now been donated 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. 6 AUSTRALIAN ETHICAL INVESTMENT LTD Launch of green property fund In October 2009 Greens MLA Caroline Le Couteur ofﬁ cially launched the australianethical Property Trust at its ﬂ agship building, 64 Allara Street, Canberra. The fund seeks to invest in energy efﬁ cient buildings with a minimum 5 Star Green Star rating, as well as medical and allied health facilities and social infrastructure. A 5 Star Green Star rating from the Green Building Council of Australia (GBCA) signiﬁ es Australian Excellence. Global smart energy In January 2010 the International Equities Trust was repositioned to focus on globalsmartenergy. The new focus targets investment in companies involved in global sustainable energy supply and demand. The fund provides specialist exposure to renewable energy supply through sources such as wind, solar and geothermal, as well as exposure to efﬁ cient and adaptive technologies in areas such as electric vehicles, recycling and smart grid systems. Events subsequent to balance date Climate Advocacy Fund resolutions On 21 September 2010 the Climate Advocacy Fund launched Australia’s ﬁ rst climate change shareholder resolutions, which are aimed at protecting shareholder returns against the risks of climate change and at maximising investment opportunities. Australian-listed Woodside Petroleum, Aquila Resources, Paladin Energy and Oil Search were the companies chosen for the ﬁ rst resolutions, which focus on disclosure of emissions and strategies to manage climate change risk. australianethical is sponsoring the resolutions which also have the support of The Climate Institute. The resolutions request the disclosure of a company’s: (cid:129) (cid:129) (cid:129) carbon emissions strategies to reduce emissions capital investment assumptions around future carbon prices and its use in making long-term investment decisions. It is hoped that institutional investors such as superannuation funds will be supporters of the resolutions as they sit ﬁ rmly within the UN Principles on Responsible Investment (UN PRI). Half the funds under management of Australian asset managers fall under these principles. Community grants allocation 0 0 0 0 3 $ 0 0 0 5 $ 0 0 0 3 $ Two $30,000 special project grants will be anounced later in 2010 Engineers without Borders Australia WIRES Free the Bears Fund I Give a Buck Foundation Central Coast Kids in Need Inc. IWDA FareShare Australia Inc Activ Foundation Eurobodalla Meals on Wheels Co-op Ltd Muscular Dystrophy Queensland Animalia Wildlife Shelter Animals Asia Foundation Barefoot Economy Coast Shelter Deal Communication Centre Inc 0 0 0 2 $ RiverSmart Australia Ltd Casa Care Inc Cystic Fibrosis Qld Timor Leste Vision Inc Greening Australia Capital Region A full description of all the grant recipients is available on the website www.australianethical.com.au AUSTRALIAN ETHICAL INVESTMENT LTD 7 Corporate governance statement 2010 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 second edition of the Council’s Principles of Good Corporate Governance and Best Practice Recommendations. The Council’s Principles of Good Corporate Governance and Best Practice Recommendations provide a framework for good governance set out in eight core principles and 27 speciﬁ c recommendations. Australian Ethical has provided information on its corporate governance practices against all recommendations. This corporate governance statement will be placed onto the corporate governance section of the company’s website. Principle 1- Lay solid foundations for management and oversight Australian Ethical has formalised the functions reserved to the board and those delegated to management. Board responsibilities The Australian Ethical Board is directly responsible for the following activities. (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Setting the strategic direction of Australian Ethical Annual appraisal of the Board Approval of Board committee fees Recommendation to shareholders on the aggregate level of directors’ fees Approval of individual director fees Appointment and removal of the CEO Annual appraisal of the CEO Approval of the annual operational and capital expenditure budget and any material revisions Approval of major contracts, acquisitions or disposals which have not been approved in the budget Authorisation of Board project expenditure Accept and sign-off of the annual audited accounts and directors’ report for the Australian Ethical group Approval of the issue of shares and options Approval of signiﬁ cant changes to unit trust fees, including discount programs Approval of signiﬁ cant changes to products or product offerings Approval of the constitutional bonus and tithe amounts Approval of the terms and conditions for any employee share ownership scheme, or if shareholder approval is required, approval of recommendations to shareholders (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Approval of employee performance based remuneration programs Approval of dividend payments and any DRP Authorisation of the issue of the Trust PDS Approval of risk management and compliance programs Approval of signiﬁ cant company policies Approval of indemnity, crime, director and ofﬁ cer and similar insurance programs (cid:129) Protection and promotion of the Australian Ethical Charter The Board makes the following general delegations. Chair of the Board The chair of the board is delegated with all necessary authority to carry out the following functions: Inside the boardroom (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Acting as the link between the board and the company when the CEO is unable to perform this role; Establishing and maintaining an effective working relationship with the CEO; Setting the tone for the board, including the establishment of a common purpose; Chairing board meetings efﬁ ciently and shaping the agenda in relation to goals, strategy, budget and executive performance; Work with the Company Secretary and CEO to ensure that appropriate information is presented to the Board; Ensuring contributions by all board members and reaching consensus when making decisions; Motivating board members and where appropriate dealing with underperformance; Instituting the process for appraising board members individually and the board as a whole; Overseeing conducting and ﬁ nalising negotiations for the CEO’s employment and evaluating the CEO’s performance; (cid:129) Assisting with the selection of board committee me mbers. Outside the boardroom (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Communicating with shareholders on matters of corporate governance; Chairing shareholder meetings – annual and extraordinary general meetings (AGMs and EGMs); Ensuring compliance with ASX Listing Rules and continuous disclosure requirements; Increasingly, being available to speak with large institutional investors; In conjunction with the CEO, communicating Board views to staff. 8 AUSTRALIAN ETHICAL INVESTMENT LTD Board Committees Board committees are delegated with all necessary authority to carry out their functions as set out in Board committee charters. CEO The CEO is delegated with all necessary authority to run Australian Ethical on an ongoing, day to day basis other than: (cid:129) (cid:129) those responsibilities reserved to the Board; delegations (general or speciﬁ c) made by the Board to the Chair, Board committees, Directors or other senior executives, Speciﬁ cally the CEO is delegated with responsibility and authority for the following: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Implementing the strategic direction set by the Board; Implementing the risk management and compliance programs approved by the Board; Approval and maintenance of Expenditure and Payment Guidelines; Approval and maintenance of Employee Authorisations; Employment, termination and suspension of staff; Employee remuneration; Employee policies and procedures. The above responsibilities and delegations are made public through the publication of this statement and the inclusion of the statement in the corporate governance section of the company’s website. Evaluating the performance of senior executives The performance of executives is evaluated in accordance with the company’s annual performance review guidelines. For the CEO, the review is conducted by the board chair. For other executives, the review is undertaken by the CEO. The process is as follows: (cid:129) (cid:129) (cid:129) (cid:129) 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 speciﬁ c 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; (cid:129) (cid:129) (cid:129) review competencies and qualiﬁ cations to ensure they remain applicable to the position. If not, a training program must be developed to bring the executive to the appropriate level; and investigate what speciﬁ c training may be suitable and available; where remuneration is subject to the achievement of performance hurdles, review and discuss the achievement of those hurdles and determine the amount of any performance based remuneration. In respect of the CEO, our process is for the chair to present the results of the review to the board. The board then has an opportunity to provide feedback to the CEO, and to consider recommendations from the chair on the CEO’s remuneration package. An evaluation of the performance of senior executives was undertaken in the ﬁ nancial year in accordance with the process described above. Principle 2 - Structure the board to add value Independent directors 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. 1 of the company 2. 3. 4. 5. 6. 7. is not a substantial shareholder or an ofﬁ cer 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; 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 ofﬁ cer 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. 1 As deﬁ ned in section 9 of the Corporations Act 2001 AUSTRALIAN ETHICAL INVESTMENT LTD 9 8. These areas reﬂ ect the relationships set out as relevant in the ASX Corporate Governance Council’s Principles and Recommendations. Unless there are speciﬁ c 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 classiﬁ cation of directors who held ofﬁ ce during or since the end of the ﬁ nancial year is as follows: Resigned directorship on 11 August 2009 Name Anne O’Donnell (CEO, Managing Director) James Thier Howard Pender Naomi Edwards (Chair) Position Executive Executive, non-independent Executive, non-independent Independent Justine Hickey Independent Les Coleman Non-executive, non-independent André Morony Independent The board of Australian Ethical did not comprise a majority of independent directors during the reporting period. For the ﬁ rst six weeks of the reporting period, the board comprised four non-executive directors (three of whom are considered independent) and three executive directors. For the remainder of the reporting period, the board comprised four non-executive directors (three of whom are considered independent) and two executive directors. Les Coleman serves on an investment committee that has responsibilities for funds invested by related parties of SMF Funds Management Limited, which is a substantial shareholder in the company. As such he is associated with a substantial shareholder (albeit in a limited way), and therefore given the above criteria is not classiﬁ ed as an independent director. At the close of the reporting period, the board had an equal number of independent and non-independent directors, with four non-executive directors out of a board of six directors. The board’s approach to composition is to seek to maintain a good long term balance between executive and non- executive / independent directors, with the right mix of independence, competence and alignment with the Australian Ethical Charter. (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) 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; 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 conﬂ icts 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 fulﬁ l their duties and responsibilities as directors. Chair of the board The company’s chair was an independent director throughout the reporting period. Nomination committee The Board has a Remuneration and Nominations committee. Naomi Edwards and Justine Hickey are the members of the Remuneration and Nominations committee. Attendance at meetings is detailed in the directors’ report. A summary of the committee’s charter is available from the corporate governance section of the company’s website. Board and director evaluation The directors undertake an annual self-assessment of their collective and individual performance and seek speciﬁ c feedback from the senior management team. 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. An assessment in accordance with the above process was undertaken in the relevant period. The board carries out its responsibilities according to its Constitution, regulatory requirements, and an overall mandate, including the following: (cid:129) the board must comprise at least three and not more then ten directors; Director skills and experience The time in ofﬁ ce, skills, experience and expertise of each director in ofﬁ ce as at the date of this report is included in the directors’ report. 10 AUSTRALIAN ETHICAL INVESTMENT LTD Selection and appointment of directors and re-appointment of incumbents The Remuneration and Nominations committee has the following responsibilities: 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 consistent with the spirit of the recommendations and the committee is able to perform its functions with independence and diligence. In particular: (cid:129) (cid:129) (cid:129) (cid:129) assess the necessary and desirable competencies of directors; ensure the directors have the appropriate mix of competencies to enable the board to discharge its responsibilities effectively; develop board succession plans to ensure an appropriate balance of skills, experience and expertise is maintained; make recommendations to the board relating to the appointment and retirement of directors. The Remuneration and Nominations committee consider the above responsibilities, the current board composition, any nominations or suggestions for directorship, and the assessment of incumbent directors and make recommendations to the board on composition on an annual basis. Principle 3 - Promote ethical and responsible decision making Code of conduct The company has a code of conduct which applies to directors and staff. It is available on the company’s website. Share trading The company has a share trading policy which applies to directors and staff. It is available on the company’s website. Principle 4 - Safeguard integrity in ﬁ nancial reporting Audit committee Throughout the period, the board had an Audit committee consisting of three members being one external member (Ruth Medd, chair), one independent director (Naomi Edwards) and one non-executive director (Les Coleman). Ms Medd is the independent chair of the company’s subsidiary, Australian Ethical Superannuation Pty Ltd. The qualiﬁ cations 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 committee does not consist of only non-executive directors of the company (it has one external member, Ruth Medd who is a director, but not an executive director, of the company’s subsidiary). (cid:129) (cid:129) the committee is comprised only of non-executives; at a number of meetings the committee speaks directly to the external auditor in the absence of executive management. The committee considers the performance and independence of the external auditor over the course of a reporting period. In selecting an external auditor the board seeks competence, industry experience, integrity and independence. In normal circumstances, appointment of the external auditor will typically continue for a signiﬁ cant number of years. Rotation of external audit engagement partners will occur in accordance with the rotation requirements of the Corporations Act 2001. Principle 5 - Make timely and balanced disclosure The company has written policies and procedures designed to ensure compliance with the ASX Listing Rule disclosure requirements and accountability at senior executive level for compliance. The disclosure policy appears in the corporate governance section on the company’s website. Principle 6 - Respect the rights of shareholders The company does not have separately documented policy for shareholder communication. However, the website includes comprehensive and informative sections which provide shareholders (and others) with up-to-date information about the corporate activities of the company, including company announcements. A facility is available to shareholders to be advised via e-mail when announcements are made. The company’s website also provides shareholders with guidance on a range of issues concerning the management of their shareholdings. The company has a reqular sequence of communication points with investors and members including a newsletter, Aim High, for trust and superannuation investors, and since listing the company has also produced 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. The company 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 summary of the charter for the Audit committee appears on the company’s website. The company complies with the corporate governance guidelines for notices of meeting. AUSTRALIAN ETHICAL INVESTMENT LTD 11 Principle 8 - Remunerate fairly and responsibly Remuneration committee The board has a Remuneration and Nominations committee. The members of the committee throughout the relevant period were Naomi Edwards and Justine Hickey. Details of attendance at meetings of the committee are provided in the directors’ report. The charter for the committee is available in the corporate governance section of 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 report distinguishes the structure of non-executive director remuneration and that of executive directors. Non- executive directors receive fees for serving as a director in the form of cash payments, plus mandated superannuation contributions. They do not participate in bonus or equity schemes designed for the remuneration of executives. Principle 7 - Recognise and manage risk Policies for the oversight and management of material business risks and internal controls The company has established policies for the oversight and management of material business risks. The company’s risk management guide is available from the corporate governance section of the company’s website. The board has required management to implement a risk management system consistent with the company’s risk management guide. The board has required management to report to it on whether material business risks are being appropriately managed. During the relevant period, management has reported to the board’s Audit, Compliance and Risk committee and directly to the board as to the effectiveness of the entity’s management of its material business risks. The CEO and risk management ofﬁ cer certify to the board that its internal control and risk management systems are operating efﬁ ciently and effectively throughout the group. CEO and CFO sign-off of ﬁ nancial reports The company requires the CEO and the CFO to state in writing to the board that the company’s ﬁ nancial reports present a true and fair view, in all material respects, of the company’s ﬁ nancial condition and operating results and are in accordance with relevant accounting standards. The CEO and chief ﬁ nancial ofﬁ cer certify to the board that the integrity of the ﬁ nancial statements is founded on a sound system of risk management and internal control, and that the system is operating effectively in all material respects in relation to ﬁ nancial reporting risks. During the reporting period the company became aware of systems errors in the calculation of administration and management fees charged to the Australian Ethical managed funds, the details of which are in the ASX Announcement dated 18 June 2010. The company is migrating to a new valuation and unit pricing system with the aim of enhancing audit controls over the calculation of administration and management fees. The implementation of this new system is an opportune time to conduct a further, more fundamental review of the risk management system. This review will cover the assessment of material risks, the systems in place to monitor and manage those risks and the systems used to identify material changes to the risks faced by the company. 12 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 ﬁ nancial year ended 30 June 2010. 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 2010 and to the date of this report are: Name Time in ofﬁ ce James Thier 19 years Howard Pender 19 years Naomi Edwards 5 years Justine Hickey 3 years Anne O’Donnell 1 year Resigned 11 August 2009 Les Coleman 2 years André Morony 2 years Phillip Vernon <1 year Appointed 27 July 2010 Directors have been in ofﬁ ce since the start of the ﬁ nancial 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 ﬁ nancial year are: Name Philip George Gary Leckie Principal activities The principal activity of the controlling entity during the ﬁ nancial year was to manage seven public offer ethical managed funds (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 ﬁ nancial year. Other than as described in this report, there were no signiﬁ cant changes in the nature of the controlling entities activities during the year. Review of operations The consolidated entity, Australian Ethical (Australian Ethical Investment Limited and its wholly owned subsidiary, Australian Ethical Superannuation Pty Ltd), has recorded a consolidated net proﬁ t after income tax expense for the year ending 30 June 2010 of $1,022,555. This result is a 15% decrease on the result of $1,202,752 for the previous ﬁ nancial year. The reported result has been adversely affected by two signiﬁ cant one-off issues: (cid:129) (cid:129) Emplo yment expenses include $482,000 related to costs associated with the departure of senior staff including the managing director; and Revenue has been reduced by $261,000 related to fee errors applicable to the comparative year but only realised and booked in the current year. These issues have adversely impacted our cost to income ratio which has increased from 85% to 88% and our return on equity reducing from 15% to 13%. If these adjustments are taken into consideration our underlying result would have been $1.5 million showing an improved cost to income ratio and return on equity. Average funds under management (FUM) grew by 12.8% with the year end FUM (before distribution) being $614 million compared to $547 million for the prior year end. After the subdued economic climate during 2008-09 due to the global ﬁ nancial crises (GFC) our inﬂ ows have grown by 10% for the year ended 30 June 2010. Outﬂ ows have reduced by 13% back to pre-GFC levels. During the year Australian Ethical launched the Climate Advocacy Fund, the Australian Ethical Property Trust and established the Australian Ethical Global Smart Energy Fund. Financial Position At the year end, Australian Ethical net assets are $8,055,728. The company has no debt and is generating positive returns and cash ﬂ ow. Dividends Dividends paid or declared by the company to members since the end of the previous ﬁ nancial year were: Total amount $ Franked/ unfranked Date of payment Cents per Share Declared and paid during the ﬁ nancial year Final 2009 132 1,308,854 Franked 16/10/2009 Interim 2010 50 496,570 Franked 26/03/2010 Total 1,805,424 Declared after end of year After balance sheet date, the directors declared the following dividend: Final 2010 50 496,570 Franked 15/10/2010 Special 2010 100 993,141 Franked 15/10/2010 AUSTRALIAN ETHICAL INVESTMENT LTD 13 was not permitted by law to indemnify the director or ofﬁ cer. The company need not pay or provide a loan to the director or ofﬁ cer to the extent that the director or ofﬁ cer 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 ﬁ nancial year, indemniﬁ ed or agreed to indemnify a director, ofﬁ cer or auditor of the company or of any related body corporate against a liability incurred as such director, ofﬁ cer or auditor. Events subsequent to balance date On 27 July 2010 the company’s chief executive ofﬁ cer, Mr Phillip Vernon, was appointed Managing Director. No other matters or circumstances have arisen since the end of the ﬁ nancial year which signiﬁ cantly affected or may signiﬁ cantly 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 ﬁ nancial years subsequent to the ﬁ nancial year ended 30 June 2010, other than as outlined in this report. Likely developments and business strategies Further information about likely developments and business strategies in the operations of the consolidated entity and the expected results of those operations in future ﬁ nancial years has been addressed in the ASX announcement accompanying our Appendix 4E disclosures. Directors’ indemniﬁ cation The constitution of the controlling entity provides a general indemnity for ofﬁ cers of the company against liabilities incurred in that capacity, including costs and expenses in successfully defending legal proceedings. During the ﬁ nancial 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 ofﬁ cers of the company and of any related body corporate against a liability incurred as such a director, secretary or ofﬁ cer 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 or maintained deeds of indemnity (The Deed), insurance and access with directors and ofﬁ cers 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 beneﬁ t of a director or ofﬁ cer of the company and any subsidiary, to the extent that such coverage is available in the market on terms which the company reasonably considers ﬁ nancially 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 ofﬁ cer or lend to the director or ofﬁ cer the amount necessary to pay the reasonable legal costs incurred by the director or ofﬁ cer in defending an action for a liability incurred as a director or ofﬁ cer of the company or a subsidiary on such terms as the company reasonably determines. The director or ofﬁ cer must repay to the company such legal costs if they become legal costs for which the company 14 AUSTRALIAN ETHICAL INVESTMENT LTD Directors’ particulars Qualiﬁ cations, experience and special responsibilities Naomi Edwards B.Sc.(Hons), FIA FIAA, Non-Executive Chairperson Howard Pender B.A.(Hons), Executive Director Naomi is a Fellow of the Institute of Actuaries and has a high level of ﬁ nancial experience with practical conservation and environmental links. Naomi was Partner in charge of the ﬁ nancial services industry group within Deloitte Touche Tohmatsu in Sydney and leader of the ﬁ nancial 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 and nominations committee and is a member of the audit, compliance and risk committee. Naomi is also a director of Australian Ethical Superannuation Pty Ltd. 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 Australian Securities Exchange- listed companies. Howard is a director of Australian Ethical Superannuation Pty Ltd and is a member of the board’s investment committee. Howard was the company’s project manager for its multi-award winning 6 Star Green Star rated building and is currently the project manager for the establishment and operation of the Climate Advocacy Fund. AUSTRALIAN ETHICAL INVESTMENT LTD 15 James Thier B.Sc. (Hons), Executive Director Justine Hickey B.Com, GAICD, SAFin, ASIP, Non-Executive Director James has had academic experience as a researcher and has taught in the faculties of economics, environmental studies and geography at the University of New South Wales. 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. James was previously awarded a Churchill Fellowship to examine the mechanisms of shareholder advocacy. Justine has over 17 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. Justine is a director of the Rio Tinto Staff Super Fund. She is a member of the investment committees of Dalton Nicol Reid and the University of Melbourne. For several years, Justine has been a director of the Youth Enterprise Trust (YET), a charity that helps young people in need discover a sense of their self worth and purpose. Justine chairs the investment committee and is a member of the remuneration and nominations committee. 16 AUSTRALIAN ETHICAL INVESTMENT LTD André Morony B.Ec.(Hons), M.Ec., Non-Executive Director Les Coleman B.Eng.(Hons), B.Sc.(Hons), M.Ec., PhD, Non-Executive Director André started his 40 years in the ﬁ nance sector at the Commonwealth Treasury, where he worked in a number of ﬁ nancial policy areas and also represented Australia for three years at the Organisation for Economic Cooperation and Development in Paris. He then had various roles at Bankers Trust Australia (BT) including as Chief Economist and Chief Investment Ofﬁ cer where he was responsible for over $40 billion of investments. From 2001-2006, André was Chief Investment Ofﬁ cer at ARIA, the Australian Government employees’ $16 billion superannuation fund. André currently sits on the boards of RBS Funds Management (Australia) Ltd and is on the investment committee for GESB, the Western Australian Government employee superannuation fund. André is a member of the board’s investment committee. Les has been a trustee of two superannuation funds, and a director of ten companies involved in ﬁ nance, retail and distribution. He has over 20 years experience in senior operational, planning and ﬁ nance roles in Australia and overseas with Anglo American Corporation and ExxonMobil Corporation. He is currently a member of the investment committee of United Funds Management (a subsidiary of IOOF Holdings Limited), and since 2004 has taught in the Finance Department of the University of Melbourne. His particular research interests are corporate risk and non- ﬁ nancial indicators of superior ﬁ rm performance, especially ethics and sustainability. He is a regular contributor to print and broadcast media, including four years as a weekly columnist with The Australian newspaper, and has published several books and numerous articles and papers. Les is on the audit, compliance and risk committee. AUSTRALIAN ETHICAL INVESTMENT LTD 17 Phillip Vernon BEc MComm MBA FCPA, Managing Director Appointed 27 July 2010 Phillip has 25 years experience in ﬁ nancial services covering funds management, capital markets and superannuation. Most recently he was a member of the executive committee of Perpetual Limited heading up its Corporate Trust division. He also has extensive experience in corporate governance and industry regulation, having been the Chairman of the Australian Securitisation Forum. Phillip has a long held interest in sustainability and corporate social responsibility and is a director of Planet Ark, an environmental not for proﬁ t organisation. 18 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 ﬁ nancial year are: Director Board Investment Remuneration and nominations Audit, compliance and risk Eligible Attend Eligible Attend Eligible Attend Eligible Attend James Thier Howard Pender Naomi Edwards Justine Hickey Anne O’Donnell Andre Morony Les Coleman 9 9 9 9 2 9 9 9 9 9 9 1 8 9 - 4 - 4 - 4 - - 4 - 4 - 4 - - - 3 3 - - - - - 3 3 - - - - - 4 - - - 4 - - 4 - - - 4 Directorships held in other listed entities in the last three years Name Entity Period of directorship Justine Hickey Hyperion Flagship Investments Limited André Morony Macquarie Private Capital Group Limited 3 years 1 years Directors’ relevant interests in securities of the company Parent entity directors Fully paid ordinary shares numbers Share option numbers Performance rights 2010 2009 2010 2009 2010 2009 Directors continuing at 30 June 2010 James Thier Howard Pender Justine Hickey Directors not - continuing at 30 June 2010 Anne O’Donnell 51,367 49,852 700 51,367 50,252 700 2,881 2,839 - 4,313 4,308 - 319 320 - 10,488 11,988 5,673 8,582 - - - - - Directors’ holdings in registered schemes made available by the company None of the current directors have holdings in the registered schemes made available by the company. Several directors are members of the Australian Ethical Retail Superannuation Fund. Remuneration report The information which follows through to the end of the section titled Employment contracts of directors and senior managers is subject to audit by the external auditor. Names and positions of key management personnel (directors and named executives) at any time during the ﬁ nancial year AUSTRALIAN ETHICAL INVESTMENT LTD 19 Parent entity directors Name James Thier Howard Pender Naomi Edwards Justine Hickey Anne O’Donnell Les Coleman André Morony Executives Name Phillip Vernon Martin Halloran James Jordan Philip George Gary Leckie Paul Harding Davis Tim Xirakis Position Director, executive Director, executive Chairperson, non-executive Director, non-executive Managing director, executive Resigned 11 August 2009 Director, non-executive Director, non-executive Appointed 7 December 2009 Resigned 30 June 2010 Appointed 7 June 2010 Position Chief executive ofﬁ cer Chief investment ofﬁ cer Chief investment ofﬁ cer Head of client services and product Chief ﬁ nancial ofﬁ cer / chief operating ofﬁ cer Head of distribution Head of client relationships The Corporations Act 2001 requires disclosure of compensation of key management personnel. Key management personnel is deﬁ ned 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. each of the ﬁ ve named company executives who receive the highest remuneration for that year; and if consolidated ﬁ nancial statements are required—each of the ﬁ ve named relevant group executives who receive the highest remuneration for that year. 2. The above named directors and executives are key management personnel of the consolidated entity. 20 AUSTRALIAN ETHICAL INVESTMENT LTD Remuneration policy Directors The aggregate amount of remuneration payable to non- executive 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 non-executive 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 the remuneration and nominations committee. Within the approved aggregate amount, fees paid to individual non- executive directors for services as a non-executive director are determined by the board. During the relevant period, the chair received a higher amount, with other non-executive directors receiving an equal amount. Under the constitution, non-executive directors are also entitled to be paid reasonable expenses, remuneration for extra services and superannuation contributions. In particular, non-executive directors are paid for serving on board committees. Executive directors receive remuneration as employees of the company. There are no arrangements to pay any director a retirement beneﬁ t. 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 managers, executive directors and group executives) in an equitable fashion. All permanent staff (including secretaries, senior managers and executives) received a cash salary and participated in a staff bonus and employee share incentive scheme. The arrangements did not apply to non-executive directors. During the reporting period, remuneration for a number of senior managers included an ‘at risk’ component linked to performance criteria. For the senior managers with an at risk component, the performance conditions required the executives to achieve objectives related to: performance of the company’s managed funds; return on equity; cost to income ratio; project delivery; funds under management; engagement with asset consultants, ratings agencies and institutional clients; and development of marketing strategies/collateral. The performance conditions were chosen to align the senior managers’ objectives with those set out in the company’s strategic plan. The remuneration and nominations committee was responsible for assessing whether the managing director met their performance conditions. The managing director was responsible for assessing whether the other senior managers had met their performance conditions. In both cases, quantitative and qualitative aspects were able to be assessed. 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 beneﬁ ts 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 or declare a dividend to be paid out of proﬁ ts of any one year, they must pay a bonus1 to current employees which is set by reference to the proﬁ t 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) satisﬁ ed by the issue of shares, under employee share ownership arrangements. An employee share ownership scheme operated up to the 2008-09 year. Under the scheme a pool of options which would, if exercised, amount to 5% of the company’s existing ordinary share capital were issued to staff each year. All permanent, non-probationary staff were eligible to participate in the plan. The options2 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, the options must be exercised within a three month exercise window or they lapse. During the three month exercise window, options can also be sold once, with the transferee then needing to exercise during the three month window, or the options lapse. In most circumstances, the options also lapse where an employee’s employment ceases before the options are exercisable. The options confer no voting or dividend rights. In the current reporting period, performance rights were issued to staff under an employee share incentive scheme. This scheme was approved at the 2008 Annual General Meeting. Under the scheme participants are granted performance rights to ordinary shares, subject to meeting speciﬁ ed performance criteria over the performance period. Ordinary shares will be issued at the end of the performance period. The number of shares that a participant will ultimately receive will depend on the extent to which the performance criteria are met by the company and, as applicable, the individual employee. The scheme has two categories -a general category and an individual category. All eligible employees participate in the general category. Employees participating in the individual category are subject to individual performance criteria. 10,819 rights were issued under the general category and 5,511 were issued under the individual category. Subject to the terms and conditions of the scheme rules, the performance rights have the following attributes determining whether shares will be issued in respect of the rights: General category (cid:129) (cid:129) employment must continue until 30 June 2012; the arithmetic average return on equity over the performance period (AROE) must exceed 15% pa or no shares shall be awarded at the end of the performance period; (cid:129) if the AROE exceeds 15% pa but is less than 20% pa, half the maximum number of shares shall be awarded; 1 See Note 1(l) in the attached ﬁ nancial report 2 See Note 25 in the attached ﬁ nancial report AUSTRALIAN ETHICAL INVESTMENT LTD 21 (cid:129) (cid:129) if the AROE is equal to or greater than 20% pa the maximum number of shares shall be awarded. AROE is determined as the arithmetic average of return on equity over six month periods calculated using audited half-year ﬁ nancial statements. (cid:129) the performance period is the three ﬁ nancial years 2009-10, 2010-11 and 2011-12. Performance rights issued under the individual employee share incentive scheme are linked to the performance of the company’s managed funds as described above. The remuneration policy discussed above has broadly been in place for the current and the previous ﬁ ve ﬁ nancial years, except that individual performance based elements have been introduced for some senior managers and staff over the last three years. Individual category (cid:129) (cid:129) employment must continue until 11 November 2010; the number of shares that will be issued to each employee in respect of their performance rights under this category will be adjusted up or down by a maximum 20%, dependent on the absolute performance of one of the company’s managed investment schemes, for which the employee has responsibility or provides signiﬁ cant input. The nominated managed investment scheme has been agreed between the company and the employee. Performance will be measured over a performance period of 1 July 2009 to 30 June 2010. Performance-based remuneration and company performance The payment of the staff bonus is set by reference to the proﬁ t of the company for a relevant year. Higher company proﬁ ts in a year correspondingly increase the aggregate amount that directors could determine be paid to current employees as a bonus. Details of options previously issued under the employee share ownership plan are set out under remuneration policy above. Options issued under the employee share ownership plan were performance based in two ways. Firstly, they were subject to a three year employment condition and 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. By way of example, options issued under the scheme which became exercisable in the 2009-10 year had an exercise price of $32.50. The share price through the exercise period was for the most part either lower than the exercise period or only marginally higher. Given the share price at the time of exercise, the result is that staff did not realise any signiﬁ cant beneﬁ t from these options. Performance rights issued under the general employee share incentive scheme are performance based in two ways. Firstly, they are subject to a three year employment condition. Secondly, shares will only be issued in respect of the performance rights where return on equity meets the levels described above. 22 AUSTRALIAN ETHICAL INVESTMENT LTD Remuneration details for the year ended 30 June 2010 Parent entity directors’ remuneration Short-term beneﬁ ts Post- employment beneﬁ ts Long- term beneﬁ ts Equity-settled share- based payments Parent entity director’s remuneration Salary, fees and leave $ Cash bonus $ Other $ Super- annuation $ Long service leave $ Termination beneﬁ ts $ Shares $ Options $ Rights $ Total $ Caroline Le Couteur 2010 - - 2009 52,964 6,000 James Thier 2010 122,576 14,150 Howard Pender Naomi Edwards Justine Hickey Anne O’Donnell André Morony 2009 158,515 26,300 2010 132,334 2,626 2009 165,096 2010 81,000 2009 71,500 2010 31,950 2009 30,000 - - - - - 2010 95,938 4,000 2009 224,420 5,000 2010 25,000 2009 23,500 - - - - Les Coleman 2010 26,000 2009 24,000 Total parent entity director’s remuneration 2010 514,798 20,776 2009 749,995 37,300 - - - - - - - - - - - - - - - - - - - - 4,485 1,097 12,874 3,604 - - - - - - - - - - - 64,546 - 9,439 162,643 15,863 3,297 - 1,000 4,979 - 209,954 12,652 3,856 - - - 9,469 160,937 14,171 3,378 - 3,900 4,840 - 191,385 7,290 6,435 2,876 2,700 - - - - - - - - 8,718 2,927 235,000 - - - - - - - - - - - 88,290 - 77,935 - 34,826 - 32,700 - 346,583 20,973 6,327 - 6,000 23,726 - 286,446 2,250 2,115 2,340 2,160 - - - - - - - - 49,000 10,387 235,000 - - - - - - - - - - 27,250 - 25,615 - 28,340 - 26,160 - 18,908 848,869 68,902 14,099 - 10,900 33,545 - 914,741 AUSTRALIAN ETHICAL INVESTMENT LTD 23 Named executives remuneration (including other key management personnel) Short-term beneﬁ ts Post- employment beneﬁ ts Long- term beneﬁ ts Equity-settled share- based payments Named executives (including other KMP) remuneration Salary, fees and leave $ Other $ Cash bonus $ Super- annuation $ Long service leave $ Termination beneﬁ ts $ Shares $ Options $ Rights $ Total $ Philip George 2010 179,638 4,000 2009 177,375 6,000 Ruth Medd 2010 42,350 2009 42,000 - - Gary Leckie 2010 179,309 4,000 2009 178,422 6,000 Tim Xirakis 2010 184,881 4,000 2009 190,597 6,000 Paul Harding Davis 2010 196,696 21,500 2009 193,503 32,535 2010 245,064 3,366 2009 201,721 2010 154,135 2009 - - - - 2010 150,951 3,200 2009 - - 2010 1,333,024 40,066 2009 983,618 50,535 Martin Halloran Phillip Vernon James Jordan Named executives (including other KMP) remuneration Cash bonus compensation beneﬁ ts - - - - - - - - - - - - - - - - - - 15,836 (8,483) 15,831 3,558 3,690 3,780 - - 16,206 1,510 15,990 5,284 15,779 1,510 15,789 3,675 19,491 3,989 - - - - - - - - - - - 14,825 205,816 - 19,434 - 222,198 - - - - - - 46,040 - 45,780 - 14,973 215,998 - 17,194 - 222,890 - - 14,588 220,758 - 16,979 - 233,040 - - 15,712 257,388 19,697 3,989 - 2,770 9,498 - 261,992 15,017 4,937 11,517 4,173 12,799 2,981 - - 14,013 4,179 - - 112,831 10,623 - - - - - - - - - - - - - - - 48,066 316,450 - - 217,411 - 8,204 178,119 - - - - 40,471 212,814 - - - - 156,839 1,653,383 82,604 20,679 - 2,770 63,105 - 1,203,311 Details of cash bonuses paid to key management personal are included in the remuneration tables set out above. The annual staff cash bonuses of $4,000 per FTE employee were paid on 11 September 2009. 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. 24 AUSTRALIAN ETHICAL INVESTMENT LTD Analysis of bonuses included in remuneration The vesting proﬁ le of short term-incentive bonuses are detailed below. No amounts vest in future ﬁ nancial years in respect of the short term-incentive bonuses for the 2010 year. Cash bonus (1) $ Performance bonus $ Share bonus $ Vested in year % Forfeited in year (2) % Parent entity directors James Thier Howard Pender Anne O’Donnell Named executives (including other KMP) Philip George Gary Leckie Tim Xirakis Paul Harding Davis Martin Halloran James Jordan 3,212 2,626 4,000 4,000 4,000 4,000 4,000 3,366 3,200 10,938 - - - - - 17,500 - - - - - - - - - - - 88 100 100 100 100 100 70 100 100 12 - - - - - 30 - - (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 ﬁ nancial year Equity based remuneration Equity based remuneration consists of grants of options and rights under the company’s employee share ownership plan and employee share incentive scheme. Details of the share plans (including the service and performance criteria) are provided in the section on remuneration policy above and in Note 25 of the attached ﬁ nancial report. Set out in the following table are the holdings of equity instruments granted to the KMP that existed during the reporting period and includes details of vesting proﬁ les of options/rights granted as compensation. AUSTRALIAN ETHICAL INVESTMENT LTD 25 Option holdings: KMP option holdings Option class Grant date Fair value at grant date No. granted No. vested & excercised % of grant vested No. expired % of grant forfeited Financial year in which grant vests Parent entity directors James Thier Howard Pender AEFAS AEFAT AEFAV 22-Sep-06 24-Sep-07 1-Dec-08 $4.14 $8.40 $3.65 2010 Total 2009 Total AEFAS AEFAT AEFAV 2010 Total 2009 Total 22-Sep-06 24-Sep-07 1-Dec-08 $4.14 $8.40 $3.65 - - - - - - - - 100% ( 1,432) 100% 22-Sep-09 - - - - - - 24-Sep-10 14-Oct-11 100% ( 1,432) 1,364 ( 1,800) 100% - - - - - - - - - 100% ( 1,469) 100% 22-Sep-09 - - - - - - 24-Sep-10 14-Oct-11 100% ( 1,469) 1326 ( 931) 100% - 100% ( 2,909) 100% 22-Sep-09 Anne O'Donnell AEFAS 22-Sep-06 AEFAT AEFAU 24-Sep-07 14-Oct-08 2010 Total 2009 Total Philip George AEFAS 22-Sep-06 AEFAT AEFAU 24-Sep-07 14-Oct-08 $4.14 $8.40 $8.96 $4.14 $8.40 $3.65 Gary Leckie Tim Xirakis 2010 Total 2009 Total AEFAS AEFAT AEFAU 2010 Total 2009 Total AEFAS AEFAT AEFAU 2010 Total 2009 Total 22-Sep-06 24-Sep-07 14-Oct-08 $4.14 $8.40 $3.65 22-Sep-06 24-Sep-07 14-Oct-08 $4.14 $8.40 $3.65 Paul Harding Davis AEFAU 14-Oct-08 $3.65 2010 Total 2009 Total James Jordan AEFAT 24-Sep-07 AEFAU 14-Oct-08 $8.40 $3.65 2010 Total 2009 Total 26 AUSTRALIAN ETHICAL INVESTMENT LTD - - - - - - - - - - - - 100% ( 2,909) 2,648 ( 3,006) 100% - - - - ( 2,356) 100% - - - - ( 2,356) 100% 2,169 ( 1,550) 100% - - - - - - - - - - - 24-Sep-10 14-Oct-11 22-Sep-09 24-Sep-10 14-Oct-11 - - - - - - - - 100% ( 1,443) 100% 22-Sep-09 - - - - - - 24-Sep-10 14-Oct-11 100% ( 1,443) 1,919 ( 1,387) 100% - - - - - 1,895 - - 1,060 - 1,243 - - - - - - - - - - - - 100% ( 1,387) 100% 22-Sep-09 - - - - 100% ( 1,387) - - - - - - - - - - - - - - - - 24-Sep-10 14-Oct-11 14-Oct-11 24-Sep-10 14-Oct-11 - - - - - - - Rights holdings: KMP rights holdings Rights class Grant date Fair value at grant date No. granted Value of rights granted ($) No. vested and excercised % of grant vested No. lapsed Value of rights lapsed ($) % of grant lapsed Parent entity directors James Thier AEFAW 30-Nov-09 $29.59 319 $9,439 2010 Total 319 $9,439 2009 Total - - Howard Pender AEFAW 30-Nov-09 $29.59 320 $9,469 2010 Total 320 $9,469 2009 Total - - Philip George AEFAW 30-Nov-09 $29.59 501 $14,825 2010 Total 501 $14,825 2009 Total - - Gary Leckie AEFAW 30-Nov-09 $29.59 506 $14,973 2010 Total 506 $14,973 2009 Total - - Tim Xirakis AEFAW 30-Nov-09 $29.59 493 $14,588 2010 Total 493 $14,588 2009 Total - - Paul Harding Davis AEFAW 30-Nov-09 $29.59 531 $15,712 2010 Total 531 $15,712 2009 Total - - Martin Halloran AEFAX 30-Nov-09 $32.91 966 $31,791 AEFAW 30-Nov-09 $29.59 550 $16,275 2010 Total 1516 $48,066 2009 Total - - Phillip Vernon AEFAW 17-Dec-09 $25.88 317 $8,204 2010 Total 317 $8,204 2009 Total - - James Jordan AEFAX 30-Nov-09 $32.91 862 $28,368 AEFAW 30-Nov-09 $29.59 409 $12,102 2010 Total 1271 $40,471 2009 Total - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (966) $22,411 100% (550) $12,760 100% (1,516) $35,171 - - - - - - - - - - - - - - - - - - - - - - - - -v AUSTRALIAN ETHICAL INVESTMENT LTD 27 Hedging policy 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 ﬂ uctuation 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 detailed for those senior managers, the remuneration of executive directors, secretaries and other senior managers is not subject to individual performance conditions. People in these positions were entitled to participate in the staff bonus and employee share schemes described above. Rights granted during the ﬁ nancial year, when valued at grant date, make up a small proportion of the overall remuneration of people holding these positions. The following table illustrates the proportion of remuneration that was performance and non-performance based and the proportion of remuneration received in the form of options/ rights during the ﬁ nancial year Proportion of elements of remuneration related to performance Proportion of elements of remuneration not related to performance Non-salary cash-based incentives % Shares % Options / rights % Fixed salary/ fees % Total % 7 - - - - - - - - - - 7 - - - - - - - - - - - - - - - - - - 6 6 - - - - - 7 - 7 7 6 15 5 19 87 94 100 100 100 100 100 93 100 93 93 87 85 95 81 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Parent entity directors’ remuneration James Thier Howard Pender Naomi Edwards Justine Hickey Anne O’Donnell André Morony Les Coleman Named executives (including other KMP) Philip George Ruth Medd Gary Leckie Tim Xirakis Paul Harding Davis Martin Halloran Phillip Vernon James Jordan 28 AUSTRALIAN ETHICAL INVESTMENT LTD Employment contracts of directors and senior managers For each individual whose remuneration has been disclosed in this report and is currently employed under an employment contract, the details of the employment contract are as follows: Name Duration of contract Period of termination notice required James Thier Ongoing 2 weeks Termination payment provided for under the contract None except for accrued leave and any payment in lieu of notice. Howard Pender Phillip Vernon Gary Leckie Philip George Paul Harding Davis Tim Xirakis James Jordan Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing 12 weeks 12 weeks 12 weeks 12 weeks 12 weeks 12 weeks 12 weeks Options and rights as at the date of this report Options/rights over unissued shares as at the date of this report are as follows: Options reference Number of options on issue Exercise period Exercise price AEFAT AEFAU AEFAV Totals 31,853 34,139 2,690 68,682 24/9/10 to 23/12/10 14/10/11 to 13/1/12 14/10/11 to 13/1/12 $57.57 $32.27 $32.27 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. Performance rights reference Number of rights on issue AEFAW AEFAX Totals 9,931 4,545 14,476 All performance rights are over unissued shares in the company. Performance rights expire if the performance conditions are not met at the end of the performance period. No holder of performance rights is entitled to, by virtue of holding the performance rights, 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 2010 on the exercise of options granted under the company’s employee share ownership plan. Shares issued upon exercise of options 1,585 Amount paid per share $32.50 No further shares have been issued since that date to the date of this report. No amounts are unpaid on any of the shares. AUSTRALIAN ETHICAL INVESTMENT LTD 29 Non-director committee members and company secretary particulars Name Qualiﬁ cations Experience Ruth Medd B.Sc., Dip Comp Science, CPA, MAICD Philip George BSc LLB ACIS Gary Leckie BEc CA Tom May BA LLB MBA Ruth is currently on the board of the NFAW Ltd (National Foundation for Australian Women) and WOB Pty Ltd. Ruth is Chair of the company’s wholly- owned subsidiary Australian Ethical Superannuation Pty Ltd. Ruth also chairs the company’s audit, 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 seven years. He was a senior associate at the national law ﬁ rm Minter Ellison and conducted a commercial legal practice in partnership for two years. Gary is a Chartered Accountant who is responsible for the ﬁ scal management and operational activities of the Australian Ethical group. Gary has more than ten years experience in the ﬁ nancial services industry. Prior to working in the ﬁ nancial services industry Gary was employed with big four accounting ﬁ rm Deloitte. Tom has experience in the superannuation and distribution aspects of ﬁ nancial services law. He has been a lawyer since 1990 when he was a legal ofﬁ cer in the federal government. He subsequently worked in house with funds management and life insurance companies before working in private practice in London and Tokyo. Auditor’s declaration Other speciﬁ c information 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. The company’s shares have traded on the ASX since 17 December 2002. Movements in closing share price at the beginning and end of ﬁ nancial years since listing are as follows: Non-audit services The directors, in accordance with advice from the audit committee, are satisﬁ ed that the provision of the non-audit services by the auditor during the year is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisﬁ ed that the services disclosed in the ﬁ nancial 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 ﬁ nancial report. Date 17 December 2002 30 June 2003 30 June 2004 30 June 2005 30 June 2006 30 June 2007 30 June 2008 30 June 2009 30 June 2010 Closing daily price3 $12.50 $11.30 $13.00 $17.20 $28.50 $48.00 $34.00 $22.00 $23.20 30 AUSTRALIAN ETHICAL INVESTMENT LTD Where shares were not traded on the day speciﬁ ed, the price quoted 3 is the closing daily price when trades did occur on the day earlier than and closest to the date speciﬁ ed. The company’s earnings over the last ﬁ ve years are as follows: Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Earnings $1,362,612 $1,819,177 $1,651,790 $1,202,752 $1,022,555 Other speciﬁ c information has been disclosed in the attached ﬁ nancial report as referenced in the table below: Disclosure Dividends Rights –issued during the ﬁ nancial year since the end of the ﬁ nancial year4 Signed in accordance with a resolution of the board of directors. Financial Statement Reference Note 5 Note 25 Phillip Vernon Managing Director Dated: 30 August 2010 4 The ﬁ nancial statements show rights issued during the ﬁ nancial year. No rights have been issued since the end of the ﬁ nancial year to the date of this report. AUSTRALIAN ETHICAL INVESTMENT LTD 31 AUDITOR’S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT 2001 I declare that, to the best of my knowledge and belief, during the year ended 30 June 2010 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 30 August 2010 Liability limited by a scheme approved under Professional Standards Legislation 32 AUSTRALIAN ETHICAL INVESTMENT LTD Financial statements for year ended 30 June 2010 Statement of financial position as at 30 June 2010 Notes Consolidated entity 2010 $ 2009 $ 1,892,734 3,050,029 998,441 24,474 337,195 2,614,467 1,800,859 1,673,953 - 279,367 Parent entity 2010 $ 2009 $ 435,037 2,604,874 998,441 213,987 297,283 1,226,311 1,288,930 1,673,953 - 235,262 7 8 9 13 10 11 12 9 13 14 16 15 16 6,302,873 6,368,646 4,549,622 4,424,456 4,215,168 46,297 100,505 435,083 4,139,581 - 82,492 464,200 4,215,168 46,297 416,505 433,688 4,139,581 - 398,492 459,850 4,797,053 4,686,273 5,111,658 4,997,923 11,099,926 11,054,919 9,661,280 9,422,379 2,495,424 - 451,046 1,756,373 227,200 535,406 2,659,060 - 451,046 1,952,798 227,200 535,406 2,946,470 2,518,979 3,110,106 2,715,404 34,805 62,923 33,732 49,003 34,805 62,923 33,732 49,003 97,728 82,735 97,728 82,735 3,044,198 2,601,714 3,207,834 2,798,139 8,055,728 8,453,205 6,453,446 6,624,240 17 5,791,147 869,149 1,395,432 5,739,635 535,269 2,178,301 5,791,147 869,149 ( 206,850) 5,739,635 535,269 349,336 8,055,728 8,453,205 6,453,446 6,624,240 Current assets Cash and cash equivalents Trade and other receivables Financial assets Current tax assets Other current assets Total current assets Non-current assets Property, plant & equipment Intangible assets Financial assets Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Current tax liabilities Short-term provisions Total current liabilities Non-current liabilities Deferred tax liabilities Other long-term provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity The accompanying notes form part of these financial statements AUSTRALIAN ETHICAL INVESTMENT LTD 33 Statement of comprehensive income for the year ended 30 June 2010 Notes Consolidated entity 2010 $ 2009 $ Parent entity 2010 $ 2009 $ Revenue 3 14,067,899 13,131,431 11,891,805 10,652,895 Commissions paid to advisers ( 194,080) ( 177,235) ( 32,394) ( 15,305) External services ( 2,358,711) ( 2,498,375) ( 898,684) ( 1,044,339) Employee benefits expense ( 7,339,724) ( 6,411,326) ( 7,316,108) ( 6,373,530) Depreciation and amortization ( 358,491) ( 298,503) ( 358,491) ( 298,503) Occupancy costs Communication costs Other expenses ( 245,823) ( 216,069) ( 232,939) ( 200,896) ( 774,633) ( 648,233) ( 774,633) ( 611,851) ( 1,065,991) ( 917,879) ( 994,545) ( 795,030) Profit before tithe and income tax expense 1,730,446 1,963,811 1,284,011 1,313,441 Tithes expense 1 (l) ( 124,941) ( 140,868) ( 124,941) ( 140,868) Profit before income tax 1,605,505 1,822,943 1,159,070 1,172,573 Income tax expense Profit for the year Other comprehensive income 4 ( 582,950) ( 620,191) 90,168 ( 64,281) 1,022,555 1,202,752 1,249,238 1,108,292 Net gain/(loss) on revaluation of available-for-sale investments Other comprehensive income for the year, net of tax 18,645 18,645 ( 22,679) ( 22,679) 18,645 18,645 ( 22,679) ( 22,679) Total comprehensive income for the year 1,041,200 1,180,073 1,267,883 1,085,613 Profit attributable to members of the parent entity 1,022,555 1,202,752 1,249,238 1,108,292 Total comprehensive income attributable to members of the parent entity Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 1,041,200 1,180,073 1,267,883 1,085,613 6 6 103.0 102.0 121.6 121.6 The accompanying notes form part of these financial statements 34 AUSTRALIAN ETHICAL INVESTMENT LTD Consolidated entity Statement of changes in equity for year ended 30 June 2010 Balance at 1 July 2008 Profit attributable to members of the parent entity Other comprehensive income for the period Total comprehensive income for the period Note Issued capital ordinary $ 5,740,791 - - - Transactions with owners in their capacity as Shares issued during the period Dividends paid or provided for Share-based payment expense Balance at 30 June 2009 17 ( 1,156) - - 5,739,635 ( 36,643) - ( 22,679) ( 22,679) - - - ( 59,322) Asset revaluation reserve $ Share-based payment reserve $ Retained earnings $ 2,305,878 1,202,752 - 1,202,752 Total $ 8,381,490 1,202,752 ( 22,679) 1,180,073 371,464 - - - - - 223,127 594,591 - ( 1,330,329) - 2,178,301 ( 1,156) ( 1,330,329) 223,127 8,453,205 Balance at 1 July 2009 Profit attributable to members of the parent entity Other comprehensive income for the period Total comprehensive income for the period Transactions with owners in their capacity as Shares issued during the period Dividends paid or provided for Share-based payment expense Balance at 30 June 2010 Parent entity Balance at 1 July 2008 Profit attributable to members of the parent entity Other comprehensive income for the period Total comprehensive income for the period Transactions with owners in their capacity as owners: Shares issued during the period Dividends paid or provided for Share-based payment expense Balance at 30 June 2009 Balance at 1 July 2009 Profit attributable to members of the parent entity Other comprehensive income for the period Total comprehensive income for the period Transactions with owners in their capacity as owners: Shares issued during the period Dividends paid or provided for Share-based payment expense Balance at 30 June 2010 5,739,635 ( 59,322) 594,591 2,178,301 8,453,205 - - - - 18,645 18,645 - - - 1,022,555 - 1,022,555 1,022,555 18,645 1,041,200 51,512 - - 5,791,147 - - - ( 40,677) - - 315,235 909,826 - ( 1,805,424) - 1,395,432 51,512 ( 1,805,424) 315,235 8,055,728 Note Issued capital ordinary $ Asset revaluation reserve $ Share-based payment reserve $ Retained earnings $ Total $ 5,740,791 ( 36,643) 371,464 571,373 6,646,985 - - - - ( 22,679) ( 22,679) - - - 1,108,292 - 1,108,292 1,108,292 ( 22,679) 1,085,613 17 ( 1,156) - - 5,739,635 - - - ( 59,322) - - 223,127 594,591 - ( 1,330,329) - 349,336 ( 1,156) ( 1,330,329) 223,127 6,624,240 5,739,635 ( 59,322) 594,591 349,336 6,624,240 - - - - 18,645 18,645 - - - 1,249,238 - 1,249,238 1,249,238 18,645 1,267,883 51,512 - - 5,791,147 - - - ( 40,677) - - 315,235 909,826 - ( 1,805,424) - ( 206,850) 51,512 ( 1,805,424) 315,235 6,453,446 AUSTRALIAN ETHICAL INVESTMENT LTD 35 Statement of cash flows for the year ended 30 June 2010 Notes Consolidated entity 2010 $ 2009 $ Parent entity 2010 $ 2009 $ 14,111,414 ( 12,274,001) - 130,785 ( 812,425) ( 170,904) ( 135,644) 14,241,650 ( 11,926,618) - 201,146 ( 467,942) ( 245,201) ( 200,891) 9,906,897 ( 10,558,223) 1,797,057 101,847 ( 161,346) ( 170,904) ( 135,644) 10,401,154 ( 9,625,550) 1,202,596 148,295 36,734 ( 245,201) ( 200,891) 22 (b) 849,225 1,602,144 779,684 1,717,137 1,847,723 ( 500,035) ( 1,133,628) ( 49,889) 18,783 1,185,344 ( 239,450) ( 1,141,871) 11,118 1,847,723 ( 500,035) ( 1,133,628) ( 49,889) 18,783 1,185,344 ( 239,450) ( 1,141,871) 11,118 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 Loans to staff Repayment of loans Net cash provided by (used in) investing activities 182,954 ( 184,859) 182,954 ( 184,859) Cash flows from financing activities Proceeds from share issue Share buy-back payment Dividends paid 51,512 - ( 1,805,424) 171,084 ( 195,811) ( 1,330,329) 51,512 - ( 1,805,424) 171,084 ( 195,811) ( 1,330,329) Net cash provided by (used in) financing activities ( 1,753,912) ( 1,355,056) ( 1,753,912) ( 1,355,056) Net increase (decrease) in cash held ( 721,733) 62,229 ( 791,274) 177,222 Cash at beginning of financial year 2,614,467 2,552,238 1,226,311 1,049,089 Cash at end of financial year 22 (a) 1,892,734 2,614,467 435,037 1,226,311 The accompanying notes form part of these financial statements 36 AUSTRALIAN ETHICAL INVESTMENT LTD Notes to the financial statements for the year ended 30 June 2010 Note 1 - Statement of significant accounting policies Basis of preparation The financial statements are general purpose financial statements that have been prepared in accordance with Australian Accounting Standards, Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. Australian Accounting Standards set out accounting policies that the AASB has concluded would result in a financial report containing relevant and reliable information about transactions, events and conditions. Compliance with Australian Accounting Standards ensures that the financial statements and notes also comply with International Financial Reporting Standards. The financial statements have been prepared on an accruals basis and are based on historical costs, modified, where applicable, by the measurement at fair value of selected non- current assets, financial assets and financial liabilities. 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 following is a summary of the material accounting policies adopted by the consolidated entity in the preparation of the financial statements. The accounting policies have been consistently applied, unless otherwise stated. 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. AUSTRALIAN ETHICAL INVESTMENT LTD 37 Notes to the financial statements for the year ended 30 June 2010 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 statement of comprehensive income 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. The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows that will be received from the assets 38 AUSTRALIAN ETHICAL INVESTMENT LTD Notes to the financial statements for the year ended 30 June 2010 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 statement of comprehensive income. When re-valued assets are sold, amounts included in the revaluation reserve relating to that asset are transferred to retained earnings. d) Intangible assets The development of the company’s website was capitalised as an intangible asset and carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over its estimated useful live at two and half years. The estimated useful life and amortisation method are reviewed at the end of each annual reporting period, with the effect of any changes in estimates being accounted for on a prospective basis. e) 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. AUSTRALIAN ETHICAL INVESTMENT LTD 39 Notes to the financial statements for the year ended 30 June 2010 Note 1 - Statement of significant accounting policies – continued e) Financial instruments– continued Fair value Fair value is determined based on current bid prices for all quoted investments. Valuation techniques are applied to determine the fair value for all unlisted securities, including recent arm’s length transactions, reference to similar instruments and option pricing models. Impairment At each reporting date, the group assesses 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 statement of comprehensive income. f) 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 statement of comprehensive income. 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. g) 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 and rights Share based compensation benefits are provided to employees via the Australian Ethical Investment Limited employee share ownership plan. Share options and rights 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 and rights that are expected to become exercisable. The employee benefit expense recognised each period takes into account the most recent estimate. 40 AUSTRALIAN ETHICAL INVESTMENT LTD Notes to the financial statements for the year ended 30 June 2010 Note 1 - Statement of significant accounting policies – continued g) Employee benefits - continued Upon the exercise of options and rights the proceeds received, net of any directly attributable transaction costs, are credited to share capital. Employee bonus The group recognises a liability and an expense for bonuses and profit-sharing based on a formula that takes into consideration the profit attributable to the company's shareholders after certain adjustments. The group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. h) 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. i) Cash and cash equivalents Cash and cash equivalents include cash on hand and deposits held at call with banks. j) 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). k) 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 Taxation 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. l) 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) 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" AUSTRALIAN ETHICAL INVESTMENT LTD 41 Notes to the financial statements for the year ended 30 June 2010 Note 1 - Statement of significant accounting policies - continued l) Tithes expense - continued (ii) "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". m) 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. n) 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 In estimating the annual leave and long service leave provision, an average salary increase of five percent has been incorporated. 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 $82,492. The directors have determined that no provision for impairment is required for this loan. Accounting Standards not previously applied The Group has adopted the following new and revised Australian Accounting Standards issued by the AASB which are mandatory to apply to the current interim period. Disclosures required by these Standards that are deemed material have been included in this financial report on the basis that they represent a significant change in information from that previously made available. Presentation of Financial Statements AASB 101 prescribes the contents and structure of the financial statements. Changes reflected in this financial report include: (cid:120) the replacement of the income statement with the statement of comprehensive income. Items of income and expense not recognised in profit or loss are now disclosed as 42 AUSTRALIAN ETHICAL INVESTMENT LTD Notes to the financial statements for the year ended 30 June 2010 Note 1 - Statement of significant accounting policies - continued Accounting Standards not previously applied - continued components of ‘other comprehensive income’. In this regard, such items are no longer reflected as equity movements in the statement of changes in equity; (cid:120) the adoption of the single statement approach to the presentation of the statement of comprehensive income; and (cid:120) other financial statements are renamed in accordance with the Standard. Operating Segments From 1 July 2009, operating segments are identified and segment information disclosed on the basis of internal reports that are regularly provided to, or reviewed by, the group’s chief operating decision maker which, for the group, is the Board of Directors. In this regard, such information is provided using different measures to those used in preparing the statement of comprehensive income and statement of financial position. Reconciliations of such management information to the statutory information contained in the interim financial report have been included. New accounting standards for application in future periods The AASB has issued new, revised and amended accounting standards and interpretations that have mandatory application dates for future reporting periods. The group has decided against early adoption of these standards. A discussion of those future requirements and their impact on the group follows: AASB 9: Financial Instruments and AASB 2009-11: Amendments to Australian Accounting Standards arising from AASB 9 [AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 121, 127, 128, 131, 132, 136, 139, 1023 & 1038 and Interpretations 10 & 12] (applicable for annual reporting periods commencing on or after 1 January 2013). These standards are applicable retrospectively and amend the classification and measurement of financial assets. The group has not yet determined the potential impact on the financial statements. AASB 124: Related Party Disclosures (applicable for annual reporting periods commencing on or after 1 January 2011). This standard removes the requirement for government related entities to disclose details of all transactions with the government and other government related entities and clarifies the definition of a related party to remove inconsistencies and simplify the structure of the standard. No changes are expected to materially affect the group. AASB 2009-8: Amendments to Australian Accounting Standards – Group Cash-settled Share- based Payment Transactions [AASB 2] (applicable for annual reporting periods commencing on or after 1 January 2010). These amendments clarify the accounting for group cash-settled share-based payment transactions in the separate or individual financial statements of the entity receiving the goods or services when the entity has no obligation to settle the share- based payment transaction. The amendments incorporate the requirements previously included in Interpretation 8 and Interpretation 11 and as a consequence, these two Interpretations are superseded by the amendments. These amendments are not expected to impact the group. AUSTRALIAN ETHICAL INVESTMENT LTD 43 Notes to the financial statements for the year ended 30 June 2010 Note 1 - Statement of significant accounting policies – continued New accounting standards for application in future periods – continued AASB 2009-10: Amendments to Australian Accounting Standards – Classification of Rights Issues [AASB 132] (applicable for annual reporting periods commencing on or after 1 February 2010). These amendments clarify that rights, options or warrants to acquire a fixed number of an entity’s own equity instruments for a fixed amount in any currency are equity instruments if the entity offers the rights, options or warrants pro-rata to all existing owners of the same class of its non-derivative equity instruments. These amendments are no expected to impact the group. AASB 2009-12: Amendments to Australian Accounting Standards [AASBs 5, 8, 108, 110, 112, 119, 133, 137, 139, 1023 & 1031 and Interpretations 2, 4, 16, 1039 & 1052] (applicable for annual reporting periods commencing on or after 1 January 2011). This standard makes a number of editorial amendments to a range of Australian Accounting Standards and Interpretations, including amendments to reflect changes made to the text of International Financial reporting Standards by the IASB. The standard also amends AASB 8 to require entities to exercise judgement in assessing whether a government and entities known to be under the control of that government are considered a single customer for the purposes of certain operating segment disclosures. These amendments are not expected to impact the group. AASB 2009-13: Amendments to Australian Accounting Standards arising from Interpretations 19 [AASB 1] (applicable for annual reporting periods commencing on or after 1 July 2010). This standard makes amendments to AASB 1 arising from the issue of Interpretation 19. The amendments allow a first-time adopter to apply the transitional provisions in Interpretation 19. This standard is not expected to impact the group. Note 2 - Auditors' remuneration Remuneration of the auditors for: Audit services - Auditing the financial report - Auditing the sustainability report Non-audit services Consolidated entity 2010 $ 2009 $ Parent entity 2010 $ 2009 $ 38,279 5,750 37,220 5,500 33,629 5,750 32,720 5,500 - Tax and other accounting advice 3,371 3,770 3,371 3,280 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 10,801,006 1,349,887 536,221 1,162,694 - 123,949 - 94,142 14,067,899 9,745,880 1,439,173 503,448 1,102,776 - 191,671 - 148,483 13,131,431 4,701,333 157,968 - 1,162,694 1,797,057 95,011 3,892,705 85,038 11,891,805 4,484,603 188,605 - 1,102,776 1,202,596 138,819 3,445,918 89,578 10,652,895 Total revenue 14,067,899 13,131,431 11,891,805 10,652,895 44 AUSTRALIAN ETHICAL INVESTMENT LTD Notes to the financial statements for the year ended 30 June 2010 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% (2009:30%) - 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 - Franking and foreign tax credits - Tax allowance on capital investment Consolidated entity 2010 $ 2009 $ Parent entity 2010 $ 2009 $ 560,819 22,131 582,950 584,440 35,751 620,191 (109,344) 19,176 (90,168) 28,380 35,901 64,281 481,651 - 546,883 - - 347,721 - 351,772 - - 673,118 555,910 1,891 94,570 5,582 583,694 1,982 66,938 15,977 631,780 1,820 94,570 5,582 1,122,811 1,962 66,938 15,977 992,559 - ( 744 ) - - ( 682 ) ( 10,907 ) ( 539,117 ) ( 744 ) ( 360,779) ( 682) ( 10,907) Income tax expense attributable to entity 582,950 620,191 582,950 620,191 Allocation of income tax expense to wholly owned entity under the tax sharing agreement - - ( 673,118) ( 555,910) Income tax expense attributable to entity 582,950 620,191 ( 90,168) 64,281 The applicable weighted average effective tax rates are as follows: 36% 34% (8%) 5% AUSTRALIAN ETHICAL INVESTMENT LTD 45 Notes to the financial statements for the year ended 30 June 2010 Note 5 - Dividends (a) Distributions paid Final fully franked dividend of 132 (2009: 120) cents per share franked at the tax rate of 30% (2009: 30%) Interim fully franked dividend of 50 (2009: 15) cents per share franked at the tax rate of 30% (2009: 30%) (b) Distributions declared Final fully franked dividend of 50 (2009: 132) cents per share franked at the tax rate of 30% (2009: 30%) Special fully franked dividend 100 cents per share franked at the tax rate of 30% (c) Franking account 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 Consolidated entity 2010 $ 2009 $ Parent entity 2010 $ 2009 $ 1,308,854 1,181,596 1,308,854 1,181,596 496,570 1,805,424 148,733 1,330,329 496,570 1,805,424 148,733 1,330,329 496,570 1,308,854 496,570 1,308,854 993,141 - 993,141 - 1,418,530 1,629,081 638,448 780,082 560,937 1,068,144 (a) Earnings used to calculate basic EPS and dilutive EPS 1,022,555 1,202,752 (b) Weighted average number of ordinary shares outstanding during the year used in calculation of basic EPS Weighted average number of rights outstanding Weighted average number of ordinary shares outstanding during the year used in calculation of dilutive EPS 992,385 9,516 988,984 - 1,001,901 988,984 Note 7 - Cash and cash equivalents Cash on hand Cash at bank Deposits at call 300 1,020,195 872,239 1,892,734 300 137,016 2,477,151 2,614,467 300 6,842 427,895 435,037 300 5,357 1,220,654 1,226,311 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. 46 AUSTRALIAN ETHICAL INVESTMENT LTD Notes to the financial statements for the year ended 30 June 2010 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 - Listed securities at fair value - Units in unit trust at fair value - Shares in wholly owned entity at cost Consolidated entity 2010 $ 2009 $ Parent entity 2010 $ 2009 $ 3,039,901 10,128 - 3,050,029 1,783,351 17,508 - 1,800,859 2,516,422 10,128 78,324 2,604,874 1,050,014 17,508 221,409 1,288,930 973,096 125,850 1,098,946 100,505 998,441 1,661,701 94,744 1,756,445 82,492 1,673,953 1,289,096 125,850 1,414,946 416,505 998,441 1,977,701 94,744 2,072,445 398,492 1,673,953 500,000 144,616 2,558 325,922 - 973,096 1,141,871 199,081 - 320,749 - 1,661,701 500,000 144,616 2,558 325,922 316,000 1,289,096 1,141,871 199,081 - 320,749 316,000 1,977,701 The money market deposit is at a fixed interest rate of 5.9% with maturity date of 31 August 2010 and is investment grade rated by S&P. The mortgage backed security is at a floating interest rate of BBSW + 0.39, has a maturity date of 24 October 2035 and is investment grade rated by S&P. b. Loans comprise - Loan to other entity - Loan to staff 82,492 43,358 125,850 94,744 - 94,744 82,492 43,358 125,850 94,744 - 94,744 The first loan is provided to an independent entity with a fixed interest rate of 9.0% and matures 1 August 2015. Loan to staff is provided to two staff members under the terms of the employee share loan scheme (ESLS) to purchase shares in the company. The loan is repayable by 30 November 2013 and currently bears interest of 6.65% per annum as per the FBT rate set by the ATO. Note 10 - Other current assets Other Prepayments 11,914 325,281 337,195 20,902 258,465 279,367 11,914 285,369 297,283 20,902 214,360 235,262 AUSTRALIAN ETHICAL INVESTMENT LTD 47 Notes to the financial statements for the year ended 30 June 2010 Note 11 - Property, plant and equipment Consolidated entity 2010 $ 2009 $ Parent entity 2010 $ 2009 $ 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 ( 297,085 ) 2,487,032 2,784,117 ( 225,528 ) 2,558,589 2,784,117 ( 297,085) 2,487,032 2,784,117 ( 225,528) 2,558,589 2,717,032 2,788,589 2,717,032 2,788,589 2,680,113 ( 1,181,977) 1,498,136 2,274,759 ( 923,767) 1,350,992 2,680,113 ( 1,181,977) 1,498,136 2,274,759 ( 923,767) 1,350,992 Total property, plant and equipment 4,215,168 4,139,581 4,215,168 4,139,581 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 2,558,589 2,626,614 2,558,589 2,626,614 - ( 71,557) 2,487,032 - ( 68,025) 2,558,589 - ( 71,557) 2,487,032 - ( 68,025) 2,558,589 1,350,992 430,862 ( 10,286) ( 273,431) 1,498,136 1,349,187 239,704 ( 7,421) ( 230,478) 1,350,992 1,350,992 430,862 ( 10,286) ( 273,431) 1,498,136 1,349,187 239,704 ( 7,421) ( 230,478) 1,350,992 Total 4,215,168 4,139,581 4,215,168 4,139,581 An independent valuer was contracted to value the land and buildings at 30 June 2009. Independent valuation will be conducted on a three year cycle in order to comply with accounting standard requirements on impairment. Based on the valuation conducted in 2009 and assessment of the market since that date, the cost value of land and building disclosed above is below the commercial valuation and therefore no impairment has occurred. 48 AUSTRALIAN ETHICAL INVESTMENT LTD Notes to the financial statements for the year ended 30 June 2010 Note 12 - Intangible assets Website development costs At cost Accumulated amortisation Total intangibles Website development costs Balance at the beginning of year Additions Disposals Amortisation expense Carrying amount at the end of year Note 13 - Tax assets Current tax assets Tax refund receivable due to income tax overpayment 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 Consolidated entity 2010 $ 2009 $ Parent entity 2010 $ 2009 $ 59,800 ( 13,503 ) 46,297 - 59,800 - ( 13,503) 46,297 24,474 24,474 - - - - - - - - - - 59,800 ( 13,503) 46,297 - 59,800 - ( 13,503) 46,297 213,987 213,987 - - - - - - - - - - 362,580 40,850 14,220 417,650 377,916 44,060 16,800 438,776 362,580 40,850 12,825 416,255 377,916 44,060 12,450 434,426 17,433 25,424 17,433 25,424 435,083 464,200 433,688 459,850 Movements Opening balance at 1 July Credited (charged) to the statement of comprehensive income Credited (charged) to equity Closing balance at 30 June 464,200 ( 21,126) ( 7,991) 435,083 489,784 ( 35,304) 9,720 464,200 459,850 ( 18,171) ( 7,991) 433,688 485,584 ( 35,454) 9,720 459,850 Note 14 - Trade and other payables Trade payables Sundry payables and accrued expenses Employee bonus Amounts payable to wholly owned entity Note 15 - Deferred tax liabilities The balance comprises temporary differences attributable to: Amounts recognised in profit or loss: Stamp duty on leasehold property: Tax deferred income Movements Opening balance at 1 July Credited/(charged) to the statement of comprehensive income Credited/(charged) to equity Closing balance at 30 June 436,714 1,864,510 194,200 - 2,495,424 253,776 1,330,217 172,380 - 1,756,373 313,031 1,655,441 194,200 496,388 2,659,060 224,206 1,131,968 172,380 424,244 1,952,798 30,896 3,909 34,805 33,732 1,073 - 34,805 30,896 2,836 33,732 33,285 447 - 33,732 30,896 3,909 34,805 33,732 1,073 - 34,805 30,896 2,836 33,732 33,285 447 - 33,732 AUSTRALIAN ETHICAL INVESTMENT LTD 49 Notes to the financial statements for the year ended 30 June 2010 Note 16 - Provisions Current Employee benefits - long service leave Non-current Employee benefits - long service leave Note 17 - Issued capital Ordinary shares Fully paid ordinary shares at the beginning of the financial year 991,556 (2009: 984,003) shares Issue of share capital Shares issued during the year under the employee share ownership plan: 660 on 23 September 2008 (share bonus) 4,567 on 27 October 2008 (option exercised) 27,814 on 6 November 2008 (options exercised) 2,326 on 26 November 2008 (options exercised) 1,585 on 22 December 2009 (options excercised) Shares bought back during the year: 27,814 on 6 November 2008 Balance 30 June 993,141 (2009 - 991,556) shares Consolidated entity 2010 $ 2009 $ Parent entity 2010 $ 2009 $ 451,046 451,046 535,406 535,406 451,046 451,046 535,406 535,406 62,923 62,923 49,003 49,003 62,923 62,923 49,003 49,003 5,739,635 5,740,791 5,739,635 5,740,791 - - - - 51,512 - 23,570 113,353 690,343 57,731 - - - - 51,512 - 23,570 113,353 690,343 57,731 - ( 886,153) - ( 886,153) 5,791,147 5,739,635 5,791,147 5,739,635 At 30 June 2010 there were 993,141 fully paid ordinary shares which have no par value. Options/rights (i) For detailed information relating to the Australian Ethical Investment Limited employee share ownership plan including details of options/rights issued, exercised and lapsed during the financial year and the options/rights outstanding at year-end, refer to note 25 share-based payments. (ii) For information related to share options and rights issued to key management personnel during the financial year refer to the remuneration report contained within the directors' report. Ordinary shares 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. Capital management 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 and senior bank 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 $5.0 million capital requirement above which no extra capital is required as a result of increased funds under management. 50 AUSTRALIAN ETHICAL INVESTMENT LTD Notes to the financial statements for the year ended 30 June 2010 Consolidated entity 2010 $ 2009 $ Parent entity 2010 $ 2009 $ Note 18 – 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 19 - 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 20 - Contingencies 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 29,220,186 11,719,003 40,939,189 4,537,926 4,454,713 8,992,639 28,346,164 10,539,437 38,885,601 3,037,326 3,521,480 6,558,806 Rights of indemnities for liabilities incurred by the consolidated entity and parent entity not recorded in the financial statements were: 40,939,189 8,992,639 38,885,601 6,558,806 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. AUSTRALIAN ETHICAL INVESTMENT LTD 51 Notes to the consolidated financial statements for the half-year ended 30 June 2010 Note 21 - Operating segments The group has identified its operating segments based on the internal reports that are reviewed and used by the board of directors (chief operating decision makers) in assessing performance and determining the allocation of resources. Reportable segments disclosed are: 1) public offer managed funds (managed funds); and 2) public offer retail superannuation fund (super) (i) Segment performance Revenue External sale Inter-segment sale Interest revenue 30 June 2010 30 June 2009 Managed funds $ Super $ Total $ Managed funds $ Super $ Total $ 6,107,033 3,892,705 95,011 7,836,917 - 28,938 13,943,950 3,892,705 123,949 5,865,561 3,445,918 138,819 7,074,198 - 52,852 12,939,759 3,445,918 191,671 Total segment revenue 10,094,749 7,865,855 17,960,604 9,450,298 7,127,050 16,577,348 Inter-segment eliminations Total group revenue (3,892,705) 14,067,899 (3,445,918) 13,131,431 Segment net profit before tax 588,405 2,243,491 2,831,896 778,545 1,852,968 2,631,513 Reconciliation of segment result to group net profit/loss after tax Income tax expense 90,168 (673,118) (582,950) (64,281) (555,910) (620,191) Unallocated items - Depreciation and amortisation - Other corporate overheads * Group net profit after tax (358,491) (867,900) 1,022,555 (298,503) (510,067) 1,202,751 * Other corporate overheads includes staff bonus, tithe expense, staff options/rights expense and the payment to the former Chief Executive Officer. (ii) Segment assets 30 June 2010 30 June 2009 Managed funds $ Super $ Total $ Managed funds $ Super $ Total $ Assets 9,661,280 2,518,170 12,179,450 9,422,379 2,594,193 12,016,572 Inter-segment eliminations Total group assets (iii) Segment liabilities (1,080,224) 11,099,226 (961,653) 11,054,919 Liabilities 3,207,834 600,589 3,808,423 2,798,139 449,228 3,247,367 Inter-segment eliminations Total group liabilities (764,225) 3,044,198 (645,653) 2,601,714 52 AUSTRALIAN ETHICAL INVESTMENT LTD Notes to the financial statements for the year ended 30 June 2010 Consolidated entity 2010 $ 2009 $ Parent entity 2010 $ 2009 $ Note 22 - Cash flow information (a) Reconciliation of cash Cash at the end of the financial year as shown in the statement of cash flows is reconciled to the related items in the statement of financial position as follows: Cash on hand Cash at bank Deposits at call 300 1,020,195 872,239 1,892,734 300 137,016 2,477,151 2,614,467 300 6,842 427,895 435,037 300 5,357 1,220,654 1,226,311 (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/ rights expensed Staff bonus paid in shares Changes in assets and liabilities (Increase) decrease in trade & other receivables (Increase) decrease in current tax assets (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 1,022,555 1,202,753 1,249,238 1,108,293 358,491 ( 70,439) 19,659 - 315,235 - 298,503 72,973 7,167 - 223,127 23,570 358,491 ( 70,439) 19,659 - 315,235 - 298,503 72,973 7,167 - 223,127 23,570 ( 1,248,023) ( 24,474) ( 57,829) 21,126 739,051 ( 227,201) 1,074 11,634 - ( 30,876) 35,304 ( 358,957) 116,500 447 (1,485,227) (213,987) (62,022) 18,171 706,262 (56,771) 1,074 9,185 - ( 31,017) 35,454 ( 95,678) 65,114 447 Net cash provided by (used in) operating activities 849,225 1,602,144 779,684 1,717,137 (c) Non-cash financing and investing activities Shares in Australian Ethical Investment Limited, to the value of $0 (2009: $23,570) were issued in lieu of staff bonus. AUSTRALIAN ETHICAL INVESTMENT LTD 53 Notes to the financial statements for the year ended 30 June 2010 Consolidated entity 2010 $ 2009 $ Parent entity 2010 $ 2009 $ Note 23 – 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 Smaller Companies Trust, Australian Ethical Income Trust, Australian Ethical Larger Companies Trust, Australian Ethical International Equities Trust, Australian Ethical World Trust, and the Climate Advocacy Fund). Note, During the financial year, the Climate Advocacy Fund and Australian Ethical Property Trust were established, the Australian Ethical Equities Trust changed its name to the Australian Ethical Smaller Companies Trust and the Australian Ethical Large Companies Share Trust changed its name to the Australian Ethical Larger Companies 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: Taxation and other Amounts payable to wholly owned entity: Management fee income - - - - - - - - - - - - 3,892,705 3,445,918 673,117 555,910 5,987,343 5,054,272 1,797,057 1,202,596 78,324 221,409 496,388 424,244 54 AUSTRALIAN ETHICAL INVESTMENT LTD Notes to the financial statements for the year ended 30 June 2010 Consolidated entity 2010 $ 2009 $ Parent entity 2010 $ 2009 $ Note 23 – 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 Smaller Companies Trust - Australian Ethical Income Trust - Australian Ethical Larger Companies Trust - Australian Ethical International Equities Trust - Australian Ethical World Trust - Australian Ethical Property Trust - Climate Advocacy Fund (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 Smaller Companies Trust - Australian Ethical Income Trust - Australian Ethical Larger Companies Trust - Australian Ethical International Equities Trust - Australian Ethical World Trust - Australian Ethical Property 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 Smaller Companies Trust - Australian Ethical Income Trust - Australian Ethical Larger Companies Trust - Australian Ethical International Equities Trust - Australian Ethical World Trust - Australian Ethical Property Trust (iv) Transaction whereby Australian Ethical Investment Limited received a distribution payment from the Australian Ethical Balanced Trust b) Outstanding balances at balance date: 3,563,536 3,842,863 327,041 1,964,631 1,017,719 14,026 136,068 510 3,521,848 3,286,338 316,833 2,065,893 476,444 35,377 - - 3,563,536 3,842,863 327,041 1,964,631 1,017,719 14,026 136,068 510 3,521,848 3,286,338 316,833 2,065,893 476,444 35,377 - - 274,208 220,101 94,591 140,969 110,050 15,572 18,362 275,896 218,138 92,595 142,057 109,072 42,156 - 274,208 220,101 94,591 140,969 110,050 15,572 18,362 275,896 218,138 92,595 142,057 109,072 42,156 - 40,599 46,764 3,873 30,272 1,933 2,808 9 71,058 81,024 6,663 56,101 7,277 107 - 40,599 46,764 3,873 30,272 1,933 2,808 9 71,058 81,024 6,663 56,101 7,277 107 - 2,695 6,873 2,695 6,873 AUSTRALIAN ETHICAL INVESTMENT LTD 55 Notes to the financial statements for the year ended 30 June 2010 Consolidated entity 2010 $ 2009 $ Parent entity 2010 $ 2009 $ Note 23 – 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 Smaller Companies Trust - Australian Ethical Income Trust - Australian Ethical Larger Companies Trust - Australian Ethical International Equities Trust - Australian Ethical World Trust - Australian Ethical Property Trust - Climate Advocacy Fund Value of units held by Australian Ethical Investment Limited in the Australian Ethical Balanced Trust Value of units held by Australian Ethical Investment Limited in the Climate Advocacy Fund Distribution receivable from Australian Ethical Balanced Trust Distribution receivable from Climate Advocacy Fund 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: 85,327 304,836 62,394 150,125 156,617 5,908 63,816 191 352,189 351,300 40,029 204,066 56,269 7,991 - - 85,327 304,836 62,394 150,125 156,617 5,908 63,816 191 352,189 351,300 40,029 204,066 56,269 7,991 - - 227,064 320,749 227,064 320,749 98,858 - 98,858 - 6,057 718 3,298 - 6,057 718 3,298 - 112,330 207,004 - - - - investment services/(rebate of investment services fee) 14,415 95,853 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. 56 AUSTRALIAN ETHICAL INVESTMENT LTD AUSTRALIAN ETHICAL INVESTMENT LTD 57 58 AUSTRALIAN ETHICAL INVESTMENT LTD AUSTRALIAN ETHICAL INVESTMENT LTD 59 Notes to the financial statements for the year ended 30 June 2010 Note 25 - Share based payments - continued During the reporting period, Australian Ethical Investment Limited issued 1,585 ordinary shares for $51,512.50 on exercise of 1,585 share options issued under its employee share ownership plan.The exercise of share options resulted in an increase in ordinary shares of 1,585. During the reporting period 16,330 performance rights in two classes (identifiers: AEFAW and AEFAX) were granted. Under the Australian Ethical Investment Limited employee share incentive scheme (ESIS) participants are granted performance rights to ordinary shares, subject to meeting specified performance criteria over the performance period. The number of shares that the participant will ultimately receive will depend on the extent to which the performance criteria are met by the company and the individual employee. These rights were issued for nil consideration. These rights hold no voting or dividend rights. Subject to the terms and conditions of the ESIS rules, the performance rights have the following attributes determining whether shares will be issued in respect of the rights. ASX Code AEFAW Number granted Attributes 10,819 - employment must continue until 30 June 2012 - the arithmetic average return on equity over the performance period (‘AROE’) must exceed 15% p.a. or no shares shall be awarded at the end of the performance period; - if the AROE exceeds 15% p.a. but is less than 20% p.a., half the maximum number of shares shall be awarded; - if the AROE is equal to or greater than 20% p.a. the maximum number of shares shall be awarded. - AROE is determined as the arithmetic average of return on equity over six month periods calculated using audited half-year financial statements AEFAX 5,511 - The performance period is the financial years 2009/10, 2010/11 and 2011/12 - employment must continue until 11 November 2010; - the number of shares that will be issued to each employee in respect of their performance rights under this category will be adjusted up or down by a maximum 20%, dependent on the absolute performance of one of the company's managed investment schemes, for which the employee has responsibility or provides significant input. The nominated managed investment scheme has been agreed between the company and the employee. Performance will be measured over a performance period of 1 July 2009 to 30 June 2010. Performance rights reconciliation Outstanding at the beginning of the financial year Granted Forfeited Exercised Expired Outstanding at year-end Exercisable at year-end Consolidated entity 2010 2009 Number of rights Number of rights Parent entity 2010 2009 Number of rights Number of rights - 16,330 ( 1,854) - - 14,476 - - - - - - - - - 16,330 ( 1,854) - - 14,476 - - - - - - - - - - Fair value - Rights All rights were calculated at grant date based on the underlying share prices minus estimated net present value of future dividends that the holders of rights are not entitled for. 60 AUSTRALIAN ETHICAL INVESTMENT LTD Notes to the financial statements for the year ended 30 June 2010 Note 25 - Share based payments - continued Weighted average fair value - Options Consolidated entity 2010 2009 Parent entity 2010 2009 Weighted average exercise price $ Number of options Number of options Weighted average exercise price $ Weighted average exercise price $ Weighted average exercise price $ Number of options Number of options Outstanding at the beginning of the financial year 116,777 40.76 116,753 39.31 116,777 40.76 116,753 39.31 Granted Forfeited Exercised Expired - ( 16,956) ( 1,585) ( 29,554) 32.27 42.78 31.00 31.00 44,627 ( 8,523) ( 34,707) ( 1,373) 32.27 43.98 30.34 24.82 - ( 16,956) ( 1,585) ( 29,554) 32.27 42.78 31.00 31.00 44,627 ( 8,523) ( 34,707) ( 1,373) 32.27 43.98 30.34 24.82 Outstanding at year-end 68,682 44.00 116,777 40.76 68,682 44.00 116,777 40.76 Exercisable at year-end - - - - - - - - There were 1,585 options exercised during the year ended 30 June 2010. The weighted average share price calculated as at exercise dates of these options was $31.00. The options outstanding at 30 June 2010 had a weighted average exercise price of $44.00 and a weighted average remaining contractual life of 1.05 years. Exercise prices range from $32.27 to $57.57 in respect of options outstanding at 30 June 2010 Included under employee benefits expense in the statement of comprehensive income is : $190,602 (2009: $223,127) relating to options issued under the employee share ownership plan; $124,633 (2009: Nil) relating to rights issued under the employee share ownership plan; and, $0 (2009: $23,570) relating to equity settled share based payment transactions for staff bonus. Note 26 - Financial instruments (a) Financial risk management The consolidated entity’s financial instruments consist of cash and cash equivalents (note 7), trade and other receivables (note 8), financial assets (note 9) and trade and other payables (note 14). 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 Floating interest rate Fixed interest rate within 1 year 2010 % % $ 2010 2009 2009 2010 $ $ 2009 $ Cash and cash equivalents Trade and other receivables Financial assets 4 5 5 5 1,892,434 2,614,167 485,040 519,829 - - 513,401 - - 1,154,124 Total financial assets 2,377,474 3,133,996 513,401 1,154,124 Trade and other payables Total financial liabilities - - - - - - - - AUSTRALIAN ETHICAL INVESTMENT LTD 61 Notes to the financial statements for the year ended 30 June 2010 (b) Interest rate risk - continued Fixed interest rate within 1 to 5 years Non-interest bearing Total 2010 $ 2009 2010 $ $ 2009 2010 $ $ 2009 $ Cash Trade and other receivable Financial assets - - 100,505 - - 82,492 300 3,050,029 - 300 1,800,859 - 1,892,734 3,050,029 1,098,946 2,614,467 1,800,859 1,756,445 Total financial assets 100,505 82,492 3,050,329 1,801,159 6,041,709 6,171,771 Trade and other payables Total financial liabilities - - - - 2,495,424 1,756,373 2,495,424 1,756,373 2,495,424 1,756,373 2,495,424 1,756,373 (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 statement of financial position 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 independen 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 term of the loan to date. Consideration of credit risk in relation to financial assets is incorporated into executive management risk considerations. 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. In relation to loans to staff disclosed in note 9, under the terms of the loan agreement, staff loans were used to purchase shares of Australian Ethical Investment Ltd and the shares are used as security and registered under the subsidiary's name (Australian Ethical Superannuation Pty Ltd is the trustee of the employee share loan scheme ) until the loans are paid off. (d) Liquidity risk The group carries no borrowing debt on the statement of financial position 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 executive management to ensure regulatory and future operational requirements are catered for. Trade and other payables are expected to be paid as follows: Consolidated entity 2010 $ 2009 $ Parent entity 2010 $ 2009 $ 1,994,991 500,433 - 2,495,424 1,253,442 502,931 - 1,756,373 2,158,627 500,433 - 2,659,060 1,449,867 502,931 - 1,952,798 Less than 6 months 6 months to 1 year 1 to 5 years (e) Net fair values For other assets and other liabilities the net fair value approximates their carrying value. 62 AUSTRALIAN ETHICAL INVESTMENT LTD Notes to the financial statements for the year ended 30 June 2010 Note 26 - Financial instruments - 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 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% Consolidated entity 2010 $ 2009 $ Parent entity 2010 $ 2009 $ 47,555 (47,555) 62,686 (62,686) 18,402 (18,402) 34,923 (34,923) 47,555 (47,555) 62,686 (62,686) 18,402 (18,402) 34,923 (34,923) AUSTRALIAN ETHICAL INVESTMENT LTD 63 64 AUSTRALIAN ETHICAL INVESTMENT LTD 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 statement of financial position as at 30 June 2010, and the statement of comprehensive income, statement of changes in equity and statement of cash flows 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 is free from material the audit 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 the auditor considers internal control relevant to the error. 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 65 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, 2010 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 6 to 14 of the directors' report for the year ended 30 June, 2010. 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. Auditor's Opinion In our opinion the Remuneration Report of Australian Ethical Investment Limited for the year ended 30 June 2010, complies with section 300A of the Corporations Act 2001. THOMAS DAVIS & CO. P.L. WHITEMAN PARTNER Chartered Accountants SYDNEY, 30 August, 2010 Liability limited by a scheme approved under Professional Standards Legislation 66 AUSTRALIAN ETHICAL INVESTMENT LTD Holdings ranges 1-1,000 1,001-5,000 5,001-10,000 10,001- 100,000 100,001+ Totals Holdings ranges 1-1,000 1,001-5,000 5,001-10,000 10,001- 100,000 100,001+ Totals Shareholder information All information as at 20 September 2010 Twenty largest shareholders Distribution of shareholdings Ordinary shares Ordinary shares Name Holders Units % Number of ordinary shares % Substantial shareholder 760 188,422 198,402 35,621 91 5 14 18.983 19.989 3.589 Select Managed Funds Pty Ltd 196,472 19.796 James Andrew Thier 51,339 5.173 Mr Howard Pender 49,743 5.012 Yes Yes Yes 373,660 37.645 Caroline Margaret Le Couteur 49,436 4.981 1 196,472 19.794 Mr Trevor Roland Lee 36,933 3.721 871 992,577 100.000 Options issued under the Employee Options Scheme Holders Units % 27 24 3 0 0 12,439 54,523 16,196 0 0 14.958 65.566 19.476 0.000 0.000 Mrs Judith Margaret Boag Ms Judith Ingrouille Ajani Mr Bruce Allan Mcgregor & Mrs Ann Marion Mcgregor Citicorp Nominees Pty Limited Hb Sarjeant & Assoc Pty Ltd Dr Edward Arthur Iceton 54 83,158 100.000 Daisy Thier Mr Peter Alexander Anderson Mr Philip Julian Eriksen & Mr Julian Hans Eriksen Ms Anne Maree O’donnell Mr Michel Beuchat & Mrs Ann Beuchat Mr Rodney Matthew Myer Ubs Wealth Management Australia Nominees Pty Ltd Mr Robert Douglas Lewin Mr Roger William Sawkins 33,683 3.394 24,462 2.465 24,447 2.463 20,620 2.078 20,140 2.029 16,500 1.662 14,474 1.458 10,833 1.091 10,562 1.064 10,488 1.057 9,667 0.974 7,332 0.739 7,160 0.721 6,300 0.635 5,162 0.520 AUSTRALIAN ETHICAL INVESTMENT LTD 67 Corporate directory Australian Ethical Investment Ltd ABN 47 003 188 930 Company secretary Tom May Telephone: 02 6201 1953 Facsimile: 02 6201 1987 Email: tmay@australianethical.com.au Postal address GPO Box 2435 Canberra ACT 2601 Registered ofﬁ ce / place of business Trevor Pearcey House (Block E) Traeger Court 34 Thynne Street Bruce ACT 2617 www.australianethical.com.au Share registry Registries Limited ABN 14 003 209 836 Street: Level 2, 28 Margaret Street Sydney NSW 2000 Telephone: 02 9290 9600 Facsimile: 02 9279 0664 Mail: 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 ﬁ le 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 (cid:129) 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 fulﬁ l our mission our goals are: (cid:129) (cid:129) 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; (cid:129) (cid:129) (cid:129) (cid:129) 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; encourage, care for and provide educational opportunity for our fellow workers, respect their individual needs, aspirations and idiosyncrasies; (cid:129) and ensure our promotional material is comprehensive, transparent and readily understood. (cid:129) 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 69 australianethical investment + superannuation ® www.australianethical.com.au | 1800 021 227 | 70

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