Massmart Annual Report 2008

Notes to the annual financial statements
for the year ended 30 June 2008

        2008  2007 
        Rm  Rm 

1.

Revenue

   
  Dividends received (included are dividends from subsidiary companies) 1 155,5  1 047,2 
  Management and administration fees received (included are management and administration fees from subsidiary companies) 19,5  35,2 
        1 175,0  1 082,4 

2.

Operating profit

   
  Credits to operating profit include: 0,7  0,4 
  Foreign exchange profit 52,0  – 
  Profit on intra-group sale of Shield Buying and Distribution (Pty) Ltd    
  Charges to operating profit include:    
  Foreign exchange loss 0,5  – 
  Share-based payment 2,8  0,9 
  Contribution to pension scheme 0,5  – 

3.

Net finance costs

   
  Finance costs    
  Interest on Group loans (7,1) (8,5)
  Finance income    
  Interest on Group loans 5,9  1,1 
  Net finance costs (1,2) (7,4)

4.

Taxation

   
  Current year    
  South African normal taxation    
     Current taxation 4,6  6,4 
     Deferred taxation 3,7  (0,8)
  Secondary taxation on companies 64,0  57,5 
    72,3  63,1 
  Prior year overprovision:    
  South African normal taxation    
     Current taxation (0,1) – 
    (0,1) – 
  Total 72,2  63,1 
        % 
  The rate of taxation is reconciled as follows:    
     Standard corporate taxation rate 28,0  29,0 
     Exempt income (26,4) (29,1)
     Disallowable expenditure –  0,5 
     Secondary tax on companies 5,5  5,5 
     Profit on intra-group sale of Shield Buying and Distribution (Pty) Ltd (1,2) – 
     Foreign income –  0,1 
  Effective rate 5,9  6,0 

5.

Interest in subsidiaries

   
  shares at cost less amount written off 103,9  134,3 
  Amount owing by / (to) subsidiaries 95,7  (134,3)
        199,6  – 
  Details of net shares at cost can be found in note 35 in the consolidated financial statements.    

6.

Other financial assets

   
  Unlisted investments    
     Preference shares - Fullimput 65 (Pty) Ltd 1 560,7  485,3 
     Investment in Imagegate Limited (UK)2 5,4  4,9 
     Investment in Massmart Black Scarce Skills Trust and Massmart Thuthukani
   Empowerment Trust
0,2  0,2 
  Listed investments 0,2  0,2 
        566,5  490,6 
 

The directors' valuation of the unlisted investments at 30 June 2008 is R566,3 million (2007: R490,4 million)

The preference share investment represents cumulative preference shares in Fullimput 65 (Pty) Ltd.

A long-term liability of the Group is secured by a cession of the preference shares.

   
  notes
1 Classified as a "held-to-maturity" financial asset for IAS 39 purposes.
2 Classified as a "loan and receivable" financial asset for IAS 39 purpose
   
  For IAS 39 accounting treatment of these financial assets, see note 37 in the consolidated financial statements.    

7.

Deferred taxation

   
  The major movements during the year are analysed as follows:    
  Net assets at the beginning of the year 3,7  2,9 
  (Release)/charge to profit or loss for the year (3,7) 0,8 
  Net asset at the end of the year –  3,7 
  The major components of deferred taxation are analysed as follows:    
  Other temporary differences –  3,7 
        –  3,7 
    Share capital Share premium
    2008 2007 2008  2007 
    Rm Rm Rm  Rm 

8.

Issued capital

       
  Authorised        
  500 000 000 (2007: 500 000 000) ordinary shares of 1 cent each 0,2 5,0 –  – 
  20 000 000 (2007: 20 000 000) non-redeemable cumulative non-participating preference shares of 1 cent each 0,2 0,2 –  – 
  18 000 000 (2007: 18 000 000) ‘A’ convertible redeemable non-cumulative participating preference shares of 1 cent each 0,2 0,2 –  – 
  2 000 000 (2007: 2 000 000) ‘B’ convertible redeemable non-cumulative participating preference shares of 1 cent each –  – 
  Issued        
  201 193 512 (2007: 201 072 831) ordinary shares of 1 cent each 2,0 2,0 264,7  254,7 
  17 868 125 (2007: 17 967 866) ‘A’ convertible redeemable non-cumulative participating preference shares of 1 cent each 0,2 0,2 –  – 
  1 979 060 (2007: 2 000 000) ‘B’ convertible redeemable non-cumulative participating preference shares of 1 cent each –  – 
      Number of   Share capital  Share 
premium 
      shares  Rm  Rm 
  Ordinary shares      
  Balance at the beginning of the year 201 040 697  2,0  262,6 
  Converted preference shares of the Massmart Thuthukani Empowerment Trust 32 134  –  (4,5)
  Ordinary shares in issue – June 2007 201 072 831  2,0  258,1 
  Treasury shares (265 720) –  (3,4)
  Ordinary shares in issue excluding treasury shares – June 2007 200 807 111  2,0  254,7 
  Balance at the beginning of the year 201 072 831  2,0  254,7 
  Shares issued in terms of the Massmart Black Scarce Skills Trust 20 940  –  – 
  Shares issued in terms of the Massmart Thuthukani Empowerment Trust 99 741  –  –  
  Ordinary shares in issue – June 2008 201 193 512  2,0  254,7  
  Issue of shares –  –  20,0  
  Treasury shares (2 000 984) –  (10,0)
  Ordinary shares in issue excluding treasury shares – June 2008 199 192 528  2,0  264,7  
  Ordinary shares, which have a par value of 1 cent, carry one vote per share and carry the right to dividends.      
  ‘A’ convertible redeemable non-cumulative participating preference shares      
  Balance at the beginning of the previous year –   –  –  
  Shares issued in terms of the Massmart BEE transaction 18 000 000  –  –  
  Shares converted to ordinary shares (32 134) 0,2 –  
  Balance at the beginning of the year 17 967 866  (0,2) –  
  Shares converted to ordinary shares (99 741) –  – 
  Balance at the end of the year 17 868 125  (0,2) –  
  ‘A’ convertible redeemable non-cumulative participating preference shares, which have a par value of 1 cent, are held in the Thuthukani Empowerment Trust. These shares carry one vote per share, which is cast by the appointed trustees, and carry the right to dividends. On election of the beneficiary, the shares will convert to ordinary shares, on a one-for-one basis and will rank pari passu with all ordinary shares then in issue.
  ‘B’ convertible redeemable non-cumulative participating preference shares      
  Balance at the beginning of the previous year –  –  – 
  Shares issued in terms of the Massmart BEE transaction 2 000 000  –  – 
  Balance at the beginning of the year 2 000 000  –  – 
  Shares converted to ordinary shares (20 940) –  – 
  Balance at the end of the year 1 979 060  –  – 
  ‘B’ convertible redeemable non-cumulative participating preference shares, which have a par value of 1 cent, are held in the Black Scarce Skills Trust. These shares carry one vote per share, which is cast by the appointed trustees, and do not carry the right to dividends. On election of the beneficiary, the shares will convert to ordinary shares on a one-for-one basis and will rank pari passu with all ordinary shares then in issue.
  Share options granted under the Massmart Holdings Limited Employee Share Trust
 

As at June 2008, executives and senior employees have options over 14 304 900 ordinary shares (of which 11 784 413 are unvested). As at June 2007, executives and senior employees have options over 10 239 002 ordinary shares (of which 7 217 626 are unvested).

Share options granted under the Employee Share Incentive Scheme carry no rights to dividends and no voting rights. Further details of the Employee Share Incentive Scheme are contained in note 27 to the financial statements.

The preference shares issued during the year were issued at par value.

The total share buyback (including shares bought in the market by the Share Trust) for the year was 3.3 million shares (2007: 4,4 million) at an average price of R83,10 (2007: R71,85) totalling R271,8 million (2007: R313,2 million).

The Directors have the authority, until the next annual general meeting, to issue the ordinary shares of the Company up to a maximum of 5% of the shares already issued.

        2008  2007 
        Rm  Rm 

9.

Non-distributable reserves

       
  Balance at the beginning of the year 0,9  – 
  Share-based payment reserve 2,8  0,9 
    3,7  0,9 
  The share-based payment reserve arises on grant of share options to employees under the Employee Share Incentive Scheme. Details of the Employee Share Incentive Scheme can be found in note 27 in the consolidated financial statements. The share-based payment valuation was performed by Alexander Forbes for all periods and the scheme is equity-settled.
        2008  2007 
        Rm  Rm 

10.

Cross-suretyships and promissory notes

   
  Cross-suretyships under banking and other financial facilities 4 463,8  4 171,2 
        4 463,8  4 171,2 
 

Banking facilities incorporate, amongst others, letters of credit, forward exchange contracts and electronic fund transfers. These facilities have been secured by cross-suretyships between Group companies.

Other financial facilities relate to promissory notes that represent commitments under non-cancellable operating leases of R936,1 million (2007: R1 060 million) entered into by Masstores (Pty) Limited on behalf of Makro and are included in operating lease commitments in land and buildings. These leases terminate in December 2020 and have a discounted present value of R601,6 million (2007: R697 million). In accordance with IAS 17 Leases, the rentals paid are amortised over the entire remaining lease period on a straight line basis.

At the balance sheet date the Massmart Group was net cash positive.

        2008  2007 
        Rm  Rm 

11.

Notes to the cash flow statement

       
  11.1   Cash flow from trading    
            Profit before taxation    
            Adjustment for: 1 221,3  1 045,0 
               Interest received (5,9) (1,1)
               Interest paid 7,1  8,5 
               Investment income (1 155,5) (1 047,2)
               Share-based payment expense 2,8  0,9 
               Other non-cash movements –  1,7 
    69,8  7,8 
  11.2   Working capital movements    
            (Increase)/decrease in trade and other receivables (18,8) 2,3 
            (Decrease)/increase in trade and other payables (74,2) 8,8 
    (93,0) 11,1 
  11.3   Taxation paid    
            Amounts owed at the beginning of the year 15,3  8,3 
            Amounts charged to the income statement 72,2  63,1 
            Deferred taxation (3,7) 0,8 
            Amounts owed at the end of the year (18,3) (15,3)
            Cash amounts paid 65,5  56,9 
  11.4   Dividends paid    
            Amounts owing at the beginning of the year
            Amounts charged to the income statement 721,4 565,8
            Amounts owing at the end of the year
            Cash amount paid 721,4 565,8
  11.5   Net acquisition of treasury shares    
            BEE transaction costs –  4,5 
            Loss from the share trust 96,3  216,5 
            Share premium movement on treasury shares acquired 3,4  5,0 
    99,7  226,0