Massmart Annual Report 2008

Directors’ report

Directors’ responsibilities

The Directors acknowledge responsibility for the preparation of the annual financial statements, which, in their opinion, fairly present the results and cash flows for the financial year and the state of affairs of Massmart Holdings Limited and its subsidiaries at the end of the financial year.

The external auditors are responsible for reporting on the fair presentation of these financial statements.

The Company and its subsidiaries have maintained adequate accounting records and an effective system of internal controls to ensure the integrity of the underlying information.

Appropriate accounting policies, supported by sound and prudent managerial judgements and estimates, have been consistently applied.

The Audit Committee of the Board reviews the financial information presented and ensures that there has been adherence to International Financial Reporting Standards. Internal and external auditors of Group companies have unrestricted access to the Committee.

Group financial results

The financial results of the Group are set out in the income statement, the cash flow statement and the statement of changes in equity. The financial position of the Group is set out in the balance sheet.

Share capital

The following ordinary shares were in issue during the year under review:

  2008 2007
Opening balance 201 072 831 201 040 697
Converted preference shares 120 681 32 134
Closing balance 201 193 512 201 072 831
The following convertible redeemable preference shares were in issue during the year under review:
Opening balance 19 967 866 20 000 000
Shares converted to 120 681 32 134
ordinary shares    
Closing balance 19 847 185 19 967 866

Dividend policy

Massmart’s dividend policy is to declare and pay an interim and total cash annual dividend based on a 1,7 times cover (2007: 1,7 times), using headline earnings, unless circumstances dictate otherwise.

Dividends to shareholders

With regard to the final distribution to shareholders, the Directors resolved to distribute to shareholders registered in the books of the Company on 12 September 2008, a final cash dividend of 163 cents (2007: 123 cents) per share, bringing the total dividend for the year to 386 cents (2007: 320 cents) per share.

A Thuthukani dividend equivalent to 50% of the Massmart ordinary dividend per share (81,5 cents) was paid to the Massmart Thuthukani Empowerment Trust on 15 September 2008.

Directorate and Secretary

The current directorate of the Company is shown on here.

The Company Secretary provides a central source of guidance and advice to the Board, and within the Company, on matters of ethics and good governance.

The Company Secretary is Mr Ilan Zwarenstein, CA(SA), whose business and postal addresses are the same as that of the Company.

In accordance with the provisions of the Company’s Articles of Association, IN Matthews, DNM Mokhobo, GM Pattison, MJ Rubin and CS Seabrooke will retire at the annual general meeting. Being eligible, IN Matthews, DNM Mokhobo, GM Pattison, MJ Rubin and CS Seabrooke offer themselves for re-election.

Interests of Directors in the Company’s shares

At 30 June 2008, Directors owned ordinary shares in the Company, or options over ordinary shares in the Company, directly or indirectly, aggregated as to beneficial and non-beneficial ownership, as follows:

  2008 2007
  Shares Options Shares Options
    Non-   Non-   Non-   Non-
  Beneficial beneficial Beneficial beneficial Beneficial beneficial Beneficial beneficial
Non-executive directors                
MJ Lamberti 500 000 500 000
CS Seabrooke 700 000 600 000
MD Brand
ZL Combi
KD Dlamini
NN Gwagwa
JC Hodkinson 8 000 4 000
P Langeni
IN Matthews
P Maw
DNM Mokhobo
MJ Rubin 70 000 29 500 70 000 19 500
Executive directors                
GM Pattison 1 337 967 605 219 1 240 919 605 219
GRC Hayward 539 808 299 889 402 524 349 889
At the date of this report, the Directors’ holdings were as follows:
          Shares Options
            Non-   Non-
          Beneficial beneficial Beneficial beneficial
Non-executive directors        
MJ Lamberti 500 000
CS Seabrooke 600 000
MD Brand
ZL Combi
KD Dlamini
NN Gwagwa
JC Hodkinson 8 000
P Langeni
IN Matthews
P Maw
DNM Mokhobo
MJ Rubin 70 000 29 500
Executive directors        
GM Pattison 1 337 967 605 219
GRC Hayward 539 808 299 889

Details of shares issued and options granted by the Company in terms of the rules of the Massmart Share Incentive Scheme are dealt with here.

Subsidiaries

The following companies are principal subsidiaries of the Company:  
Federated Timbers (Proprietary) Limited 2004/035206/07
Masscash Holdings (Proprietary) Limited 1997/014716/07
Massmart International Holdings Limited (Incorporated in Mauritius) 47902 C1/GBL
Massmart Management & Finance Company (Proprietary) Limited 1992/004084/07
Masstores (Proprietary) Limited 1991/006805/07
Servistar (Proprietary) Limited 1948/031897/07
Shield Buying and Distribution (Proprietary) Limited 1984/011353/07

Details of the Company’s interests in material subsidiaries are set out here. Total net profit for all subsidiaries for the 2008 financial year amounted to R1 317,2 million.

Borrowing powers

In terms of the Articles of Association, the Group has unlimited borrowing powers. At 30 June 2008, borrowings were R535,1 million (2007: R567,9 million).

Going concern

The Directors are of the opinion that the business will be a going concern in the year ahead. In reaching this opinion, the Directors considered the following factors:

  • strong positive cash flows from trading
  • no recurring operating losses
  • well-controlled working capital and good quality inventory
  • approved short- and long-term financing, with sufficient additional short-term borrowing capacity if required
  • key executive management is in place
  • there have been no material changes that may affect the Group in any of our customer, product or geographic markets
  • budgets to June 2009 reflect a continuation of the above positive issues.

Address

The Company’s registered office and postal address:

Registered office
Massmart House, 16 Peltier Drive,
Sunninghill Ext 6, Sandton, 2191

Postal address
Private Bag X4, Sunninghill, 2157

Litigation

There are no current, pending or threatened legal or arbitration proceedings that may have, or have had in the previous 12 months, a material effect on the Group’s financial position.

Audit Committee report

The Audit Committee met three times during the year and the internal and external auditors presented formal reports to the Committee and attended meetings by invitation. In accordance with section 270(1)(f) of the Companies Act, No. 61 of 1973, as amended, the Committee reports as follows:

  • The scope, independence and objectivity of the external auditors was reviewed.
  • The audit firm Deloitte & Touche, and audit partner André Dennis, are, in the Committee’s opinion, independent of the Company, and have been proposed to the shareholders for approval to be the Group’s auditor for the 2009 financial year.
  • On an ongoing basis, the Committee reviews and approves the fees proposed by the external auditors.
  • The appointment of the external auditor complies with the Companies Act, as amended, and with all other legislation relating to the appointment of external auditors.
  • The nature and extent of non-audit services provided by the external auditors has been reviewed to ensure that the fees for such services do not become so significant as to call into question their independence.
  • The nature and extent of future non-audit services have been defined and preapproved.
  • As at the date of this report, no complaints have been received relating to accounting practices and internal audit of the Company or to the content or auditing of the Company’s financial statements, or to any related matter.

Subsequent events

Subsequent to 30 June 2008, Masscash Holdings (Pty) Ltd signed an agreement to acquire Brett Four (Pty) Ltd, trading as Cambridge Foods, which owns five food retail stores operating in the Durban area. The acquisition is subject to Competition Tribunal approval. The financial effects of this pending acquisition are not material.

On the first day of the 2009 financial year, the sale of the Massdiscounters Consumer Credit Division and associated debtors book became effective and cash proceeds of R174 million were received on the same date.

At the August 2008 meeting, the Board resolved to proceed, subject to shareholder approval, with assisting our black non-executive Directors to become shareholders in the Company. When the Group’s BEE staff equity schemes were implemented in 2006, the black non-executive Directors were not included as the Board was of the view that the design of those schemes was more suited to the Group’s general staff. It is now proposed that the five designated black non-executive Directors will each be given the opportunity to purchase at par 20 000 shares in Massmart, and then be restricted in the sale of these shares –half for three years and half for five years.

The Company regards the cost of this transaction as part of the engagement cost of these Directors over the five-year period in addition to their annual fees. The Board has considered the effect of this transaction on the continued independence of those Directors and believes that the limited size and its once-off nature are sufficient to ensure their continued ability to act independently.

Shareholders are referred to here Notice of sale of shares currently held as treasury shares to the black non-executive Directors and Fairness Opinion by an Independent Professional Expert which contains all the information required in terms of the JSE and the Companies Act.

On behalf of the Board

Ilan Zwarenstein

Ilan Zwarenstein
Company Secretary

1 October 2008