Massmart Annual Report 2008

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

        2008 2007
        Rm Rm

21.

Non-distributable reserves

   
  Foreign currency translation reserve 20,2 15,6
  Hedging reserve (0,7) 1,2
  Share-based payment reserve 225,8 116,7
  Capital redemption reserve fund 1,8 0,2
  Deferred taxation on trademarks 0,6 6,4
  Amortisation of trademarks 76,5 77,7
  Fair value adjustment of available-for-sale financial asset (13,2) (13,2)
  Change in minority interests 1,9 0,8
  Treasury shares (43,9)
        269,0 205,4
  Reconciliation of the foreign currency translation reserve    
  Balance at the beginning of the year 15,6 9,1
  Translation on consolidation 4,6 0,6
  Deconsolidation of Makro Zimbabwe 5,9
  Balance at the end of the year 20,2 15,6
  Exchange differences relating to the translation from the functional currencies of the Group’s foreign subsidiaries into Rands are brought to account by entries made directly to the foreign currency translation reserve.    
  Reconciliation of the hedging reserve    
  Balance at the beginning of the year 1,2
  (Loss)/gain recognised on cash flow hedges (1,9) 1,2
  Balance at the end of the year (0,7) 1,2
  The hedging reserve represents hedging gains and losses recognised on the effective portion of cash flow hedges. The hedge is released from equity at the same time the forecast transaction is recognised in profit or loss. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to profit or loss for the period.    
  Reconciliation of the share-based payment reserve    
  Balance at the beginning of the year 116,7 43,4
  Share-based payment expense on Massmart Holdings Limited Employee Share Trust 42,0 19,0
  Share-based payment expense on Massmart Thuthukani Empowerment Trust 62,3 52,2
  Share-based payment expense on the Massmart Black Scarce Skills Trust 4,8 2,1
  Balance at the end of the year 225,8 116,7
  The share-based payment reserve arises on grant of share options to employees under the Employee Share Incentive Schemes. Details of the Employee Share Incentive Schemes can be found in note 27. The share-based payment valuation was performed by Alexander Forbes for all periods and all schemes are equity-settled share schemes.    
  Massmart Share Schemes    
  Massmart Holdings Limited Employee Share Trust    
  Details of the share options outstanding during the year are as follows:      
           
    2008
Number of
share options
2008
Weighted
average
exercise price
2007
Number of
share options
2007
Weighted
average
exercise price
      Rm   Rm
  Outstanding at the beginning of the year 10 239 002 48,86 12 206 168 26,79
  Granted during the year 6 468 090 71,32 3 742 348 82,97
  Forfeited during the year (600 558) 75,14 (1 468 158) 43,29
  Exercised during the year (1 801 634) 26,27 (4 241 356) 17,29
  Outstanding at the end of the year 14 304 900 60,76 10 239 002 48,86
  Exercisable at the end of the year 2 913 504   3 021 376  
       
    2008 2007
  Massmart Holdings Limited Employee Share Trust    
  The weighted average share price at the date of exercise for share options exercised during the year was R72,62 (2007: R74,11). The options outstanding at the end of the year have a weighted average remaining contractual life of 4,5 years (2007: 4,1 years). In 2008, options were granted on 24 August 2007, 30 November 2007, 1 April 2008 and 26 May 2008. The estimated fair values of the options granted on those dates are R29,40, R23,46, R22,88 and R21,10 respectively. In 2007, options were granted on 25 August 2006, 1 October 2006, 15 November 2006, 23  2007, 2 April 2007 and 24 May 2007. The estimated fair values of the options granted on those dates are R16,22, R17,20, R18,30, R28,99, R24,55 and R27,47 respectively.    
  These fair values were calculated using the binomial model. The inputs into the model were as follows:    
  Weighted average share price (Rand) 70,26 86,40
  Expected volatility 31,1% – 31,7% 29,7% – 31,3%
  Expected life 3 – 5 years 3 – 5 years
  Risk-free rate 9,0% – 9,6% 7,4% – 8,5%
  Expected dividend yield 3,4% – 3,8% 3,6% – 3,9%
  Expected volatility was determined by calculating the historical volatility of the Company’s share price over the number of previous years corresponding with the option lifetime. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.    
  Massmart Thuthukani Empowerment Trust    
  The weighted average share price at the date of exercise for share options exercised during the year was R76,67. The options outstanding at the end of the year have a weighted average remaining contractual life of 4 years. In 2007, options were granted on 2 October 2006. The estimated fair values of the options granted on that date is R24,75.    
  These fair values were calculated using the binomial model. The inputs into the model were as follows:    
  Weighted average share price (Rand) 56,91 56,91
  Expected volatility 30,1% – 32,3% 30,1% – 32,3%
  Expected life 5,0 5,0
  Risk-free rate 8,3% – 8,4% 8,3% – 8,4%
  Expected dividend yield 3,7% 3,7%
  Expected volatility was determined by calculating the historical volatility of the Company’s share price over the number of previous years corresponding with the option lifetime. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.    
  Massmart Black Scarce Skills Trust    
  No options were exercised during the year. The options outstanding at the end of the year have a weighted average remaining contractual life of 4 years. In 2008, options were granted on 30 November 2007 and 1 April 2008. The estimated fair values of the options granted on those dates are R23,46 and R22,85 respectively. In 2007, options were granted on 1 October 2006 and 2 April 2007.The estimated fair values of the options granted on those dates are R17,20 and R24,55 respectively.    
  These fair values were calculated using the binomial model. The inputs into the model were as follows:    
  Weighted average share price (Rand) 70,08 58,26
  Expected volatility 31,0% – 31,3% 30,1% – 31,3%
  Expected life 3 – 5 years 4,1
  Risk-free rate 9,0% – 9,1% 7,7% – 8,5%
  Expected dividend yield 3,5% – 3,7% 3,7% – 3,9%
  Expected volatility was determined by calculating the historical volatility of the Company’s share price over the number of previous years corresponding with the option lifetime. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.    
       
    2008 2007
    Rm Rm

22.

Minority interest

   
  At the beginning of the year 25,8 50,6
  Changes in minority interests (3,0) (37,3)
  Income attributable to minorities 21,5 15,3
  Distribution to minorities (13,6) (2,8)
  At the end of the year 30,7 25,8
 

During the prior year, Massmart Holdings Limited purchased the remaining 49% shareholding in De La Rey 1001 Building Materials (Pty) Ltd.

The minority interest at year-end relates to the minority shareholders in subsidiaries of Masscash Holdings (Pty) Ltd.

23.

Non-current liabilities

  Interest-bearing    
  Unsecured    
  Medium-term payable 15,1 3,4
  Less: Included in current liabilities (15,1) (3,4)
  Secured    
  Medium-term bank loans 302,6 429,7
  Less: Included in current liabilities (116,9) (116,2)
  Foreign bank loan 52,6 54,9
  Less: Related cash deposit (52,6) (54,9)
    185,7 313,5
  Capitalised finance leases 96,2 101,2
  Less: Included in current liabilities (14,2) (12,0)
    82,0 89,2
  Total interest-bearing liabilities 267,7 402,7
  Interest-free    
  Unsecured    
  Minority shareholders’ loans 0,7 1,9
  Income received in advance 141,1 140,8
  Less: Included in trade and other payables (52,0) (47,6)
  Operating lease liability 462,0 475,0
  Less: Included in trade and other payables 5,4 (13,2)
  Total non-interest-bearing liabilities 557,2 556,9
  Total non-current liabilities 824,9 959,6
 

Included in current liabilities is a medium-term payable of R3,6 million (2007: R3,4 million), which is an amount owing to the Massmart Education Trust relating to cash held on its behalf.

Two medium-term bank loans, raised in 2001, were repayable in ten equal instalments over five years (last payment was during the 2007 financial year). One loan bore interest at a fixed rate of 9,2% and the other interest at a floating rate linked to the ninety-day JIBAR. The loans were secured by intragroup cross suretyships.

A further two medium-term bank loans, raised in the 2006 financial year to fund the Massbuild acquisitions, are repayable in nine equal instalments over five years. The loans bear interest at a fixed rate of 8,8% and 8,7% respectively. The loans are secured by intragroup cross suretyships.

The foreign bank loan relates to a US Dollar-denominated loan in one of Massdiscounters’ foreign operations which has a legal right of offset with a US Dollar-denominated cash deposit. The interest rate is 0,5% below the US Dollar prime overdraft rate. Capitalised finance leases include vehicles, fixtures, fittings, plant and computer equipment and property leases, repayable in monthly instalments varying from one to five years at varying interest rates (varying between 8,25% and 15,5%).

The capitalised finance leases are secured by movable assets with a book value of R29,5 million (2007: R35,7 million) and the property lease by the value of the underlying land amounting to R42,3 million (2007: R44,2 million).

The income received in advance is for extended warranties which are sold within the Group and which will be released over the next two to four years.

The operating lease liability relates to the lease smoothing adjustment required by IAS 17 Leases.

24.

Non-current provisions

       
  Onerous lease provision     2,1 2,8
  Less: Payable within one year included in current provisions     (0,7) (0,7)
  Provision for post-retirement medical aid contributions and other medical aid provisions     47,7 45,0
        49,1 47,1
           
    Repayable within 1 year* Repayable in
2 – 5 years
Repayable
after
5 years
Total
    Rm Rm Rm Rm
  2008 0,7 1,4 47,7 49,8
  2007 0,7 2,1 45,0 47,8
  * Included in current provisions in note 26.        
           
 

Certain Group companies provide post-retirement healthcare benefits to their retirees. The policy ceased to be offered to new employees with effect from 1999. This fund is accounted for as a defined benefit plan and measured using the projected unit credit method. The liability is unfunded. The main assumption used in calculating the costs and the provision is an “interest rate – medical inflation rate” gap of 1,0% (2007: 1,5%)

        2008 2007
        Rm Rm
  The net expense recognised in the income statement is:    
     Current service cost 2,2 1,8
     Interest cost 3,4 3,3
     Benefits paid against balance sheet held liability (1,0) (1,0)
     Net actuarial (gain)/loss recognised in the year (1,9) 1,9
  Net expense recognised as part of employment costs 2,7 6,0
  Movements in the post-retirement medical aid liability:    
     Opening defined-benefit obligation 45,0 39,0
     Expense as above 2,7 6,0
  Closing defined-benefit obligation 47,7 45,0
 

The last valuation of the liability for the post-retirement medical aid contributions was performed as at 30 June 2008 by Alexander Forbes, Fellow of the Institute of Actuaries (2007: Alexander Forbes, Fellow of the Institute of Actuaries). The current year costs have been assessed in accordance with the advice of independent actuaries.

The net actuarial gain in the current year arose as a result of a combination of the following factors:

  • Six members were transferred to RCS on 30 June 2008 and this resulted in a gain of R0,3 million.
  • Alexander Forbes was unable to confirm the date of employment for certain employees. In consultation with Massmart, the date of joining the medical scheme was used to accrue the liability and this resulted in an unexpected gain of R0,9 million.
  • Higher than expected increase in medical scheme contributions resulted in a gain of R1,0 million.
  • Other miscellaneous items resulted in a net gain of R0,4 million.

Other than the changes listed above, the remaining assumptions are consistent with the assumptions applied in the prior year.

25.

Trade and other payables

   
  Trade payables 5 928,1 5 285,8
  Operating lease liability (5,4) 13,2
  Sundry payables and other accruals 1 457,3 1 456,7
        7 380,0 6 755,7
 

Trade and other payables are classified as ‘Loans and receivables’ for IAS 39 Financial Instruments: Recognition and Measurement purposes. See note 37, ‘Financial instruments’ for IAS 39 accounting treatment.

The Group has financial risk management policies in place to ensure that all payables are paid within the credit timeframe. Settlement discounts received range from 1,1% to 2,5%.

26.

Provisions

       
  Restructuring costs raised on acquisition 1,9 1,8
  Onerous lease provision 0,7 0,7
  Other 8,9 1,4
        11,5 3,9
  Provisions raised against specific assets, for example inventories and trade receivables, are offset against those assets.
           
          Unused  
    Opening Amounts Amounts amounts Closing
    balance provided utilised reversed balance
    Rm Rm Rm Rm Rm
  Reconciliation of provisions          
  2008          
  Restructuring costs raised on acquisition 1,8 0,1 1,9
  Onerous lease provision 0,7 1,1 (0,7) (0,4) 0,7
  Other 1,4 7,5 8,9
    3,9 8,6 (0,7) (0,3) 11,5
  2007          
  Restructuring costs raised on acquisition 4,3 (2,5) 1,8
  Onerous lease provision 1,0 0,7 (1,0) 0,7
  Other 1,4 1,4
    5,3 2,1 (1,0) (2,5) 3,9
             
          2008 2007
          000s 000s

27.

Employee share incentive schemes

   
  Massmart Holdings Limited Employee Share Trust    
  Total shares and options available to the scheme 39 500 39 500
  Total shares and options available to the scheme 39 500 39 500
  Shares and options ever allocated to participants who are still employees (31 726) (37 514)
  Shares which have been paid for and transferred which are more than ten years old 1 927 1 395
  Remaining capacity for issue in terms of the JSE practice 9 701 3 381
  Opening balance of shares and options 13 395 19 077
  New shares and options offered to employees and executive directors 7 216 4 121
  Shares and options sold by employees and directors (1 869) (8 189)
  Shares repurchased from/forfeited by employees and options lapsed/forfeited (637) (1 614)
  Closing balance of shares and options 18 105 13 395
 

The closing balance includes 3 800 048 (2007: 3 155 538) shares and 14 304 900 (2007: 10 239 002) options. Shares and options previously issued to employees who then subsequently left the Group are excluded from the figures above. In accordance with the new Schedule 14 of the JSE – ‘Requirements for share incentive schemes’ effective from 15 October 2008 the shares available for issue to the Share Trust will increase from the 9 701 000 shares above to 36 003 396 shares. Any amendments required to bring the Share Trust rules in line with the new Schedule 14 have to be approved by the JSE and shareholders by no later than 1 January 2011.

Options may be exercised at any time, but shares arising out of options may only be sold when they have vested with the participant. Vesting occurs over a five-year periods as follows:

  • 25% two years after the offer date
  • 50% three years after the offer date
  • 75% four years after the offer date
  • 100% five years after the offer date.

In terms of the scheme rules, all share loans on offers made prior to 22 May 2002 must be repaid or options exercised no later than ten years from the offer date. For subsequent offers, share loans must be repaid or options exercised no later than six years from the offer date.

The following options granted to employees and directors in terms of the Massmart Employee Share Incentive Scheme have not yet been exercised:



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              2008 2007
              000s 000s
  Massmart Thuthukani Empowerment Trust    
  Total share units available to the scheme 18 000 18 000
  Opening balance of share units 17 231
  New share units offered to eligible employees 18 124
  Share units sold (128) (111)
  Share units repurchased from/forfeited by employees and share units lapsed/forfeited (1 825) (782)
  Closing balance of share units 15 278 17 231
 

Vesting occurs over a six-year period as follows:

  • 33,3% four years after the offer date
  • 33,3% five years after the offer date
  • 33,4% six years after the offer date.

The following share units granted to eligible employees in terms of the Massmart Thuthukani Empowerment Trust have not yet been exercised:

                 
  Offer date Expiry date Exercise
price (R)
No of share
units at
June 2007
No of
share units
forfeited and
expired
No of
share units
exercised
New share
units granted
No of share
units at
June 2008
  2008              
  1 October 2006 2 October 2012 49,98 17 230 925 1 824 770 128 150 15 278 005
  2007              
  1 October 2006 2 October 2012 49,98 782 440 111 225 18 124 590 17 230 925
                 
              2008 2007
              000s 000s
  Massmart Black Scarce Skills Trust    
  Total share units available to the scheme 2 000 2 000
  Opening balance of share units 626
  New share units offered to employees 1 048 687
  Share units sold by employees (21)
  Share units repurchased from/forfeited by employees and share units lapsed/forfeited (29) (61)
  Closing balance of share units 1 624 626
 

Vesting occurs over a five-year period as follows:

  • 25% two years after the offer date
  • 50% three years after the offer date
  • 75% four years after the offer date
  • 100% five years after the offer date.

The following share units granted to eligible employees in terms of the Massmart Black Scarce Skills Trust have not yet been exercised:

                 
  Offer date Expiry date Exercise
price (R)
No of share
units at June
2007
No of
share units
forfeited and
expired
No of
share units
exercised
New share
units granted
No of share
units at
June 2008
  2008              
  1 October 2006 2 October 2011 56,42 600 524 29 026 20 940 550 558
  2 April 2007 3 April 2012 82,67 25 464 25 464
  30 November 2007 29 November 2013 71,58 10 794 10 794
  1 April 2008 31 March 2014 66,97 1 037 045 1 037 045
        625 988 29 026 20 940 1 047 839 1 623 861
  2007              
  1 October 2006 2 October 2011 56,42 60 947 661 471 600 524
  2 April 2007 3 April 2012 82,67 25 464 25 464
        60 947 686 935 625 988
                 

28.

Retirement benefit information

  All full-time permanent Massmart staff are members of either the Massmart Pension Fund, the Massmart Provident Fund or the SACCAWU National Provident Fund. These funds are defined-contribution funds and are subject to the Pension Funds Act, 1956. Following the recent acquisitions, many of their staff are still members of the retirement funds of the previous business owners. Projects are underway to transfer these employees to one of the above funds in future.

The Massmart Pension Fund and the Massmart Provident Fund are not required to submit a statutory actuarial valuation to the Financial Services Board every three years as they have been granted valuation exemption with effect from 1 March 2007. The funds’ valuator certified that the funds were financially sound at 28 February 2006, being the last statutory actuarial valuation date of the funds and the assets were suitable in nature, in terms of the liabilities as at valuation date.

Contributions received by the funds for the year ended 30 June 2008 amounted to R210 million (2007: R187 million). The Group’s contribution of R126 million (2007: R112 million) was included in the income statement for the year as part of the employee costs.

              2008 2007
              Rm Rm

29.

Commitments

   
  Commitments in respect of capital expenditure approved by directors:    
  Contracted for 278,0 101,0
  Not contracted for 287,2 327,7
              565,2 428,7
 

Commitments contracted for in the current year include three new Builders Warehouse stores, four new Game stores, one new Dion Wired store and two new Builders Trade Depot stores. Two Game stores are to be relocated and four Game stores are to be refurbished. There will be a general Makro store refurbishment as well as SAP upgrades at Builders Warehouse and Makro, and an IT wishlist at Massdiscounters.

Commitments not contracted for in the current year include a Great Plains upgrade at Shield, a SAP upgrade at Builders Warehouse and various store refurbishments, and tangible and intangible asset purchases.

Massmart has the right of first refusal on the sale of any shares by the minority shareholders in various CBW stores. Historically Massmart has exercised this right. The amount to be paid in future, should Massmart exercise its rights, totals R111,7 million (2007: R73,5 million).

Capital commitments will be funded utilising current facilities.

      2008 2007
      Rm Rm

30.

Operating lease commitments

   
  Land and buildings    
    Year 1 713,5 667,5
    Years 2 to 5 2 977,5 2 728,6
    Subsequent to year 5 2 446,3 2 625,6
      6 137,3 6 021,7
  Plant and equipment    
    Year 1 17,2 19,2
    Years 2 to 5 27,5 31,8
    Subsequent to year 5 0,5 2,0
      45,2 53,0
  Other    
    Year 1 3,5 3,6
    Years 2 to 5 3,1 4,2
      6,6 7,8
  Promissory notes that represent commitments under non-cancellable operating leases of R936,1 million (2007: R1 059,9 million) entered into by Masstores (Pty) Ltd on behalf of Makro 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: R678,9 million), discounted at 15%. In accordance with IAS 17 Leases, the rentals paid are amortised over the entire remaining lease period on a straight-line basis.