WELCOME TO OUR ONLINE ANNUAL REPORT 2011

Directors’ report

MASSMART ADDRESS
The Company’s registered office and postal address are as follows:

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

Postal address
Private Bag X4
Sunninghill
2157
South Africa

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 judgments and estimates, have been consistently applied.

The Audit and Risk 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, statement of comprehensive income, the statement of cash flows and the statement of changes in equity. The financial position of the Group is set out in the statement of financial position.

Dividend

SHARES IN ISSUE
Ordinary shares  
Closing balance June 2009 201,302,639
Converted preference shares* 192,865
Closing balance June 2010 201,495,504
New shares issued 6,331,173
Converted preference shares* 6,056,783
Closing balance June 2011 213,883,460
Preference shares*  
Closing balance June 2009 19,738,058
New shares issued 2,000,000
Converted to ordinary shares 192,865
Closing balance June 2010 21,545,193
Converted to ordinary shares 6,056,783
Closing balance June 2011 15,488,410
* The preference shares relate to
   Massmart's Thuthukani
   Empowerment Trust and Black
   Scarce Skills Trust.

Massmart’s current dividend policy is to declare and pay an interim and final cash dividend representing a 1.7 times dividend cover unless circumstances dictate otherwise. For the 2011 financial year, the Board has resolved to pay a final dividend such that dividends for the year are maintained relative to the prior year, notwithstanding the lower cover, due to the strong cash position of the Group and growth prospects for the coming year.

With regard to the final distribution to shareholders, the Directors resolved to distribute to shareholders registered in the books of the Company on 16 September 2011, a final cash dividend of 134 cents (2010: 134 cents) per share, bringing the total dividend for the year to 386 cents (2010: 386 cents) per share.

A Thuthukani dividend equivalent to 100% of the Massmart ordinary dividend per share (134 cents) was paid to the Massmart Thuthukani Empowerment Trust on 19 September 2011.

Alongside please find the movement in ordinary and preference shares for the period under review.

Directorate and secretary

The current directorate of the Company is shown here. Following the Walmart transaction, the Board of Massmart has been reconstituted with the resignation of Messrs Dods Brand, Kuseni Dlamini, Jim Hodkinson, Nigel Matthews, Peter Maw and Michael Rubin, and Ms Dawn Mokhobo. We thank them for their many years of service, leadership and counsel. Messrs Doug McMillon, Jeff Davis and JP Suarez are the Walmart-appointees to the Board. Grant Pattison and Guy Hayward remain on as CEO and CFO respectively. The Board now comprises nine directors of whom seven are non-executive and the majority of whom are independent. In addition, each Board committee is chaired by an independent Director.

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, JA Davis, CD McMillon, GM Pattison, CS Seabrooke and JP Suarez will retire at the annual general meeting. Being eligible, JA Davis, CD McMillon, GM Pattison, CS Seabrooke and JP Suarez offer themselves for re-election.

Interests of directors in the Company’s shares

At 26 June 2011, 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:

  2011   2010
  SHARES OPTIONS   SHARES OPTIONS
    Non-   Non-     Non-   Non-
  Beneficial beneficial Beneficial beneficial   Beneficial beneficial Beneficial beneficial
Non-executive directors                  
MJ Lamberti 245,000   500,000
CS Seabrooke   30,000
MD Brand*  
JA Davis  
KD Dlamini*   20,000
NN Gwagwa 9,800   20,000
JC Hodkinson*   8,000
P Langeni 9,800   20,000
IN Matthews*  
P Maw*  
CD McMillon  
DNM Mokhobo*   20,000
MJ Rubin   29,500
JP Suarez  
Executive directors                  
GM Pattison 696,473 245,000   1,457,308 550,000
GRC Hayward 394,394 36,750   804,898 250,000

* Resigned on 20 June 2011

At the dates of reporting, the Directors’ holdings were as follows:

  2011   2010
  SHARES OPTIONS   SHARES OPTIONS
    Non-   Non-     Non-   Non-
  Beneficial beneficial Beneficial beneficial   Beneficial beneficial Beneficial beneficial
Non-executive directors                  
MJ Lamberti 245,000   500,000
CS Seabrooke  
JA Davis  
NN Gwagwa 9,800   20,000
P Langeni 9,800   20,000
CD McMillon 2,400  
JP Suarez  
Executive directors                  
GM Pattison 696,473 354,603   1,421,389 500,000
GRC Hayward 394,394 120,987   804,898 75,000


Subsidiaries

As at the date hereof, the following companies are principal subsidiaries of the Company:
Massbuild (Proprietary) Limited (previously Builders Trade Depot) 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


Details of the Company’s interests in material subsidiaries are set out in note 37. Total net profit after tax for all subsidiaries for the 2011 financial year amounted to R1,004.4 million (2010: R1,291.8 million).

Borrowing powers

In terms of the Articles of Association, the Group has unlimited borrowing powers. At 26 June 2011, borrowings were R1.0 billion (2010: R0.7 billion).

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 in place
  • there have been no material changes that may affect the Group in any of our customer, product or geographic markets; and
  • budgets to June 2012 reflect a continuation of the above positive issues.

Litigation

Following the South African Competition Tribunal’s approval of the Walmart/Massmart merger in June 2011, certain Unions and South African Government departments have filed legal papers to appeal and review, respectively, the Tribunal’s decision. This matter will be heard by the Competition Appeal Court on 20-21 October 2011. Whilst the outcome of this hearing is uncertain, Walmart and Massmart are confident about the strength of our legal position.

In the unlikely event of an adverse ruling, whatever that may be, it is unclear what the impact, if any, will be on the Group’s financial position. Shareholders will be kept informed about all material developments in this regard.

Audit Committee report

The Audit and Risk Committee met four times during the year and the internal and external auditors presented formal reports to the Committee and attended meetings by invitation. In response to the requirements of the Companies Act, King III and in terms of its charter, the Committee can report 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 2012 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 pre-approved.
  • No reportable irregularities were identified and reported by the external auditors to the Committee.
  • The Committee is satisfied that the internal financial controls of the Divisions and Group operated effectively throughout the 2011 financial year and can be relied upon. In addition, the Committee is satisfied with the Group’s accounting policies and that these have been appropriately and consistently applied throughout the 2011 financial year.
  • The Committee reviewed this integrated annual report and recommended it to the Board for approval.
  • 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.
  • The Massmart website (www.massmart.co.za) has a link enabling the general public to lodge complaints with the Committee. Since establishing this functionality in 2009, no complaints have been received.

Nothing has come to the attention of the Audit and Risk Committee or Board arising out of the internal control self-assessment process, internal audits or external audits that causes the Committee or Board to believe that the Group’s system of internal controls and risk management is not effective or that the internal financial controls do not form a sound basis for the preparation of reliable financial statements.

Subsequent events

There are no subsequent events other than two conditional acquisitions: Fruitspot and Rhino Cash & Carry, have been filed with the Competition Commission whose findings are expected to be issued in October 2011.

IIan Zwarenstein
Company Secretary

5 October 2011