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Mustek a
nn
ual re
po
rt 20
06
‘
STRONG RELATIONSHIPS
Mission Statement
Mustek assembles, markets and distributes ICT
(Information Communications Technology)
products and services. Mustek provides
competitive, value-added services to our
customers and creates wealth for shareholders.
Mustek meets its objectives through strong relationships in the international ICT market,
and by continually nurturing the entrepreneurial spirit of our people and
business associates.
CONTENTS
Mission Statement Corporate Vision 1 Group Profile 1 Core Values 3 Chairman’s Report 7 Chief Executive Officer’s Report 14 Six-year Financial Review 15 Environmental Sustainability 17 Social Responsibility 21 Group Structure 22 Board of Directors 23 Annual Financ ial Statements 105 Notice of the Annual General Meeting 109 Form of Proxy
Corporate Vision
>> Leadership of the Mecer, Rectron, Comztek and Brother brands in our chosen markets.
>> Increasing market share while maintaining margins.
>> Maintaining our leadership position by introducing technology advances to the market place ahead of other suppliers.
>> Superior procurement, manufacturing and distribution capabilities, ensuring that high quality and competitively priced products and services are delivered to our customers.
>> Equity in the workplace through focused empowerment initiatives.
>> Growth and value through targeted initiatives at larger, high-value customers.
This annual report is also available in PDF which can be downloaded from our website: www.mustek.co.za
Mustek annual report 2006
1
Group Profile
Mustek, from its corporate headquarters in Midrand, South Africa, oversees the activities of its business units operating in its chosen markets in Africa, South America and Australia.
The Group invests heavily in its core resource – competent people – by pursuing a comprehensive programme of training and people development. The tenets of the Group’s philosophy embrace transparency of operation, imaginative application of technology and accountability to all stakeholders.
Mustek’s ongoing success is attributable to a clear and forward-looking strategic vision, responsible management, the technical capabilities of a committed owner-workforce, superior products, service levels and a strong asset base. The Group aims at continuing sustainable headline earnings growth and creating long-term shareholder value by remaining focused on its core businesses – the manufacturing and selling of personal computers under its Mecer brand, and the distribution of computer components through its Rectron brand. These businesses are supported by associated companies within Mustek that provide complementary ICT services and products.
‘
Core Values
>> Safeguard the integrity and quality of our technological standards.
>> Implement the highest business ethics and corporate governance, striving for greater trust from all our stakeholders.
>> Our people are our greatest asset.
>> The development of a harmonious and prosperous South African society.
>> Faith and growth in the African continent and its people.
‘
Superior procurement,
manufacturing and distribution
capabilities, ensuring that high
quality and competitively priced
products and services are delivered
to our customers.
‘
2
3
Mustek annual report 2006
OVERVIEW
South Africa’s economy continued its seemingly
unstoppable climb in the financial year under
review, but growing clouds on the horizons of
world politics and economics may be signalling a
sea change.
The Middle East remains a chronic hotbed of
tension, with the recent Israel – Lebanon flare-
up the worst in years, while deteriorating
international relations with emerging nuclear
powers such as Iran and North Korea threaten to
destabilise the fragile global balance of power
between nations.
As national economies around the world have
expanded, with China and India in particular
roaring ahead, global demand for energy has
become insatiable.
Oil prices have consequently reached their
highest real levels in decades, with the world
teetering on the edge of a new oil crisis for some
years now. A full-blown oil crisis such as in the
early 1970s will surely peg back economic
growth while probably also fuelling higher
inflation.
In South Africa, sharply increased trade deficit
figures in May and June 2006 caught most
economists by surprise, triggering an interest
rate rise and a weakening of the Rand exchange
rate. We will no doubt follow these trends closely
in the year ahead, as the nature of our business,
with its significant reliance on imported
components, makes Mustek vulnerable to sudden
exchange rate shifts.
Although we still believe that the South African
economy will continue growing, its pace may
slow, with consumer spending easing back due
to higher interest rates and transport costs.
WORLD CUP 2010
On the upside, a key South Africa’s economic
dynamic is different to every other nation at this
time – the 2010 World Cup Soccer tournament
will be played here. World Cup 2010 is sparking
off a massive programme of public-private
spending on national infrastructure, and serious
government-level heart-searching on social
issues such as crime. These factors will to a
large extent shape our country’s economic and
developmental landscape over the next four
years, and could possibly even counterbalance
the negative international picture. Certainly,
from Mustek’s point of view, we trust this will be
the case.
CHANGES TO THE MUSTEK BOARD
In June 2006 non-executive director Ms Sindi
Mabaso resigned from the Mustek Board. Ms
Mabaso was a valued member of our board, but
we respect that her accepting a senior partner
position in a major auditing firm meant her
having to relinquish all other company
directorships.
We wish Ms Mabaso well in her future endeavours
and are confident that she still has much to
contribute to the growing commercial influence
of South Africa’s women and to the chartered
accountancy profession.
Chairman’s Report
Chairman’s Report(continued)
4
Mustek annual report 2006
ICT CHARTER
The ICT (Information and Communications
Technology) Charter, which in mid-2005 finally
reached final draft form after three gruelling
years of debate and redrafting, has been placed
on hold. The charter can only be implemented
when it has been aligned with the Department of
Trade and Industry’s (dti) Codes of Good Practice,
which are still being finalised.
Mustek expects to endorse and abide by the
parameters of the ICT Charter when it can be
formally adopted by industry.
SAFIKA HOLDINGS (PTY) LIMITED
In 2003 Safika Holdings (Pty) Limited (Safika)
agreed to purchase 25% of Mustek’s shareholding
for about R224 million in terms of a structured
deal.
At this time the funded period of this
empowerment deal is reaching the end of its
term and a compliance audit is underway. The
working relationship between Mustek and Safika
to date has been outstanding and we will make
an announcement regarding our ongoing
relationship into the future once the audit has
been completed.
BROTHER TRANSFORMS INTO BROTEK
In 1981 James Booysen founded Brother
Business Machines (Pty) Limited (Brother) in
South Africa, having secured the exclusive
distribution rights for the highly respected
Brother branded range of printers, fax machines,
multifunction centres, typewriters and
consumables for Southern Africa. In 1996 Mustek
purchased 70% of Brother’s shares and the
company joined the Mustek Group, with James
Booysen remaining as Brother’s managing
director and 30% shareholder.
Brother has continued to grow from strength to
strength, but in recent years James Booysen has
been planning to retire. In this financial period
– with the assistance of majority shareholder
Mustek – Booysen sold his 30% shareholding
to black-owned Puno Printing Solutions
Investments.
The decision was taken to rebrand the company
and it was renamed Brotek (Pty) Limited from
1 June 2006. Brotek’s new CEO is Munna Desai,
a veteran of nearly 30 years in the ICT industry.
I take this opportunity to heartily thank James
Booysen for his outstanding leadership and drive
over the years, and we all wish him a most
relaxing and fulfilling retirement.
HUMAN RESOURCES
Mustek’s relationship with its workforce has
generally been cordial and trouble-free, largely
due to the company’s open door policy when
employees feel the need to discuss problems or
issues.
Even so, during this financial year a human
resources issue arose that required the
empathetic intervention of a board member. The
consequent discussions resolved the situation to
the satisfaction of all involved parties, and
labour relations in Mustek returned to its usual
trouble-free status.
5
Mustek annual report 2006
CONCLUSION
What should have been an exceptional year was
downgraded to a merely satisfactory one, as the
Rand tumbled against the USD in the last few
weeks of the financial year. In one stroke this
event removed a significant portion of our
anticipated profits.
Even so, from my perspective, this annual report
reveals an exceptionally well-managed company
in a tough industry, with trading conditions and
margins still prejudiced towards the imported
international brands rather than local
manufacturers.
Mustek remains a pioneer in South Africa ICT
market, and has a tested strategy of penetrating
deeper into Africa’s untapped markets as and
when the right conditions become apparent.
With experienced management at all levels, a
stable and competent workforce – and possibly
most important of all – a company culture that
respects the diversity of people and encourages
all to always do better than before, Mustek is
poised for the future.
As Africa and other undeveloped markets emerge
from behind the digital divide, Mustek is ideally
positioned to build upon the sturdy foundation it
has already put in place.
Yours sincerely
Vuli Cuba
Chairman
‘
Maintaining our leadership position
by introducing technology advances
to the market place ahead of other
suppliers.
6
7
Mustek annual report 2006
HIGHLIGHTS
This financial year was in many ways similar to
the previous reporting period, with unit sales
climbing as South Africans took advantage of
historically low interest rates to spend on
consumer goods such as our PC hardware.
Up to mid-May 2006, Mustek was poised to
notch up another record year, but our profits
were knocked back by the Rand’s sudden and
sharp depreciation against the USD at the end of
the period.
Even though over R67 million was effectively
deleted from our bottom line in a matter of
weeks, Mustek still recorded a satisfactory profit
of R74,6 million.
Mustek remains positioned for sustainable
growth, as the long anticipated computerisation
of schools is still in its pilot phase, while the
home user market shows signs of responding
positively to falling broadband costs and new
technologies such as Voice Over Internet Protocol
(VOIP).
FINANCIAL HIGHLIGHTS
This was again a satisfactory year for the
Group, with revenue increasing by 8% from
R2,8 billion to over R3 billion. Gross profit
from continuing operations increased from
R471 million to R503 million, while gross margin
from continuing operations remained consistent
at 16,4%.
Revenue growth was mainly attributable to a
10% increase in unit sales, higher revenues
from our international operations and the
proportionate consolidation of Comztek for
the full 12-month period. The Group’s bank
balances and cash totalled a healthy
R477 million, with cash flow from operations
contributing R222 million.
An unexpected and steep drop in the Rand
during the six weeks prior to year-end impacted
heavily on operating profit margins, which
could only be partially compensated for by
the Group’s prudent policy of partly hedging
against currency volatility by way of forward
exchange contracts.
The effect was that Mecer’s accounts reflected
R41,3 million and Rectron R26,1 million in
unrealised foreign exchange losses on the
revaluation of accounts payable at year-end.
We expect to recover some of these unrealised
losses in the 2007 financial year through higher
selling prices and the Rand’s strengthening after
June 2006.
Accounting standards
This year Mustek reported in terms of the
incoming International Financial Reporting
Standards (“IFRS”) for the first time, with
comparative figures restated where necessary
for comparison purposes.
Dividends
Two dividends were declared during the period.
Chief Executive Officer’s Report
Chief Executive Officer’s Report(continued)
8
Mustek annual report 2006
The first dividend of 35 cents per ordinary share
and the second of 25 cents totalled 60 cents per
share for the year – exactly the same amount
as the previous period. Headline earnings per
ordinary share fell from 89,46 cents to 44,15
cents and basic earnings per ordinary share
decreased from 79,25 cents to 58,00 cents.
WHAT CAN WE EXPECT IN THE NEXT
FEW YEARS?
Little has changed in the five-year outlook I
published in last year’s annual report. As stated
before, we are expecting wide-scale growth in
Africa’s ICT market, although this quickening is
happening slower than we anticipated.
In South Africa the potential market for PCs is
still largely untapped, with home users and the
education sector expected to provide the bulk of
future sales growth.
Telkom and certain other companies last
year launched “bundles” of ADSL services
packaged with Mecer PCs or notebooks. These
bundles varied from entry-level Mecer Celeron
PCs to top-end Pentium 4 PCs and Centrino
notebooks.
This offering proved popular and we expect to
see more large ICT companies coming to the
market with competing “bundles” of products
and services, which will certainly increase PC
sales to the home user market.
The education market is potentially massive and
government is clearly intent on computerising
its schools and tertiary education institutions.
Getting this huge undertaking off the ground,
however, has been slow and fragmented, with
pilot projects still underway around South Africa.
To date Mustek has been awarded a considerable
share of these pilot projects and, as South
Africa’s largest manufacturer and distributor of
locally branded PCs (Mecer), we anticipate
clinching a large slice of this market when the
major tenders are eventually tabled.
Two primary factors will drive the next immediate
stage of upgrading PCs and notebooks. The first
is the new generation of 64-bit computer chips
introduced by Intel, which considerably
outperform Intel’s previous generation of 32-bit
chips. These two chips, named Conroe for PCs
and Merom for the notebook version, introduce
a new, dual core architecture that recaptures
the performance lead for Intel in its perennial
“chip wars” with AMD.
The second is the imminent introduction of new
Microsoft operating systems, expected in late
2006 or early 2007.
The 64-bit Vista and Longhorn operating system
packages will replace the current 32-bit XP and
server platforms respectively. These 64-bit
platforms are notably faster than current 32-bit
applications, and will cause popular applications
to be rewritten for 64-bit technology.
These twin push-factors of upgraded processing
power and new operating systems will drive
organisations to replace their ICT infrastructure
in order to match their competitors.
9
Mustek annual report 2006
Broadband
Broadband is not being adopted in South Africa
as quickly as we would have liked, mainly due to
a technical and financial constraints. On the
technical side, demand for ADSL is outstripping
the present capacity of service providers to
physically install it, especially if a particular
installation requires the upgrading of carrier
lines or local exchanges. We do however, expect
this situation to rectify itself in the near future.
On the financial side, many home users cannot
afford ADSL, which is comparatively more
expensive in South Africa than most developed
countries. In this last year ADSL prices began to
come down, and we expect that competition
from the SNO and other broadband technologies
will continue to drive ADSL prices down to levels
that home users can afford.
Telkom’s ADSL fixed line technology remains by
far the most used broadband technology in South
Africa, although it has three wireless broadband
competitors. Sentech’s MyWireless and WBS’s
iBurst remain concentrated on the major urban
centres, but MTN and Vodacom’s 3G products,
supported by their extensive GSM networks, are
fast gaining corporate user market share.
Intel’s Wi-Max, based on the IEEE 802.16
standard, is probably the next big thing in
broadband connectivity. Wi-Max will enable
wireless connectivity over large areas through
transmitter masts similar to those presently
used by MTN, Vodacom and Cell C.
In the next three years Intel intends merging
the current Wi-Fi and the incoming Wi-Max
standards in its new CPU (central processing
unit) “chips”, which will power both Windows
and Macintosh computers. These chips will
enable newer computers to connect to both local
and regional wireless networks, which should
revolutionise always-on connectivity. This would
be a positive development for Mustek, as
notebook users would be further compelled to
replace their hardware.
LOWERING THE COST OF COMPUTERS AND
SOFTWARE
Several international initiatives are underway to
sharply lower the price of computing and getting
connected for people in the lower income groups
in the world’s developing nations.
One laptop per child
The first – and certainly the most cost-effective
if successful – is renowned ICT guru Professor
Nicholas Negroponte’s non-profit “one laptop
per child” project, which has designed and is
raising funding for a robust and basic laptop for
distribution to poor communities for less than
USD100 per laptop.
We applaud Professor Negroponte for launching
this noble project, which potentially could
introduce millions of people – who otherwise
would have no opportunity – to the digital worlds
of education and commerce.
Chief Executive Officer’s Report(continued)
10
Mustek annual report 2006
Mustek itself isn’t geared to get involved in this
project at this time, though if approached we
would certainly consider it. If Negroponte’s “one
laptop per child” project succeeds, even partially,
it will bring many disadvantaged people out of
digital darkness into the world of computing and
connectivity.
Affordable personal computer
A second project, in which Mustek is the only
ICT company in South Africa currently
participating, is Intel’s Affordable Personal
Computer (APC) project.
The APC will be an entry-level PC costing
significantly less than the cheapest current
entry-level Intel Celeron or AMD Sempron
equipped PC, and will feature a low power, low
heat and fanless CPU.
The APC will only draw 65 watts of electric
current as opposed to the 200 watts of current
desktop PCs. We believe it to be the ideal PC for
the education sector as it is significantly cheaper
than current entry-level models – and of key
importance – its low power draw and not having
a fan continuously pushing out heat means that
it is well suited to classrooms, where 30+
conventional and fanned PCs could cause
overheating problems for both scholars and
machines.
Microsoft FlexGo
Microsoft is introducing a new package that
bundles PCs and software into a pay-as-you-go
scheme similar to that of many African cellphone
users.
Aimed at developing markets, where income is
generally low and can be erratic, FlexGo will let
users take delivery of PCs and software which
they can then activate through vouchers
purchased from authorised vendors, just as
mobile users currently finance the ongoing use
of their cellphones.
Although negotiations with Microsoft are still
underway at the time of writing this report, in
essence this model offers several advantages
and could considerably grow the home user PC
market.
In summary, the targeted users are already
familiar with the pay-as-you-go model; they can
get a full featured PC with current Microsoft
software; and they can pay for the PC package
when they use it, which is intrinsically fair.
At the end of the day FlexGo will create an
entirely new ICT market niche for PCs and
Microsoft products.
Voice Over Internet Protocol (VOIP)
Voice Over Internet Protocol (VOIP) means that
telephone calls can be routed via the internet
rather than through a conventional fixed
line or cellphone. The primary benefit of
VOIP is cost savings, particularly on long-distance
calls or calls to cellphones. Another key advantage
is that PC to PC calls can be made at minimal
cost, but generally with enhanced quality.
11
Mustek annual report 2006
At this stage VOIP telephony appears to be the
next wave in voice communication, particularly
as broadband becomes more widely used.
BEE AND TRANSFORMATION
Mustek is committed to the transformation of
South Africa, and is equally committed to
furthering the cause of black economic empower-
ment (BEE) where it can. Our current BEE
participation is channelled through three
initiatives.
The first initiative is a 25% shareholding in
Mustek owned by Safika Holdings. The second
initiative was taken in this year, when a 30%
shareholding in Brotek, a Mustek subsidiary, was
sold to black-owned Puno Printing Solutions
Investments. These transactions are commented
on by the Chairman in his report, so I won’t
repeat it here.
Our third initiative, which is ongoing and still
expanding, is Mustek’s support for its growing
network of 3 000+ mostly BEE and SMME
dealers. The Group actively seeks out BEE
enterprises to service its supply contracts and, if
required, bridges the experience gap by
furnishing management, marketing, technical or
training support.
INTERNATIONAL MARKETS
Africa
In this period Mustek bought out the remaining
49% shareholding in Mecer East Africa and
Mecer EPZ, its two East African companies.
These companies are now 100%-owned
subsidiaries of the Group.
Kenya has announced a project worth R1,8 billion
to computerise its schools, but at this time
formal tenders have not yet been issued.
Although Mustek’s African operations remain
small contributors to Group revenue; these are
strategically placed to take advantage of the
immense potential for future growth in PC sales
that Africa offers.
NEPAD
In partnership with Microsoft and Oracle, Mustek
has invested funds and expertise into NEPAD’s
e-Schools Initiative. To date we have supplied
computer hardware to 21 pilot schools in nine
African countries.
Brazil
In this period Mecer Brazil’s revenue grew by
45%, from R80 million to R116 million.
This operation however, recorded a loss of
R12,2 million, primarily due to low margins
and a lack of manufacturing skills that are still
being developed.
Although we are building market share and
learning the South American market, Mustek will
continue assessing the long-term sustainability
of our operations there. The board will, in due
course, take a decision on the future of our
Brazilian presence.
Chief Executive Officer’s Report(continued)
12
Mustek annual report 2006
REVIEW OF OPERATIONS
Mecer
With 98% brand recognition Mecer
continues to be one of South Africa’s most
well-known local PC and notebook brands.
Unit sales grew 10% and margins were largely
maintained, but Mecer recorded an unrealised
R43,1 million foreign exchange loss in the last
weeks of the period due to a sudden decline of
the Rand against the USD. Mecer expects to
recover a portion of this unrealised book loss in
the 2007 financial year.
Mecer and Rectron have also signed agency
agreements to distribute the Toshiba range of
notebooks.
Rectron
Africa’s biggest supplier of ICT components
and peripherals.
Although Rectron’s revenue also grew healthily
and its results ended in the black, it was also
impacted by the Rand’s sharp decline against
the USD, having to account for R26,1 million on
the revaluation of accounts payable.
The decision was also taken to close down
Rectron’s loss-making United Kingdom operation,
resulting in a loss of R24 million and a profit on
discontinuance of R19,1 million. Rectron realised
proceeds of R95 million on the sale of its
Johannesburg and Durban buildings.
Brotek (Pty) Limited (Brother)
Supplying ICT equipment to public sector
organisations.
Brother again recorded a pleasing performance
for the year. Managing Director James Booysen
duly sold his 30% shareholding to black-owned
Puno Printing Solutions Investments, and retired
from the company he founded in 1981 and
successfully managed for so many years.
The decision was taken to rebrand Brother, and
from 1 June 2006 it became Brotek (Pty)
Limited. Brotek’s new CEO is Munna Desai, a
veteran of nearly 30 years in the ICT industry.
Comztek
An ICT systems and networking distributor,
Comztek has grown considerably since
joining the Mustek Group in 1999.
This was the first financial year in which
Comztek’s results were proportionally
consolidated for the full year. In this period,
Comztek substantially improved its performance,
and is well-positioned to repeat this feat in the
2007 financial year.
13
Mustek annual report 2006
Conclusion
The nature of our business is such that Mustek
will always be challenged by the Rand’s exchange
rate against the USD. In recent years the Rand
strengthened and appeared to stabilise within
a broad range, but its recent unexpected
depreciation was damaging to our business.
This is a reality that we will probably never
be able to fully control, but is factored into
our risk management strategy.
With strong brands and well-managed
subsidiaries, Mustek is ready to tap into the
massive demand for hardware that is inevitable
with digital e-schooling and e-government on its
way. New Intel processors and the arrival of
Microsoft’s Vista will add impetus, with private
and public sector companies upgrading to 64-bit
systems from late 2007.
Mustek is much more than strong brands, new
technologies and clever management. To
perform we are reliant on the day-to-day
hard and productive work of our employees,
who constantly amaze me with their ideas, zeal
and loyalty.
To all Mustek people – shareholders, employees,
dealers, suppliers and end-users – thank you for
another remarkable year at the helm of
Mustek.
Yours sincerely
David Kan
Chief Executive Officer
14
Mustek annual report 2006
2006R000
Restated2005R000
2004R000
2003R000
2002R000
2001R000
SUMMARISED GROUP INCOME STATEMENTS (continued and discontinued operations)Revenue 3 200 206 2 942 244 2 683 978 2 975 517 2 825 776 2 127 241 Cost of sales (2 692 283) (2 469 795) (2 201 310) (2 518 640) (2 346 117) (1 791 205)
Gross profit 507 923 472 449 482 668 456 877 479 659 336 036 Distribution, administrative and other operating expenses (385 267) (299 335) (345 899) (222 398) (254 849) (185 100)
EBITDA 122 656 173 114 136 769 234 479 224 810 150 936
Headline profit 47 058 92 796 71 793 112 005 87 335 56 047
SUMMARISED GROUP BALANCE SHEETSAssets 1 889 569 1 696 305 1 437 392 1 401 518 1 215 702 996 472
Property, plant and equipment 105 429 144 946 61 511 40 000 39 706 39 252 Intangible assets 11 735 3 598 4 277 11 537 11 218 18 753 Investments and loans 56 531 48 867 73 865 89 862 123 954 101 867 Non-current trade and other receivables 22 116 13 233 — — — — Deferred tax assets 30 330 20 202 29 528 6 851 10 800 17 243 Current assets 1 663 428 1 465 459 1 268 211 1 253 268 1 030 024 819 357
Equity and liabilities 1 889 569 1 696 305 1 437 392 1 401 518 1 215 702 996 472
Equity attributable to equity holders of the parent 505 823 500 283 457 983 457 056 363 260 327 053 Minority interest 69 594 80 615 66 871 65 769 52 214 38 914 Long-term borrowings 115 805 245 330 229 130 207 685 167 340 9 857 Deferred tax liabilities 808 469 — — 102 728 Current liabilities 1 197 539 869 608 683 408 671 008 632 786 619 920
KEY BALANCE SHEET FIGURESTotal assets (R’000) 1 889 569 1 696 305 1 437 392 1 401 518 1 215 702 996 472 Ordinary shareholders’ equity (R’000) 505 823 500 283 457 983 457 056 363 260 327 053 Gearing ratio — — — — — 23%Return on ordinary shareholders’ equity 12,2% 16,4% 10,9% 20,1% 21,3% 5,7%Net asset value per share (cents) 471 478 451 469 400 327
MARKET INFORMATION AT 30 JUNEOrdinary shares in issue 107 514 661 104 643 639 101 566 618 97 433 818 90 912 333 100 114 533 Weighted average number of ordinary shares 106 595 794 103 723 755 100 010 307 94 396 031 98 257 129 100 114 533 Headline earnings per share (cents) 44,1 89,5 71,8 118,7 88,9 56,0 Market price per share (cents)– year-end 1 025 1 010 750 520 361 185 – highest 1 200 1 060 831 550 385 310 – lowest 871 680 500 256 160 90 Number of transactions 7 874 4 157 5 542 2 515 2 151 3 174 Number of shares traded 71 471 937 44 112 050 64 386 080 50 436 867 38 674 395 47 978 098 Value of shares traded (R) 730 750 291 384 317 153 464 736 151 228 636 343 108 566 468 85 337 335 Percentage of issued shares traded 67% 43% 64% 53% 39% 48%
LIQUIDITY AND LEVERAGEInterest cover (times) 1,8 2,5 2,5 4,3 5,0 3,5Net cash from (used in) operating activities 98 754 8 615 (9 424) 166 550 120 940 148 575 Current ratio (times) 1,4 1,7 1,9 1,9 1,6 1,3
PROFITABILITYOperating margin 3,8% 5,9% 5,1% 7,9% 8,0% 7,1%
EMPLOYEESNumber of employees 1 205 1 162 1 058 937 887 946
Glossary EBITDA – Earnings before interest, tax, depreciation, amortisationCurrent ratio – current assets divided by current liabilitiesGearing ratio – ratio of net interest bearing borrowings to ordinary shareholders’ equityInterest cover – EBITDA plus income from investments divided by interest paidNet asset value (ordinary shareholders’ equity) – total assets less total liabilitiesOperating margin – EBITDA as a percentage of revenueReturn on ordinary shareholders’ equity – net profit for the year as a percentage of ordinary shareholders’ equity (net assets)
Six-year Financial Review
15
Mustek annual report 2006
ISO 14001 (ENVIRONMENTAL
MANAGEMENT)
Mustek achieved full compliance with the revised
international ISO 14001 standards (environmental
management), which were released in 2005.
ENVIRONMENTAL IMPROVEMENT
To date Mustek has embarked on 13 ISO 14001
projects, of which three were finalised and one
new project initiated during this reporting
period.
Improvements were made in the following
aspects:
>> Reduction in electricity consumption
>> Waste management
>> Environmental contributions from tenants
and contractors.
MATERIALS
Lead, mercury, cadmium, and polybrominated
flame retardants are all persistent, bio
accumulative toxins that can cause
environmental and health risks when computers
are manufactured, incinerated, landfilled, or
melted down during recycling.
Several manufacturers now offer computer
technology that doesn’t include these hazardous
substances. Mustek is continuing to explore ways
and means of amending its technologies to also
exclude these substances. As a consequence
most Mustek-supplied motherboards and LCD
monitors are becoming compliant with the RoHS,
(Restriction of hazardous substances) require-
ments which took effect from 1 July 2006.
ENERGY
Mustek uses electricity supplied by local
metropolitan providers. The company is not a
significant user as our assembly operations do
not require heavy machinery. We produced 10%
more PCs this year and our electricity usage
increased by 12%.
WATER
Water continues to be obtained from local
municipal suppliers and is only used for domestic
consumption such as cleaning and drinking.
Water is not required in Mustek’s production
processes. Employees are routinely informed of
the importance of saving water during their
induction training. Our usage for the year June
2005 to July 2006 was recorded at approximately
15 000 kilolitres.
BIODIVERSITY
Mustek reduced the volumes of hazardous
chemical cleaning materials used in cleaning
operations by introducing steam cleaning
alternatives. The Group utilises organic pesticides
and fertilisers rather than artificial or hazardous
chemicals in maintaining its green areas.
EMISSIONS, EFFLUENT AND WASTE
Group generation of hazardous waste remained
minimal, and was limited to fluorescent lighting
tubes, which contain traces of mercury, and
hydrocarbons.
Strict control was kept over Mustek’s hazardous
waste storage facilities, which were upgraded in
this period.
Environmental Sustainability
Environmental Sustainability(continued)
16
Mustek annual report 2006
Since November 2005 Mecer Gauteng’s e-waste
has been recycled by a Port Elizabeth-based
contractor. Mecer’s KwaZulu-Natal branch now
passes its waste onto “The Westmead Community
Recycling Project”, a community upliftment and
empowerment project which earns money from
recycled waste.
The bulk of Mustek’s waste is discarded packaging
in the form of cardboard, paper and plastic. In
the period July 2005 to June 2006 Mustek’s
operations recycled about 200 tons of cardboard/
paper (an increase of 37% over last year)
and 20 tons of plastic. This higher volume
of waste was generated by increased PC
production.
Waste produced by Mustek is categorised as
follows:
>> Recyclable waste – Paper, pallets, cans,
plastic and cardboard packaging
>> Non-recyclable – Cleaning chemicals,
polystyrene, kitchen waste
>> Non-recyclable hazardous waste –
Hydrocarbon waste, fluorescent light bulbs
>> Recyclable computer waste – Computer
components, cathode ray tubes
>> Hazardous computer waste – Toners, NiCad
UPSs and batteries
CONTRACTORS
Mustek complies with the revised ISO 14001
standards released in 2005, which places
increased emphasis on contractor awareness.
The Group has accordingly disseminated
its environmental policy to all contractors,
whose environment-related responsibilities are
controlled through our contracts with them.
Current on-site contractors include Nakasani
(cleaning) and Axon (security).
COMPLIANCE WITH ENVIRONMENTAL
LEGISLATION
Mustek rigorously complies with environmental
legislation and retains a service provider to
provide timely warning of envisaged changes in
environmental legislation. Amendments to
environmental legislation received during the
period of review did not significantly impact on
Mustek’s scope of activities, although these
updates did reflect increasing concern regarding
the management of e-waste.
No compliance problems were experienced
during the period of review and an SABS
legal compliance audit is scheduled for the
coming year.
TRANSPORT
Traffic flow during peak times in and out of
Mustek’s Midrand corporate headquarters was
markedly improved by placing two Outsurance-
sponsored “points-people” at two busy
intersections in the vicinity. This action has had
the effect of reducing fuel consumption and
vehicle related emissions caused by Mustek’s
operations.
17
Mustek annual report 2006
Social Responsibility
This section of the Mustek annual report is
structured according to the requirements
of the Global Reporting Initiative (GRI),
which was implemented in 2002.
LABOUR PRACTICES AND DECENT WORK
Labour and management relations
Mustek currently employs approximately 650
people in South Africa. The Group’s “open door”
policy towards its employees, a feature since its
founding in 1987, has kept industrial strife to a
minimum.
Employees are aware that, should they need to
discuss an issue or are aggrieved for whatever
reason, they can immediately approach Human
Resources (HR) to find a solution rather than
going through a formal procedure. As a result
virtually all potential employee problems are
resolved before these can evolve into more
serious issues.
Standard grievance and disciplinary procedures
are available to all employees through the
company intranet, but in practice these are
seldom used. In this period no grievances and
only a handful of formal disciplinary hearings
were conducted.
Unlike many other large companies, management
and staff do not perceive themselves to be on
opposite “sides”, which is reflected in a
team-based rather than hierarchical working
culture.
Health and safety
Mustek conforms to all legislation and conducts
its business within the parameters of a group
Safety, Health, Environmental and Quality
(SHEQ) manual. Emergency and disaster plans
have been prepared for all areas and our
workforce is trained in their use.
Health and safety in Mustek is driven by staff
volunteers, who are elected from all company
units onto health and safety committees. These
committees meet quarterly to assess company
performance in health, safety and related issues,
and to suggest how relevant procedures can
be improved.
No reportable SHEQ incidents occurred in
this year.
Training and education
Our organisation competes in one of the world’s
quickest evolving industries. We are continuously
facing up to the challenges of new technologies,
new products and new developments in PC
design, which means we have to be quick on our
feet and learning all the time.
Probably a key component of Mustek’s ongoing
success is that executive management has
always clearly grasped the need to keep our
workforce skills levels up to the demands of
the industry.
18
Mustek annual report 2006
Social Responsibility(continued)
As a consequence our training programme gets
the open-handed budget it needs to ensure that
our workforce is properly skilled throughout,
with each employee attending on average at
least one training course per annum.
With a stable and settled workforce that records a
lower turnover than most local ICT operations,
Mustek can develop people with the potential for
senior and executive positions. In line with national
directives, priority is accorded to previously
disadvantaged individuals (PDIs) and women.
Our employee development policy is
comprehensive and proactive. We identify staff
members that can benefit from further
development and provide the necessary training.
We also actively encourage employees to
approach the HR department when they believe
that additional training can benefit Mustek and
themselves. Each case is weighed on merit, and
the go-ahead is given if HR concurs. Where
necessary, Mustek will offer finance or time off
to study.
As an accredited member of ISETT SETA, we
ensure that our course material complies with
NQF (National Qualification Framework)
standards, which also enabled Mustek to fully
reclaim its skills development levies for the
financial year.
Diversity and opportunity
For many years now Mustek’s workforce has
been closely aligned to South Africa’s
demographics, being drawn from a wide variety
of cultures and languages. Our work culture
embraces all employees into a “greater Mustek
family”, we view all people as equals and do not
tolerate unfair discrimination in any form. When
vacancies occur, Mustek first seeks to promote
or transfer people within its ranks before going
out to the broader job market.
HUMAN RIGHTS
Non-discrimination
The South African constitution, recognised as
being among the most advanced in the world,
outlaws all forms of unfair discrimination.
Since its inception Mustek has employed a
multicultural workforce. Our long track record of
peaceful employee relations proves that Mustek
people work together in a stable and considerate
environment.
Freedom of association
Mustek complies with the Labour Relations Act
and all associated labour legislation. Our
employees may associate with any representative
organisation or trade union that they choose.
19
Mustek annual report 2006
Disciplinary practices
All cases and disputes are handled in terms of a
legally compliant disciplinary code and grievance
procedure that is applicable to all Mustek’s
South Africa-based workers. Disciplinary and
grievance procedures have been extensively
circulated to all our workplaces.
HIV/Aids and the workplace
In 2002 Mustek introduced a comprehensive
HIV/Aids strategy founded on the core principle
that the human rights and dignity of its employees
infected by the virus should be upheld, while
also recognising that fellow workers should be
thoroughly educated regarding the pandemic
and protected where possible.
Other large South African commercial
organisations have since adopted versions of
this groundbreaking HIV/Aids company policy.
Although Mustek has felt the sting of valued
colleagues falling to HIV/Aids complications, and
will probably continue to do until a cure is found,
the comparative worker peace that prevails
within the Group regarding HIV/Aids is testament
to Mustek’s far-sighted and pragmatic approach
launched five years ago.
SOCIETY
Corporate social investment (CSI) –
2004/05 financial year
Mustek has a long and proud record in community
support and corporate social investment
(CSI), and in this year contributed nearly
R2 million to various CSI projects. We traditionally
focus our CSI efforts on children’s needs – in
particular their education – but also support
charities, sporting events and government
programmes.
Computers and education in Africa’s
schools
We are proud of being able to leverage our
ICT expertise and country-wide infrastructure to
help develop ICT learning facilities in schools
across Africa. In South Africa we have for several
years been involved with school computerisation
programmes such as GautengOnline and the
Khanya project, which is intended to further
e-learning in schools by installing dedicated
computer centres.
In this year Mustek was allocated 27 of the 80
schools earmarked for GautengOnline Phase 5.
Our allocation was the biggest single share
given to any of the six involved ICT vendors, and
all our installations were completed on schedule.
Toward the end of the financial year Mustek’s
Mecer division won a tender from North West
Province to equip 134 of its schools with “thin
client” ICT systems and we continue to be
the vendor of choice in the Western Cape’s
Khanya project.
20
Mustek annual report 2006
NEPAD
Mustek is heavily involved, with partners
Microsoft and Oracle, in the pilot phases of
NEPAD’s e-School’s Initiative. To date Mustek
has contributed to 21 schools in nine African
countries, including Gabon, Ghana, Kenya, Mali,
Lesotho, Nigeria, Rwanda and Senegal.
Inter-ED
Under continual development by Mustek since
1996, Inter-ED is a multilingual, multimedia
system that enables students to learn basic
numeracy, literacy and life skills in any of
South Africa’s 11 official languages. InterED
supports true multilinguism and promotes
learner self-confidence, as users can proceed at
their own pace.
Learners also get prompt and appropriate
support from teachers, who are provided with
a suite of tools to monitor, intervene and
interact with any or all learners logged into
the network.
Inter-ED is installed in many GautengOnline and
other schools with ICT learning centres
throughout South Africa.
Social Responsibility(continued)
21
Mustek annual report 2006
Group Structureas at 30 June 2006
Quickstep 94 (Pty) Ltd
Comztek (Pty) Ltd
MFS Technologies (Pty) Ltd
Mecer East Africa Ltd100%
100%
40%
30%
100%
CIS Thuthukani Technology (Pty) Ltd
Mecer (EPZ) Ltd
Lithatek Investments (Pty) Ltd
Mustek Electronics Durban (Pty) Ltd
Mustek Electronics Cape Town (Pty) Ltd
Mustek Electronics Port Elizabeth (Pty) Ltd
Mustek Investments (Pty) Ltd
Mustek International (Pty) Ltd
Mustek Management (Pty) Ltd
Mecer (Pty) Ltd
Quickstep 95 (Pty) Ltd
Mandarin Trading House (Pty) Ltd
Mecer Finance (Pty) Ltd
Planet Internet (Pty) Ltd
First Campus (Pty) Ltd
Inter-Ed (Pty) Ltd
100%
100%
100%
44,7%
Rectron Johannesburg100%
Rectron Cape Town100%
Rectron Durban100%
Rectron Bloemfontein100%
Rectron Australia (Pty) Ltd50%
Corex IT Distribution Dynamics (Pty) Ltd60%
68%
38%
100%
8%Datazone Ltd
Mecer Inter-Ed (Pty) Ltd100%
PWS Investments (Pty) Ltd100%
100%
Brotek (Pty) Ltd100% Brobusmac Investments (Pty) Ltd100%
L I M I T E DRegistration number 1987/070161/06
Makeshift 1000 (Pty) Ltd
100% Tradeselect 38 (Pty) Ltd
100% Mustek Mecer Gauteng100%
Mecer Western Cape
Mecer Eastern Cape
Mecer KwaZulu-Natal
100%
100%
100%
65,8% Rectron Holdings Ltd
Rectron Port Elizabeth100%
Casetek International Co Ltd
Soft 99 (Pty) Ltd
Preworx (Pty) Ltd
Secure Electronic Commerce (Pty) Ltd
100%
Wavetrend Technologies Ltd14,6%
Comztek Africa (Pty) Ltd100%
Netshield (Pty) Ltd31%
Mustek Limited Co Ltd
Mustek Zimbabwe Private Ltd
Zinox Technologies Ltd
Mecer Digital Do Brasil LTDA
Dormant
Formprops 110 (Pty) Ltd100%
Sheerprops 69 (Pty) Ltd100%
22
Mustek annual report 2006
Board of Directors
EXECUTIVE DIRECTORS
David Kan
Chief executive officer
David Kan, aged 47, is the co-founder and a major shareholder of Mustek, and its CEO since the Group’s inception in 1987. He holds a BSc (Eng) degree, with a major in mechanical engineering.
Hein Engelbrecht
Financial director
Hein Engelbrecht, aged 37, holds a BCom (Hons) degree, is a registered chartered accountant, and joined the group in 1997 as Group financial manager. Hein completed his articles with Grant Thornton Kessel Feinstein and spent two and a half years as financial manager of Office Directions (Pty) Limited. Hein was appointed to the board as financial director on 1 September 2000.
Tony Wang
Technology and international operations director
Tony Wang, aged 56, was appointed as director in 1999 and has over 20 years of executive experience in international IT markets, including the USA, the Pacific Rim and Africa. He holds a BSc degree.
NON-EXECUTIVE DIRECTORS
Vuli Cuba
Non-executive chairman
Vuli Cuba was born in 1955 and studied at the University of Fort Hare (1975 – 1978), where he was awarded a BSc in Land Surveying and won the Abe Bailey trust award, and at the University of South Africa (1983 – 1986), where he gained a BSc in Information Systems and won the Italian Government academic performance scholarship. He completed his further education at the London Business School in England (1991 – 1993), where he gained an MBA degree and was presented with the Helen Suzman leadership award. Vuli has extensive strategy and ICT consulting experience gained while working for Andersen Consulting (now Accenture) and Monitor Consulting covering a period of more than ten years. In September 1995 Vuli founded Safika Holdings (Pty) Limited, together with economist Moss Ngoasheng, and is currently the CEO of the company. Vuli’s directorships include Stanlib Limited, Foschini Limited and Safika Holdings. He is the founder and former president of ENSA (Enterprise Network of South Africa), the South African affiliate of the Southern African Enterprise Network that is headquartered in Lusaka, Zambia. He is also the founder and honorary chairman of the Swiss – South African Chamber of Commerce.
Mike Hennessy
Non-executive director
Mike Hennessy, aged 61, joined the Mustek board in 1997, after 35 years in auditing. Mike holds a BA (Hons) degree, is a registered chartered accountant and has been a partner of Deloitte & Touche since 1974 until he joined Mustek.
Dr. Len Konar
Non-executive director
Doctor Len Konar, aged 52, joined the Mustek board on 25 November 2003. Len is a chartered accountant and was previously executive director of The Independent Development Trust where he was, amongst other activities, responsible for the internal audit and investments portfolios. Prior to that, he was Professor and head of the Department of Accountancy at the University of Durban – Westville. He is the past patron of the Institute of Internal Auditors South Africa, and a member of the King Committee on Corporate Governance, the Securities Regulation Panel, the Corporate Governance Forum and the Institute of Directors. He is also the chairperson of the Ministerial Panel for the review of the regulation of accountants and auditors. Dr Konar is also a non-executive director of Old Mutual South Africa, the South African Reserve Bank, J D Group, Sappi, Kumba Resources and Steinhoff International Holdings.
Mdu Gama
Non-executive director
Mdu Gama, aged 37, was appointed as director of Mustek in 2002. He holds a MBA degree and various management qualifications from SA, US and UK universities. Mdu is currently the CEO of Safika Asset Finance (Pty) Limited and a non-executive director of Comztek (Pty) Limited.
23
Mustek annual report 2006
Annual Financial Statements30 June 2006
CONTENTS
24 Directors’ Responsibility for Financial Reporting
24 Certification by Company Secretary
25 Corporate Governance Statement
29 Report of the Independent Auditors
30 Report of the Directors
39 Consolidated Income Statement
40 Consolidated Balance Sheet
41 Consolidated Statement of Changes in Equity
42 Consolidated Cash Flow Statement
43 Company Income Statement
44 Company Balance Sheet
45 Company Statement of Changes in Equity
46 Company Cash Flow Statement
47 Accounting Policies
56 Notes to the Annual Financial Statements
101 Annexure A – Investments in Subsidiaries
103 Annexure B – Investments in Associates
104 Annexure C – Other Investments and Loans
Fin
an
cial
Sta
tem
en
ts
24
Mustek annual report 2006
The directors of the company are responsible for the maintenance of adequate accounting records and the preparation and integrity of the annual financial statements and related information. The financial statements are based on appropriate accounting policies supported by reasonable and prudent judgements, with estimates that have been consistently applied and have been prepared in accordance with International Financial Reporting Standards. The Group’s joint independent external auditors, Henry K H Pon & Co and Deloitte & Touche, have audited the financial statements and their unqualified report appears on page 29.
The directors are also responsible for the systems of internal control. These are designed to provide reasonable, but not absolute, assurance as to the reliability of the financial statements, and to adequately safeguard, verify and maintain accountability of assets, and to prevent and detect material misstatement and loss. The systems are implemented and monitored by suitably trained personnel with an appropriate segregation of authority and duties. Nothing has come to the attention of the directors to indicate that any
material breakdown in the functioning of these controls, procedures and systems has occurred during the year under review.
The annual financial statements are prepared on a going concern basis. Nothing has come to the attention of the directors to indicate that the company will not remain a going concern for the foreseeable future.
The annual financial statements set out on pages 30 to 104 were approved by the board of directors on 30 August 2006 and are signed on their behalf by:
W V Cuba
D C Kan
Directors’ Responsibility for Financial Reporting for the year ended 30 June 2006
In my capacity as company secretary, I hereby confirm, in terms of section 268 G(d) of the Companies Act, 1973, that for the year ended 30 June 2006, the company has lodged with the Registrar of Companies all such returns as are required of a public company in terms of this Act and that all such returns are true, correct and up to date.
C J Coetzee
Secretary
Certification by Company Secretary
25
Mustek annual report 2006
THE KING CODE OF CORPORATE PRACTICES AND CONDUCT
In accordance with the requirements of the JSE Limited, applicable to all companies listed on the Main Board of the JSE Limited, the directors submit that they subscribe to the principles incorporated in the Code of Corporate Practices and Conduct as set out in the King Report and substantially comply therewith. The directors have recognised the need to conduct the enterprise with integrity and in accordance with generally accepted corporate practices.
BOARD OF DIRECTORS AND SECRETARY
The Board is responsible for the adoption of strategic plans, monitoring of operational performance and management, determination of policy and processes to ensure the integrity of the company’s risk management and internal controls, communications policy, and director selection, orientation and evaluation. These responsibilities are set out in the approved Board Charter. To adequately fulfil their responsibilities, directors have unrestricted access to timely financial information, all company information, records, documents and property. Directors are provided with guidelines regarding their duties and responsibilities as directors and a formal orientation programme has been established to familiarise incoming directors with information about the company’s business, competitive position and strategic plans and objectives.
The Board meets at least four times a year and additional meetings are held when non-scheduled matters arise. At all Board meetings, directors declare their interests in contracts where applicable.
The Corporate Board comprises three executives and five non-executive directors, including the Chairman and Chief Executive Officer. The roles of the Chairman and the Chief Executive Officer do not vest in the same person. Major responsibilities of the Board include the appointment of the Chairman and Chief Executive Officer and other Board members, and agreement of the top management structures and management succession. The Corporate Board is responsible to shareholders, but it proceeds mindful of the interests of the group’s staff, customers, suppliers and the communities in which the group pursues its business. The names of the executive and non-executive directors in office at
30 June 2006 and at the date of this report are set out in the report of the directors.
AUDIT COMMITTEE
The audit committee, which was formed in 1997, comprises four non-executive directors. The external auditors have unrestricted access to this committee. Its principal functions are to review the annual financial statements and accounting policies, the effectiveness of the internal controls over management information and other systems of internal control, the reported interim financial information and the effectiveness of the internal audit process and to discuss the auditors’ findings and recommendations. The external auditors are appointed each year, based on the recommendations of the audit committee.
The Committee operates within defined terms of reference and authority granted to it by the Board and meets at least two times a year when the external auditors and the Group chief executive officer and finance director are invited to attend. The external auditors have unrestricted access to the audit committee. The members of the committee are considered to have sufficient financial skills and knowledge to carry out their duties and responsibilities.
The audit committee ensures that there is appropriate independence relating to non-audit services provided by the external auditors. A process exists to evaluate which services are permissible. These services provided are reviewed on an annual basis.
REMUNERATION AND NOMINATION COMMITTEE
A separate remuneration and nomination committee was established in 1997. This committee performs the functions as envisaged in the guidelines set out in the King Report. The remuneration committee comprises two independent non-executive directors and the chief executive officer.
The committee operates within defined terms of reference and authority granted to it by the board and meets at least twice a year. The group finance director and the Human Resources manager are invited to attend these meetings, but neither may take part in decisions regarding their own remuneration, nor the chief executive officer.
Corporate Governance Statementfor the year ended 30 June 2006
26
Mustek annual report 2006
The committee is responsible for making recommendations to the board on the company’s framework of executive remuneration and to determine specific remuneration packages for each of the executive directors and certain senior managers of the Group. The committee is also responsible for the Group’s remuneration policies and the award of bonuses and the allocation of share options in terms of the Group’s share option and incentive scheme. The committee makes recommendations to the board regarding the appointment of new executive and non-executive directors and makes recommendations on the composition of the board generally.
INSIDER TRADING
Directors and officers of the Group who have access to unpublished price-sensitive information are prohibited from dealing in the shares of the company during defined restricted periods, including those periods immediately prior to the announcement of interim and final financial results.
RISK MANAGEMENT
The focus of risk management in Mustek is on identifying, assessing, mitigating, managing and monitoring all known forms of risk across the Group. Management is involved in a continuous process of developing and enhancing its comprehensive systems for risk identification and management. The risks to the business encompass such areas as the world product prices, exchange rates, political and economic factors, legislation and national regulations, interest rates, people skills, and general operational and financial risks.
The major risks are the subject of the ongoing attention of the board of directors and are given particular consideration in the annual strategic plan which is approved by the board. A strategic risk assessment is carried out on an annual basis and a documented and tested disaster recovery plan exists.
The management of operational risk is a line function, conducted in compliance with a comprehensive set of Group policies and standards to cover all aspects of operational risk control. Performance is measured on a regular basis by means of both self-assessments and audits by independent consultants. In addition, the Group
promotes ongoing commitment to risk management and control by participating in externally organised risk management and safety systems.
Insurance cover on assets is based upon current replacement values. Consistent with the high standard of risk management, a substantial portion of risk is self-insured at costs well below market premiums. All risks are adequately covered, except where the premium cost is excessive in relation to the probability and extent of loss.
ENVIRONMENT
The underlying philosophy of the Group’s environmental policy is the adoption of protective strategies to manage and control the impact of Mustek’s operations upon the environment, at the same time as safeguarding its extensive assets and human resources.
SOCIAL INVESTMENT
The Group operates in diverse environments where, particularly in the African and South American countries of operation, the development needs of the communities from which it draws its employees are significant.
Recognising Mustek’s interdependence with these communities, the Group has active social investment programmes in each country of operation which are structured to address the specific needs of such communities.
FINANCIAL AND INTERNAL CONTROL
The board of directors is responsible for the Group’s systems of internal control. To fulfil its responsibilities, management maintains accounting records and has developed, and continues to maintain appropriate systems of internal control. The directors report that the Group’s internal controls and systems are designed to provide reasonable, and not absolute assurance, as to the integrity and reliability of the annual financial statements and to safeguard, verify and maintain accountability of its assets and to detect and minimise significant fraud, potential liability, loss and material misstatement while complying with applicable laws and regulations.
The Group has implemented a system of control self-assessment across all Group companies.
Corporate Governance Statementfor the year ended 30 June 2006 (continued)
27
Mustek annual report 2006
Local management is required to complete and submit control self-assessment programmes bi-annually. Local management is monitored against internal control norms in other Group companies and action is taken when ratings are considered to be inadequate.
Employees are required to maintain the highest ethical standards in ensuring that business practices are conducted in a manner, which in all reasonable circumstances, is above reproach.
It must be recognised that systems of internal control can provide only reasonable, and not absolute assurance. In that context, none of the above reviews indicated that the systems of internal control were not appropriate or satisfactory. Furthermore, no material loss, exposure or misstatement arising from the material breakdown in the functioning of the systems has been reported to the directors in respect of the year under review.
Nothing came to the attention of the directors or arose out of the internal control self-assessment process or year-end external audits to indicate that any material breakdown in the functioning of the Group’s internal controls, procedures and systems had occurred during the course of the year.
INTERNAL AUDIT
Internal audit is an independent appraisal function, which examines and evaluates the activities and the appropriateness of the systems of internal control, risk management and governance processes. This function has been outsourced to specialist external service providers.
Internal audit reports to the chief executive officer on day-to-day matters. Audit plans are based on an assessment of risk areas. A number of internal audits were conducted during the period under review.
The objective of internal audit is to assist the board in the effective discharge of its responsibilities.
MANAGEMENT REPORTING
Management reporting disciplines include the preparation of annual budgets by operating entities. Monthly results and the financial status of operating entities are reported against the approved budgets. Profit projections and cash flow forecasts are reviewed regularly, while working capital and borrowing levels are monitored on an ongoing basis.
GOING CONCERN
The annual financial statements and group annual financial statements set out on pages 30 to 104 have been prepared on the going concern basis since the directors have every reason to believe that the company and Group have adequate resources in place to continue in operation for the foreseeable future.
EMPLOYEE PARTICIPATION
The Group will continue to have its operating decisions made at the appropriate levels of its diverse business. Participative management lies at the heart of this strategy, which relies on the building of employee partnerships at every level to foster mutual trust and to encourage people to always think about how they can do things better. The Group strives to liberate the initiative and energies of its people, because they are the ones who make the difference to the performance of the Group.
EMPOWERMENT AND EMPLOYMENT EQUITY
Mustek places particularly high value on the abilities and contributions made by employees in the development and achievements of its businesses.
The Group is open to new partnerships that will increase shareholder value as well as plough back skills and resources into the South African community.
The Group has employment policies, which it believes are appropriate to the business and the market in which it trades. They are designed to attract, motivate and retain quality staff at all levels. Equal employment opportunities are offered to all employees without discrimination.
Around the globe, the Group is an equal opportunities employer. In terms of the Employment Equity Act, the Group strives to afford all staff members opportunities to realise their full potential and advance their careers. The Group is committed to a working environment that is free from any discrimination and seeks to develop skills and talent inherent in its work force.
28
Mustek annual report 2006
COMPANY SECRETARY
All directors have access to the advice and services of the company secretary and are entitled and authorised to seek independent and professional advice about affairs of the Group at the Group’s expense. The company secretary is responsible for the duties set out in Section 268G of the Companies Act. The certificate required to be signed in terms of subsection (d) of the Act appears on page 24.
CODE OF ETHICS
The Group subscribes to a code of ethics and endeavours to act with honesty, responsibility and integrity towards all stakeholders.
The Group also undertakes to investigate all incidents involving potentially fraudulent activities and to adapt procedures to prevent future unethical behaviour when deemed necessary.
The directors are of the opinion that the Group complies with the code of ethics.
SHAREHOLDER RELATIONS
Mustek’s investor relations programme includes communications with shareholders through interim and annual reports, meetings and presentations.
BOARD MEETINGS AND ATTENDANCE
Board meetings
Auditcommittee meetings
Remunera-tion and
nomination committee meetings
V CubaD KanH EngelbrechtT WangM HennessyM GamaL KonarS Mabaso*
444—3441
222—1221
—33———3—
Total 4 2 3
*Served for part of the year as director
Corporate Governance Statementfor the year ended 30 June 2006 (continued)
29
Mustek annual report 2006
Report of the Independent Auditors to the members of Mustek Limited
for the year ended 30 June 2006
We have audited the annual financial statements and Group annual financial statements of Mustek Limited set out on pages 30 to 104 for the year ended 30 June 2006. These financial statements are the responsibility of the company’s directors. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with International Standards of Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements fairly present, in all material respects, the financial position of the Group and company at 30 June 2006 and the results of their operations and cash flows for the year then ended in conformity with International Financial Reporting Standards, and in the manner required by the Companies Act of South Africa.
Henry K H Pon & Co
Registered Auditors
Per: H K H Pon
Partner
30 August 2006
1st Floor, 17 Commissioner Street Johannesburg 2001
Partners: Henry K H Pon and Denise Hendson
Deloitte & Touche
Registered Auditors
Per: D F Crowther
Partner
30 August 2006
221 Waterkloof Road Waterkloof 0181
National Executive:
G G Gelink Chief Executive
A E Swiegers Chief Operating Officer
G M Pinnock Audit
D L Kennedy Tax
L Geeringh Consulting
M G Crisp Financial Advisory
L Bam Strategy
C R Beukman Finance
T J Brown Clients & Markets
S J C Sibisi Public Sector and Corporate Social Responsibility
N T Mtoba Chairman of the Board
J Rhynes Deputy Chairman of the Board
Regional Leader:
T Kalan
A full list of partners and directors is available on request
30
Mustek annual report 2006
INTRODUCTION
The directors have pleasure in presenting their report on the activities of the company and the Group for the year ended 30 June 2006.
GENERAL REVIEW
Mustek Limited is a listed company on the JSE Limited and the Group’s major activities comprise the procurement, assembly, distribution and servicing of computers, computer components and allied products. The Group’s profit before taxation from these activities was R77,4 million (2005: R144,9 million).
SHARE CAPITAL
The authorised and issued share capital of the company is detailed in note 20 to the annual financial statements.
DIRECTORS AND SECRETARY
S N Mabaso was appointed as a non-executive director on 15 May 2005 and resigned on 12 June 2006. C C Kan retired as non-executive chairman on 31 March 2005. W V Cuba was appointed as Chairman on 25 July 2005. The directors in office at the date of this report are as follows:
Non-executive Executive Business address Postal address
W V Cuba (Chairman) D C Kan (Chief executive officer)▲∞ 322 15th Road PO Box 1638
M F Hennessy†▲√ Y T Wang*∞ Randjespark Parklands
M E Gama∞ H Engelbrecht Midrand 2121
D Konar†▲√ 1685
*Republic of China
√Independent
†Audit committee member
▲Remuneration and nomination committee member
∞ These directors are retiring in terms of the company’s Articles of Association. In terms of the statutes of the company D C Kan, Y T Wang and M E Gama are available for re-election at the next annual general meeting. Biographical details of all the directors are set out on page 22.
Secretary – C J Coetzee
The business and postal address of the secretary is shown above.
In terms of a transaction with Safika Holdings (Proprietary) Limited (Safika) approved by shareholders on 31 August 2004, Safika has the right to nominate one more executive director to the board of directors. This right was not exercised at the end of the current year. See note 20 to the annual financial statements for further information.
Report of the Directors 30 June 2006
31
Mustek annual report 2006
DIRECTORS’ SHAREHOLDING
At 30 June 2006, the directors collectively held the following direct and indirect interests in shares in the company, which represents 9,3% (2005: 9,7%) of the issued share capital of the company. (No change occurred between 30 June 2006 and 25 August 2006):
Direct and beneficial Indirect and non-beneficial
2006 2005 2006 2005
D C Kan† 1 238 500 1 201 955 6 509 883 6 723 428
M F Hennessy 200 000 358 563 400 000 400 000
T Wang 1 238 282 1 240 000 — —
H Engelbrecht 430 000 200 000 — —
D Konar 25 303 25 303 — —
3 132 085 3 025 821 6 909 883 7 123 428
† He has voting rights and the right to dividends on a further 3 000 000 shares (2005: 3 000 000 shares) entered into a scrip lending agreement. That increases the interest of directors to 12,1% (2005: 12,8%).
These shareholdings exclude options held. The remainder of the directors do not hold any shares.
EXECUTIVE SHARE TRUST
The scheme consists of both a share option scheme where options can be awarded by either the company or the trust and a share purchase scheme where shares are purchased through the trust. In terms of the option scheme, participants are granted options to acquire shares in the company. In terms of the share purchase scheme, shares are offered to employees for purchase.
The allocation shares are acquired by participants at the middle market price on the trading day immediately preceding the day upon which the options were granted.
Share options or purchase offers must be accepted within 14 days of grant date and must be exercised within one calendar year. These shares will therefore not be deemed issued until actually issued and delivered and is not included in issued share capital in notes 9 and 20. Payment is only due on delivery. Options or purchase offers accepted and exercised lapse on resignation.
Shares acquired in terms of either schemes will only be delivered to the participants after expiry of the following periods from date of acceptance:
Year 1 5% Year 4 50%
Year 2 15% Year 5 70%
Year 3 30% Year 6 100%
The directors may and have amended these delivery periods and percentages.
There are no share purchase offers outstanding as at 30 June 2006. Until 30 June 2003 the trust did not own any shares. On 1 July 2003 the Trust was offered 2 895 358 options at R5,00 each to be delivered equally over a five-year period. The trust accepted and exercised the full option and was issued the first tranche of 20%, 579 071 shares on 1 July 2004 and 579 072 shares on 8 September 2005. In turn, the trust allocated 1 158 143 shares for transfer to participants at R5,00 each after obtaining the necessary permission from the JSE listings division. As a result of the ruling, the remaining 1 737 215 (2005: 2 316 287) options are taken into account in the calculation of diluted earnings per share in note 9.
32
Mustek annual report 2006
Report of the Directors 30 June 2006 (continued)
EXECUTIVE SHARE TRUST (continued)
Weighted average price Number of options
2006 2005 2006 2005
Options undelivered at the beginning of the year R3,44 R3,19 6 490 237 9 567 258
Options granted during the year R10,34 — 7 800 000 —
Shares delivered during the year (see note 20) R2,39 R2,65 (2 871 022) (3 077 021)
Options undelivered at year-end R8,42 R3,44 11 419 215 6 490 237
7 800 000 options were granted to employees during the year (2005: Nil). All of these options have been accepted but have not been exercised at 30 June 2006 (2005: Rnil).
In 2006, 4 000 000 and 3 800 000 options were granted on 2 March and 29 June respectively and accepted by all participants. The estimated fair values of the options granted on those dates are R2,54 and R2,71 respectively. No options were granted in 2005. The fair values were calculated using a binomial tree that adheres to all the Black-Scholes option pricing model principles. In terms of IFRS 2, share options allocated and accepted with all conditions being met before 7 November 2002, were not valued. All these share options are equity settled and therefore only valued upon granting. The inputs into the model were as follows:
29 June 2006
2 March 2006
Before1 July 2005
Weighted average share price R10,05 R10,62 R5,00
Weighted average exercise price R10,01 R10,66 R5,00
Expected volatility 27% 25% 33%
Expected life 8 years 8 years 8 years
Risk free rate 8,5% 7,5% 9,0%
Expected dividend yield 5,5% 5,5% 5,0%
Expected volatility was determined by calculating the historical volatility of the company’s share price over the previous six years. The Group and company recognised total expenses of R2 607 780 (2005: R1 632 387 restated in terms of IFRS 2) related to equity-settled share options during the current and previous years.
The options valued will be expensed as follows:
2006 R000
2005 R000
First year 10 147 1 044
Second year 4 852 627
Third year 2 753 279
Fourth year 1 502 —
Fifth year 547 —
19 801 1 950
33
Mustek annual report 2006
EXECUTIVE SHARE TRUST (continued)
Options accepted and/or exercised may lapse and shares may be early-delivered to participants under certain circumstances.
2006 2005
Held by:
Executive directors 4 115 000 1 655 000
Executives and employees 5 567 000 2 518 950
Executive share trust 1 737 215 2 316 287
11 419 215 6 490 237
Share options exercised, including these R5,00 options held by the trust, are due for delivery and payment at the following values and in the following periods ending 30 June:
2006
Option price 2007 2008 2009 2010 2011
Number of undelivered
sharesTotal Rand
value
R1,65 557 000 — — — — 557 000 919 050
R2,25 45 000 — — — — 45 000 101 250
R3,50 210 000 210 000 — — — 420 000 1 470 000
R5,00 729 071 909 072 959 072 — — 2 597 215 12 986 075
R10,01 760 000 760 000 760 000 760 000 760 000 3 800 000 38 038 000
R10,66 800 000 800 000 800 000 800 000 800 000 4 000 000 42 640 000
3 101 071 2 679 072 2 519 072 1 560 000 1 560 000 11 419 215 96 154 375
2005
Option price 2006 2007 2008 2009
Number of undelivered
sharesTotal Rand
value
R1,32 1 437 450 — — — 1 437 450 1 897 434
R1,65 557 000 557 000 — — 1 114 000 1 838 100
R2,25 45 000 45 000 — — 90 000 202 500
R3,50 140 000 210 000 210 000 — 560 000 1 960 000
R5,00 691 572 729 072 909 071 959 072 3 288 787 16 443 935
2 871 022 1 541 072 1 119 071 959 072 6 490 237 22 341 969
The directors may amend the delivery periods or percentages. The full balance available for delivery in 2005 and 2006, was delivered. The weighted average price of the options outstanding during the year is R8,42 per option (2005: R3,44).
34
Mustek annual report 2006
Report of the Directors 30 June 2006 (continued)
SHARE OPTIONS
The directors have the following share options outstanding or delivered to them after being accepted at the following dates:
2006
Director
Offer
price Acceptance date
Undelivered
shares at
30 June
2005
Delivered
during
the year Delivery date
Undelivered
shares at
30 June
2006
Share
option
gain
2006*
D C Kan R1,65 9 July 2001 150 000 75 000 8 September 2005 75 000 698 250
D C Kan R1,32 30 November 2000 525 000 525 000 5 December 2005 — 4 242 000
D C Kan R10,01 29 June 2006 — — N/A 2 250 000 —
T Wang R3,50 19 August 2002 560 000 140 000 8 September 2005 420 000 1 044 400
H Engelbrecht R1,32 30 November 2000 122 550 122 550 5 December 2005 — 990 204
H Engelbrecht R1,32 3 January 2001 57 450 57 450 7 March 2006 — 521 646
H Engelbrecht R1,65 9 July 2001 240 000 120 000 8 September 2005 120 000 1 117 200
H Engelbrecht R10,01 29 June 2006 — — N/A 1 250 000 —
1 655 000 1 040 000 4 115 000 8 613 700
2005
Director
Offer
price Acceptance date
Undelivered
shares at
30 June
2004
Delivered
during
the year Delivery date
Undelivered
shares at
30 June
2005
Share
option
gain
2005*
D C Kan R1,65 9 July 2001 200 000 50 000 3 September 2004 150 000 340 000
D C Kan R1,32 30 November 2000 1 050 000 525 000 1 November 2004 525 000 3 927 000
T Wang R3,50 19 August 2002 665 000 105 000 3 September 2004 560 000 519 750
H Engelbrecht R1,32 30 November 2000 245 100 122 550 1 November 2004 122 550 916 674
H Engelbrecht R1,32 3 January 2001 114 900 57 450 2 March 2005 57 450 497 517
H Engelbrecht R1,65 9 July 2001 320 000 80 000 3 September 2004 240 000 544 000
2 595 000 940 000 1 655 000 6 744 941
* The gain represents the increase in value of shares from the option value at the date of acceptance and exercise of the options, to the share value on the date of delivery of the shares.
35
Mustek annual report 2006
DIRECTORS’ EMOLUMENTS
Fees for services
R000
Basic salary R000
Expense allowances
R000
Pension contributions
R000Total R000
2006
Executive directors — 1 517 609 67 2 193
D C Kan — 558 338 67 963
H Engelbrecht — 630 271 — 901
Y T Wang — 329 — — 329
Non-executive directors 553 — 99 — 652
W V Cuba 150 — — — 150
S N Mabaso# — — — — —
M F Hennessy 103 — 98 — 201
M E Gama 180 — 1 — 181
D Konar 120 — — — 120
553 1 517 708 67 2 845
2005
Executive directors — 1 515 609 67 2 191
D C Kan — 556 338 67 961
H Engelbrecht — 630 271 — 901
Y T Wang — 329 — — 329
Non-executive directors 462 — 92 — 554
C C Kan* 75 — 1 — 76
W V Cuba# — — — — —
S N Mabaso# — — — — —
M F Hennessy 111 — 90 — 201
M E Gama 180 — 1 — 181
D Konar 96 — — — 96
462 1 515 701 67 2 745
*For a nine-month period until resignation
#No fees paid
Gains made by directors on share options are disclosed on the previous page.
36
Mustek annual report 2006
Report of the Directors 30 June 2006 (continued)
SUBSIDIARIES
The interest of the company in the aggregate net profit (loss) after tax of subsidiaries and joint venture is:
2006R000
2005R000
Net aggregate profits 54 307 55 022
Net aggregate losses (13 884) (9 334)
Details of the company’s subsidiaries are set out in note 12 and Annexure A to these annual financial statements.
DIVIDENDS
A final dividend of 30 cents per ordinary share was declared on 23 September 2005 and paid on 3 October 2005. An interim dividend for the current year of 35 cents per ordinary share was declared on 16 March 2006 and paid on 27 March 2006. (A final dividend of 25 cents per ordinary share was declared on 23 September 2004 and paid on 4 October 2004 and a prior year interim dividend of 30 cents per ordinary share was declared on 16 March 2005 and paid on 29 March 2005.)
SHAREHOLDERS’ SPREAD
At 30 June 2006, insofar as is known, the following shareholders beneficially held more than 5% of the issued Mustek Limited shares:
Shareholding – ordinary shares in issueNumber of
shares% of shares
in issue
DK Trust (*) 6 509 883 6,1CCK Trust 6 000 000 5,6
12 509 883 11,7
* David Kan, chief executive and a trustee of this trust, also owns 1 238 500 shares (2005: 1 201 955 shares) and has voting rights for another 3 000 000 shares (2005: 3 000 000) increasing this percentage to 10,0% (2005: 10,4%).
Shareholding – ordinary shares in issueNumber of
shareholders %Number of
shares% of shares
in issue
1 – 5 000 2 160 79,9 3 460 023 3,25 001 – 10 000 223 8,2 1 756 377 1,610 001 – 50 000 189 7,0 4 113 633 3,850 001 – 100 000 37 1,4 2 899 863 2,7100 001 – 1 000 000 69 2,6 28 236 749 26,3Over 1 000 000 24 0,9 67 048 016 62,4
2 702 100,0 107 514 661 100,0
Public/non-public shareholdersNumber of
shareholders %Number of
shares% of shares
in issue
Non-public shareholdersDirectors of the company 5 0,2 3 132 085 2,9Trusts with directors as trustees 2 0,1 6 909 883 6,4Public shareholders 2 695 99,7 97 472 693 90,7
2 702 100,0 107 514 661 100,0
37
Mustek annual report 2006
At 30 June 2005, insofar as is known, the following shareholders beneficially held more than 5% of the issued Mustek shares:
Shareholding – ordinary shares in issueNumber of
shares% of shares
in issue
DK Trust (*) 6 723 428 6,4
CCK Trust 6 000 000 5,7
12 723 428 12,1
Shareholding – ordinary shares in issueNumber of
shareholders %Number of
shares% of shares
in issue
1 – 5 000 1 501 77,2 2 154 243 2,1
5 001 – 10 000 137 7,0 1 085 430 1,0
10 001 – 50 000 155 8,0 3 668 205 3,5
50 001 – 100 000 39 2,0 3 037 190 2,9
100 001 – 1 000 000 89 4,6 32 583 002 31,1
Over 1 000 000 24 1,2 62 115 569 59,4
1 945 100,0 104 643 639 100,0
Public/non-public shareholdersNumber of
shareholders %Number of
shares% of shares
in issue
Non-public shareholders
Directors of the company 5 0,3 3 025 821 2,9
Trusts with directors as trustees 2 0,1 7 123 428 6,8
Public shareholders 1 938 99,6 94 494 390 90,3
1 945 100,0 104 643 639 100,0
38
Mustek annual report 2006
Report of the Directors 30 June 2006 (continued)
FAIR VALUE ADJUSTMENTS TO AND IMPAIRMENTS OF INVESTMENTS IN AND LOANS TO SUBSIDIARIES, ASSOCIATES AND OTHER INVESTMENTS
The directors considered the fair value of Mustek’s investments in and loans to subsidiaries, associates and other investments. Refer Annexures A, B and C to the notes to the annual financial statements for more information.
Preworx (Pty) Limited
The directors have decided to use the net asset value of the company, adjusted for the Group’s equity share of losses, as the best indicator of fair value of the investment. The remainder of the investment of R6,6 million had been written down in the previous year. The directors consider the loan of R10,0 million to be fully recoverable due to the Group being the only major creditor to the company with the ability to acquire and use the intellectual property of the company which is regarded as extremely valuable in the delivery of desktop solutions to corporate and government customers. The directors closely monitor the performance of this associate.
Wavetrend Technologies Limited
The Group has an option, through subsidiary Datazone Limited (registered in Taiwan) to obtain, from Bridgestone International, 574 646 shares of the total 3 934 642 shares in Wavetrend at a nominal value. Wavetrend issued 922 871 (2005: 851 897) shares to Private Equity firms during the financial year at a subscription price of US$5,87 (2005: US$5,87) each. This effectively values Datazone’s option to acquire Bridgestone’s 14,6% (2005: 19,1%) share in Wavetrend at US$3 372 744, converted at R7,12 (2005: R6,63), the year-end rate to the US$, at R24,0 million (2005: R22,4 million). The directors recorded the investment at R24,0 million (2005: R22,4 million) considering the track record of Wavetrend, its current performance and the guidance in accounting standards that a recent share transaction with an informed unrelated party is a strong indicator of value. A deferred capital gains tax liability of R3,5 million (2005: R3,2 million) has been raised against this revaluation. The only change in the current year represents a currency change that was processed directly to equity. In 2005 a revaluation of R22,4 million was processed through the income statement.
ACQUISITION OF SUBSIDIARIES
On 1 July 2005, Mustek Limited increased its investment in Mecer East Africa Limited and Mecer (EPZ) Limited from 51% to 100%. Mustek Limited also acquired the remainder of the issued share capital not previously held in Brotek (Pty) Limited effective 1 July 2005, as part of a Black Economic Empowerment transaction (See note 11). The Group also acquired Formprops 110 (Pty) Limited and Sheerprops 69 (Pty) Limited during the year.
POST-BALANCE SHEET EVENTS
The directors of the company propose a final dividend of 25 cents per share to all shareholders. There have been no other significant events subsequent to year-end up until the date of this report that require adjustment to or disclosure in these annual financial statements.
39
Mustek annual report 2006
Consolidated Income Statementfor the year ended 30 June 2006
Notes2006R000
Restated2005R000
Continuing operations
Revenue 2 3 056 451 2 842 287
Cost of sales (2 553 827) (2 371 261)
Gross profit 502 624 471 026
Other income 17 738 15 697
Distribution, administrative and other operating expenses (412 067) (319 641)
Share of profit (loss) of associates 4 660 (567)
Profit from operations 3 112 955 166 515
Investment revenues 4 28 946 32 505
Finance costs 5 (63 846) (56 343)
Other (losses) and gains 6 (624) 2 249
Profit before tax 77 431 144 926
Income tax expense 7 (15 966) (42 807)
Profit for the year from continuing operations 61 465 102 119
Discontinued operations
Profit (loss) for the year from discontinued operations 8 13 128 (6 176)
Profit for the year 74 593 95 943
Attributable to:
Equity holders of the parent 61 821 82 199
Minority interest 12 772 13 744
74 593 95 943
Earnings and dividend per share (cents) 9
From continuing and discontinued operations:
Basic earnings per ordinary share 58,00 79,25
Diluted basic earnings per ordinary share 56,92 76,33
Dividend per ordinary share – paid 65,00 55,00
Dividend per ordinary share – proposed 25,00 30,00
From continuing operations:
Basic earnings per ordinary share 49,89 83,17
Diluted basic earnings per ordinary share 48,96 80,10
40
Mustek annual report 2006
Notes2006R000
Restated2005R000
ASSETSNon-current assetsProperty, plant and equipment 10 105 429 144 946Intangible assets 11 11 735 3 598Investments in associates 13 28 557 21 603Investment in joint venture 14 1 106 830Other investments and loans 15 26 868 26 434Deferred tax asset 16 30 330 20 202Non-current trade and other receivables 18 22 116 13 233
226 141 230 846
Current assetsInventories 17 763 399 611 277Trade and other receivables 18 401 695 434 122Foreign currency assets 23 10 599 6 304Tax assets 10 814 15 354Bank balances and cash 19 476 921 398 402
1 663 428 1 465 459
TOTAL ASSETS 1 889 569 1 696 305
EQUITY AND LIABILITIESCapital and reservesOrdinary share capital 20 860 837Ordinary share premium 20 95 017 85 567Preference share capital 20 265 265Preference share premium 20 4 000 4 000Retained earnings 398 848 406 467Revaluation reserve 2 014 681Foreign currency translation reserve 4 819 2 466
Equity attributable to equity holders of the parent 505 823 500 283Minority interest 69 594 80 615
Total equity 575 417 580 898
Non-current liabilitiesLong-term borrowings 21 115 805 245 330Deferred tax liabilities 16 808 469
116 613 245 799
Current liabilitiesShort-term borrowings 21 173 470 61 931Trade and other payables 22 976 556 768 298Provisions 22 11 628 6 975Foreign currency liabilities 23 5 655 —Deferred income 20 729 9 144Tax liabilities 7 029 2 652Loan from associate 13 — 329Bank overdrafts 21 2 472 20 279
1 197 539 869 608
Total liabilities 1 314 152 1 115 407
TOTAL EQUITY AND LIABILITIES 1 889 569 1 696 305
Consolidated Balance Sheetat 30 June 2006
41
Mustek annual report 2006
Note
Ordinaryshare
capitalR000
Ordinaryshare
premiumR000
Pref-erenceshare
capitalR000
Pref-erenceshare
premiumR000
Retainedearnings
R000
Reval-uation
reserveR000
Trans-lation
reserveR000
Attri-butable
to equity holders
of the parent
R000
Minorityinterest
R000TotalR000
Balance at 1 July 2004 812 73 127 — — 389 836 — (7 783) 455 992 66 471 522 463
Effect of changes in accounting policies 32 — 2 664 — — (8 456) — 7 783 1 991 400 2 391
Restated balance at 1 July 2004 812 75 791 — — 381 380 — — 457 983 66 871 524 854
Net profit for the year — — — — 82 199 — — 82 199 13 744 95 943
Shares issued in terms of option scheme 25 8 143 — — — — — 8 168 — 8 168
Recognition of share-based payments — 1 633 — — — — — 1 633 — 1 633
Preference share issued — — 265 4 000 — — — 4 265 — 4 265
Dividends paid — — — — (57 112) — — (57 112) — (57 112)
Asset revaluation — — — — — 681 — 681 — 681
Net foreign currency translation reserve – foreign entities — — — — — — 2 466 2 466 — 2 466
Restated balance at 30 June 2005 837 85 567 265 4 000 406 467 681 2 466 500 283 80 615 580 898
Net profit for the year — — — — 61 821 — — 61 821 12 772 74 593
Shares issued in terms of option scheme 23 6 842 — — — — — 6 865 — 6 865
Recognition of share-based payments — 2 608 — — — — — 2 608 — 2 608
Dividends paid — — — — (69 440) — — (69 440) — (69 440)
Asset revaluation — — — — — 1 333 — 1 333 275 1 608
Net foreign currency translation reserve – foreign entities — — — — — — 2 353 2 353 261 2 614
Increase in investments in subsidiaries — — — — — — — — (24 329) (24 329)
Balance at 30 June 2006 860 95 017 265 4 000 398 848 2 014 4 819 505 823 69 594 575 417
Consolidated Statement of Changes in Equityfor the year ended 30 June 2006
42
Mustek annual report 2006
Notes2006R000
2005R000
OPERATING ACTIVITIES
Cash receipts from customers 3 211 073 2 864 120
Cash paid to suppliers and employees (2 989 010) (2 744 938)
Net cash from operations 24 222 063 119 182
Investment revenues received 19 039 26 944
Finance costs paid (63 416) (55 843)
Dividends received 9 937 5 590
Dividends paid (69 440) (57 112)
Income taxes paid (19 429) (30 146)
Net cash from operating activities 98 754 8 615
INVESTING ACTIVITIES
Additions to property, plant and equipment (57 332) (98 090)
Proceeds from sale of property, plant and equipment 97 788 1 015
Proceeds on disposal of subsidiaries, net of cash disposed 25 (12) (22)
Acquisition of subsidiaries and joint ventures, net of cash acquired 26 (28 072) 6 827
Increase in investments in and loans to associates (2 623) (351)
Proceeds on disposal of investments in and loans to associates — 17 600
(Increase) decrease in investments and loans (450) 3 500
(Increase) decrease in loan to joint venture (276) 2 500
Decrease (increase) in non-current trade receivables 2 939 (3 236)
Net cash from (used in) investing activities 11 962 (70 257)
FINANCING ACTIVITIES
Proceeds on shares issued 6 865 12 433
Increase (decrease) in long-term borrowings 43 945 (10 043)
(Decrease) increase in short-term borrowings (65 199) 57 614
Decrease in bank overdrafts (17 808) (14 255)
Net cash (used in) from financing activities (32 197) 45 749
Net increase (decrease) in cash and cash equivalents 78 519 (15 893)
Cash and cash equivalents at beginning of the year 398 402 414 295
Cash and cash equivalents at end of the year 476 921 398 402
Consolidated Cash Flow Statementfor the year ended 30 June 2006
43
Mustek annual report 2006
Notes2006R000
Restated2005R000
Revenue 2 1 360 133 1 292 149
Cost of sales (1 120 826) (1 053 397)
Gross profit 239 307 238 752
Other income 14 218 14 836
Distribution, administrative and other operating expenses (277 024) (228 454)
(Loss) profit from operations 3 (23 499) 25 134
Investment revenues 4 96 058 52 957
Finance costs 5 (11 351) (10 430)
Other gains and (losses) 6 417 (11 835)
Profit before tax 61 625 55 826
Income tax benefit (expense) 7 9 195 (11 540)
Profit for the year 70 820 44 286
Company Income Statement for the year ended 30 June 2006
44
Mustek annual report 2006
Notes2006R000
Restated2005R000
ASSETS
Non-current assets
Property, plant and equipment 10 21 661 20 481
Investments in subsidiaries 12 186 067 148 448
Investments in associates 13 12 338 11 045
Investment in joint venture 14 2 000 1 500
Other investments and loans 15 215 618 174 266
Deferred tax asset 16 23 652 13 404
Non-current trade receivables 18 10 294 13 233
471 630 382 377
Current assets
Inventories 17 300 084 293 257
Trade and other receivables 18 64 892 41 691
Foreign currency assets 23 1 092 6 353
Tax assets 10 399 10 414
Bank balances and cash 19 259 515 217 757
635 982 569 472
TOTAL ASSETS 1 107 612 951 849
EQUITY AND LIABILITIES
Capital and reserves
Ordinary share capital 20 860 837
Capital reserves 20 95 017 85 567
Preference share capital 20 265 265
Preference share premium 20 4 000 4 000
Retained earnings 313 820 312 440
Total equity 413 962 403 109
Non-current liabilities
Long-term borrowings 21 23 299 22 787
Current liabilities
Short-term borrowings 21 938 761
Trade and other payables 22 633 688 500 420
Provisions 22 4 838 4 485
Loans to subsidiaries 12 11 855 11 143
Deferred income 19 032 9 144
670 351 525 953
Total liabilities 693 650 548 740
TOTAL EQUITY AND LIABILITIES 1 107 612 951 849
Company Balance Sheetat 30 June 2006
45
Mustek annual report 2006
Note
Ordinaryshare
capitalR000
Ordinaryshare
premiumR000
Pref-erenceshare
capitalR000
Pref-erenceshare
premiumR000
Retainedearnings
R000TotalR000
Balance at 1 July 2004 812 73 127 — — 326 737 400 676
Effect of changes in accounting policies 32 — 2 664 — — (1 471) 1 193
Restated balance at 1 July 2004 812 75 791 — — 325 266 401 869
Net profit for the year — — — — 44 286 44 286
Shares issued in terms of option scheme 25 8 143 — — — 8 168
Recognition of share-based payments — 1 633 — — — 1 633
Preference share issued — — 265 4 000 — 4 265
Dividends paid — — — (57 112) (57 112)
Balance at 30 June 2005 837 85 567 265 4 000 312 440 403 109
Net profit for the year — — — — 70 820 70 820
Shares issued in terms of option scheme 23 6 842 — — — 6 865
Recognition of share-based payments — 2 608 — — — 2 608
Dividends paid — — — — (69 440) (69 440)
Balance at 30 June 2006 860 95 017 265 4 000 313 820 413 962
Company Statement of Changes in Equityfor the year ended 30 June 2006
46
Mustek annual report 2006
Company Cash Flow Statement for the year ended 30 June 2006
Notes2006R000
Restated2005R000
OPERATING ACTIVITIES
Cash receipts from customers 1 328 498 1 287 152
Cash paid to suppliers and employees (1 235 789) (1 241 740)
Net cash from operations 24 92 709 45 412
Interest received 6 738 11 932
Finance costs paid (11 351) (10 430)
Dividends received 49 082 4 539
Dividends paid (69 440) (57 112)
Income taxes paid (1 038) (11 497)
Net cash from (used in) operating activities 66 700 (17 156)
INVESTING ACTIVITIES
Additions to property, plant and equipment (8 761) (6 707)
Proceeds from sale of property, plant and equipment 369 144
Acquisition of subsidiaries (20 407) (1 658)
(Increase) decrease in loans to subsidiaries (3 729) 2 784
Decrease in investments in associates — (443)
Proceeds on disposal of associates — 17 600
(Increase) decrease in loans to associates (1 293) 465
(Increase) decrease in loan to joint venture (500) 2 500
Decrease (increase) in non-current trade receivables 2 939 (3 236)
(Increase) decrease in investments and loans (1 114) 3 500
Net cash (used in) from investing activities (32 496) 14 949
FINANCING ACTIVITIES
Proceeds on shares issued 6 865 12 433
Increase in long-term borrowings 512 3 307
Increase (decrease) in short-term borrowings 177 (2 846)
Decrease in bank overdrafts — (6 457)
Net cash from financing activities 7 554 6 437
Net increase in cash and cash equivalents 41 758 4 230
Cash and cash equivalents at beginning of the year 217 757 213 527
Cash and cash equivalents at end of the year 259 515 217 757
47
Mustek annual report 2006
The financial statements have been prepared in
accordance with International Financial Reporting
Standards (IFRS).
The financial statements have been prepared on the
historical cost basis, except for certain financial
instruments, and are presented in South African
Rands. The principal accounting policies adopted are
set out below.
ADOPTION OF NEW AND REVISED
INTERNATIONAL FINANCIAL REPORTING
STANDARDS
In the current year the Group and company has
adopted all of the new and revised Standards and
Interpretations issued by the International
Accounting Standards Board (the IASB) and the
International Financial Reporting Interpretations
Committee (IFRIC) of the IASB that are relevant to
its operations and effective for accounting periods
beginning on 1 July 2005. The adoption of these new
and revised Standards and Interpretations has
resulted in changes to the Group and company’s
accounting policies in the following areas that have
affected the amounts reported for the current or
prior years (refer note 32):
IFRS 2: Share-based payments.
IFRIC 8: Scope of IFRS 2 Share-based payments.
IFRS 5: Non-current assets held for sale and
discontinued operations.
IAS 1: Presentation of financial statements.
IAS 16: Property, plant and equipment.
At the date of authorisation of these financial
statements, the following Standards and
Interpretations were in issue but not yet effective:
IFRS 6: Exploration for and evaluation of mineral
resources.
IFRS 7: Financial instruments disclosures.
IAS 21: Amendment to net investment in a
foreign entity.
IAS 39: Amendment to fair value option and
guarantees.
IFRIC 4: Determining whether an arrangement
contains a lease.
IFRIC 5: Rights to interests arising from decom-
missioning, restoration and environmental
rehabilitation funds.
IFRIC 6: Liabilities arising from participating in a
specific market – waste electrical and
electronic equipment.
IFRIC 7: Applying the restatement approach under
IAS 29 Financial reporting in hyper-
inflationary economies.
IFRIC 9: Reassessment of embedded derivatives.
IFRIC 10: Interim financial reporting and
impairment
BASIS OF CONSOLIDATION
The consolidated financial statements incorporate
the financial statements of the company and entities
(including special purpose entities) controlled by the
company (its subsidiaries). Control is achieved
where the company has the power to govern the
financial and operating policies of an entity so as to
obtain benefits from its activities.
The results of subsidiaries acquired or disposed of
during the year are included in the consolidated
income statement from the effective date of
acquisition or up to the effective date of disposal, as
appropriate.
Where necessary, adjustments are made to the
financial statements of subsidiaries to bring their
accounting policies into line with those used by other
members of the Group.
All intra-group transactions, balances, income and
expenses are eliminated on consolidation.
Minority interests in the net assets of consolidated
subsidiaries are identified separately from the
Group’s equity therein. Minority interests consist of
the amount of those interests at the date of the
original business combination (see below) and the
minority’s share of changes in equity since the date
of the combination. Losses applicable to the minority
in excess of the minority’s interest in the subsidiary’s
equity are allocated against the interests of the
Group except to the extent that the minority has a
binding obligation and is able to make an additional
investment to cover the losses.
Accounting Policiesfor the year ended 30 June 2006
48
Mustek annual report 2006
Accounting Policiesfor the year ended 30 June 2006 (continued)
BUSINESS COMBINATIONS
The acquisition of subsidiaries is accounted for using
the purchase method. The cost of the acquisition is
measured at the aggregate of the fair values, at the
date of exchange, of assets given, liabilities incurred
or assumed, and equity instruments issued by the
Group in exchange for control of the acquiree, plus
any costs directly attributable to the business
combination. The acquiree’s identifiable assets,
liabilities and contingent liabilities that meet the
conditions for recognition under IFRS 3 are recognised
at their fair values at the acquisition date, except for
non-current assets (or disposal groups) that are
classified as held for sale in accordance with IFRS 5
Non-Current Assets Held for Sale and Discontinued
Operations, which are recognised and measured at
fair value less costs to sell.
Goodwill arising on acquisition is recognised as an
asset and initially measured at cost, being the
excess of the cost of the business combination over
the Group’s interest in the net fair value of the
identifiable assets, liabilities and contingent liabilities
recognised. If, after re-assessment, the Group’s
interest in the net fair value of the acquiree’s
identifiable assets, liabilities and contingent liabilities
exceeds the cost of the business combination, the
excess is recognised immediately in profit or loss.
The interest of minority shareholders in the acquiree
is initially measured at the minority’s proportion of
the net fair value of the assets, liabilities and
contingent liabilities recognised.
INVESTMENTS IN ASSOCIATES
An associate is an entity over which the Group has
significant influence and that is neither a subsidiary
nor an interest in a joint venture. Significant
influence is the power to participate in the financial
and operating policy decisions of the investee but is
not control or joint control over those policies.
The results and assets and liabilities of associates are
incorporated in these financial statements using the
equity method of accounting, except when the
investment is classified as held for sale, in which case
it is accounted for under IFRS 5 Non-current Assets
Held for Sale and Discontinued Operations. Under the
equity method, investments in associates are carried
in the consolidated balance sheet at cost as adjusted
for post-acquisition changes in the Group’s share of
the net assets of the associate, less any impairment
in the value of individual investments. Losses of an
associate in excess of the Group’s interest in that
associate (which includes any long-term interests
that, in substance, form part of the Group’s net
investment in the associate) are not recognised.
Any excess of the cost of acquisition over the
Group’s share of the net fair value of the identifiable
assets, liabilities and contingent liabilities of the
associate recognised at the date of acquisition is
recognised as goodwill. The goodwill is included
within the carrying amount of the investment and is
assessed for impairment as part of the investment.
Any excess of the Group’s share of the net fair value
of the identifiable assets, liabilities and contingent
liabilities over the cost of acquisition, after reassess-
ment, is recognised immediately in profit or loss.
Where a group entity transacts with an associate of the
Group, profits and losses are eliminated to the extent
of the Group’s interest in the relevant associate.
INTERESTS IN JOINT VENTURES
A joint venture is a contractual arrangement whereby
the Group and other parties undertake an economic
activity, which is subject to joint control. The results
and assets and liabilities of joint ventures are
incorporated in these financial statements using the
proportional consolidation method of accounting.
Where the Group transacts with its jointly controlled
entities, unrealised profits and losses are eliminated
to the extent of the Group’s interest in the joint
venture, except where unrealised losses provide
evidence of impairment of the asset transferred.
GOODWILL
Goodwill arising on the acquisition of a subsidiary or
a jointly controlled entity represents the excess of
the cost of acquisition over the Group’s interest in
the net fair value of the identifiable assets, liabilities
and contingent liabilities of the subsidiary or jointly
controlled entity recognised at the date of acquisition.
Goodwill is initially recognised as an asset at cost
and is subsequently measured at cost less any
accumulated impairment losses.
49
Mustek annual report 2006
GOODWILL (continued)
For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.
On disposal of a subsidiary or a jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
The Group’s policy for goodwill arising on the acquisition of an associate is described under
‘Investments in associates’ above.
REVENUE RECOGNITION
Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts and sales related taxes. Consolidated revenue excludes sales to Group companies.
Sales of goods are recognised when goods are delivered and title has passed.
Revenue for services is recognised when services are rendered.
Deferred income represents amounts received for services not yet rendered.
Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.
Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established.
LEASING
Leases are classified as finance leases whenever the
terms of the lease transfer substantially all the risks
and rewards of ownership to the lessee. All other
leases are classified as operating leases.
The Group as lessee
Assets held under finance leases are recognised as
assets of the Group at their fair value at the date of
acquisition. The corresponding liability to the lessor
is included in the balance sheet as a finance lease
obligation. Finance costs, which represent the
difference between the total leasing commitments
and the fair value of the assets acquired, are
charged to the income statement over the term of
the relevant lease so as to produce a constant
periodic rate of charge on the remaining balance of
the obligations for each accounting period.
Rentals payable under operating leases are charged
to income on a straight-line basis over the term of
the relevant lease.
FOREIGN CURRENCIES
The individual financial statements of each group
entity are presented in the currency of the primary
economic environment in which the entity operates
(its functional currency). For the purpose of the
consolidated financial statements, the results and
financial position of each entity are expressed in
Currency Units, which is the functional currency of
the company, and the presentation currency for the
consolidated financial statements.
In preparing the financial statements of the individual
entities, transactions in currencies other than the
entity’s functional currency (foreign currencies) are
recorded at the rates of exchange prevailing on the
dates of the transactions. At each balance sheet
date, monetary items denominated in foreign
currencies are retranslated at the rates prevailing on
the balance sheet date. Non-monetary items carried
at fair value that are denominated in foreign
currencies are retranslated at the rates prevailing on
the date when the fair value was determined. Non-
monetary items that are measured in terms of
historical cost in a foreign currency are not
retranslated.
50
Mustek annual report 2006
Accounting Policiesfor the year ended 30 June 2006 (continued)
FOREIGN CURRENCIES (continued)
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit or loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity. For such non-monetary items, any exchange component of that gain or loss is also recognised directly in equity.
In order to hedge its exposure to certain foreign exchange risks, the Group enters into forward contracts and options (see below for details of the Group’s accounting policies in respect of such derivative financial instruments).
For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations (including comparatives) are expressed in Currency Units using exchange rates prevailing on the balance sheet date. Income and expense items (including comparatives) are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised in profit or loss in the period in which the foreign operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate.
RETIREMENT BENEFIT COSTS
Payments to defined contribution retirement benefit plans are charged as an expense as they fall due. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution plans where the Group’s obligations under the plans are equivalent to those arising in a defined contribution retirement benefit plan.
For defined benefit retirement benefit plans, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each balance sheet
date. Actuarial gains and losses that exceed 10% of the greater of the present value of the Group’s defined benefit obligation and the fair value of plan assets are amortised over the expected average remaining working lives of the participating employees. Past service cost is recognised immediately to the extent that the benefits are already vested, and otherwise is amortised on a straight-line basis over the average period until the benefits become vested.
The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised actuarial gains and losses and unrecognised past service cost, and as reduced by the fair value of plan assets. Any asset resulting from this calculation is limited to unrecognised actuarial losses and past service cost, plus the present value of available refunds and reductions in future contributions to the plan.
TAXATION
Income tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
51
Mustek annual report 2006
TAXATION (continued)
Deferred tax liabilities are recognised for taxable
temporary differences arising on investments in
subsidiaries and associates, and interests in joint
ventures, except where the Group is able to control
the reversal of the temporary difference and it is
probable that the temporary difference will not
reverse in the foreseeable future.
The carrying amount of deferred tax assets is
reviewed at each balance sheet date and reduced to
the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of
the asset to be recovered.
Deferred tax is calculated at the tax rates that are
expected to apply in the period when the liability is
settled or the asset realised. Deferred tax is charged
or credited to profit or loss, except when it relates to
items charged or credited directly to equity, in which
case the deferred tax is also dealt with in equity.
Deferred tax assets and liabilities are offset when
there is a legally enforceable right to set off current
tax assets against current tax liabilities and when
they relate to income taxes levied by the same
taxation authority and the Group intends to settle its
current tax assets and liabilities on a net basis.
PROPERTY, PLANT AND EQUIPMENT
Land and buildings held for use in the production or
supply of goods or services, or for administrative
purposes, are stated in the balance sheet at their
revalued amounts, being the fair value at the date
of revaluation, less any subsequent accumulated
depreciation and subsequent accumulated
impairment losses. Revaluations are performed with
sufficient regularity such that the carrying amount
does not differ materially from that which would be
determined using fair values at the balance sheet
date.
Any revaluation increase arising on the revaluation of
such land and buildings is credited to the properties
revaluation reserve, except to the extent that it
reverses a revaluation decrease for the same asset
previously recognised in profit or loss, in which case
the increase is credited to profit or loss to the extent
of the decrease previously charged. A decrease in
carrying amount arising on the revaluation of such
land and buildings is charged to profit or loss to the
extent that it exceeds the balance, if any, held in the
properties revaluation reserve relating to a previous
revaluation of that asset.
Depreciation on revalued buildings is charged to
profit or loss. On the subsequent sale or retirement
of a revalued property, the attributable revaluation
surplus remaining in the properties revaluation
reserve is transferred directly to retained earnings.
All other items of plant and equipment are stated at
cost less accumulated depreciation, except for land,
which is not depreciated.
Depreciation is charged so as to write off the cost of
assets over their estimated useful lives, using the
straight-line method.
Assets held under finance leases are depreciated
over their expected useful lives on the same basis as
owned assets or, where shorter, the term of the
relevant lease.
The gain or loss arising on the disposal or retirement
of an asset is determined as the difference between
the sales proceeds and the carrying amount of the
asset and is recognised in the income statement.
INTANGIBLE ASSETS
Research costs are charged against operating profit
as incurred.
Development costs are capitalised when the following
criteria are met:
>> the product or process is clearly defined and the
costs attributable to the process or product can
be separately identified and measured reliably;
>> the technical feasibility of the product or process
can be demonstrated;
>> the enterprise intends to produce and market or
use the product or process;
>> the existence of a market or, if to be used
internally rather than sold, its usefulness to the
enterprise, can be demonstrated; and
>> adequate resources exist, or their availability
can be demonstrated, to complete the project
and market or use the product or process.
The extent of capitalisation is limited to that amount
which, taken together with further related costs, will
probably be recovered from related future economic
benefits.
52
Mustek annual report 2006
Accounting Policiesfor the year ended 30 June 2006 (continued)
IMPAIRMENT OF INTANGIBLE AND TANGIBLE
ASSETS, EXCLUDING GOODWILL
At each balance sheet date, the Group reviews the
carrying amounts of its tangible and intangible
assets to determine whether there is any indication
that those assets may be impaired. If any such
indication exists, the recoverable amount of the
asset is estimated in order to determine the extent
of the impairment loss (if any). Where it is not
possible to estimate the recoverable amount for an
individual asset, the recoverable amount is
determined for the cash-generating unit to which
the asset belongs.
Recoverable amount is the higher of fair value less
costs to sell and value in use. In assessing value in
use, the estimated future cash flows are discounted
to their present value using a pre-tax discount rate
that reflects current market assessments of the time
value of money and the risks specific to the asset.
If the recoverable amount of an asset (or cash-
generating unit) is estimated to be less than its
carrying amount, the carrying amount of the asset
(cash-generating unit) is reduced to its recoverable
amount. Impairment losses are recognised as an
expense immediately, unless the relevant asset is
carried at a revalued amount under another
accounting standard, in which case the impairment
loss is treated as a revaluation decrease under that
other accounting standard.
Where an impairment loss subsequently reverses,
the carrying amount of the asset (cash-generating
unit) is increased to the revised estimate of its
recoverable amount, but so that the increased
carrying amount does not exceed the carrying
amount that would have been determined had no
impairment loss been recognised for the asset
(cash-generating unit) in prior years. A reversal of
an impairment loss is recognised as income
immediately, unless the relevant asset is carried at
a revalued amount under another accounting
standard, in which case the reversal of the impairment
loss is treated as a revaluation increase under that
other accounting standard.
INVENTORIES
Inventories are stated at the lower of cost or net
realisable value. Cost comprises direct materials
and, where applicable, direct labour costs and those
overheads that have been incurred in bringing the
inventories to their present location and condition.
Cost is calculated using the weighted average
method. Net realisable value represents the
estimated selling price less all estimated costs to
completion and costs to be incurred in marketing,
selling and distribution.
FINANCIAL INSTRUMENTS
Financial assets and financial liabilities are recognised
on the Group’s balance sheet when the Group
becomes a party to the contractual provisions of the
instrument.
Trade receivables
Trade receivables are measured at initial recognition
at fair value, and are subsequently measured at
amortised cost using the effective interest rate
method. Appropriate allowances for estimated
irrecoverable amounts are recognised in profit or
loss when there is objective evidence that the asset
is impaired. The allowance recognised is measured
as the difference between the asset’s carrying
amount and the present value of estimated future
cash flows discounted at the effective interest rate
computed at initial recognition.
Investments
Investments are recognised and derecognised on a
trade date basis where the purchase or sale of an
investment is under a contract whose terms require
delivery of the investment within the timeframe
established by the market concerned, and are
initially measured at fair value, plus directly
attributable transaction costs.
53
Mustek annual report 2006
FINANCIAL INSTRUMENTS (continued)
Investments (continued)
At subsequent reporting dates, debt securities that
the Group has the expressed intention and ability to
hold to maturity (held-to-maturity debt securities)
are measured at amortised cost using the effective
interest rate method, less any impairment loss
recognised to reflect irrecoverable amounts. An
impairment loss is recognised in profit or loss when
there is objective evidence that the asset is impaired,
and is measured as the difference between the
investment’s carrying amount and the present value
of estimated future cash flows discounted at the
effective interest rate computed at initial recognition.
Impairment losses are reversed in subsequent
periods when an increase in the investment’s
recoverable amount can be related objectively to an
event occurring after the impairment was recognised,
subject to the restriction that the carrying amount of
the investment at the date the impairment is
reversed shall not exceed what the amortised cost
would have been had the impairment not been
recognised.
Investments other than held-to-maturity debt
securities are classified as either investments held for
trading or as available-for-sale, and are measured at
subsequent reporting dates at fair value. Where
securities are held for trading purposes, gains and
losses arising from changes in fair value are included
in profit or loss for the period. For available-for-sale
investments, gains and losses arising from changes in
fair value are recognised directly in equity, until the
security is disposed of or is determined to be impaired,
at which time the cumulative gain or loss previously
recognised in equity is included in the profit or loss for
the period. Impairment losses recognised in profit or
loss for equity investments classified as available-for-
sale are not subsequently reversed through profit or
loss. Impairment losses recognised in profit or loss for
debt instruments classified as available-for-sale are
subsequently reversed if an increase in the fair value
of the instrument can be objectively related to an
event occurring after the recognition of the impairment
loss.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand
and demand deposits, and other short-term highly
liquid investments that are readily convertible to a
known amount of cash and are subject to an
insignificant risk of changes in value.
Financial liabilities and equity
Financial liabilities and equity instruments issued by
the Group are classified according to the substance
of the contractual arrangements entered into and
the definitions of a financial liability and an equity
instrument. An equity instrument is any contract
that evidences a residual interest in the assets of the
Group after deducting all of its liabilities. The
accounting policies adopted for specific financial
liabilities and equity instruments are set out below.
Bank borrowings
Interest-bearing bank loans and overdrafts are
initially measured at fair value, and are subsequently
measured at amortised cost, using the effective
interest rate method. Any difference between the
proceeds (net of transaction costs) and the settlement
or redemption of borrowings is recognised over the
term of the borrowings in accordance with the
Group’s accounting policy for borrowing costs (see
above).
Trade payables
Trade payables are initially measured at fair value,
and are subsequently measured at amortised cost,
using the effective interest rate method.
Equity instruments
Equity instruments issued by the company are
recorded at the proceeds received, net of direct
issue costs.
Derivative financial instruments
The Group’s activities expose it primarily to the
financial risks of changes in foreign exchange rates
and interest rates.
The Group uses derivative financial instruments
(primarily foreign currency forward contracts) to
hedge its risks associated with foreign currency
fluctuations relating to certain firm commitments
and forecasted transactions. The significant interest
rate risk arises from bank loans.
54
Mustek annual report 2006
Accounting Policiesfor the year ended 30 June 2006 (continued)
FINANCIAL INSTRUMENTS (continued)
Derivative financial instruments (continued)
The use of financial derivatives is governed by the
Group’s policies approved by the board of directors,
which provide written principles on the use of
financial derivatives consistent with the Group’s risk
management strategy. The Group does not use
derivative financial instruments for speculative
purposes.
Derivative financial instruments are initially measured
at fair value on the contract date, and are remeasured
to fair value at subsequent reporting dates.
Derivatives embedded in other financial instruments
or other non-financial host contracts are treated as
separate derivatives when their risks and
characteristics are not closely related to those of the
host contract and the host contract is not carried at
fair value with unrealised gains or losses reported in
profit or loss.
Interest rate swaps
The carrying amounts of interest rate swaps, which
comprise net interest receivables and payables
accrued, are included in trade receivables and trade
payables, respectively. Payments and receipts under
interest rate swap contracts are recognised in the
income statement on a basis consistent with
corresponding fluctuations in the interest payments
on floating rate financial liabilities.
Redeemable preference shares
Preference shares, which are redeemable on a
specific date or at the option of the shareholder, are
presented in long-term liabilities. The dividends
received on preference shares are recognised as
investment income. The dividends paid on preference
shares are recognised as finance costs.
PROVISIONS
Provisions are recognised when the Group has a
present obligation as a result of a past event, and it
is probable that the Group will be required to settle
that obligation. Provisions are measured at the
directors’ best estimate of the expenditure required
to settle the obligation at the balance sheet date,
and are discounted to present value where the effect
is material.
SEGMENTS
All segment revenue and expenses are directly
attributable to the segments. Segment assets include
all operating assets used by a segment and segment
liabilities include all operating liabilities. These
assets and liabilities are all directly attributable to
the segments. Segment revenue, expenses and
result include transfers between business segments
(primary segments) and between geographical
segments (secondary segments). Such transfers are
accounted for at competitive market prices charged
to unaffiliated customers for similar goods. These
transfers are eliminated on consolidation.
BORROWING COSTS
Borrowing costs are expensed as incurred.
SHARE-BASED PAYMENTS
The Group issues equity-settled share options to
certain employees. Equity-settled share-based
payments are measured at fair value (excluding the
effect of non-market-based vesting conditions) at
the date of grant. The fair value determined at the
grant date of the equity-settled share-based
payments is expensed on a straight-line basis
over the vesting period, based on the Group’s
estimate of the shares that will eventually vest and
adjusted for the effect of non-market-based vesting
conditions.
Fair value is measured using the a binomial
tree that adheres to all the Black-Scholes option
pricing principles. 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.
55
Mustek annual report 2006
COMPARATIVES
Certain comparative disclosure has been adjusted.
See note 32 for a detailed list of the changes.
Additional comparative disclosures have been added
to ensure compliance with new accounting
standards.
CRITICAL ACCOUNTING JUDGEMENTS AND
KEY SOURCES OF ESTIMATION
In the process of applying the entities accounting
policies, which are described above, management
has made the following judgements that have the
most significant effect on the amounts recognised in
the financial statements (apart from those involving
estimations, which are dealt with below):
>> Revenue recognition (refer note 2) and
>> Residual values and useful lives of property,
plant and equipment (refer note 10).
The key assumptions concerning the future, and
other key sources of estimation uncertainty at the
balance sheet date, that have a significant risk of
causing a material adjustment to the carrying
amounts of assets and liabilities within the next
financial year are:
>> impairment of goodwill (refer note 11),
>> valuation of investments (refer report of the
directors),
>> inventory provisions (refer note 17),
>> recoverability of accounts receivable (refer note
18) and
>> bonus and leave pay provisions (refer note 22).
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Mustek annual report 2006
1. SEGMENTAL REPORTINGBUSINESS SEGMENTS
For management purposes, the Group is currently organised into the following segments and these segments are the basis on which the Group reports its primary segment information:
Mecer Assembly and distribution of Mecer branded computer products.
Rectron Distribution of computer components and peripherals.
Brotek Distribution of Brother computer and printer products and those of other international brands.
Comztek Distribution of networking equipment and related software licences.
Investments Strategic investments in technology entities include investments in, associates and other investments and loans. Refer Annexure B and C for more information about their activities.
2006
REVENUEMecerR000
RectronR000
BrotekR000
ComztekR000
Invest-mentsR000
Elimina-tionsR000
TotalR000
External sales 1 473 251 1 192 043 137 034 254 123 — — 3 056 451
Inter-segment sales 14 661 74 771 9 133 2 665 — (101 230) —
Total revenue from continuing operations 1 487 912 1 266 814 146 167 256 788 — (101 230) 3 056 451
SEGMENT RESULTS
Continuing operations
EBITDA* 32 451 55 447 26 788 13 267 — — 127 953
Depreciation (7 596) (11 078) (195) (493) — — (19 362)
Amortisation of intangible assets (296) — — — — — (296)
Share of profit of associates — — — 193 4 467 — 4 660
Profit from operations 24 559 44 369 26 593 12 967 4 467 — 112 955
Investment revenues 25 507 962 2 280 680 — (483) 28 946
Finance costs (41 267) (18 916) (17) (4 129) — 483 (63 846)
Other losses (see note 6) — — — (298) (326) — (624)
Profit before tax 8 799 26 415 28 856 9 220 4 141 — 77 431
Income tax benefit (expense) 3 998 (9 089) (8 326) (2 311) (238) — (15 966)
Profit for the year from continuing operations 12 797 17 326 20 530 6 909 3 903 — 61 465
Discontinued operations
Profit for the year from discontinued operations — 13 128 — — — — 13 128
Profit for the year 12 797 30 454 20 530 6 909 3 903 — 74 593
*EBITDA – earnings before interest, taxation, depreciation and amortisation.
Notes to the Annual Financial Statementsfor the year ended 30 June 2006
57
Mustek annual report 2006
1. SEGMENTAL REPORTING (continued)
BUSINESS SEGMENTS (continued)
2005
REVENUE
Restated MecerR000
Restated Rectron
R000
Restated Brother
R000
Restated Comztek**
R000
Invest-mentsR000
Elimina-tion
R000
Restated TotalR000
External sales 1 391 733 1 154 488 127 212 168 854 — — 2 842 287
Inter-segment sales 6 554 18 714 4 126 1 722 — (31 116) —
Total revenue from continuing operations 1 398 287 1 173 202 131 338 170 576 — (31 116) 2 842 287
SEGMENT RESULTS
Continuing operations
EBITDA 94 980 69 159 12 801 5 889 — — 182 829
Depreciation (9 376) (5 169) (251) (387) — — (15 183)
Amortisation of intangible assets (564) — — — — — (564)
Income (loss) from associates — — — 103 (670) — (567)
Profit from operations 85 040 63 990 12 550 5 605 (670) — 166 515
Investment revenues 18 589 8 729 3 508 2 074 — (395) 32 505
Finance costs (32 994) (18 774) (17) (4 953) — 395 (56 343)
Other (losses) and gains (see note 6) (75) — — — 2 324 — 2 249
Profit before tax 70 560 53 945 16 041 2 726 1 654 — 144 926
Income tax expense (13 730) (18 448) (5 067) (371) (5 191) — (42 807)
Profit for the year from continuing operations 56 830 35 497 10 974 2 355 (3 537) — 102 119
Discontinued operations
Loss for the year from discontinued operations — (6 176) — — — — (6 176)
Profit for the year 56 830 29 321 10 974 2 355 (3 537) — 95 943
**Comztek’s results have been proportionately consolidated (44,7%) from 1 October 2004. See note 14 for more information.
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
58
Mustek annual report 2006
1. SEGMENTAL REPORTING (continued)
BUSINESS SEGMENTS (continued)
2006MecerR000
RectronR000
BrotherR000
ComztekR000
Invest-mentsR000
Elimina-tionsR000
TotalR000
OTHER INFORMATION
Capital expenditure 9 232 46 416 293 1 391 — — 57 332
ASSETS
Segment assets 1 001 620 656 189 70 312 102 169 38 506 (18 598) 1 850 198
Investment in associates — — — 770 27 787 — 28 557
Consolidated total assets 1 001 620 656 189 70 312 102 939 66 293 (18 598) 1 878 755
LIABILITIES
Segment liabilities 754 789 464 066 18 938 87 928 — (18 598) 1 307 123
Number of employees at year-end 680 341 45 139 — — 1 205
2005
OTHER INFORMATION
Capital expenditure 8 462 89 421 79 128 — — 98 090
ASSETS
Segment assets 911 311 547 457 85 900 88 674 29 639 (3 633) 1 659 348
Investment in associates — — — 109 21 494 — 21 603
Consolidated total assets 911 311 547 457 85 900 88 783 51 133 (3 633) 1 680 951
LIABILITIES
Segment liabilities 631 148 390 273 12 369 82 598 — (3 633) 1 112 755
Number of employees at year-end 671 315 49 127 — — 1 162
59
Mustek annual report 2006
1. SEGMENTAL REPORTING (continued)
GEOGRAPHICAL SEGMENTS
2006 Mecer South
AmericaR000
Mecer East
AfricaR000
Rectron Australia
R000
RectronUK
R000
Comztek AfricaR000
South Africa
R000TotalR000
Continuing operations
Revenue 115 599 12 761 119 424 — 5 378 2 803 289 3 056 451
(Loss) profit for the year from continuing operations (12 161) (243) 853 — (296) 73 312 61 465
Discontinued operations
Profit (loss) for the year from discontinued operations — — — 13 452 — (324) 13 128
(Loss) profit for the year (12 161) (243) 853 13 452 (296) 72 988 74 593
OTHER INFORMATION
Capital expenditure 35 342 13 769 — 16 43 170 57 332
Total assets 74 908 12 878 47 825 — 928 1 753 030 1 889 569
2005 (Restated)
Revenue 79 826 12 336 104 965 — 10 129 2 635 031 2 842 287
Continuing operations
(Loss) profit for the year from continuing operations (3 255) (640) 621 — (1 627) 107 020 102 119
Discontinued operations
(Loss) profit for the year from discontinued operations — — — (6 581) — 405 (6 176)
Profit for the year (3 255) (640) 621 (6 581) (1 627) 107 425 95 943
OTHER INFORMATION
Capital expenditure 908 411 321 473 51 95 926 98 090
Total assets 52 921 8 755 36 215 25 386 1 644 1 571 384 1 696 305
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
60
Mustek annual report 2006
GROUPContinuing operations
GROUPDiscontinued operations
GROUP
Total
COMPANY
2006R000
2005R000
2006R000
2005R000
2006R000
2005R000
2006R000
2005R000
2. REVENUEAn analysis of the Group and company’s revenue for the year from continuing and discontinued operations, is as follows:
Sales of goods 3 051 169 2 837 527 143 755 99 957 3 194 924 2 937 484 1 356 176 1 289 091
Rendering of services 5 282 4 760 — — 5 282 4 760 3 957 3 058
3 056 451 2 842 287 143 755 99 957 3 200 206 2 942 244 1 360 133 1 292 149
The directors considered whether the recognition of the revenue in the current year is appropriate, taking into account the detailed criteria for the recognition of revenue from the sale of goods set out in IAS 18 Revenue and, in particular, whether the Group had transferred to the buyer the significant risks and rewards of ownership of the goods.
3. PROFIT (LOSS) FROM OPERATIONSProfit (loss) from operations for continuing and discontinued operations has been arrived at after taking the following items into account:
Auditors’ remuneration:
Audit fees 3 917 3 188 123 81 4 040 3 269 2 273 1 795
Fees for other services 1 146 1 323 — 1 1 146 1 324 601 827
Under (over) provision in previous years 9 22 — — 9 22 (20) 57
Expenses 9 84 — — 9 84 9 80
5 081 4 617 123 82 5 204 4 699 2 863 2 759
Staff costs 133 335 119 964 3 520 4 285 136 855 124 249 80 465 73 112
61
Mustek annual report 2006
GROUPContinuing operations
GROUPDiscontinued operations
GROUP
Total
COMPANY
2006R000
2005R000
2006R000
2005R000
2006R000
2005R000
2006R000
2005R000
3. PROFIT (LOSS) FROM OPERATIONS (continued)
Depreciation of property, plant and equipment:
Land and buildings 186 129 — — 186 129 — —
Improvements to leased premises 4 913 2 587 52 68 4 965 2 655 1 282 1 227
Plant and machinery 1 472 181 — — 1 472 181 75 103
Furniture, fixtures and office equipment 4 110 2 633 103 118 4 213 2 751 970 974
Computer equipment 6 983 7 528 125 128 7 108 7 656 4 435 5 659
Motor vehicles 1 605 1 203 39 29 1 644 1 232 485 360
Capitalised leased furniture, fixtures and office equipment 13 25 — — 13 25 — —
Capitalised leased computer equipment — 725 — — — 725 — 725
Capitalised leased motor vehicles 80 172 — — 80 172 — —
19 362 15 183 319 343 19 681 15 526 7 247 9 048
Amortisation:
Software 296 564 — — 296 564 — —
Net profit (loss) on disposal of property, plant and equipment:
Land and buildings 4 718 — — — 4 718 — — —
Improvements to leased premises (9) (2) (183) — (192) (2) (8) (2)
Plant and machinery — (11) — — — (11) —
Furniture, fixtures and office equipment (16) (10) (211) — (227) (10) 28 10
Computer equipment (261) 10 (65) — (326) 10 — (2)
Motor vehicles (140) (20) (59) — (199) (20) 15 2
Capitalised leased motor vehicles (32) (108) — — (32) (108) — —
4 260 (141) (518) — 3 742 (141) 35 8
Fees for services:
Administrative 58 67 — — 58 67 — 67
Managerial 23 — — — 23 — — —
Secretarial 16 5 — — 16 5 10 —
Technical 1 521 2 043 — — 1 521 2 043 — 30
1 618 2 115 — — 1 618 2 115 10 97
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
62
Mustek annual report 2006
GROUPContinuing operations
GROUPDiscontinued operations
GROUP
Total
COMPANY
2006R000
2005R000
2006R000
2005R000
2006R000
2005R000
2006R000
2005R000
3. PROFIT (LOSS) FROM OPERATIONS (continued)
Operating lease expenses:
Land and buildings 24 712 23 378 1 665 1 551 26 377 24 929 16 211 16 211
Furniture, fixtures, office and computer equipment 281 1 545 45 83 326 1 628 — 1 290
Motor vehicles 280 — — — 280 — — —
Plant and machinery 384 462 — — 384 462 — —
25 657 25 385 1 710 1 634 27 367 27 019 16 211 17 501
Pension contributions 7 223 6 199 7 3 7 230 6 202 3 955 3 305
Foreign exchange (losses) gains:
Realised 18 544 (3 585) — (405) 18 544 (3 990) 6 612 1 903
Unrealised (69 517) (21 199) — (272) (69 517) (21 471) (41 276) (7 626)
(50 973) (24 784) — (677) (50 973) (25 461) (34 664) (5 723)
Fair value adjustments:
Open foreign exchange contracts gain 4 945 6 304 — — 4 945 6 304 1 092 6 353
Interest rate swap derivative (loss) gain (8 434) 3 459 — — (8 434) 3 459 (8 434) 3 459
(3 489) 9 763 — — (3 489) 9 763 (7 342) 9 812
63
Mustek annual report 2006
GROUPContinuing operations
GROUPDiscontinued operations
GROUPTotal COMPANY
2006R000
2005R000
2006R000
2005R000
2006R000
2005R000
2006R000
2005R000
4. INVESTMENT REVENUESInterest received on bank balances and cash 11 190 19 826 30 29 11 220 19 855 4 794 7 438
Other interest received 7 819 7 089 — — 7 819 7 089 — —
Interest received from subsidiaries and joint venture — — — — — — 1 944 4 494
Preference dividends received (see note 18 pertaining to set-off against interest paid at consolidated level) — — — — — — 40 238 36 486
Dividends received from short-term dividend only unit trusts 9 937 5 590 — — 9 937 5 590 7 709 4 539
Dividends from subsidiaries — — — — — — 41 373 —
28 946 32 505 30 29 28 976 32 534 96 058 52 957
5. FINANCE COSTSInterest paid on bank overdrafts 4 918 7 903 220 150 5 138 8 053 1 585 4 279
Interest paid on loans 92 317 82 384 — — 92 317 82 384 — 316
Preference dividends received (see note 18 pertaining to set-off against interest paid at company level) (48 112) (43 400) — — (48 112) (43 400) — —
Trade finance commission 12 351 8 806 — — 12 351 8 806 9 643 5 799
Other interest paid 2 372 650 — — 2 372 650 123 36
63 846 56 343 220 150 64 066 56 493 11 351 10 430
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
64
Mustek annual report 2006
GROUPContinuing operations
GROUP
Total
COMPANY
2006R000
2005R000
2006R000
2005R000
2006R000
2005R000
6. OTHER (LOSSES) AND GAINSFair valuation (loss) gain on investments and loans (see note 15) (326) 16 729 (326) 16 729 — —
Impairment of investment in subsidiary (see note 12) — — — — — (2 948)
Reversal of (writing-off) subsidiary loan (see note 12) — — — — 417 (13 664)
Profit on disposal of associates (see note 24) — 2 239 — 2 239 — 10 400
Impairment of associates (see note 13) — (10 793) — (10 793) — (4 189)
Impairment of goodwill (see note 11) (298) (5 852) (298) (5 852) — —
Profit on disposal of shares in other businesses (see note 24) — 1 360 — 1 360 — —
Surety obligations settled — (1 434) — (1 434) — (1 434)
(624) 2 249 (624) 2 249 417 (11 835)
65
Mustek annual report 2006
GROUPContinuing operations
GROUPDiscontinued operations
GROUP
Total
COMPANY
2006R000
2005R000
2006R000
2005R000
2006R000
2005R000
2006R000
2005R000
7. INCOME TAX (EXPENSE) BENEFITSouth African normal tax (14 739) (41 869) (197) 70 (14 936) (41 799) 9 195 (11 540)
Foreign tax (1 227) (938) — — (1 227) (938) — —
(15 966) (42 807) (197) 70 (16 163) (42 737) 9 195 (11 540)
Comprising:
Normal current tax – Current year (22 707) (29 231) — — (22 707) (29 231) — (6 765)
– Prior year (467) (3 352) — — (467) (3 352) (1 053) 110
– Current year 6 059 (4 499) (197) 70 5 862 (4 429) 4 628 (2 727)
Normal deferred tax
– Prior year 747 (104) — — 747 (104) (192) 1
– Rate change — (457) — — — (457) — (302)
Secondary tax on companies
– Current tax (5 172) — — — (5 172) — — —
– Deferred tax 5 812 (1 857) — — 5 812 (1 857) 5 812 (1 857)Capital gains tax– Current tax — (64) — — — (64) — —– Deferred tax (238) (3 243) — — (238) (3 243) — —
Income tax (expense) benefit for the year (15 966) (42 807) (197) 70 (16 163) (42 737) 9 195 (11 540)
% % % %
Tax rate reconciliation
South African statutory rate of tax 29,0 29,0 29,0 29,0
Dividends received (18,6) (10,2) (42,7) (21,3)
Secondary tax on companies (0,7) 1,3 (9,4) 3,3
Tax effect of share of results of associates (1,5) 0,1 — —
Capital profit inclusion rate and base cost adjustment 0,3 2,3 — 0,8
Current tax prior year under (over) provision 0,5 2,4 1,7 (0,2)
Deferred tax prior year (over) under provision (0,8) 0,1 0,3 —
Change in rate — 0,3 — 0,5
Disallowed expenses 9,6 5,5 6,2 8,6
Effective rate of tax 17,8 30,8 (14,9) 20,7
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
66
Mustek annual report 2006
8. DISCONTINUED OPERATIONSOn 1 April 2006, the Group discontinued the operations of Rectron Plc and Axper Technologies (Pty) Limited (previously IT Depot (Pty) Limited.)
The profit for the year from the discontinued operations is analysed as follows:
GROUP
2006R000
2005R000
Current year loss of Rectron Plc and Axper Technologies (Pty) Limited (6 003) (10 109)
Gain on discontinuance (see note 25) 19 131 3 933
Group’s share of profit (loss) on disposal of subsidiaries 13 128 (6 176)
The results of the discontinued operations for the period from 1 July 2005 to 31 March 2006 are as follows:
Revenue 143 755 99 957
Cost of sales (138 456) (98 534)
Gross profit 5 299 1 423
Other income — 272
Distribution, administrative and other operating expenses (10 915) (11 753)
Loss from operations (5 616) (10 058)
Investment revenue 30 29
Finance costs (220) (150)
Loss before tax (5 806) (10 179)
Income tax (expense) benefit (197) 70
Loss for the year (6 003) (10 109)
The carrying amounts of the assets and liabilities of the discontinued operations at the date of disposal are disclosed in note 25.
9. EARNINGS PER SHAREFrom continuing and discontinued operations
The calculation of the basic and headline earnings per share is based on the following data:
Basic earnings (profit for the year attributable to equity holders of the parent) 61 821 82 199
Impairment of goodwill (see note 11) 298 5 852
Group’s share of profit on disposal of subsidiaries and other businesses (12 596) (3 950)
Profit on disposal of associate — (2 239)
Group’s share of profit on disposal of property, plant and equipment (2 465) 141
Impairment of associates (see note 13) — 10 793
Headline earnings 47 058 92 796
Number of shares 000 000
Weighted average number of ordinary shares for the purposes of basic earnings per share 106 596 103 724
Effect of dilutive potential ordinary shares – share options 2 011 3 970
Weighted average number of ordinary shares for the purposes of diluted earnings per share 108 607 107 694
At year-end 11 419 215 (2005: 6 490 237) share options were outstanding exercisable over the next 5 (2005: 4) years at a weighted average price of R8,42 per share (2005: R3,44 per share). The weighted average market price for the 2006 year was R10,22 per share (2005: R8,87 per share).
67
Mustek annual report 2006
9. EARNINGS PER SHARE (continued)
From continuing operations
The calculation of the basic and headline earnings per share from continuing operations attributable to the ordinary equity holders of the parent entity is based on the following data:
GROUP
Earnings2006R000
2005R000
Basic earnings (profit for the year attributable to equity holders of the parent) 61 821 82 199
Less Group’s share of (profit) loss for the year from discontinued operations (8 643) 4 066
Basic earnings from continuing operations 53 178 86 265
Impairment and amortisation of goodwill (see note 11) 298 5 852
Profit on disposal of subsidiaries and other businesses — (1 360)
Group’s share of profit on disposal of property, plant and equipment (2 465) 141
Profit on disposal of associate — (2 239)
Impairment of associates (see note 13) — 10 793
Headline earnings from continuing operations 51 011 99 452
Earnings per share Cents Cents
From continuing and discontinued operations:
Headline earnings per ordinary share 44,15 89,46
Basic earnings per ordinary share 58,00 79,25
Diluted headline earnings per ordinary share 43,33 86,17
Diluted basic earnings per ordinary share 56,92 76,33
From continuing operations:
Headline earnings per ordinary share 47,85 95,88
Basic earnings per ordinary share 49,89 83,17
Diluted headline earnings per ordinary share 46,97 92,35
Diluted basic earnings per ordinary share 48,96 80,10
From discontinued operations:
Headline earnings per ordinary share (3,70) (6,42)
Basic earnings per ordinary share 8,11 (3,92)
Diluted headline earnings per ordinary share (3,64) (6,18)
Diluted basic earnings per ordinary share 7,96 (3,77)
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
68
Mustek annual report 2006
10. PROPERTY, PLANT AND EQUIPMENT
GROUP — 2006
Cost
Opening balance
R000Additions
R000Disposals
R000
Revalu-ationsR000
Exchangediffer-encesR000
Sub-sidiaries acquired
R000
Closing balance
R000
Land and buildings 91 574 27 165 (90 282) 1 969 — 13 333 43 759
Improvements to leased premises 18 057 1 848 (346) — (33) — 19 526
Plant and machinery 8 520 2 640 — — — — 11 160
Furniture, fixtures and office equipment 25 866 12 696 (1 335) — 151 10 37 388
Computer equipment 55 399 8 411 (907) — (8) 12 62 907
Motor vehicles 14 035 4 572 (3 989) — 19 46 14 683
Capitalised leased furniture, fixtures and office equipment 514 — — — 1 456 — 1 970
Capitalised leased computer equipment 9 486 — (9 486) — — — —
Capitalised leased motor vehicles 357 — (114) — — — 243
223 808 57 332 (106 459) 1 969 1 585 13 401 191 636
Accumulated depreciation
Restated opening balance
R000
Current yearR000
DisposalsR000
Exchange differ-encesR000
Sub-sidiaries
acquiredR000
Closing balance
R000
Land and buildings 129 186 — 10 — 325
Improvements to leased premises 7 734 4 965 (149) (10) — 12 540
Plant and machinery 1 236 1 472 — — — 2 708
Furniture, fixtures and office equipment 14 145 4 213 (1 056) 39 1 17 342
Computer equipment 42 363 7 108 (829) (6) 2 48 638
Motor vehicles 4 218 1 644 (1 622) 35 6 4 281
Capitalised leased furniture, fixtures and office equipment 148 13 — — — 161
Capitalised leased computer equipment 8 700 — (8 700) — — —
Capitalised leased motor vehicles 189 80 (57) — — 212
78 862 19 681 (12 413) 68 9 86 207
69
Mustek annual report 2006
10. PROPERTY, PLANT AND EQUIPMENT (continued)
COMPANY — 2006
Cost
Opening balance
R000Additions
R000Disposals
R000
Closing balance
R000
Land and buildings 711 — — 711
Improvements to leased premises 9 133 187 (28) 9 292
Plant and machinery 1 055 915 — 1 970
Furniture, fixtures and office equipment 9 632 653 (325) 9 960
Computer equipment 40 209 4 532 (18) 44 723
Motor vehicles 4 810 2 474 (904) 6 380
Capitalised leased computer equipment 8 700 — (8 700) —
74 250 8 761 (9 975) 73 036
Accumulated depreciation
Restated opening balance
R000
Current year
R000Disposals
R000
Closing balance
R000
Improvements to leased premises 3 772 1 282 (20) 5 034
Plant and machinery 923 75 — 998
Furniture, fixtures and office equipment 6 511 970 (289) 7 192
Computer equipment 32 894 4 435 (17) 37 312
Motor vehicles 969 485 (615) 839
Capitalised leased computer equipment 8 700 — (8 700) —
53 769 7 247 (9 641) 51 375
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
70
Mustek annual report 2006
10. PROPERTY, PLANT AND EQUIPMENT (continued)
GROUP – 2005
Cost
Opening balance
R000Additions
R000Disposals
R000
Revalu-ationsR000
Exchange differ-encesR000
Sub-sidiaries
acquiredR000
Closing balance
R000
Land and buildings 16 352 74 263 — 959 — — 91 574
Improvements to leased premises 17 785 236 (12) — 20 28 18 057
Plant and machinery 1 697 6 964 (141) — — — 8 520
Furniture, fixtures and office equipment 21 118 4 882 (507) — 140 233 25 866
Computer equipment 45 873 9 263 (778) — 29 1 012 55 399
Motor vehicles 12 232 2 185 (570) — 135 53 14 035
Capitalised leased furniture, fixtures and office equipment 514 — — — — — 514
Capitalised leased computer equipment 9 486 — — — — — 9 486
Capitalised leased motor vehicles 327 297 (267) — — — 357
125 384 98 090 (2 275) 959 324 1 326 223 808
Accumulated depreciation
Restatedopening balance
R000
Restated current
yearR000
Restated disposals
R000
Exchange differ-encesR000
Sub-sidiariesacquired
R000
Restated closing
balanceR000
Land and buildings — 129 — — — 129
Improvements to leased premises 5 080 2 655 (10) 4 5 7 734
Plant and machinery 1 083 181 (28) — — 1 236
Furniture, fixtures and office equipment 11 419 2 751 (171) 85 61 14 145
Computer equipment 34 920 7 656 (574) 21 340 42 363
Motor vehicles 3 098 1 232 (192) 65 15 4 218
Capitalised leased furniture, fixtures and office equipment 123 25 — — — 148
Capitalised leased computer equipment 7 975 725 — — — 8 700
Capitalised leased motor vehicles 175 172 (158) — — 189
63 873 15 526 (1 133) 175 421 78 862
71
Mustek annual report 2006
10. PROPERTY, PLANT AND EQUIPMENT (continued)
COMPANY – 2005
Cost
Opening balance
R000Additions
R000Disposals
R000
Closing balance
R000
Land and buildings 658 53 — 711
Improvements to leased premises 9 034 111 (12) 9 133
Plant and machinery 1 027 28 — 1 055
Furniture, fixtures and office equipment 9 442 343 (153) 9 632
Computer equipment 34 609 5 760 (160) 40 209
Motor vehicles 4 499 412 (101) 4 810
Capitalised leased computer equipment 8 700 — — 8 700
67 969 6 707 (426) 74 250
Accumulated depreciation
Restated opening balance
R000
Restated current
year R000
Restated disposals
R000
Restated closing balance
R000
Improvements to leased premises 2 555 1 227 (10) 3 772
Plant and machinery 820 103 — 923
Furniture, fixtures and office equipment 5 615 974 (78) 6 511
Computer equipment 27 386 5 659 (151) 32 894
Motor vehicles 660 360 (51) 969
Capitalised leased computer equipment 7 975 725 — 8 700
45 011 9 048 (290) 53 769
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
72
Mustek annual report 2006
GROUP COMPANY
2006 R000
2005 R000
2006 R000
2005 R000
10. PROPERTY, PLANT AND EQUIPMENT (continued)
COMPANY – 2005
Net book value
Land and buildings 43 434 91 445 711 711
Improvements to leased premises 6 986 10 323 4 258 5 361
Plant and machinery 8 452 7 284 972 132
Furniture, fixtures and office equipment 20 046 11 721 2 768 3 121
Computer equipment 14 269 13 036 7 411 7 315
Motor vehicles 10 402 9 817 5 541 3 841
Capitalised leased furniture, fixtures and office equipment 1 809 366 — —
Capitalised leased computer equipment — 786 — —
Capitalised leased motor vehicles 31 168 — —
105 429 144 946 21 661 20 481
Capitalised leased items are encumbered as security for a liability of R1 232 000 (2005: 397 000) (see note 21).
Land and buildings are encumbered as security for a liability of R12 848 000 (2005: R38 765 000).
Land and buildings were revalued during the year by independent valuers not connected with the Group, by reference to market evidence of recent transactions for similar properties. The valuations conforms to International Valuation Standards.
At 30 June 2006, had the land and buildings been carried at historical cost less accumulated depreciation and accumulated impairment losses, the carrying amount would have been approximately R41,4 million (2005: R90,5 million).
A register of land and buildings and details on the valuers and the dates of the valuations are available at the registered office of the company.
The following estimated useful lives are used for the depreciation of property, plant and equipment:
Improvements to leased premises over period of the initial lease
Plant and machinery 5 years
Furniture, fixtures and office equipment 5 – 10 years
Computer equipment 3 years
Motor vehicles 5 years
During the period, the Group carried out a review of the recoverable amount of its plant and equipment, having regard to its ongoing programme of modernisation and the introduction of new product lines. The recoverable amount of the relevant assets has been determined on the basis of their value in use.
The directors reviewed the residual values, useful lives and carrying amount of its property, plant and equipment and intangible assets to determine the appropriate level of depreciation and whether there is any indication that those assets have suffered an impairment loss. The directors judged a residual value of zero as a result of the fact that plant and equipment are not held for trading and are normally scrapped. The residual value of land and buildings normally exceeds the original costs. Land is not depreciated. Buildings are revalued in terms of the accounting policy. The revalued amounts did not exceed the estimates’ residual values of the buildings.
73
Mustek annual report 2006
GROUP
2006 R000
2005 R000
11. INTANGIBLE ASSETSGoodwill
Cost 17 788 9 057
At the beginning of the year 9 057 67 337
Elimination of accumulated amortisation with the adoption of IFRS 3 — (63 586)
Arising on acquisition of subsidiaries 8 731 5 946
Eliminated on disposal of subsidiaries and other businesses — (640)
Accumulated impairments (6 150) (5 852)
At the beginning of the year (5 852) (63 586)
Elimination of accumulated amortisation with the adoption of IFRS 3 — 63 586
Impairment charge (298) (5 852)
Carrying amount 11 638 3 205
Software
Cost 15 689 15 689
At the beginning of the year 15 689 11 271
Acquisition of subsidiary — 4 418
Incurred during the year — —
Accumulated amortisation (15 592) (15 296)
At the beginning of the year (15 296) (10 745)
Acquisition of subsidiary — (3 987)
Charge for the year (296) (564)
Carrying amount 97 393
Total 11 735 3 598
Software is written-off on a straight-line basis over three years.
Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units that are expected to benefit from that business combination. The carrying amount of goodwill had been allocated as follows:
Mecer Free State Province (Proprietary) Limited 3 205 3 205
Brotek (Proprietary) Limited 7 965 —
Mecer East Africa Limited 468 —
11 638 3 205
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
74
Mustek annual report 2006
11. INTANGIBLE ASSETS (continued)
The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired.
The recoverable amounts of the cash generating units are determined based on fair value less costs to sell. Fair value less costs to sell is determined using an observable market price.
The recoverable amounts of the cash generating units were determined from value-in-use calculations. The key assumptions for the value-in-use calculations are those regarding discount rates, expected volume growth rates, and expected changes to selling prices and direct costs. Management estimates discount rates using pre-tax rates that reflect management’s assessment of the time value of money and their views on the risks specific to the cash generating units. The growth rates are based on management experience and their expectations of industry and market share growth. Expectation of changes in gross margins and changes in indirect costs are based on past practices, expectations of future changes in the market and a view on expected inflation rates.
Management prepared a five-year cash flow forecast using the 2006 financial year performance and the approved 2007 financial year budget based on an estimated 3%, maintaining current gross margins, applying an expected inflation rate of 5% to indirect expenses and using a discount rate of 18%.
The Group fully impaired R0,3 million (2005: R4,3 million) of goodwill arising on acquisitions.
On 1 July 2005, Mustek acquired the remaining 30% of Brotek (Pty) Limited (Brotek). Shortly thereafter, Mustek sold the 30%, that it just acquired, to Puno Printing Solutions (Pty) Limited (Puno). In order to finance the transaction, Puno borrowed the consideration amount from Mustek at prime. The interest and capital of the loan will be repaid using the dividends received from Brotek. The dividends must be applied in that manner until the loan is fully repaid. The agreement does not guarantee any minimum dividend. If the dividend stream is less that the interest on the loan the interest will be capitalised. The loan and any unpaid interest must be repaid by 2008. If it is not repaid Mustek will take ownership of the 30% shares and may pursue further claims against Puno.
Mustek carries all the underlying risks and rewards of owning the shares until the loan is repaid. Mustek therefore consolidates 100% of Brotek as from 1 July 2005 until the loan is repaid. Once the risk of ownership transfers to Puno, a disposal will be recorded. As the price is already determined, the directors considered the likelihood of a loss on disposal which should be set off (impaired) against the goodwill asset on the balance sheet. No such loss is expected.
The directors considered and appropriately accounted for the transaction in terms of IFRS 2 Share-based Payment, IFRIC 8 Scope of IFRS 2 and AC 503 Accounting for Black Economic Empowerment Transactions.
COMPANY
2006 R000
2005 R000
12. INVESTMENTS IN SUBSIDIARIESShares at cost 149 700 116 939
– opening balance 116 939 116 541
– subsidiaries acquired (see note 26) 32 761 1 658
– subsidiary disposed — (1 260)
Opening carrying value adjustments (58 835) (43 254)
Disposal of subsidiaries carrying value adjustment — 1 031
Current year reversal of (writing-off) loan 417 (13 664)
Current year impairment of investment — (2 948)
Loans owing by subsidiaries 94 785 90 344
Non-current investments in subsidiaries 186 067 148 448
Loans owing to subsidiaries (11 855) (11 143)
174 212 137 305
Refer Annexure A for detail of subsidiaries, including areas of management judgement and estimation uncertainty.
75
Mustek annual report 2006
GROUP COMPANY
2006R000
2005R000
2006R000
2005R000
13. INVESTMENTS IN ASSOCIATESShares at cost 43 496 43 496 8 277 8 277
– opening balance 43 496 46 575 8 277 11 434
– associates acquired — 730 — 443
– transfer to joint venture — 1 484 — —
– transfer to subsidiaries — (1 693) — —
– associates disposed — (3 600) — (3 600)
Impairments (27 539) (27 539) (4 189) (4 189)
– opening balance (27 539) (16 746) (4 189) —
– current year impairment — (10 793) — (4 189)
Balance carried forward from previous page 15 957 15 957 4 088 4 088
Share of post-acquisition (losses) earnings (5 746) (10 406) — —
– opening balance (10 406) 6 061 — —
– share of current year earnings 4 660 (2 515) — —
– share of post-acquisition earnings disposed — (14 001) — —
– share of post-acquisition earnings acquired — 49 — —
Shares and post-acquisition earnings 10 211 5 551 4 088 4 088
Loans owing by associates 18 346 16 052 8 250 6 957
Investments in associates 28 557 21 603 12 338 11 045
Loans owing to associates — (329) — —
28 557 21 274 12 338 11 045
The aggregate assets, liabilities and results of operations of associates at year-end are summarised as follows:
Total assets 82 884 4 752 80 432 669
Total liabilities 34 304 12 247 22 680 9 264
Revenue 82 172 10 282 76 265 3 462
Profit (loss) before tax 18 220 (947) 19 120 (1 934)
Income tax expense (6 346) (4 706) (6 118) (4 417)
Net profit (loss) for the year 11 874 (5 653) 13 002 (6 351)
Detail of the Group’s investments in associates is disclosed in Annexure B, including areas of management judgement and estimation uncertainty.
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
76
Mustek annual report 2006
14. INVESTMENT IN JOINT VENTUREGROUP COMPANY
2006R000
2005R000
2006R000
2005R000
Since 1 October 2004, due to a change in the shareholders’ agreement, the Group jointly controls Comztek (Pty) Limited. The results of the joint venture have been proportionately consolidated from that date.
Cost — — — —
Loans owing by joint venture 1 106 830 2 000 1 500
1 106 830 2 000 1 500
Percentage share holding 44,7% 44,7% 44,7% 44,7%
The Group and company’s 44,7% interest in the assets, liabilities and results of operations of the joint venture are summarised as follows:
GROUP AND COMPANY
2006R000
2005R000
Non-current assets 2 799 1 240
Current assets 100 140 87 720
Non-current liabilities 25 046 23 911
Current liabilities 64 283 58 358
Revenue 256 788 168 854
Profit before tax 9 220 2 716
Income tax expense (2 311) (368)
Profit after tax 6 909 2 348
Minority interest (651) 638
Net profit for the year 6 258 2 986
Comztek (Pty) Limited declared a dividend of R4 million after year-end.
77
Mustek annual report 2006
GROUP COMPANY
2006R000
2005R000
2006R000
2005R000
15. OTHER INVESTMENTS AND LOANSShares at cost 5 764 10 172 204 004 163 766
– opening balance 10 172 10 848 163 766 127 280
– exchange differences 74 (26) — —
– disposal of investments (3 832) — — —
– additional investments (650) (650) 40 238 36 486
Loans 3 653 3 203 11 614 10 500
Fair value adjustments 17 451 13 059 — —
– opening balance 13 059 (3 660) — —
– disposal of investments 3 079 — — —
– exchange differences taken to equity 1 639 — — —
– current year fair value (loss) gain (326) 16 719 — —
26 868 26 434 215 618 174 266
All investments are classified as held for trading and unrealised gains and losses are included in the net profit for the year. The directors’ valuation of unlisted investments equal their fair values. Refer Annexure C for details of other investments and loans, including management judgement and areas of estimation uncertainty.
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
78
Mustek annual report 2006
GROUP COMPANY
2006R000
2005R000
2006R000
2005R000
16. DEFERRED TAX ASSETS AND LIABILITIESThe tax effects of temporary differences of the company and subsidiary companies resulted in deferred tax assets and liabilities. There is probable assurance that future taxable income will be sufficient to allow the tax benefit to be realised. The following are the major deferred tax liabilities and assets recognised at 29% (2005: 29%) except if otherwise indicated:
Tax loss 10 103 7 207 1 280 —
Provision for doubtful debts 1 007 1 456 887 1 218
Amortisation of intangible assets 32 (40) 40 42
Salary-related provisions 1 672 2 779 1 403 1 229
Accelerated wear and tear for tax purposes (4 189) (3 328) (2 408) (2 059)
Leased assets 272 — 272
Prepayments (922) (837) (851) (806)
Minor assets 75 83 75 41
Lease liability 8 646 7 352 6 846 6 462
Other provisions 1 430 — — —
Unrealised exchange gain (1 153) 800 (1 763) 3
Deferred revenue 5 870 2 891 5 544 2 661
Interest rate swap (1 081) (3 527) (1 081) (3 527)
Secondary tax on companies (12,5%) 13 680 7 868 13 680 7 868
Capital gains (2 167) — — —
Unrealised fair value capital gain on investment (14,5%) (3 481) (3 243) — —
29 522 19 733 23 652 13 404
Deferred tax assets 30 330 20 202 23 652 13 404
Deferred tax liabilities (808) (469) — —
29 522 19 733 23 652 13 404
79
Mustek annual report 2006
GROUP COMPANY
2006R000
2005R000
2006R000
2005R000
16. DEFERRED TAX ASSET AND LIABILITY (continued)
Reconciliation between opening and closing balances:
Deferred tax asset at the beginning of the year 19 733 29 528 13 404 18 290
Originating (reversing) differences for taxable loss 2 896 (1 737) 1 280 —
Reversing differences on provision for doubtful debts (449) (1 252) (331) (422)
Reversing (originating) differences on amortisation of intangible assets 72 74 (2) 1
(Reversing) originating differences on salary-related provisions (1 107) 1 079 174 (146)
(Originating) reversing differences on accelerated wear and tear (861) (231) (349) 473
Reversing differences on leased assets (272) (388) (272) (385)
Originating differences on prepayments (85) (46) (45) (15)
(Reversing) originating differences on minor assets (8) 1 34 (41)
Originating differences on lease liability 1 294 368 384 396
Originating differences on other provisions 1 430 884 — —
Originating differences on unrealised exchange gain (1 953) (804) (1 766) —
(Originating) reversing differences on deferred revenue 2 979 (1 104) 2 883 (1 334)
Reversing (originating) differences on interest rate swap derivative 2 446 (916) 2 446 (916)
Originating (reversing) differences on secondary tax on companies 5 812 (1 857) 5 812 (1 857)
Reversing differences on capital gains tax (2 167) (626) — (159)
Reversing (originating) IAS 39 differences on inventory — 3 — (481)
Originating difference on fair value adjustment (238) (3 243) — —
29 522 19 733 23 652 13 404
The 2005 deferred taxation balances have been restated. See note 32 for more information.
17. INVENTORIESFinished goods, net of provision for obsolescence 667 702 556 118 260 627 262 544
Inventories in transit 95 697 55 159 39 457 30 713
763 399 611 277 300 084 293 257
Service stock and trading stock obsolescence provisions are highly judgemental because of the very competitive nature of the business and the extremely short life cycle of the product. Service stock is impaired depending on its age. The net realisable values of inventories are used to manage their cost. The net realisable value of inventory represents the estimated selling price in the current market at balance sheet date.
The Group provides for the amount which the cost of inventory is higher than the net realisable value multiplied by the units of stock on hand at balance sheet date. Included above are the carrying amounts of inventory stated at net realisable value for the Group and company of R36 020 383 (2005: R26 881 989) and R27 703 167 (2005: R20 395 941) respectively.
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
80
Mustek annual report 2006
GROUP COMPANY
2006R000
2005R000
2006R000
2005R000
18. TRADE AND OTHER RECEIVABLESTrade receivables 368 233 372 499 50 037 5 653
Other receivables 29 734 49 461 11 127 23 876
Interest rate swap derivative asset (also see note 23) 3 728 12 162 3 728 12 162
Total current trade and other receivables 401 695 434 122 64 892 41 691
Non-current trade and other receivables 22 116 13 233 10 294 13 233
Trade receivables securitisation
ObjectivesThe Group is party to receivables securitisation transactions, which have the following funding and earnings enhancement objectives:
>> To create a flexible environment whereby the Group can raise external funding using its trade receivables as security.
>> To raise funding at an efficient cost.
>> To facilitate the recurring funding of the Group’s growing operations.
>> To enhance profitability and earnings per share by reducing the Group’s funding rate.
Structure components
>> Special purpose entities (“SPEs”), were incorporated and the Group entered into the sale of receivables and other agreements with the SPEs. The Group reserves the right to administer the receivables books itself and earns a market-related fee for this function.
>> The SPEs raise funds against its accumulated receivables books. In order to provide the external funders of the SPEs with well secured credit exposure, the SPEs are capitalised with a sufficient level of subordinated debt, obtained from finance companies (“FinCOs”).
>> Credit ratings were obtained on the SPEs’ abilities to meet their obligations and the Group’s ability to manage the receivables books, taking into consideration that the receivables books are insured by third party insurers to a large extent.
>> The Group invests in preference shares issued by investment companies. As security for the preference share investments, the Group has put options to put the preference shares to the FinCOs if certain option events are met. As security for the put options, the FinCOs cede all its rights to the Group in respect of the subordinated loans to the SPEs.
>> The Group has options to acquire all the issued shares of the SPEs after the initial five-year transaction period (see Annexure C).
Accounting treatment
>> The SPEs are consolidated in terms of SIC 12 Consolidation – special purpose entities.
>> The Group trade receivables includes R306,2 million (2005: R302,8 million) of SPE trade receivables and R244,4 million (2005: R229,2 million) of external borrowings by the SPEs are included in the total borrowings of the Group (see note 21).
>> The financial assets (preference share investments) and financial liabilities (subordinated loans of the FinCOs to the SPEs) are offset on the balance sheet. The net amount is reported as the Group has legally enforceable rights to set-off and intends to settle on a net basis (see Annexure C).
>> Since the balance sheet items are set-off, it is appropriate to set-off the corresponding income and expense items, being the dividends received from the preference share investments and the interest paid on the subordinated loans (see note 4 and note 5).
81
Mustek annual report 2006
18. TRADE AND OTHER RECEIVABLES (continued)
Other information
The directors consider that the carrying amount of trade and other receivables approximates to their fair value.
The Group’s credit risk is primarily attributable to its trade and other receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group’s management based on prior experience and the current economic environment. Provision for doubtful debts of the company was based on specific identified doubtful debtors. The provision for Rectron Holdings (Proprietary) Limited debts was based on all debtor amounts older than 60 days. The directors believe that the provision appears to be appropriate and not excessive. The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers. The Group performs ongoing credit valuations of the financial condition of customers, and where appropriate, credit guarantee insurance is purchased for 80% of the value of trade receivables.
19. BANK BALANCES AND CASHBank balances and cash comprise cash, funds on call and short-term deposits. The carrying amount of these assets approximates to their fair value. The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. In terms of IAS 1 Presentation of Financial Statements, included in bank balances and cash is R280,3 million (2005: R713,2 thousand) (Group) and R220,1 million (2005: R499,2 thousand) (company) of investments in dividend yielding unit trusts that can be converted into cash within 24 hours and that is not exposed to equity fluctuations.
2006R000
2005R000
20. SHARE CAPITAL AND SHARE PREMIUMGROUP AND COMPANY
Authorised:
250 000 000 ordinary shares of R0,008 each 2 000 2 000
1 non-cumulative preference share of R265 489,66 265 265
2 265 2 265
Issued:
107 514 661 (2005: 104 643 639) ordinary shares of R0,008 each 860 837
1 non-cumulative preference share of R265 489,66 265 265
1 125 1 102
Number of shares000
Ordinary shares
Balance at 30 June 2005 104 644 101 567
Share-based payments — —
Shares issued in terms of option scheme 2 871 3 077
Balance at 30 June 2006 107 515 104 644
Preference share
Share issued in previous years * *
*1 preference share
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
82
Mustek annual report 2006
20. SHARE CAPITAL AND SHARE PREMIUM (continued)
These shares exclude the 11 419 215 (2005: 6 490 237) share options granted to participants in terms of the Mustek executive share scheme.
Taiwan Depository Receipts (“TDRs”) are listed on the Taiwan Securities Exchange. At 30 June 2006, 1 484 000 TDRs were in issue (2005: 1 591 000).
On 31 August 2004 the shareholders approved an empowerment transaction with Safika Holdings (Pty) Limited. In terms of the agreement, Safika will acquire up to a maximum shareholding of 25% plus one share of the voting rights in Mustek on a poll; and acquire up to a cumulative maximum of 25% plus one share of the effective number of issued shares in Mustek over the relevant period.
The following special resolutions were approved at the general meeting:
1. The par value of the preference share was increased to R265 489,66.
2. The insertion of Articles 32A, 32B and 32C into the articles of association of the company to afford the preference shareholder 25% plus one vote (including any ordinary share that the shareholder may hold) of the voting rights of the company for a period of five years
3. The replacement of the existing article 84 in the articles of association of the company. The holder shall be entitled to a collective vote of 25% plus one vote of the voting rights of the company for a period of five years from 1 July 2003 unless the preference share has been cancelled. To the extent that the preference share voting rights are not recognised for the purposes of the JSE Limited (JSE), the holder shall be entitled to attend the general meeting of the company to exercise the votes attaching to the preference share at any meeting. If after taking into account the preference share voting rights on any resolution, the requisite majority of the passing of the resolution for JSE purposes is not achieved, the resolutions shall be deemed to have failed. The preference share voting rights shall reduce proportionately to the extent that the holder acquires ordinary shares in the company in terms of the call option. The holder shall, on an annual basis, during the period that it holds the preference share and subject to the approval of the board of the company, which approval shall not be unreasonably withheld, be entitled to identify an executive director to the board of the company, a non-executive director who will be the non-executive deputy chairman of the board, a member to the audit committee of the company and an independent non-executive director who shall be appointed to its board. The preference share shall be entitled to a dividend on an annual basis equal to 62,3% of the overnight call rate offered by Nedbank to the company on deposits of R5 000 000, less the amount of dividends declared by the company during the financial year concerned in respect of the ordinary shareholding of the holder in the company.
The preference share was not listed on the JSE.
The one preference share with a par value of R265 490 was issued to Safika on 6 October 2004 at a premium of R4 734 510. In terms of IAS 32 Financial Instruments: Presentation and disclosure, the proceeds were divided into liability and equity portions of R734 956 and R3 999 554 respectively. Preference share dividends accrued are recorded against the liability portion. The liability portion is revalued at each reporting period with the adjustment booked to income statement as finance cost or investment income. Due to these amounts being immaterial, they are not separately disclosed in notes 4 and 5. An implied average interest rate of 7,79% (2005: 6,26%) was used to value the liability portion at year-end. The liability portion is included in short-term loans in note 21 and the fair value adjustment in other interest received in note 4 due to favourable interest rate movements for the period.
On the attainment of certain EBITDA hurdles by Mustek from 1 July 2003, Safika will be entitled to subscribe for ordinary shares in Mustek up to a cumulative maximum of 5% of the effective number of issued shares at the end of the financial year for which the relevant portion of the call option relates. Safika will subscribe for the ordinary shares at the nominal value of such ordinary shares. Safika will only be entitled to exercise each portion of the call option at the end of each financial year in which the EBITDA hurdles are achieved by Mustek.
The number of shares that Mustek will issue to Safika at each call option date will be limited to an effective cumulative maximum of 5% in year one, 10% in year two, 15% in year three, 20% in year four, and 25% in year five, of the effective number of issued shares after taking into account the number of shares to be issued to Safika at the end of the particular financial year to which that portion of the call option relates.
In the event that Mustek does not achieve the EBITDA hurdles in any financial year, Safika will be entitled to a catch up mechanism that will allow Safika to subscribe for ordinary shares based on the achievement of minimum EBITDA hurdles during the remaining transaction period. Safika will not be entitled to carry forward any over-achievement in respect of the EBITDA hurdles achieved by Mustek. In the event of any corporate actions during the relevant period, the number of shares that Safika will be entitled to hold will be adjusted accordingly.
The EBITDA hurdles for the years ended 30 June 2004, 30 June 2005 and 30 June 2006 were not achieved. In terms of the agreement either Mustek or Safika can cancel the agreement if the hurdles have not been achieved for three consecutive years.
83
Mustek annual report 2006
GROUP COMPANY
2006R000
2005R000
2006R000
2005R000
21. BORROWINGSInterest bearing
Long-term loans (see note 18) 244 413 229 240 — 505
Mortgage and term loans 12 848 38 765 — —
Capitalised finance leases (see note 10) 1 232 397 — —
Operating lease liabilities 28 877 25 145 23 609 22 282
Instalment sale agreements 51 290 — —
Short-term loans 1 522 13 110 628 761
Bank overdrafts 2 472 20 279 — —
Total interest-bearing borrowings 291 415 327 226 24 237 23 548
Interest free
Long-term loans — — — —
Short-term loans 332 314 — —
Total interest-free borrowings 332 314 — —
Total borrowings 291 747 327 540 24 237 23 548
Bank balances and cash (476 921) (398 402) (259 515) (217 757)
Total funds available (185 174) (70 862) (235 278) (194 209)
The borrowings are repayable as follows:
On demand or within one year 175 942 82 210 938 761
In the second year 27 572 163 906 2 127 815
In the third to fifth years inclusive 23 826 48 014 19 398 12 656
After five years 64 407 33 410 1 774 9 316
Total borrowings 291 747 327 540 24 237 23 548
Bank overdrafts (2 472) (20 279) — —
Amounts due for settlement within 12 months (173 470) (61 931) (938) (761)
Long-term borrowings 115 805 245 330 23 299 22 787
Consisting of:
Interest-bearing borrowings 115 473 245 016 23 299 22 787
Interest-free borrowings 332 314 — —
115 805 245 330 23 299 22 787
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
84
Mustek annual report 2006
21. BORROWINGS (continued)
Additional information
Included in borrowings are the following:
R160,0 million (2005: R160,0 million), due by Mecer Capital (Pty) Limited, is bearing interest at a fixed interest rate of 11,88 % per annum, secured against the trade receivables (see note 18) and repayable on 30 November 2006. The rate has been swapped for a floating rate of three-month ZAR-JIBAR-SAFEX minus 0,07% (see note 23). This loan is classified as short term in the current year but will, most likely, be renegotiated.
R50,0 million (2005: R46,0 million) due by Firefly 91 Investments (Pty) Limited, is bearing interest at prime minus 2,1%, secured against the trade receivables (see note 18) and repayable on 31 May 2011.
R34,4 million (2005: R23,2 million) due by KGM 202 Investments (Pty) Limited, bearing interest at a fixed interest rate of 8,89% per annum, secured against the trade receivables (see note 18) and repayable on 29 June 2008.
Interest-free loans have no fixed terms of repayment. These are therefore regarded as repayable on demand.
The short-term loan bears interest at between 62% and 72% of prime and is repayable in the next 12 months.
Bank overdrafts denominated in South African Rand bear interest at the prime overdraft rate.
The term loan (2005: mortgage loan) is denominated in Australian Dollar and bears interest at 17,8% (2005: prime), is secured by land and buildings with a net book value of R15,0 million (2005: R70,4 million) and is repayable in 2027 (2005: equal instalments over a period of 10 years).
Operating lease liabilities occur in the earlier years of long-term operating lease contracts with fixed escalation clauses as an equal amount is expensed every year as the cash flow escalates. These liabilities are not secured and do not have an interest component attached to them.
GROUP
Minimum lease payments
Present value of minimum lease
payments
Obligations under finance leases2006R000
2005R000
2006R000
2005R000
Amounts payable under finance leases:
Within one year 438 143 305 102
In the second to fifth years inclusive 1 125 346 927 295
1 563 489 1 232 397
Less future finance charges (331) (92) N/A N/A
Present value of lease obligations 1 232 397 1 232 397
Less amounts due for settlement within 12 months (305) (102)
Amount due for settlement after 12 months 927 295
It is the Group’s policy to lease certain of its fixtures and equipment under finance leases. The average lease term is four years. For the year ended 30 June 2006, the effective borrowing rate was between 10,2% and 12,4% (2005: 9,0% – 10,0%). Interest rates are fixed at the contract date, and thus expose the Group to fair value interest rate risk. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. The Group’s obligations under finance leases and instalment sale agreements are secured by the lessors’ charges over leased assets with a net book value of R1,8 million (2005: R1,3 million) (see note 10).
All obligations are denominated in Rand, except as noted above.
The fair value of the Group’s obligations approximates their carrying amount.
The Group’s obligations are secured by the lessors’ title to the leased assets.
85
Mustek annual report 2006
21. BORROWINGS (continued)
Borrowing powers, borrowing capacity and banking facilities
In terms of the memorandum of association, the company’s borrowing powers are unlimited. The Group has banking facilities amounting to R813,3 million (2005: R542,3 million), which are secured by cross guarantees in the Group as follows:
GROUP
2006R000
2005R000
General overdraft and similar facilities 314 496 142 250
Trade finance facilities* 302 016 265 252
Foreign exchange contracts pre-settlement exposure 196 815 134 836
813 327 542 338
*This includes facilities mentioned in note 22
GROUP COMPANY
2006R000
2005R000
2006R000
2005R000
22. TRADE AND OTHER PAYABLES AND PROVISONSTrade finance payables 308 497 313 382 247 825 264 560
Trade payables 588 925 349 576 353 112 217 293
Other payables 79 134 105 340 32 751 18 567
Total trade and other payables 976 556 768 298 633 688 500 420
The Group entered into trading agreements with international trading companies whereby the trading companies purchase products from foreign suppliers for the purpose of re-selling such products to the Group. The trading companies facilitate the transactions, provide certain services and supply between 90 to 120 days trade payment terms to the Group. The maximum facility available to the Group is US$43,5 million (2005: US$40 million) and trade finance commission, treated as a finance cost in the income statement (see note 5), is calculated at rates between LIBOR and LIBOR plus 1,35%.
Trade and other payables comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 128 days (2005: 102 days).
The directors consider that the carrying amount of trade and other payables approximates to their fair value.
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
86
Mustek annual report 2006
22. TRADE AND OTHER PAYABLES AND PROVISIONS (continued)
The following movements occurred in provisions:
Leave pay provision
Bonus provision Other Total
GROUP
Opening carrying amount 3 533 3 442 — 6 975
Additional provision 2 165 10 523 6 12 694
Amounts used (1 045) (6 771) (6) (7 822)
Unused amounts reversed — (219) — (219)
Closing carrying amount 4 653 6 975 — 11 628
COMPANY
Opening carrying amount 2 159 2 326 — 4 485
Additional provision 348 4 676 — 5 024
Amounts used (119) (4 552) — (4 671)
Closing carrying amount 2 388 2 450 — 4 838
Employee entitlements to annual leave are recognised as services are rendered. A provision, based on total employment cost, is raised for the estimated liabilities as a result of services rendered by employees up to balance sheet date.
The bonus provision relates to performance bonus targets achieved and the annual 13th cheque payable to employees of the Group and the company.
87
Mustek annual report 2006
23. DERIVATIVE FINANCIAL INSTRUMENTSCurrency derivatives
The company and Group enters into forward exchange contracts to buy and sell specific amounts of foreign currencies in the future at predetermined exchange rates. The contracts are entered into in order to manage the Group’s exposure to fluctuations in foreign exchange rates on specific transactions. The contracts are matched with anticipated future cash flows in foreign currencies primarily from purchases.
The company and Group do not use derivative financial instruments for speculative purposes.
At balance sheet date, the company and Group had contracted to buy/sell the following amounts under forward exchange contracts:
2006Rate
R
2005Rate
R
2006Foreign
000
2005Foreign
000
GROUP
Buy:
US Dollars
Less than three months 6,75 6,33 76 271 28 177
Three to six months 7,22 — 392 —
Euro
Less than three months 9,22 — 261 —
SELL:
US Dollars
Less than three months 6,45 6,49 35 198 17 800
COMPANY
Buy:
US Dollars
Less than three months 6,37 6,33 32 594 28 177
Sell:
US Dollars
Less than three months 6,17 6,49 24 659 17 800
At 30 June 2006 the equivalent market value of the Group and company’s net currency derivatives is estimated to be approximately R298,0 million (2005: R69,2 million) and R56,7 million (2005: R69,2 million) respectively. These amounts are based on market values of equivalent instruments at the balance sheet date. As a result of the difference between the net forward obligation and the market value thereof at year-end, the Group and company recognised net foreign currency assets of R4,9 million (2005: R6,3 million) and R1,1 million (2005: R6,3 million) respectively.
GROUP COMPANY
2006R000
2005R000
2006R000
2005R000
Foreign currency assets 10 599 6 304 1 092 6 353
Foreign currency liabilities 5 655 — — —
Net foreign currency assets 4 944 6 304 1 092 6 353
Interest rate swap
On 9 May 2002 the company entered into an interest rate swap with a nominal value of R160 million at a floating rate of three-month ZAR-JIBAR-SAFEX minus 0,07%. The effective date is 1 March 2003 and the termination date is 30 November 2006. The fair value of the swap is estimated at R3,7 million (2005: R12,2 million) for the Group and company. This amount is based on the market value of a similar instrument at the balance sheet date and is included in trade and other receivables (see note 18).
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
88
Mustek annual report 2006
GROUP COMPANY
2006R000
2005R000
2006R000
2005R000
24. NET CASH FROM OPERATIONSProfit for the year 74 593 95 943 70 820 44 286
Adjustments for:
Income tax expense (benefit) 16 163 42 737 (9 195) 11 540
Interest income (19 039) (26 944) (46 976) (48 418)
Finance costs 64 066 56 493 11 351 10 430
Dividend income (9 937) (5 590) (49 082) (4 539)
Gain on disposal of discontinued operation (19 131) (3 933) — —
Depreciation of property, plant and equipment 19 681 15 526 7 247 9 048
Net (profit) loss on disposal of plant and equipment (3 742) 141 (35) (8)
Increase in provisions 4 653 1 184 353 60
Unrealised foreign exchange losses 69 517 21 471 41 276 7 626
Fair value adjustments of derivative instruments 3 489 (9 763) 7 342 (9 812)
Share-based payment 2 608 1 633 2 608 1 633
(Profit) loss from associates (4 660) 567 — —
Amortisation of intangible assets 296 564 — —
Impairment of goodwill 298 5 852 — —
Profit on disposal of subsidiaries and other businesses — (1 360) — —
Fair valuation of investment 326 (22 366) — —
Subsidiary loan written (back) off — — (417) 13 664
Impairment of investment in subsidiary — — — 2 948
Profit on disposal of associate — (2 239) — (10 400)
Impairment of associates — 10 793 — 4 189
Fair value adjustments of investments and loans — 5 637 — —
Operating cash flows before movements in working capital 199 181 186 346 35 292 32 247
Working capital movements 22 882 (67 164) 57 417 13 165
Increase in inventories (152 122) (88 649) (6 827) (50 357)
Increase (decrease) in trade and other receivables 10 867 (77 895) (31 635) (4 997)
Increase (decrease) in deferred income 11 585 (4 173) 9 888 (4 173)
(Decrease) increase in trade finance payables (74 402) 20 771 (58 011) 35 129
Increase in trade and other payables 226 954 82 782 144 002 37 563
Net cash from operations 222 063 119 182 92 709 45 412
89
Mustek annual report 2006
GROUP
2006R000
2005R000
25. PROCEEDS ON DISCONTINUANCE OR DISPOSAL OF SUBSIDIARIESDuring the current year, the Group disposed of Rectron Plc and Axper Technologies (Pty) Limited (2005: Rectron International BV and Third Party Management (Pty) Limited).
The aggregate value of assets and liabilities disposed of were as follows:
Plant and equipment — —
Trade and other receivables 1 371 —
Bank balances and cash 12 22
Trade and other payables (20 514) (3 954)
Net asset value disposed (19 131) (3 932)
Profit on disposal 19 131 3 932
Total consideration — —
Cash and cash equivalents disposed (12) (22)
Net cash outflow (12) (22)
26. ACQUISITION OF SUBSIDIARIES AND JOINT VENTUREDuring the year the Group acquired Sheerprops 69 (Pty) Limited, Formprops 110 (Pty) Limited, Comztek Africa Namibia (Pty) Limited and additional shares in Brotek (Pty) Limited, Mecer East Africa Limited and Mecer (EPZ) Limited (2005: Additional shares in CIS Thuthukani Technology (Pty) Limited, Mecer Inter-Ed (Pty) Limited and Soft 99 International (Pty) Limited and started accounting for the investment in Comztek (Pty) Limited on the proportionate consolidation basis (see note 14)).
The aggregated fair value of the assets acquired and liabilities assumed were as follows:
Property, plant and equipment 13 392 905
Software — 431
Investment in and loan to associate — 531
Inventories — 12 678
Trade and other receivables 67 31 362
Bank balances and cash 2 9 260
Deferred tax (liability) asset (2 427) 534
Long-term borrowings — (27 919)
Trade and other payables (397) (25 246)
Short-term borrowings (3 268) —
Bank overdraft (1) —
Sub-total 7 368 2 536
Goodwill 8 731 5 946
16 099 8 482
Acquired previously as investments in associates — (6 049)
Adjustments to minority interests 24 329 —
Trade and other payables (12 354) —
Total consideration satisfied by cash 28 074 2 433
Satisfied by cash (28 074) (2 433)
Bank balances and cash acquired 2 9 260
Net cash (out flow) in flow on acquisition (28 072) 6 827
The goodwill arising on the acquisition of Brotek (Pty) Limited and Mecer East Africa Limited is attributable to the anticipated future economic benefits from the subsidiaries.
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
90
Mustek annual report 2006
GROUP COMPANY
2006R000
2005R000
2006R000
2005R000
27. OPERATING LEASE ARRANGEMENTSThe Group has outstanding commitments under non-cancellable operating leases, which fall due as follows:
Cash due:
During the ensuing year 33 779 20 173 16 521 16 399
In the second year 35 512 21 187 18 339 18 254
In the third to fifth year inclusive 114 497 72 939 68 031 62 864
Thereafter 55 301 29 820 4 476 29 556
239 089 144 119 107 367 127 073
Operating lease liability 28 877 25 145 23 609 22 282
To be expensed:
During the ensuing year 32 994 21 132 16 211 17 726
In the second year 32 402 20 662 16 211 17 944
In the third to fifth year inclusive 91 289 58 090 48 634 50 208
Thereafter 53 527 19 090 2 702 18 913
239 089 144 119 107 367 127 073
The majority of operating lease payments represent rentals payable by the Group for the use of the properties from which it operates.
28. GUARANTEES AND CONTINGENT LIABILITIES
Unlimited guarantees
>> Banking facilities of subsidiary companies.
Limited guarantees
>> Standby letters of credit for Microsoft and Intel International BV for US$500 000 each.
Legal dispute
>> The Group has a legal matter pending with Siltek Holdings Limited which if unsuccessful, may result in the Group being liable for approximately R0,3 million.
29. RETIREMENT BENEFIT PLANS
The Mustek Group Retirement Fund, a defined contribution fund, was established with effect from 1 January 1998. Smaller funds previously in existence have been amalgamated into this fund. The fund has been registered by the Registrar of Pension funds and is governed by the Pension Funds Act No 24 of 1956 as amended. The majority of the Group’s employees belong to this fund.
30. INTERESTS OF DIRECTORS IN CONTRACTS
The directors have certified that they were not materially interested in any transaction of any significance with the company or any of its subsidiaries. Accordingly, a conflict of interest with regards to directors’ interest in contracts does not exist.
91
Mustek annual report 2006
31. RELATED PARTY TRANSACTIONSDuring the 2006 financial year the company had the following related parties:
SUBSIDIARIES
Related partyType of
transaction
Amount of transaction
R000
Amount receivable (payable)
R000
Terms and
conditions
Nature of conside-ration in
settlement
Brotek (Pty) Limited@ Purchases 8 816 (779) Contracted terms Cash
Sales 790 9 Contracted terms Cash
Makeshift 1000 (Pty) Limited* Loan 873 46 114 Interest free Cash
Quickstep 94 (Pty) Limited@ Loan 49 23 396 Interest at prime Cash
Mecer East Africa Limited@ Sales 10 531 4 578 Cost plus 2% Cash
Loan 4 270 4 348 Interest free Cash
Mecer Digital Do Brasil Limited@ Sales 65 871 38 303 Cost plus 2% Cash
Lithatek Investments (Pty) Limited@ Loan 751 2 465 Interest free Cash
MFS Technologies (Pty) Limited@ Sales 24 268 232 Gross profit of 2% Cash
Datazone Limited@ Loan 712 (712) Interest free Cash
Rectron Holdings Limited@ Sales 6 512 174 Gross profit of 5% Cash
Purchases 73 991 (16 207) Gross profit of 5% Cash
Mecer Inter-Ed (Pty) Limited@ Purchases 1 493 — Contracted terms Cash
Note: Refer to Annexure A for a complete list of subsidiaries.
@ Amounts receivable or payable are unsecured and no guarantees have been given or received. No amount has been provided as doubtful and no expense has been recognised in respect of bad or doubtful debts due from the related party.
* R24,3 million of the amount outstanding has been impaired.
ASSOCIATES
Related partyType of
transaction
Amount of transaction
R000
Amount receivable
R000
Terms and
conditions
Nature of conside-ration in
settlement
Zinox Technologies Limited@ Loan 710 8 250 Interest at prime Cash
Sales 1 952 42 Contracted terms Cash
Preworx (Pty) Limited@ Sales 148 6 Contracted terms Cash
Loan 863 9 958 Contracted terms Cash
Note: Refer to Annexure B for a complete list of associates.
@ Amounts receivable or payable are unsecured and no guarantees have been given or received. No amount has been provided as doubtful and no expense has been recognised in respect of bad or doubtful debts due from the related party.
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
92
Mustek annual report 2006
31. RELATED PARTY TRANSACTIONS (continued)
JOINT VENTURE
Related partyType of
transaction
Amount of transaction
R000
Amount receivable
(payable) R000
Terms and
conditions
Nature of conside-ration in
settlement
Comztek (Pty) Limited@ Purchases 5 943 (407) Gross profit of 5% Cash
Sales 16 465 17Z3 Gross profit of 5% Cash
Loan 500 2 000 Interest at 72% of prime Cash
@ Amounts receivable or payable are unsecured and no guarantees have been given or received. No amount has been provided as doubtful and no expense has been recognised in respect of bad or doubtful debts due from the related party.
OTHER RELATED PARTIES
Related partyNature of
relationshipType of
transaction
Amount of transaction
R000
Amounts payable
R000Terms and conditions
Nature of conside-ration in
settlement
Mecer Capital (Pty) Limited@
Common directorship
Sale of debtors 1 410 330 (120 563) Contracted terms Cash
Bees Marketing (Pty) Limited@
Close member of family Marketing 15 388 (1 337) Contracted terms Cash
Mustek Electronics Properties (Pty) Limited@
Common directorship
Rental of premises 13 409 — Contracted terms Cash
@ Amounts receivable or payable are unsecured and no guarantees have been given or received. No amount has been provided as doubtful and no expense has been recognised in respect of bad or doubtful debts due from the related party.
During the 2005 financial year the company had the following related parties:
SUBSIDIARIES
Related partyType of
transaction
Amount of transaction
R000
Amount receivable (payable)
R000
Terms and
conditions
Nature of conside-ration in
settlement
Brotek (Pty) Limited@ Purchases 4 126 (791) Contracted terms Cash
Makeshift 1000 (Pty) Limited* Loan 945 45 241 Interest free Cash
Tradeselect 38 (Pty) Limited@ Loan 8 14 230 Interest free Cash
Quickstep 94 (Pty) Limited@ Repayment of loan 5 030 23 347 Interest at prime Cash
CIS Thuthukani Technology (Pty) Limited (Comp Import)@ Sales 13 075 1 065 Gross profit of 5% Cash
Mustek Limited Company Limited Loan 1 273 1 741# Interest free Cash
Mecer East Africa Limited@ Sales 6 297 3 099 Cost plus 2% Cash
Mecer Digital Do Brasil Limited@ Sales 278 200 Cost plus 2% Cash
MFS Technologies (Pty) Limited@ Sales 14 049 980 Gross profit of 2% Cash
Rectron Holdings Limited@ Sales 5 382 510 Gross profit of 5% Cash
Purchases 16 011 (1 131) Gross profit of 5% Cash
Mecer Inter-Ed (Pty) Limited Purchases 8 646 — Contracted terms Cash
Note: Refer to Annexure A for a complete list of subsidiaries.
@ Amounts receivable or payable are unsecured and no guarantees have been given or received. No amount has been provided as doubtful and no expense has been recognised in respect of bad or doubtful debts due from the related party.
*R24,3 million of the amount outstanding has been impaired.
#R689 416 has been provided as doubtful and expensed in the 2005 financial year.
93
Mustek annual report 2006
31. RELATED PARTY TRANSACTIONS (continued)
ASSOCIATES
Related partyType of
transaction
Amount of transaction
R000
Amountreceivable
(payable) R000
Terms and conditions
Nature of conside-ration in
settlement
Zinox Technologies Limited@ Loan 535 6 957 Contracted terms Cash
Sales 105 — Contracted terms Cash
Comztek (Pty) Limited❉@ PurchasesSales
Loan
1 778134
1 000
(4)314
1 500
Contracted termsContracted termsInterest at 72%
of prime
Cash
CashCash
Gijima Support Services (Pty) Limited•@ Sales 2 336 52 Contracted terms Cash
Preworx (Pty) Limited@ Sales 130 — Contracted terms Cash
Loan 945 9 095 Contracted terms Cash
Note: Refer to Annexure B for a complete list of associates.
❉For the period until 30 September 2004 when it became a joint venture.
•For the period until 31 October 2004 when it was disposed.
@ Amounts receivable or payable are unsecured and no guarantees have been given or received. No amount has been provided as doubtful and no expense has been recognised in respect of bad or doubtful debts due from the related party.
JOINT VENTURE
Related partyType of
transaction
Amount of transaction
R000
Amountreceivable
(payable) R000
Terms and conditions
Nature of conside-ration in
settlement
Comztek (Pty) Limited*@ Purchases 3 574 (660) Gross profit of 5% Cash
Sales 1 172 122 Gross profit of 5% Cash
Repayment of loan 2 500 1 500
Interest at 72% of prime Cash
*From 1 October 2004 when it became a joint venture.
@ Amounts receivable or payable are unsecured and no guarantees have been given or received. No amount has been provided as doubtful and no expense has been recognised in respect of bad or doubtful debts due from the related party.
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
94
Mustek annual report 2006
31. RELATED PARTY TRANSACTIONS (continued)
OTHER RELATED PARTIES
Related partyNature of
relationshipType of
transaction
Amount of transaction
R000
Amountreceivable (payable)
R000Terms and conditions
Nature of conside-ration in
settlement
Formprops 110 (Pty) Limited@ Directors’ influence
Rental of premises 1 771 4 466 Contracted terms Cash
Sheerprops 69 (Pty) Limited@ Directors’ influence
Rental of premises 1 986 (1 371) Contracted terms Cash
Mecer Capital (Pty) Limited@
Common directorship
Sale of debtors 1 342 963 (106 952) Contracted terms Cash
Bees Marketing (Pty) Limited@
Close member of family Marketing 18 270 (4 672) Contracted terms Cash
Mustek Electronics Properties (Pty) Limited@
Common directorship
Rental of premises 14 884 — Contracted terms Cash
@ Amounts receivable or payable are unsecured and no guarantees have been given or received. No amount has been provided as doubtful and no expense has been recognised in respect of bad or doubtful debts due from the related party.
Key management personnel compensation
The remuneration of directors and other members of key management during the year were as follows:
GROUP COMPANY
2006 R000
2005 R000
2006 R000
2005 R000
Short-term benefits 9 222 7 516 3 574 3 385
Share-based payments 254 — 254 —
9 476 7 516 3 828 3 385
95
Mustek annual report 2006
32. RESTATEMENTSDiscontinued operations
The prior year income statement amounts have been adjusted in terms of IFRS 5 Non-current assets held for sale and discontinued operations for operations discontinued in the current year.
Transition to international financial reporting standards
The Group and company adopted International Financial Reporting Standards (“IFRS”) with effect from the 2005 financial year. The Group and company’s date of transition to IFRS is 1 July 2004. The opening balance sheets on 1 July 2004 and comparative information for 2005 have been restated to comply with all IFRS effective as at 30 June 2006, except for the exemptions applied in terms of IFRS 1 First-time adoption of IFRS. The adoption of these new and revised Standards and Interpretations has resulted in changes to the Group’s accounting policies in the following areas that have affected the amounts reported for the current or prior years:
>> Foreign currency translation reserve
The Group has elected to apply the exemption afforded in IFRS 1 First-time adoption of International Financial Reporting Standards (“IFRS”) whereby the foreign currency translation reserve is reset to zero at the date of transition.
>> Share-based payments
IFRS 2 Share-based payments has been applied retrospectively to the employee share option scheme. The fair value of equity-settled share-based payment transactions is charged to the income statement and the reciprocal credit is shown in ordinary share premium in the balance sheet.
>> Property, plant and equipment
The residual values and useful lives of major items of property, plant and equipment have been re-assessed and where applicable, depreciation has been adjusted as required by IAS 16 Property, Plant and Equipment. This statement has been applied retrospectively.
>> Deferred tax and minority interests
Deferred tax and minority interests have been adjusted for the changes made to the carrying value of assets and liabilities through the adoption of IFRS.
>> Discontinued operations
IFRS 5 Non-current assets held for sale and discontinued operations has been applied retrospectively.
>> Reclassifications
IAS 1 Presentation of Financial Statements has been applied retrospectively and resulted in the reclassification of certain account balances.
The impact of the discontinued operations of the current year and the transition to IFRS on the Group and company’s reported earnings for the year ended 30 June 2005 and the balance sheets on 30 June 2005 is presented below. There was no impact on the Group or company cash flow statements.
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
96
Mustek annual report 2006
32. RESTATEMENTS (continued)
The 2005 consolidated income statement has been restated as follows:
Consolidated income statement Continuing operations
PreviousGAAP R000
IAS 1 R000
IAS 16 R000
IFRS 2 R000
IFRS 5 R000
IFRS Restated
R000
Revenue 2 942 244 — — — (99 957) 2 842 287
Cost of sales (2 469 795) — — — 98 534 (2 371 261)
Gross profit 472 449 — — — (1 423) 471 026
Other income 15 969 — — — (272) 15 697
Distribution, administrative and other operating expenses (313 557) (15 747) (115) (1 632) 11 410 (319 641)
EBITDA* 174 861* * (115)* (1 632)* 9 715* *
Depreciation (16 548) 15 183 1 022 — 343 —
Amortisation of intangible assets (564) 564 — — — —
Share of loss of associates (567) — — — — (567)
Profit from operations 157 182 — 907 (1 632) 10 058 166 515
Investment revenue 32 534 — — — (29) 32 505
Finance costs (56 493) — — — 150 (56 343)
Other gains and (losses) 6 182 — — — (3 933) 2 249
Profit before tax 139 405 — 907 (1 632) 6 246 144 926
Income tax expense (42 510) — (227) — (70) (42 807)
Profit for the year from continuing operations 96 895 — 680 (1 632) 6 176 102 119
Discontinued operations
Loss for the year from discontinued operations — — — — (6 176) (6 176)
Profit for the year 96 895 — 680 (1 632) — 95 943
Attributable to:
Equity holders of the parent 83 274 — 557 (1 632) — 82 199
Minority interest 13 621 — 123 — — 13 744
96 895 — 680 (1 632) — 95 943
*In line with IAS 1, EBITDA would not be appropriate.
97
Mustek annual report 2006
32. RESTATEMENTS (continued)
Headline earnings per ordinary share, basic earnings per ordinary share, diluted headline earnings per ordinary share and diluted basic earnings per ordinary share have been restated as follows:
PreviousGAAP R000
IAS 16 R000
IFRS 2R000
RestatedIFRS
R000
From continuing and discontinued operations
Headline earnings per ordinary share (cents) 90,36 0,67 (1,57) 89,46
Basic earnings per ordinary share (cents) 80,28 0,54 (1,57) 79,25
Diluted headline earnings per ordinary share (cents) 87,03 0,65 (1,51) 86,17
Diluted basic earnings per ordinary share (cents) 77,32 0,52 (1,51) 76,33
From continuing operations
Headline earnings per ordinary share (cents) — — — 95,88
Basic earnings per ordinary share (cents) — — — 83,17
Diluted headline earnings per ordinary share (cents) — — — 92,35
Diluted basic earnings per ordinary share (cents) — — — 80,10
The 2005 consolidated balance sheet has been restated as follows:
CONSOLIDATED BALANCE SHEET
PreviousGAAP R000
IFRS 1 R000
IFRS 2 R000
IAS 16 R000
IAS 1 R000
RestatedIFRS R000
ASSETS
Non-current assets
Property, plant and equipment 140 610 — — 4 336 — 144 946
Intangible assets 3 598 — — — — 3 598
Investments in associates 21 274 — — — 329 21 603
Investment in joint venture 830 — — — — 830
Other investments and loans 26 434 — — — — 26 434
Non-current trade and other receivables 13 233 — — — — 13 233
Deferred tax asset 21 453 — — (1 251) — 20 202
227 432 — — 3 085 329 230 846
Current assets
Inventories 611 277 — — — — 611 277
Trade and other receivables 434 122 — — — — 434 122
Foreign currency assets 6 304 — — — — 6 304
Tax assets 15 354 — — — — 15 354
Bank balances and cash 398 402 — — — — 398 402
1 465 459 — — — — 1 465 459
Total assets 1 692 891 — — 3 085 329 1 696 305
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
98
Mustek annual report 2006
32. RESTATEMENTS (continued)
CONSOLIDATED BALANCE SHEET (continued)
PreviousGAAP R000
IFRS 1 R000
IFRS 2 R000
IAS 16 R000
IAS 1 R000
RestatedIFRS R000
EQUITY AND LIABILITIES
Capital and reserves
Share capital 837 — — — — 837
Capital reserves 81 270 — 4 297 — — 85 567
Preference share capital 265 — — — — 265
Preference share premium 4 000 — — — — 4 000
Accumulated profits 415 998 (7 783) (4 297) 2 549 — 406 467
Revaluation reserve 681 — — — — 681
Foreign currency translation reserve (5 317) 7 783 — — — 2 466
Equity attributable to equity holders of the parent 497 734 — — 2 549 — 500 283
Minority interest 80 079 — — 536 — 80 615
Total equity 577 813 — — 3 085 — 580 898
Non-current liabilities
Long-term borrowings 245 330 — — — — 245 330
Deferred tax liability 469 — — — — 469
245 799 — — — — 245 799
Current liabilities
Trade and other payables 775 273 (6 975) — — — 768 298
Provisions — 6 975 — — — 6 975
Short-term borrowings 61 931 — — — — 61 931
Deferred income 9 144 — — — — 9 144
Tax liabilities 2 652 — — — — 2 652
Loan from associate — — — — 329 329
Bank overdrafts 20 279 — — — — 20 279
869 279 — — — 329 869 608
Total liabilities 1 115 078 — — — 329 1 115 407
Total equity and liabilities 1 692 891 — — 3 085 329 1 696 305
99
Mustek annual report 2006
32. RESTATEMENTS (continued)
Reconciliation of equity reported under previous GAAP to equity under IFRS:
GROUP COMPANY
2005 R000
1 July 2004R000
2005 R000
1 July 2004 R000
Total equity previous GAAP 577 813 522 463 401 662 400 676
IFRS 1 First-time adoption of IFRS
>> Retained earnings (7 783) (7 783) — —
>> Foreign currency translation reserve 7 783 7 783 — —
IFRS 2 Share-based payment
>> Retained earnings (4 297) (2 664) (4 297) (2 664)
>> Ordinary share premium 4 297 2 664 4 297 2 664
IAS 16 Property, plant and equipment
>> Reduction in depreciation 4 336 3 415 2 030 1 705
>> Tax effect on the above (1 251) (1 024) (583) (512)
Total equity IFRS 580 898 524 854 403 109 401 869
The 2005 company income statement has been restated as follows:
COMPANY INCOME STATEMENT
PreviousGAAP R000
IAS 1 R000
IAS 16 R000
IFRS 2 R000
RestatedIFRS
R000
Revenue 1 292 149 — — — 1 292 149
Cost of sales (1 053 397) — — — (1 053 397)
Gross profit 238 752 — — — 238 752
Other income 14 836 — — — 14 836
Distribution, administrative and other operating expenses (217 723) (9 048) (51) (1 632) (228 454)
EBITDA* 35 865* * (51)* (1 632)* *
Depreciation (9 423) 9 048 375 — —
Profit from operations 26 442 — 324 (1 632) 25 134
Investment revenues 52 957 — — — 52 957
Finance costs (10 430) — — — (10 430)
Other gains and losses (11 835) — — — (11 835)
Profit before tax 57 134 — 324 (1 632) 55 826
Income tax expense (11 469) — (71) — (11 540)
Profit for the year 45 665 — 253 (1 632) 44 286
*In line with IAS 1, EBITDA would not be appropriate.
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
100
Mustek annual report 2006
32. RESTATEMENTS (continued)
The 2005 company balance sheet has been restated as follows:
COMPANY BALANCE SHEET
PreviousGAAP R000
IAS 16 R000
IFRS 2 R000
IAS 1 R000
RestatedIFRS
R000
ASSETS
Non-current assets
Property, plant and equipment 18 451 2 030 — — 20 481
Investments in subsidiaries 137 305 — — 11 143 148 448
Investments in associates 11 045 — — — 11 045
Investment in joint venture 1 500 — — — 1 500
Other investments and loans 174 266 — — — 174 266
Non-current trade receivables 13 233 — — — 13 233
Deferred tax asset 13 987 (583) — — 13 404
369 787 1 447 — 11 143 382 377
Current assets
Inventories 293 257 — — — 293 257
Trade and other receivables 41 691 — — — 41 691
Foreign currency assets 6 353 — — — 6 353
Tax assets 10 414 — — — 10 414
Bank balances and cash 217 757 — — — 217 757
569 472 — — — 569 472
TOTAL ASSETS 939 259 1 447 — 11 143 951 849
EQUITY AND LIABILITIES
Capital and reserves
Share capital 837 — — — 837
Capital reserves 81 270 — 4 297 — 85 567
Preference share capital 265 — — — 265
Preference share premium 4 000 — — — 4 000
Retained earnings 315 290 1 447 (4 297) — 312 440
Total equity 401 662 1 447 — — 403 109
Non-current liabilities
Long-term borrowings 22 787 — — — 22 787
Current liabilities
Trade and other payables 504 905 (4 485) — — 500 420
Provisions — 4 485 — — 4 485
Loans to subsidiaries — — — 11 143 11 143
Short-term borrowings 761 — — — 761
Deferred income 9 144 — — — 9 144
514 810 — — 11 143 525 953
Total liabilities 537 597 — — 11 143 548 740
TOTAL EQUITY AND LIABILITIES 939 259 1 447 — 11 143 951 849
33. CAPITAL EXPENDITURE
The Group and company does not have any significant planned capital expenditure in the near future.
ANNEXURE AINVESTMENTS IN SUBSIDIARIES
Ownership interest
Shares at cost
Loans to (from)
Net investment
2006%
2005%
2006R000
2005R000
2006R000
2005R000
2006R000
2005R000
DIRECT
Unlisted
Brotek (Pty) Limited ù ß 100 70 63 364 32 640 — — 63 364 32 640
Makeshift 1000 (Pty) Limited ∂ π ù 100 100 10 698 10 698 46 114 45 241 21 789 20 926
Tradeselect 38 (Pty) Limited c ù 100 100 3 400 3 400 14 230 14 230 17 630 17 630
Quickstep 94 (Pty) Limited ∂ π ù 100 100 2 581 2 581 23 396 23 347 25 977 25 928
CIS Thuthukani Technology(Pty) Limited (Comp Import) U c ß 100 100 6 793 6 793 — 2 314 6 793 9 107
Mustek Limited Company Limited + c 100 100 — — 1 741 1 741 259 583
Mandarin Trading House (Pty) Limited * c 100 100 — — 22 22 22 22
Mecer East Africa Limited U! c 100 51 2 169 132 4 348 78 6 517 210
Mecer (EPZ) Limited U! 100 51 2 833 2 833 — — 2 833 2 833
Mecer Digital Do Brasil Limited $ c 100 100 33 200 33 200 155 155 33 355 33 355
Lithatek Investments (Pty) Limited Ö ∂ c ù 100 100 19 448 19 448 2 465 3 216 — —
MFS Technologies (Pty) Limited ß c 100 100 — — 2 314 — 2 314 —
Quickstep 95 (Pty) Limited * 100 100 — — — — — —
Mustek Electronics (Cape Town) (Pty) Limited * c 100 100 3 229 3 229 (6 575) (6 575) (3 346) (3 346)
Mustek Electronics (Durban) (Pty) Limited * c 100 100 1 658 1 658 (3 301) (3 301) (1 643) (1 643)
Mustek Electronics (Port Elizabeth) (Pty) Limited * c 100 100 327 327 (1 213) (1 213) (886) (886)
Mustek Investments (Pty) Limited * 100 100 — — — — — —
Mustek International (Pty) Limited * 100 100 — — — — — —
Mustek Management (Pty) Limited * 100 100 — — — — — —
Mecer (Pty) Limited * 100 100 — — — — — —
Planet Internet (Pty) Limited * 100 100 — — — — — —
Mustek annual report 2006
101
102 ANNEXURE A (continued)
INVESTMENTS IN SUBSIDIARIES (continued)
Ownership interest
Shares at cost
Loans to (from)
Net investment
2006%
2005%
2006R000
2005R000
2006R000
2005R000
2006R000
2005R000
INDIRECT
Unlisted
Rectron Limited c ß 65,8 65,8 — — (54) (54) (54) (54)
Rectron Australia (Pty) Limited @ 50 50 — — — — — —
Rectron Plc = — 100 — — — — — —
Corex IT Distribution Dynamics (Pty) Limited ß 60 60 — — — — — —
Formprops 110 (Pty) Limited U 100 — — — — — — —
Sheerprops 69 (Pty) Limited U 100 — — — — — — —
Axper Technologies (Pty) Limited (previously IT Depot (Pty) Limited) — 100 — — — — — —
Soft 99 (Pty) Limited U v ß 68 68 — — — — — —
Mecer Inter-Ed (Pty) Limited U v ß 100 90 — — — — — —
First Campus (Pty) Limited * 100 100 — — — — — —
Brobusmac Investments (Pty) Limited U 100 100 — — — — — —
Datazone Limited € c 100 100 — — (712) — (712) —
PWS Investments (Pty) Limited ù 100 100 — — — — — —
Inter-Ed (Pty) Limited * 100 100 — — — — — —
149 700 116 939 82 930 79 201 174 212 137 305
Mecer Inter-Ed supplies educational software solutions to its customers. The other trading subsidiaries’ activities comprise the procurement, assembly, distribution and servicing of computers and printers, related components and allied products. A list of the number of shares that is held in each subsidiary is available at the registered office of the company.
∂ These loans have been subordinated in favour of all other creditors of the subsidiary. Except for the Quickstep 94 (Pty) Limited loan, the loans have been partially impaired.
c These loans are interest free and have no fixed terms of repayment.π These loans bear interest at prime and have no fixed terms of repayment.* Dormant companies registered and incorporated in South Africa.! Active trading company registered and incorporated in Kenya.$ Active trading company registered and incorporated in Brazil.= Active trading company registered and incorporated in the United Kingdom put into liquidation during the year.@ Active trading company registered and incorporated in Australia.+ Active trading company registered and incorporated in Taiwan.ù Non-trading investment company or property company registered and incorporated in South Africa.€ Non-trading investment company or property company registered and incorporated in the United States of America.ß Active trading company registered and incorporated in South Africa.Ö All the investments in Lithatek (Pty) Limited have been impaired and as a result the Group impaired its goodwill on the
consolidation of the company.v Goodwill arising on acquisitions were fully impaired at acquisition date.U The Group increased its shareholding in Brother Business Machines (Pty) Limited, Mecer East Africa Limited and Mecer (EPZ)
Limited on 1 July 2005. The Group also acquired 100% of Formprops 110 (Pty) Limited and Sheerprops 69 (Pty) Limited on 1 March 2006. An additional R30,7 million was invested in Brother Business Machines (Pty) Limited, R2,0 million in Mecer East Africa Limited and R7,7 million in Formprops 110 (Pty) Limited and Sheerprops 69 (Pty) Limited. Brother Business Machines (Pty) Limited, MecerEast Africa Limited and Mecer (EPZ) Limited were consolidated in the past and Formprops 110 (Pty) Limited and Sheerprops 69 (Pty) Limited contributed an immaterial amount to the revenue and profit of the Group. The Group increased its shareholding in CIS Thuthukani (Pty) Limited, Soft 99 (Pty) Limited and Mecer Inter-Ed (Pty) Limited on 21 October 2004, 1 July 2004 and 26 January 2005 respectively. An additional R0,8 million was invested in Mecer Inter-Ed (Pty) Limited and R1,7 million in CIS Thuthukani (Pty) Limited. Mecer Inter-Ed (Pty) Limited and CIS Thuthukani (Pty) Limited were consolidated in the past and Soft 99 (Pty) Limited contributed an immaterial amount to the profit of the Group in the previous financial year.
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
Mustek annual report 2006
103ANNEXURE BINVESTMENTS IN ASSOCIATES
Percentageholding Cost
Loans to (from)
Equity accounted share of earnings
Net investment
2006%
2005%
2006R000
2005R000
2006R000
2005R000
2006R000
2005R000
2006R000
2005R000
COMPANY
Unlisted
Zinox Technologies Limited ∏ 30,0 30,0 4 088 4 088 8 250 6 957 — — 12 388 11 045
Mustek Zimbabwe Private Limited t — — 4 189 4 189 — — — — — —
8 277 8 277 8 250 6 957 — — 12 338 11 045
GROUP
Unlisted
Preworx (Pty) Limited ∏ 38,0 38,0 24 447 24 447 9 958 9 095 (4 097) (4 097) 9 958 9 095
Netshield (Pty) Limited ∏ 31,0 31,0 287 287 138 (329) 345 152 770 110
A Open (Pty) Limited 43,0 43,0 — — — — — — — —
Civon Corporation 30,0 30,0 10 485 10 485 — — (7 485) (7 485) — —
Zinox Technologies Limited 30,0 30,0 — — — — 5 491 1 024 5 491 1 024
Mustek Zimbabwe Private Limited t — — — — — — — — — —
43 496 43 496 18 346 15 723 (5 746) (10 406) 28 557 21 274
The net investment is after impairment charges against the investments and loans of R27 539 000 (2005: R27 539 000) for the Group and R4 189 000 (2005: R4 189 000) for the company.
Additional information Nature of businessCountry ofincorporation
Period equity accounted
Preworx (Pty) Remote access diagnostics technology South Africa 12 months
A Open (Pty) Limited Dormant South Africa 12 months
Civon Corporation Digital picture surveillance systems technology USA 12 months
Netshield (Pty) Limited Research and development of network communication equipment South Africa 9 months
Zinox Technologies Limited Computer assembly and distribution Nigeria 12 months
Mustek Zimbabwe Private LimitedAssembly and distribution of computers and computer components Zimbabwe 12 months
∏ These loans bear interest at prime, have no fixed terms of repayment and are repayable on demand.t On 1 July 2002 Mustek disposed of Mustek Zimbabwe. The purchaser irrevocably granted Mustek an option to purchase at any
time 40% of the entire issued share capital of Mustek Zimbabwe for a nominal value and, as a result, the option investment is treated as an equity investment in an associate company. Due to the hyperinflationary environment in Zimbabwe and the dramatic annual devaluation of the Zimbabwean Dollar the current and prior year effect of equity accounted results from Zimbabwe are immaterial. It was decided to impair the 40% option in the previous financial year.
Mustek annual report 2006
Notes to the Annual Financial Statementsfor the year ended 30 June 2006 (continued)
104 ANNEXURE COTHER INVESTMENTS AND LOANS
Ownership interest
Shares at cost
Loans to (from)
Net investment
2006%
2005%
2006%
2005%
2006R000
2005R000
2006R000
2005R000
COMPANY
Unlisted
Puno Printing Solutions Investments (Pty) Limited ✡ — — — — 614 — 614 —
Option – Mecer Capital (Pty) Limited (see note 18) ù — — 250 250 — — 250 250
Ritzshelf 97 (Pty) Limited (see note 18) ù — — 203 754 163 516 — — 203 754 163 516
Mecer Capital (Pty) Limited ù — — — — 9 000 9 000 9 000 9 000
L van der Bijl Family Trust # — — — — 1 000 750 1 000 750
Marburg Family Trust # — — — — 1 000 750 1 000 750
204 004 163 766 11 614 10 500 215 618 174 266
GROUP
Unlisted
Casetek International Co Limited Ø 8,0 8,0 5 514 5 440 — — — 1 004
Atio Corporation (Pty) Limited ❡ — 4,4 — 3 832 — — — —
Datazone Trust * — — — — 1 039 1 703 — 664
Mettle Finance (Pty) Limited (see note 17) ù — — (203 754)(162 866) — — (203 754)(162 866)
Mecer Capital (Pty) Limited ù — — — — (9 000) (9 000) (9 000) (9 000)
Firefly 91 Investments (Pty) Limited ù — — — — 25 000 — 25 000 —
Firefly 91 Investments (Pty) Limited ù — — — — (25 000) — (25 000) —
KGM 69 (Pty) Limited ù — — — — — 18 500 — 18 500
KGM 69 (Pty) Limited ù — — — — — (18 500) — (18 500)
Wavetrend Technologies Limited U — — — — — — (24 004) 22 366
5 764 10 172 3 653 3 203 26 868 26 434
Note:* These loans are interest free and have no fixed terms of repayment.# These loans bear interest at 72% of prime and are repayable on demand.✡ These loans bear interest at prime and are repayable as soon as sufficient dividends are declared by Brother Business Machines
(Pty) Limited.U Mustek has an option to acquire 14,6% of the issued shares in Wavetrend Technologies Limited at par. In line with a recent
subscription for shares in the company, the option was valued at R24,0 million (2005: R22,4 million).ù In terms of funding structures the Group has in three of its entities, Mustek Limited, Rectron (Pty) Limited and Comztek
(Pty) Limited, and the accounting interpretation of these structures as entities that should be consolidated, these amounts receivable and payable are set off and the difference, if any, on setting off represents the remaining portion of future finance costs at a consolidated level. See note 18 for more information.
❡ R0,8 million of the prior year impairment has been reversed on disposal of the investment.Ø The investment has been fully impaired during the year.
Mustek annual report 2006
105
Mustek annual report 2006
Notice is hereby given that the nineteenth annual general meeting of the company will be held at Mustek Limited’s head office at 322 15th Road, Randjespark, Midrand at 10:00 on Thursday, 23 November 2006 for the following purposes:
1. To consider and approve the annual financial statements for the year ended 30 June 2006.
2. To re-elect director D C Kan who retires in terms of the company’s Articles of Association, but being eligible, offer himself for re-election.
3. To re-elect director Y T Wang who retires in terms of the company’s Articles of Association, but being eligible, offer himself for re-election.
4. To re-elect director M E Gama who retires in terms of the company’s Articles of Association, but being eligible, offer himself for re-election.
5. To confirm the remuneration of the directors for the year under review.
6. To authorise the directors to determine the auditors’ remuneration for the year under review.
7. To confirm the re-appointment of Deloitte & Touche as the company’s auditors.
8. To approve the interim dividend of 35 cents per share and the final dividend of 25 cents per share.
9. To consider, and if deemed fit to pass, with or without modification, the following ordinary and special resolutions:
Ordinary resolution number 1
Resolved that 4 000 000 ordinary shares in the authorised but unissued share capital of the company be and are hereby placed under the control of the directors of the company as a general authority in terms of section 221(2) of the Companies Act, 61 of 1973, as amended, for the allotment and issue of shares.
Ordinary resolution number 2
Resolve that the company’s directors be hereby authorised by way of a general authority to issue unissued shares in the company for cash at the discretion of the directors, as and when suitable opportunities arise, subject to the Listings Requirements of the JSE, which currently provide, inter alia:
>> that this authority will be valid until the company’s next annual general meeting or for 15 months from the date of this ordinary resolution number, whichever period is shorter; [5.50(b)];
>> that a paid press announcement, giving full details including the impact on net asset value and earnings per ordinary share, will be published at the time of any issue representing on a cumulative basis within one year, 5% or more of the number of shares of that class in issue prior to the issues;
>> the securities will be of a class already in issue;
>> that issues in the aggregate will not exceed, in any financial year of the company, 10% of the number of ordinary shares in the company’s issued share capital;
>> in determining the price at which an issue of shares can be made in terms of this authority, the maximum discount at which the ordinary shares may be issued is 10% of the weighted average traded price of the shares in question, over the 30 day period prior to the date that the price of the issue is determined or agreed by the directors of the company; and
>> that any such issue will only be made to public shareholders and excluding related parties, as defined by the JSE [5.52(b)].
The approval of 75% of the votes cast by shareholders present or represented by proxy at this meeting is required for this ordinary resolution to become effective.
Ordinary resolution number 3
Resolve that the following amendment to the Mustek Executive Share Trust be approved and adopted by the company:
>> to provide that the definition of share price as defined in 1.1.21 of the Mustek Executive Share Trust that reads as follows:
“share price” means the price per share payable by a participant for scheme shares, which shall not be less than the middle market price on the trading day immediately preceding the day upon which the board will have resolved to direct the trustees to offer the relevant scheme shares to eligible applicants;
Notice of Annual General Meeting
106
Mustek annual report 2006
Notice of Annual General Meeting(continued)
be amended to read as follows:
“share price” means the price per share payable by a participant for scheme shares, which price shall not be less than 90% of the volume weighted average closing market price for the 30 trading days preceding the date upon which the board will have resolved to direct the trustees to offer the relevant scheme shares to eligible applicants.
Special resolution number 1
Resolve that the company and its subsidiaries be and are hereby authorised, by way of a general authority, to acquire ordinary shares issued by the company, subject to the provisions of the Companies Act No 61 of 1973, as amended, the Listings Requirements of the JSE and the articles of association of the company, being that [5.72(b)]:
>> the repurchase of securities being affected through the order book operated by the JSE trading system and done without any prior understanding or arrangement between the company and the counter party [5.72(a)];
>> this general authority shall be valid only until the company’s next annual general meeting, or for 15 months from the date of this special resolution number 1, whichever period is shorter [5.72(c)];
>> an announcement will be published as soon as the company has acquired ordinary shares constituting, on a cumulative basis 3% or every 3% thereafter, of the number of ordinary shares in issue prior to the acquisition pursuant to which the aforesaid 3% threshold is reached, containing full details of such shares;
>> any general repurchase shall not in the aggregate in any one financial year exceed 20% of the company’s ordinary issued share capital [5.68];
>> in determining the price at which ordinary shares issued by the company will be acquired by the company and/or its subsidiaries in terms of this general authority, the maximum premium at which such ordinary shares may be acquired will be no more than 10% above the weighted average of the market value at which such ordinary shares are traded on the JSE, as determined over the five trading days immediately preceding the date of repurchase of such ordinary shares by the company and/or its subsidiaries;
>> the sponsor of the company provides a letter to the JSE on the adequacy of working capital in terms of section 2.12 of the JSE Listings Requirements, before the share repurchase commences;
>> at any point in time, may only appoint one agent to effect any repurchase on the company’s behalf;
>> the company may only undertake a repurchase of securities if, after such repurchase, it still complies with the shareholder spread requirements as set out in the JSE Listings Requirements;
>> the company or its subsidiaries may not repurchase securities during a prohibited period, as defined in the JSE Listings Requirements; and
>> that such authority is limited to paragraphs 5.72(c) and 5.84(a) (when derivatives are used), which states the following:
5.72(c) Approval by shareholders in terms of a special resolution of the company, in annual general/general meeting, which shall be valid only until the next annual general meeting or for 15 months from the date of the resolution, whichever period is shorter.
5.84(a) With regard to the price of the derivative the:
i. the strike price of any put option written by the company less the value of the premium received by the company for that put option may not be greater than the fair value of a forward agreement based on a spot price not greater than that stipulated in 5.72(d);
ii. the strike price of any call option may be greater than that stipulated in 5.72(d) at the time of entering into the derivative agreement, but the company may not exercise the call option if it is more that 10% “out the money”; and
iii. the strike price of the forward agreement may be greater than the price indicated in 5.72(d) but limited to the fair value of a forward agreement calculated from a spot price not greater than stipulated in 5.72(d).
107
Mustek annual report 2006
5.72(d) A further announcement must be made when the derivative transactions entered into are exercised and due to the exercise of these transactions the effected repurchases are greater than 3% of the initial number of securities, and for each 3% in aggregate of the affected repurchase thereafter. This announcement must be made as soon as possible and in any event by not later than 08:30 on the second business day following the day on which the relevant threshold is reached or exceeded.
The board of directors of Mustek will use this authority as and when opportunities arise [11.26(c)].
Having considered the effect of the maximum repurchase of 20% of the company’s issued share capital in any one financial year, the directors are of the opinion that:
>> the company and the Group will, after payment for such maximum repurchase, be able to repay its debts in ordinary course of business for a period of 12 months following the date of the annual general meeting;
>> the company’s and the Group’s consolidated assets, fairly valued according to generally accepted accounting practice and on a basis consistent with the last financial year of the company, will, after such payment, exceed their consolidated liabilities for a period of 12 months following the date of the annual general meeting;
>> the company’s and the Group’s ordinary share capital and reserves will, after such payment, be sufficient to meet their needs for a period of 12 months following the date of the annual general meeting; and
>> the company and the Group will, after such payment, have sufficient working capital to meet its needs for a period of 12 months following the date of the annual general meeting.
Reason for and effect of the special resolution
The effect of this special resolution and the reason therefore is to grant the company and its subsidiaries a general approval in terms of the Companies Act No 61 of 1973, as amended, for the acquisition by the company of its own shares and/or acquisition by a subsidiary of shares in the company, which general approval shall be valid until the next annual general meeting of the company, provided that this general authority shall be valid only until the company’s next annual general meeting or for 15 months from the date of this special resolution number 1, whichever period is shorter. Such general authority will provide the board with the flexibility to repurchase shares should same be in the interest of the company at any time while the general authority subsists.
Special resolution number 2
Resolve that paragraph 84.5.5 of the Articles of Association of the company that reads as follows:
At the election of the company, the preference share/s shall immediately be cancelled for a cancellation value of R1,00 (one Rand) in the following circumstances:;
be and are hereby amended to read as follows in the circumstances contemplated in clause 84.5.5.7:
At the election of the company, the preference share/s shall immediately be cancelled for a cancellation value of R5 000 000,00 (five million Rand).
Reason for and effect of the special resolution
The reason for the special resolution is to acknowledge the contribution made by Safika Holdings (Pty) Limited. The effect of the resolution is that the preference share will be cancelled for a cancellation value of R5 000 000 (five million Rand) which equals the subscription price of the preference share.
Other disclosure in terms of Section 11.26 of the JSE Listings Requirements
– Directors and management (page 22)
– Major shareholders of Mustek Limited (page 36)
– Directors’ interests in securities (page 31)
– Share capital of Mustek Limited (page 81)
108
Mustek annual report 2006
Notice of Annual General Meeting(continued)
1.1 Material change
Other than the facts and developments as referred to on page 38 of the annual report, there have been no material changes in the affairs or financial position of Mustek Limited and its subsidiaries since the date of signature of the audit report and the date of this notice.
1.2 Directors’ responsibility statement
The directors, whose names are given on page 22 of the annual report, collectively and individually accept full responsibility for the accuracy of the information pertaining to the special resolution and certify that to the best of their knowledge and belief there are no facts that have been omitted which would make any statement false or misleading, and that all reasonable enquiries to ascertain such facts have been made and that this resolution contains all such information.
1.3 Litigation statement
In terms of section 11.26 of the Listings Requirements of the JSE, the directors, whose names are given on page 22 of the annual report of which this notice forms part, are not aware of any legal or arbitration proceedings, including proceedings that are pending or threatened, that may have or have had in the recent past, being at least the previous 12 months, a material effect on the Group’s financial position.
VOTING
Any member entitled to vote at the annual general meeting may appoint a proxy or proxies to attend, speak and vote in his stead and the person/persons so appointed need not be a member/members of the company.
If you are a certificated or own name dematerialised shareholder and unable to attend the annual general meeting of ordinary shareholders to be held at 10:00 on Thursday, 23 November 2006 at Mustek Limited’s head office at 322 15th Road, Randjespark, Midrand and wish to be represented thereat, you must complete and return the attached form of proxy in accordance with the instructions therein.
If you have dematerialised your shares with a Central Securities Depository Participant (“CSDP”) or broker (ie not own name dematerialised shareholders) you must arrange with them to provide you with the necessary authorisation to attend the annual general meeting or you must instruct them as to how you wish to vote in this regard. This must be done in terms of the agreement entered into between you and the CSDP or broker, in the manner and by the cut-off time stipulated by your CSDP or broker.
Additional proxy forms are obtainable from the company secretary and must be deposited at the registered office of the company or the transfer secretaries not less than 48 hours before the meeting (Saturdays, Sundays and public holidays excluded).
By order of the board
C J Coetzee
Midrand
16 October 2006
109
Mustek annual report 2006
Mustek Limited(Incorporated in the Republic of South Africa) (Registration number: 1987/070161/06)
Share code: MST ISIN: ZAE000012373
(“Mustek” or “the company”)
For the use by certificated shareholders or dematerialised shareholders registered with own-name registration only, at the general meeting of shareholders of the company to be held at Mustek’s head office at 322 15th Road, Randjespark, Midrand on Thursday, 23 November 2006 commencing at 10:00.
Dematerialised shareholders holding shares other than with own-name registration, must inform their CSDP or broker of their intention to attend the general meeting and request their CSDP or broker to issue them with the necessary letter of representation to attend the general meeting in person and vote or provide their CSDP or broker with their voting instructions should they not wish to attend the general meeting in person. These shareholders must not use this form of proxy.
I/We(name/s in block letters)of(address)being the holders of shares in the capital of the company do hereby appoint (see note):
1. or failing him/ her,
2. or failing him/ her,
3. the Chairperson of the general meeting, as my/our proxy to act for me/us at the general meeting for purposes of considering and, if deemed fit, passing, with or without
modification, the resolutions to be proposed thereat and at each adjournment thereof; and to abstain from voting for and/or against the resolutions in respect of the shares registered in my/our name in accordance with the following instructions:
Number of shares
For Against Abstain
1. Adoption of the annual financial statements
2. Re-election of D C Kan as director
3. Re-election of Y T Wang as director
4. Re-election of M E Gama as director
5. Confirm the directors’ remuneration for the past financial year
D C Kan
H Engelbrecht
Y T Wang
W V Cuba
S N Mabaso
M F Hennessy
M E Gama
D Konar
6. Authorise directors to determine auditors’ remuneration
7. Confirm the re-appointment of Deloitte & Touche as the company’s auditors
8. Approve dividends for the year
Interim dividend
Final dividend
9. Ordinary resolution number 1: General authority to issue and allot 4 000 000 shares
10. Ordinary resolution number 2: That the company’s directors may issue unissued shares
11. Ordinary resolution number 3: Amendment of share price as defined by the Mustek Executive Share Trust
12. Special resolution number 1: That the company’s directors may purchase issued shares
13. Special resolution number 2: Amendment of Articles of Association Signed at on 2006 Signature Assisted by (where applicable)
Each shareholder is entitled to appoint one or more proxies (who need not be a shareholder of the company) to attend, speak and vote in place of that shareholder at the meeting.
Form of Proxy
110
Mustek annual report 2006
NOTES
1. The form of proxy must only be used by shareholders who hold shares that are not dematerialised or who hold
dematerialised shares in their own name.
2. A shareholder entitled to attend and vote may insert the name of a proxy or the names of two alternative proxies of the
shareholder’s choice in the space provided, with or without deleting “the Chairperson of the general meeting”. A proxy
need not be a shareholder of the company. The person whose name stands first on the form of proxy and who is present
at the meeting will be entitled to act as proxy to the exclusion of those whose names follow.
3. A shareholder is entitled to one vote on a show of hands and, on a poll, one vote in respect of each share held.
A shareholder’s instructions to the proxy must be indicated by inserting the relevant number of votes exercisable by the
shareholder in the appropriate box(es). Failure to comply with this will be deemed to authorise the proxy to vote or to
abstain from voting at the general meeting as he deems fit in respect of all the shareholders’ votes.
4. A vote given in terms of an instrument of proxy shall be valid in relation to the general meeting notwithstanding the death
of the person granting it, or the revocation of the proxy, or the transfer of the shares in respect of which the vote is given,
unless an intimation in writing of such death, revocation or transfer is received by the transfer secretaries not less than
48 hours before the commencement of the general meeting.
5. If a shareholder does not indicate on this form that his proxy is to vote in favour of or against any resolution or to abstain
from voting, or gives contradictory instructions, or should any further resolution(s) or any amendment(s) which may
properly be put before the general meeting be proposed, the proxy shall be entitled to vote as he thinks fit.
6. The Chairperson of the general meeting may reject or accept any form of proxy which is completed and/or received other
than in compliance with these notes.
7. The completion and lodging of this form of proxy will not preclude the relevant shareholder from attending the meeting
and speaking and voting in person thereat to the exclusion of any proxy appointed in terms hereof, should such
shareholder wish to do so.
8. Documentary evidence establishing the authority of a person signing the form of proxy in a representative capacity must
be attached to this form of proxy, unless previously recorded by the company or unless this requirement is waived by the
Chairperson of the general meeting.
9. A minor or any other person under legal incapacity must be assisted by his/her parent or guardian, as applicable, unless
the relevant documents establishing his/her capacity are produced or have been registered by the company.
10. Where there are joint holders of shares:
– any one holder may sign the form of proxy; and
– the vote(s) of the senior shareholders (for that purpose seniority will be determined by the order in which the names
of shareholders appear in the company’s register of shareholders) who tenders a vote (whether in person or by proxy)
will be accepted to the exclusion of the vote(s) of the other joint shareholder(s).
11. Forms of proxy should be lodged with or mailed to Computershare Investor Services 2004 (Pty) Limited:
Hand deliveries to: Postal deliveries to:
Computershare Investor Services 2004 (Pty) Limited Computershare Investor Services 2004 (Pty) Limited
Ground Floor, 70 Marshall Street PO Box 61051
Johannesburg, 2001 Marshalltown, 2107
to be received by no later than 10:00 on Tuesday, 21 November 2006 (or 48 hours before any adjournment of the general
meeting which date, if necessary, will be notified in the press).
12. Any alteration or correction made to this form of proxy, other than the deletion of alternatives, must be initialled by the
signatory/ies.