MICROMEGA HOLDINGS L IMITED. annual report 2004 AND ITS SUBSIDIARY COMPANIES

Transcription

1 MICROMEGA HOLDINGS L IMITED AND ITS SUBSIDIARY COMPANIES annual report 2004

2 CONTENTS Salient Features 1 Group Profile 2 Chairman s Report 3 Corporate Governance 4 Directors Approval 6 Certification by Company Secretary 6 Report of the Independent Auditors 7 Report of the Directors 8 Balance Sheet 10 Income Statement 11 Statement of Changes in Equity 12 Cash Flow Statement 13 Notes to the Financial Statements 14 Segmental Report 35 Shareholders Information 36 Notice of Annual General Meeting 37 Corporate Information 40 Proxy Form Inserted

3 SALIENT FEATURES Year ended Year ended Group 31 December 31 December Financial performance (R'000) Revenue Headline earnings Earnings/(loss) attributable to shareholders (12 383) Share performance (cents) Headline earnings per share 12,88 14,76 Earnings/(loss) per share 16,93 ( 14,53) Net cash per ordinary share 51,75 58,35 Net asset value per share 89,81 72,89 Shares in issue ('000) Weighted average number of shares Total number of shares in issue MICROmega annual report

4 GROUP PROFILE at 31 December 2004 MICROmega Holdings Limited Reg. No. 1998/003821/06 MICROmega Treasury Solutions (Pty) Limited Reg. No. 1998/012365/07 100% 100% 100% 50% 50% 50% 100% 100% 100% 100% MICROmega Securities (Pty) Limited Reg. No. 1996/011565/07 MICROmega (Pty) Limited Formerly Add X Trading 834 CC Reg. No. 2004/032493/07 MICROmega Revenue Management Services (Pty) Limited Reg. No. 1980/003268/07 SA Meter Reading Services (Pty) Limited Reg. No. 2002/004552/07 Inter Map (Pty) Limited Reg. No. 2000/006169/07 Deltec Power Distributors (Pty) Limited Reg. No. 1979/001476/07 G2 Properties (Pty) Limited Reg. No. 1997/021396/07 MICROmega Investments (Pty) Limited Reg. No. 1998/014652/07 MICROmega Investment Portfolio (Pty) Limited Reg. No. 1998/014652/07 100% 100% 100% 100% 100% 100% 100% 49% MICROmega Technologies (Pty) Limited Reg No. 1996/013106/07 TTSA Securities (Pty) Limited Reg No. 1997/010287/07 SA International & Capital Market Brokers (Pty) Limited Reg. No. 1996/011180/07 MICROmega Services (Pty) Limited Reg. No. 1993/001112/07 Unitech Computer Services (Pty) Limited Reg. No. 1992/002387/07 African Financial Solutions (Pty) Limited Reg. No. 1997/005849/07 Nyl-Data Computer Services (Pty) Limited Reg. No. 1998/009017/07 Sebata Municapal Solutions (Pty) Limited Reg. No. 1994/000005/07 DIRECTORS MICROmega HOLDINGS LIMITED Ian Gregory Morris (37) Executive Chairman CA (SA) Wayne Edward Rosenberg (38) Chief Executive Officer Founder of SA Money Brokers and TTSA Securities Member of the Bond Traders Association Ross Lewin (37) Executive Director Pr. Eng Founder of Inter Map Elias Sibusiso Mpanza (42) Non-Executive Director BCom, MBL Financial accountant Provisional Government: Acting Head of Department of Administration Potsishi Oupa Hendrik Seabi (38) Non-Executive Director Financial and taxation consultant Provisional Government: Head of Department of Social Services and Population Development Jonas John Letlhogonolo Storom (36) Executive Director BCom Businessman Anton Vercueil (44) Executive Director Forex Broker Founder of SA Money Brokers and TTSA Securities 2

5 CHAIRMAN S REPORT The results for the period under review reflect a year in which MICROmega adopted a programme of restructuring its businesses to access higher earnings and a broader market share, pursued a number of acquisitions and attended to the implementation of a broad based black economic empowerment and transformation programme. CORPORATE PERFORMANCE The decline in headline earnings of 10% reflects the impact of the continued slow down in income generated by MICROmega Securities from broking activities. The group enjoyed strong earnings growth from both the revenue management and information technology businesses. The demand for these services and consequent growth in these businesses, together with the acquisitions concluded during this period, has ensured that shareholders are in future shielded against a material fluctuation in earnings from a single subsidiary. TRANSFORMATION MICROmega has embraced the need for transformation and broad based black economic empowerment. Our direct investment in capacity building and internal transformation for 2004 was R6 million. This investment was used to create capacity and fast track the development of employees. In order to facilitate empowerment at the shareholder level, within subsidiary entities, MICROmega established an internal Empowerment Fund during The fund has facilitated transactions in two operating entities, thereby affording investment opportunity to strategic partners who would not otherwise have had the opportunity to access capital on an efficient and cost effective basis. Our investment in broad based black economic empowerment and our active programme of transformation has ensured that our operating entities continue to increase their market share, whilst growing sustainable internal capacity. ACQUISITIONS Our strategy to increase earnings by way of acquisitions has been successful. These transactions compounded by an increase in market share will result in a doubling of turnover in The following companies have been acquired subsequent to our last reporting period: ADD X MICROmega acquired 100% of the issued share capital of ADD-X on 1 July This business provides meter reading and related revenue management services to Public Sector South Africa. ADD X complemented the restructuring and transformation programme which was adopted by our revenue management business during Deltec Power Distributors ( Deltec ) MICROmega acquired 100% of the issued share capital of Deltec on 1 October The business has been in operation for some 22 years providing batteries to the UPS and automotive markets. This business complements MMG s agency-based businesses and has introduced a market sector previously unavailable to the Group. Deltec s contribution to earnings is anticipated to exceed expectation for Unitech Computer Services ( Unitech ) MICROmega acquired 100% of the issued share capital of Unitech on 1 December This business has been in operation for some 15 years and provides financial management systems to more than 70 local authorities in South Africa, and dominates financial system delivery to local authorities in Namibia. The business has a strategic fit with both MMG s revenue management and information technology businesses. The business earnings are annuity based through long-term service support agreements with its clients. We remain focused at ensuring that we retain our dominant position as market leaders in the provision of risk management and revenue management solutions, and are committed to our business model of retaining an independent intermediary status. We are most grateful to our clients for their ongoing support. We remain committed to our long standing relationships and will ensure that our ongoing development of product and innovative services meets your expectations. We would like to thank both the management and staff of the group for their hard work and loyalty. MICROmega annual report

6 CORPORATE GOVERNANCE The directors of MICROmega fully endorse and are committed to exercising the principles of transparency, integrity and accountability as advocated in the King Report II on Corporate Governance. The directors realise the importance of good corporate governance and have applied the Code with all variances being disclosed. Good corporate governance incorporates the adoption and monitoring of sound effective systems of internal control, the assessment and management of business risk and the implementation of appropriate business procedures. BOARD OF DIRECTORS The board of MICROmega meets regularly, to evaluate performance, assess risk and review the strategic direction of the group. All directors retain full and effective control over the affairs of the company and monitor management. Composition The composition of the board ensures that a range of skills and knowledge are available to advise on and implement key decisions, to ensure that it retains proper direction and control of the company. The board as a whole is involved in the process of nomination, selection and the appointment of directors. The directors are selected on the basis of their skill, knowledge, business acumen and contribution to the company. The board currently comprises five executive directors, Mr I G Morris (Chairman), Mr W E Rosenberg (Chief Executive Officer), Mr R Lewin, Mr J J L Storom and Mr A Vercueil and two non-executive directors, Mr P H Seabi and Mr E S Mpanza. During the reporting period, the board met four times, the following being the dates, major items on the agenda and the number of attending directors. Date Agenda Attendance by directors 24 June 2004 Approval of the acquisition of Add X Trading 843 (Pty) Limited 4 Date Agenda Attendance by directors 31 August 2004 Appointment of Mr P H Seabi, Mr E S Mpanzi as non-executive directors 6 Appointment of Mr A Vercueil as executive director The resignation of Mr A Browne as executive director 29 September 2004 Report on group and subsidiary results for the six months ended 30 June November 2004 Appointment of Mr J J L Storom as executive director 6 Resignation of Mr F Pretorius as executive director Review of group results for the nine months ended 30 September 2004 BOARD COMMITTEES To assist the board in discharging its collective responsibilities for corporate governance, several committees have been established to which certain of the board s responsibilities have been delegated. These committees all have specific terms of reference and are accountable to the board. The committees comprise directors who have a blend of skills and experience and other qualities appropriate to their roles. Board committees currently in place are: Audit committee The audit committee has been delegated powers by the board. These powers clearly set out the responsibilities and authority together with the structures and processes of the committee. During the year under review the audit committee has addressed its responsibilities in terms of delegated powers. 4

7 CORPORATE GOVERNANCE The primary objective of the audit committee is to promote the overall effectiveness of corporate governance in the group. Its objectives include: Ensuring the integrity of the group s accounting and financial reporting systems; Ensuring the appropriate systems are in place for monitoring risk, financial control and compliance with the law and codes of conduct; Evaluating the effectiveness of the risk and compliance management functions in the group; Maintaining transparent appropriate relationships with external auditors; Reviewing the scope and quality of the statutory audit and the independence and objectivity of the auditors; Reviewing interim and annual financial statements before approval by the board; Reviewing reports from external auditors; Approval of audit fees. The audit committee is currently chaired by a non-executive director, Mr P H Seabi, and comprises the remaining members of the board of directors. The committee meets at least four times a year and is attended by senior management and the external auditors by invitation. Remuneration committee The remuneration committee is responsible for determining the terms of employment and remuneration of the group s executive directors and senior management; this includes assessment of specific rewards. The committee ensures that the group remunerates and incentivises senior management fairly, taking all circumstances into account. The committee is further responsible for the remuneration strategy for the group as approved by the board. Mr P H Seabi currently chairs the remuneration committee. INTERNAL CONTROL SYSTEM The group maintains systems of internal control over the financial reporting and for the safeguarding of assets (against unauthorised acquisition, use or disposal). These systems are designed to provide reasonable assurance to the group s management and board of directors that reliable financial statements are prepared. Corrective action is taken to address and control deficiencies in control systems, as and when these are identified. There are inherent limitations to the effectiveness of any system of internal control, including the possibility of human error and circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation and safeguarding assets. RISK MANAGEMENT The group s audit committee is responsible for addressing all operational and financial risk, together with risk funding. GOING CONCERN The directors are satisfied that there is no reason to believe that the group will not continue in operation for the forthcoming year. EMPLOYMENT EQUITY The group is committed to creating a workplace in which individuals of ability can develop rewarding careers at all levels, regardless of their background, religion, race or gender. ETHICS The board of directors and the management of the group are committed to exercising and maintaining high ethical standards. A culture of high ethical integrity and standards has been developed and flourishes amongst all levels of employees and directors. Honesty and integrity is expected from all employees and all suppliers. DIRECTORS CONTRACTS OF EMPLOYMENT No director has a contract of employment in excess of a period of three years. SHAREHOLDERS COMMUNICATION The board of directors is committed to continued improvement of communication with shareholders. LPC Manhattan Moela, the company s sponsor, continues to help and improve all levels of communication. MICROmega annual report

8 DIRECTORS APPROVAL The financial statements which appear on pages 8 to 35 were approved by the board of directors on 31 March 2005 and signed on their behalf by: Mr I G Morris Chairman Mr W E Rosenberg Chief Executive Officer CERTIFICATION BY COMPANY SECRETARY In terms of section 268G (d) of the Companies Act 1973, as amended, I certify that the company has lodged with the Registrar of Companies all such forms as are required of a public company in terms of the Companies Act and further that such returns are true, correct and up to date. Mr C J Holroyd Company Secretary 31 March

9 REPORT OF THE INDEPENDENT AUDITORS TO THE MEMBERS OF MICROmega HOLDINGS LIMITED AND ITS SUBSIDIARY COMPANIES We believe that our audit provides a reasonable basis for our opinion. We have audited the annual financial statements of MICROmega Holdings Limited and the group set out on pages 8 to 35 for the year ended 31 December These financial statements are the responsibility of the directors. Our responsibility is to express an opinion on these financial statements based on our audit. SCOPE We conducted our audit in accordance with statements of South African Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance that 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. AUDIT OPINION In our opinion, the financial statements fairly present, in all material respects, the financial position of the company and the group at 31 December 2004 and the results of their operations and cash flows for the year then ended in accordance with South African Statements of Generally Accepted Accounting Practice, and in the manner required by the Companies Act in South Africa. R W Irish Alliott Inc. Registered Accountants and Auditors Randburg 31 March 2005 MICROmega annual report

10 REPORT OF THE DIRECTORS for the year ended 31 December 2004 The directors present their report for the year ended 31 December This report forms part of the audited financial statements. GENERAL REVIEW The group's business and operations and the results thereof are clearly reflected in the attached financial statements. NATURE OF BUSINESS The group provides independent intermediary and agency based services. These services include: Inter dealer broking Revenue management solutions Web based software and information visualisation solutions Importing and selling of electronic goods These services are provided throughout South Africa and extend across a diverse client base ranging from local government to the corporate market. STATEMENTS OF RESPONSIBILITY The directors are responsible for the maintenance of adequate accounting records and the preparation and integrity of the financial statements and related information. The auditors are responsible to report on the fair presentation of the financial statements. The financial statements have been prepared in accordance with South African Statements of Generally Accepted Accounting Practice and in the manner required by the Companies Act, The directors are also responsible for the group's system of internal control. These controls 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 misstatement and loss. Nothing has come to the attention of the directors to indicate any material breakdown of these controls, procedures and systems has occurred during the year under review. DIVIDENDS No dividends were declared during the year. SHARE CAPITAL The changes in the authorised and issued share capital of the group during the year under review are as follows: On 5 February 2004, shares of 1 cent each were issued at premium of 99 cents per share pursuant to the acquisition of of Inter Map (Proprietary) Limited. On 10 May 2004, shares of 1 cent each were issued at a premium of 44 cents per share in terms of the MICROmega Share Incentive Scheme. On 6 October 2004, shares of 1 cent each were issued at a premium of 75 cents per share to the previous shareholders of MICROmega Services (Proprietary) Limited upon meeting profit warranties in terms of the purchase agreement. PROPERTY, PLANT AND EQUIPMENT The changes in the property, plant and equipment during the year or any changes in the policy relating to their use are set out in the attached financial statements and do not, in our opinion, require further comments. SUBSEQUENT EVENTS On 28 January 2005 the company acquired 90% of the issued share capital of NOSA International (Proprietary) Limited, for a purchase consideration of R1,00 plus an annual payment equal to 2% of the turnover of NOSA International (Proprietary) Limited. On 21 April 2005 NOSA International (Proprietary) Limited was placed in provisional liquidation by its bankers. The financial statements have been prepared on a going concern basis, since the directors have every reason to believe that the group has adequate resources in place to continue for the foreseeable future. 8

11 REPORT OF THE DIRECTORS DIRECTORS The directors of the group during the accounting period and up to the date of this report were as follows: Mr I G Morris Chairman Appointed 01 June 2004 Mr W E Rosenberg Chief Executive Officer Appointed 01 June 2004 Mr E S Mpanza Non-executive Appointed 01 September 2004 Mr P H Seabi Non-executive Appointed 01 September 2004 Mr R Lewin Executive Appointed 18 February 2004 Mr J J L Storom Executive Appointed 26 November 2004 Mr A Vercueil Executive Appointed 01 September 2004 Mr G M Kelly resigned on 18 February Mr R Gibbs resigned on 1 June Mr A W Browne resigned on 1 September Mr F J Pretorius resigned on 26 November SECRETARY The secretary of the group is Mr C J Holroyd, whose business and postal addresses are: Block C Chislehurston Office Park 19 Impala Road Chislehurston Sandton 2196 Private Bag X9966 Sandton 2146 Mr A W Browne resigned as company secretary on 1 June SUBSIDIARIES Number of shares in Percentage Shares at Due by/(to) issue holding cost subsidiaries % R 000 R 000 MICROmega Treasury Solutions (Proprietary) Limited MICROmega Securities (Proprietary) Limited and its subsidiary companies MICROmega Revenue Management Services (Proprietary) Limited and its subsidiary company MICROmega Investments (Proprietary) Limited MICROmega Investment Portfolio (Proprietary) Limited SA Meter Reading Services (Proprietary) Limited Inter Map (Proprietary) Limited MICROmega (Proprietary) Limited Deltec Power Distributors (Proprietary) Limited (4 401) G2 Properties (Proprietary) Limited and its subsidiary companies MICROmega annual report

12 BALANCE SHEET Group Company at 31 December 2004 Note R'000 R'000 R'000 R'000 Assets Non-current assets Property, plant and equipment Intangible assets Deferred taxation Investment in subsidiaries Investment in associate Long-term investments Loans receivable Amounts owing by group companies Current assets Short-term investments Inventories Accounts receivable Current portion of loans receivable Taxation 407 Bank and cash Total assets Equity and liabilities Capital and reserves Share capital Accumulated loss (97 028) ( ) (13 808) (30 413) Minority interests 109 Non-current liabilities Amounts owing to group companies Borrowings Current liabilities Taxation 398 Accounts payable Current portion of borrowings Provisions Total equity and liabilities Net asset value per share (cents) 89,81 72,89 174,00 158,42 Net tangible asset value per share (cents) 61,20 72,89 174,00 158,42 Total ordinary shares in issue ('000)

13 INCOME STATEMENT Group Company for the year ended 31 December 2004 Note R'000 R'000 R'000 R'000 Revenue Cost of sales (8 199) Gross profit Other income Operating costs (70 392) ( ) (3 010) (14 520) Operating profit/(loss) (24 666) (8 968) Investment income Finance costs 19 (5) (3) (1) (2) Income from associates 39 (124) Profit/(loss) before taxation (21 181) Taxation 20 (2 330) (1 223) Profit/(loss) after taxation (16 653) Minority interest (12) Profit/(loss) attributable to ordinary shareholders (16 653) Exceptional items Net profit/(loss) (12 383) Reconciliation of headline earnings Amortisation of goodwill Capital profit on sale of subsidiaries (13 858) Deferred tax credit (7 328) (9 412) Exceptional items (6 021) (4 270) (6 021) (4 270) Restructuring provision Headline earnings Headline earnings per share (cents) 22 12,88 14,76 12,04 24,26 Earnings/(loss) per share (cents) 22 16,93 (14,53) 18,90 26,84 Fully diluted earnings/(loss) per share (cents) 22 16,15 (14,06) 18,03 25,96 Weighted average shares in issue ('000) Diluted weighted average shares in issue ('000) Total ordinary shares in issue ('000) MICROmega annual report

14 STATEMENT OF CHANGES IN EQUITY Share Share Non-distribu- Accumulated capital premium table reserve loss Total for the year ended 31 December 2004 R 000 R 000 R 000 R 000 R 000 Group Restated balance at 01 January (1 479) (99 522) Net loss for the year (12 383) (12 383) Foreign currency translation reserve Issue of share capital Reduction of share capital (7) (2 833) (2 840) Balance at 01 January ( ) Net profit for the year Issue of share capital Share issue expenses (22) (22) Balance at 31 December (97 028) Share Share Accumulated capital premium loss Total R'000 R'000 R'000 R'000 Company Restated balance at 01 January (53 281) Net profit for the year Issue of share capital Reduction of share capital (7) (2 833) (2 840) Balance at 01 January (30 413) Net profit for the year Issue of share capital Balance at 31 December (13 808)

15 CASH FLOW STATEMENT Group Company for the year ended 31 December 2004 Note R'000 R'000 R'000 R'000 Cash flows from operating activities Cash generated by operating activities Interest received Finance costs (5) (3) (1) (2) Dividends received Taxation paid 26.2 (2 412) (4 292) Cash flows from investing activities (28 937) (24 902) Expenditure to maintain operating capacity Property, plant and equipment acquired (2 126) (835) (123) (10) Intangible assets acquired (30) (1 033) Proceeds of disposals of property, plant and equipment Proceeds of disposals of intangible assets Proceeds of disposals of subsidiaries Expenditure for expansion Subsidiaries acquired 26.4 (27 617) (405) (36 689) Investment in associates (40) Investments Cash flows from financing activities (15 395) (24 240) Capital raised (2 704) Loans raised Loans repaid (2 366) (21 843) (15 414) (23 427) (Decrease)/increase in bank and cash (3 928) (5 130) Bank and cash at beginning of the year Bank and cash at end of the year MICROmega annual report

16 NOTES TO THE FINANCIAL STATEMENTS at 31 December Basis of preparation The financial statements are prepared in accordance with South African Statements of Generally Accepted Accounting Practice. The financial statements are prepared under the historical cost convention except as modified by the revaluation of certain assets. The following are the principal accounting policies of the group which are consistent with those of the previous year, except as otherwise indicated: 1.1 Revenue recognition Revenue represents income derived from net broking services, revenue management solutions, customised web-based business solutions and the selling of electronic goods. Revenue is recognised on an accrual basis or in accordance with the billing cycle of the relevant agreements. 1.2 Basis of consolidation The consolidated financial statements incorporate the financial statements of the holding company and of its subsidiaries. The results of the subsidiaries are included from the dates effective control was acquired and up to the dates effective control ceased. All significant intra-group transactions and balances have been eliminated on consolidation. 1.3 Goodwill Goodwill represents the difference between the cost of an acquisition and the fair value of net tangible assets of subsidiaries at the date of acquisition. Goodwill is stated at cost, if there is an indication that the fair value of a subsidiary is impaired at balance sheet date, the goodwill is written off to its estimated recoverable amount. 1.4 Associates An associate is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor. Interests in associates are accounted for using the equity method, less impairment losses. 1.5 Investments Short-term investments Short-term investments comprising listed and unlisted investments are those expected to be disposed of within twelve months. Short-term investments are stated at fair value and are written down for any permanent impairment in value. Long-term investments Long-term investments comprise listed and unlisted investments. Listed investments are stated at fair value and are written down for any impairment in value. Unlisted investments are stated at directors valuation. The investment in the Bond Exchange represents the cost of the Bond Exchange Seat which enables the company to trade on the Bond Exchange. 1.6 Property, plant and equipment Property, plant and equipment are stated at historical cost. Depreciation is calculated to write off the cost of property, plant and equipment on a straight-line basis over their expected useful lives. The depreciation rates applicable to each category of property, plant and equipment are as follows: Plant and equipment 20,00 % Motor vehicles 20,00 % Furniture and fittings 10,00 % Dealing room equipment 20,00 % Office equipment 20,00 % Computer equipment 33,33 % Leasehold improvements 10,00 % 14

17 NOTES TO THE FINANCIAL STATEMENTS at 31 December Basis of preparation (continued) 1.6 Property, plant and equipment (continued) Land is not depreciated as it is deemed to have an indefinite life. Buildings have not been depreciated as the estimated residual values exceed the cost. The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount. 1.7 Taxation Deferred taxation is provided using a balance sheet liability method on all temporary differences between the carrying amounts for financial reporting purposes and the amounts used for taxation purposes, except for differences relating to goodwill which are not deductible for taxation purposes and the initial recognition of assets or liabilities which affect neither accounting nor taxable profit or loss. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the associated unused tax losses and deductible temporary differences can be utilised. Deferred taxation is calculated using taxation rates that have been enacted at the balance sheet date. The effect on deferred taxation of any changes in taxation rates is recognised in the income statement in the year in which the change occurs, except to the extent that it relates to items previously charged or credited directly to equity. 1.8 Provisions Provisions are recognised when the group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Employee entitlements to annual leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up to the balance sheet date. 1.9 Employee benefits Defined contribution plans Certain group companies contribute to a defined contribution plan. Contributions to the defined contribution plan in respect of service in a particular period are recognised as an expense in that period Financial instruments Financial instruments carried on the balance sheet include cash and bank balances, investments, receivables, trade creditors and borrowings. The particular recognition methods adopted are disclosed in the individual policy statements associated with each item Related party transactions All inter-group transactions are eliminated on consolidation. Related party transactions are concluded at arm's length in the ordinary course of business Cash flows For the purpose of the cash flow statement, cash includes cash on hand, deposits held on call and bank overdrafts. MICROmega annual report

18 NOTES TO THE FINANCIAL STATEMENTS at 31 December Basis of preparation (continued) 1.13 Leased assets Leases of assets under which all the risks and benefits of ownership are effectively retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease Translation of foreign currencies Transactions Foreign currency transactions are recorded, on initial recognition in Rand, by applying to the foreign currency amount the exchange rate between the Rand and the foreign currency at the date of the transaction. At each balance sheet date: (a) foreign currency monetary items are reported using the closing rate, (b) non-monetary items, which are carried in terms of historical cost denominated in a foreign currency, are reported using the exchange rate at the date of the transaction, and (c) non-monetary items which are carried at fair value denominated in a foreign currency are reported using the exchange rates that existed when the values were determined. Exchange differences arising on the settlement of monetary items or on reporting an enterprise's monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, are recognised as income or expenses in the period in which they arise. Foreign entities In translating the financial statements of a foreign entity for incorporation in the financial statements, the following procedures are used: (a) The assets and liabilities, both monetary and non-monetary, of the foreign entity are translated at the closing rate. (b) Income and expense items of the foreign entity are translated at exchange rates at the dates of the transactions. (c) All resulting exchange differences are classified as equity until the disposal of the net investment. Disposal of a foreign entity On the disposal of a foreign entity, the cumulative amount of the exchange differences that have been deferred and relate to that foreign entity are recognised as income or expenses in the same period in which the gain or loss on disposal is recognised Segmental reporting Segment information is reported using the accounting policies adopted by the group. Business segments are based on core business activities. This forms the basis of the primary segmental analysis. No secondary geographical segmental analysis has been included as geographical location does not play a significant role in the group's operations and thus this information will not be beneficial. Segment revenue Segment revenue represents the gross value of services invoiced excluding value-added taxation, which is directly attributable and reasonably allocated to each business segment. Investment income generated from investments is included in the investment activities segment. Segment results Segment result equals segment revenue less segment expenses before any adjustment to minority interests. Segment assets and liabilities Segment assets and liabilities include direct and reasonable allocable operating assets, investments in associates and liabilities. 16

19 NOTES TO THE FINANCIAL STATEMENTS 2. PROPERTY, PLANT AND EQUIPMENT Group Accumulated Carrying Accumulated Carrying Cost depreciation value Cost depreciation value R'000 R'000 R'000 R'000 R'000 R'000 Owned assets Land and buildings Plant and equipment Motor vehicles Furniture and fittings Dealing room equipment Office equipment Computer equipment Leasehold improvements The carrying amounts of property, plant and equipment can be reconciled as follows: 2004 Carrying value at Carrying beginning value at of year Additions Disposals Depreciation end of year R'000 R'000 R'000 R'000 R'000 Owned assets Land and buildings Plant and equipment 73 (18) (23) 32 Motor vehicles (184) (269) Furniture and fittings (3) (282) Dealing room equipment (180) (328) 397 Office equipment (49) (123) 499 Computer equipment (493) 894 Leasehold improvements (49) (434) (1 567) MICROmega annual report

20 NOTES TO THE FINANCIAL STATEMENTS at 31 December PROPERTY, PLANT AND EQUIPMENT (continued) Company Accumulated Carrying Accumulated Carrying Cost depreciation value Cost depreciation value R'000 R'000 R'000 R'000 R'000 R'000 Owned assets Motor vehicles Furniture and fittings Office equipment Computer equipment Leasehold improvements The carrying amounts of property, plant and equipment can be reconciled as follows: 2004 Carrying value at Carrying beginning value at of year Additions Depreciation end of year R'000 R'000 R'000 R'000 Owned assets Motor vehicles 47 (8) 39 Furniture and fittings 218 (44) 174 Office equipment (36) 62 Computer equipment (68) 58 Leasehold improvements 87 (27) (183)

21 NOTES TO THE FINANCIAL STATEMENTS Group Company at 31 December 2004 R'000 R'000 R'000 R' PROPERTY, PLANT AND EQUIPMENT (continued) Land and buildings comprise: Erf 581 and Erf 582, Elsburg Extension 1, Registration Division I.R. the province of Gauteng. At cost Additions at cost Erf Kimberley, the province of the Northern Cape. At cost Land and buildings are encumbered as stated in note INTANGIBLE ASSETS Group Accumulated Carrying Accumulated Carrying Cost amortisation value Cost amortisation value R'000 R'000 R'000 R'000 R'000 R'000 Goodwill Development costs The carrying amounts of intangible assets can be reconciled as follows: 2004 Carrying value at Carrying beginning value at of year Additions Impairment end of year R'000 R'000 R'000 R'000 Goodwill Development costs MICROmega annual report

22 NOTES TO THE FINANCIAL STATEMENTS Group Company at 31 December 2004 R'000 R'000 R'000 R' DEFERRED TAXATION Balance at beginning of year Movements during year attributable to: Temporary differences (11) (1 222) Disposal of subsidiary (699) Balance at end of year The balance comprises: Capital allowances Provisions Assessed losses INVESTMENT IN SUBSIDIARIES Shares at cost less amounts written off INVESTMENT IN ASSOCIATE Associate company Associate company Equity accounted GCM Meter Reading Services (Proprietary) Limited 50% interest in the unlisted shares of GCM Meter Readings Services (Proprietary) Limited, a company involved in meter reading services. Carrying value of investment: Shares at cost 1 1 Retained earnings since acquisition Summary financial information of GCM Meter Reading Services (Proprietary) Limited Assets Current assets Equity and liabilities Equity and reserves Current liabilities Net profit/(loss) 78 (19) 20

23 NOTES TO THE FINANCIAL STATEMENTS Group Company at 31 December 2004 R'000 R'000 R'000 R' LONG-TERM INVESTMENTS Listed shares Unlisted investments Number of ordinary shares The group held the following investments: Listed shares Sanlam Limited Spectrum Shipping Limited R'000 R'000 R'000 R'000 Unlisted investments Bond Exchange Foreign investments LOANS RECEIVABLE Enigma Holdings Limited Kopano Utilities (Proprietary) Limited Tullett Liberty PLC F J Pretorius 148 G K K Berner Less: Current portion included in current portion of loans receivable MICROmega annual report

24 NOTES TO THE FINANCIAL STATEMENTS Group Company at 31 December 2004 R'000 R'000 R'000 R' LOANS RECEIVABLE (CONTINUED) The loan to Enigma Holdings Limited bears interest at the prime overdraft rate as determined by First Rand Bank Limited and is repayable in two equal annual instalments as follows: 31 October 2004 R3 million 31 October 2005 R3 million Interest is paid semi-annually in arrears. The loan is secured by 3 million shares in MICROmega Holdings Limited. The loan to Kopano Utilities (Proprietary) Limited is unsecured, interest free and is repayable 60 months from 1 January In the event of termination of the agreement the loan is repayable on demand. The loan to Tullett Liberty PLC is unsecured, interest free and has no fixed terms of repayment. The loan to G K K Berner is unsecured, interest free and has no fixed terms of repayment. The loan to F J Pretorius was unsecured, bore interest at the prime lending rate and was repayable in monthly instalments of R AMOUNTS OWING BY GROUP COMPANIES TTSA Securities (Proprietary) Limited MICROmega Revenue Management Services (Proprietary) Limited MICROmega Treasury Solutions (Proprietary) Limited MICROmega Investments (Proprietary) Limited MICROmega Investment Portfolio (Proprietary) Limited SA Meter Reading Services (Proprietary) Limited 82 Tiseletso Investments (Proprietary) Limited

25 NOTES TO THE FINANCIAL STATEMENTS Group Company at 31 December 2004 R'000 R'000 R'000 R' AMOUNTS OWING BY GROUP COMPANIES (continued) The loan to TTSA Securities (Proprietary) Limited is unsecured, bears interest at the call account rate and has no fixed terms of repayment. The loan to Tiseletso Investments (Proprietary) Limited is secured by a deed of pledge for 100% of the issued share capital of Tiseletso Investments (Proprietary) Limited, bears interest at a rate of 2% below prime and is repayable in full on 30 April The loan has been subordinated in favour of other creditors until such time as the company s assets, fairly valued, exceed, its liabilities. The remaining loans are unsecured, interest free and have no fixed terms of repayment. 10. INVENTORIES The amounts attributable to the different categories are as follows: Consumables 11 Work in progress 196 Merchandise Goods in transit BANK AND CASH Included in bank and cash for the group are amounts which have been ceded as follows: MICROmega Securities (Proprietary) Limited and its subsidiary companies Fixed deposit held with First National Bank Limited amounting to R has been ceded as security for the bank overdrafts and acceptances of the company. An amount of R on call has been ceded to First National Bank Limited as security against a broking facility. An amount of R on call has been ceded to ABSA Corporate & Merchant Bank Limited as security against a broking facility. MICROmega Revenue Management Services (Proprietary) Limited An amount of R has been ceded to First National Bank as security against a performance guarantee. MICROmega annual report

26 NOTES TO THE FINANCIAL STATEMENTS Group Company at 31 December 2004 R'000 R'000 R'000 R' SHARE CAPITAL Authorised ordinary shares of 1 cent each Issued (2003: ) ordinary shares of 1 cent each Share premium The directors are authorised, until the forthcoming annual general meeting, to dispose of the unissued shares for any purpose and upon such terms and conditions as they deem fit, subject to the provisions of section 221 and 222 of the Companies Act and the requirements of the JSE Securities Exchange South Africa. 13. AMOUNTS OWING TO GROUP COMPANIES SA International & Capital Market Brokers (Proprietary) Limited Deltec Power Distributors (Proprietary) Limited The loans are unsecured, interest free and have no fixed terms of repayment. 14. BORROWINGS Vendors loans The amounts due to vendors represent the balance of the purchase consideration owing in respect of acquisitions. The loans are settled through the issue of shares and cash resources upon achievement of profit warranties. 24

27 NOTES TO THE FINANCIAL STATEMENTS Group Company at 31 December 2004 R'000 R'000 R'000 R' BORROWINGS (continued) Instalment sale liabilities Liabilities under instalment sale agreements repayable over periods from three to five years at effective interest rates ranging from 9% to 12% per annum. Secured by property, plant and equipment with a carrying value of R Mortgage bond Loan bearing interest at prime plus 0,5% per annum secured by mortgage over Erf Kimberley and repayable in annual instalments of R Less: Current portion included in current portion of borrowings (10 881) (468) (10 866) (468) 15. PROVISIONS Unused Carrying amounts Carrying amount at Used reversed amount beginning Additional during during at end of year provision the year the year of year R'000 R'000 R'000 R'000 R'000 Group Provision for claims (6 021) Provision for leave pay (238) (408) Provision for deal differences Provision for restructuring Provision for loyalty payments (238) (6 429) Company Provision for claims (6 021) MICROmega annual report

28 NOTES TO THE FINANCIAL STATEMENTS at 31 December PROVISIONS (continued) Provision for claims The provision for claims has been reversed, as the company no longer has a current obligation to make payment to the previous vendors (refer note 21). Provision for leave pay The group makes provision for accumulated leave due to employees, calculated at current salary rates. Deal differences The group makes provision for deal differences due to market volatility. Restructuring MICROmega Services (Proprietary) Limited announced a detailed formal plan of restructuring to all employees before year end. The provision consists of amounts payable to the specified employees in terms of retrenchment packages. Loyalty payments The group makes provision for accumulated payments due to specific employees in terms of loyalty payments which become payable after five years. Group Company R'000 R'000 R'000 R' REVENUE Revenue comprises turnover, which excludes value-added tax and represents the invoiced value of services and goods supplied. 17. OPERATING PROFIT/(LOSS) Operating profit/(loss) is stated after: Income Income from subsidiaries Dividends Profit on disposals of property, plant and equipment Expenditure Auditors' remuneration Audit fee Prior year (over)/under-provision (9) Other services

29 NOTES TO THE FINANCIAL STATEMENTS Group Company at 31 December 2004 R'000 R'000 R'000 R' OPERATING PROFIT/(LOSS) (continued) Depreciation Property, plant and equipment Amortisation of goodwill Lease rentals Premises Equipment 16 Loss on foreign exchange INVESTMENT INCOME Interest income Interest received Dividend income Dividends received from listed companies 1 1 Dividends received from unlisted companies 185 Dividends received from subsidiaries FINANCE COSTS Long-term loans 1 Bank overdrafts TAXATION South African normal tax Current tax Deferred tax Current year 126 (6 797) (9 412) Prior year adjustments (1) Tax for the year (4 528) (9 412) Reconciliation of rate of taxation % % % % South African normal tax rate 30,00 30,00 30,00 30,00 Adjusted for: Disallowable expenditure (exempt income) (3,56) (6,07) (16,04) (14.86) Utilisation of assessed losses (5,63) (7,77) (13,96) (15.14) Effective rate 20,81 16,16 MICROmega annual report

30 NOTES TO THE FINANCIAL STATEMENTS Group Company at 31 December 2004 R'000 R'000 R'000 R' EXCEPTIONAL ITEMS Claims Restructuring costs The provision for claims raised in the prior year has been reversed, as the dispute with the previous vendor has been resolved (refer note 15). The restructuring costs raised to protect the company from the impact of negative publicity surrounding the previous directors has been reversed. There are no tax effects with respect to the exceptional items. 22. EARNINGS PER ORDINARY SHARE Group The calculation of earnings per ordinary share is based on the net profit attributable to ordinary shareholders of R (2003: loss R ) and a weighted average of (2003: ) ordinary shares in issue throughout the year. The calculation of diluted earnings per ordinary share is based on net profit attributable to ordinary shareholders of R (2003: loss R ) and a diluted weighted average of (2003: ) ordinary shares in issue throughout the year. Reconciliation between weighted average ordinary shares and diluted weighted average ordinary shares: Weighted average ordinary shares Share options Shares to be issued for acquisition of subsidiaries Weighted average diluted ordinary shares The calculation of headline earnings per share is based on earnings of R (2003: R ) and a weighted average of (2003: ) ordinary shares in issue throughout the year. 28