SHAPING THE FUTURE... PALADIN CAPITAL LIMITED ANNUAL REPORT 2011

Transcription

1 SHAPING THE FUTURE... PALADIN CAPITAL LIMITED ANNUAL REPORT 2011

2 SHAPING THE FUTURE......THROUGH PASSION & INSIGHT PALADIN CAPITAL ANNUAL REPORT 2011 CONTENTS Financial highlights 1 At a glance 2 Group structure 3 Board of directors 4 Letter to shareholders 5 Review of operations 10 Corporate governance 17 Annual financial statements 19 Administration 72

3 PALADIN CAPITAL ANNUAL REPORT financial highlights RECURRING HEADLINE EARNINGS PER SHARE (cents) SOTP VALUE PER SHARE (cents) 20,0 15, ,0 5, YEAR ENDED 28/29 FEBRUARY Headline earnings (Rm) 51,5 75,4 (18,0) 217,3 199,9 Headline earnings per share (cents) 49,7 22,5 (4,6) 43,9 34,5 Recurring headline earnings (Rm) 8,9 62,8 78,2 95,5 69,8 Recurring headline earnings per share (cents) 8,6 18,7 20,0 19,3 12,1 Net asset value (Rm) 314,6 633,6 603, , ,5 Net asset value per share (cents) 113,7 165,6 151,9 175,7 238,5 Sum of the Parts (SOTP) value (Rm) 494,7 707,9 486, , ,0 SOTP value per share (cents) 178,7 185,1 123,0 203,0 299,0 Shares in issue (m) 276,8 382,5 396,2 574,6 580,6 Weighted average number of shares in issue (m) 103,6 335,9 390,6 495,4 578,6

4 2 AT A GLANCE PALADIN CAPITAL LTD is the preferred investment vehicle for the PSG Group in sectors other than agriculture, food and beverages

5 PALADIN CAPITAL ANNUAL REPORT INVESTMENT CRITERIA We have enhanced the criteria of a typical business that we would be interested to invest in. Such a business has the following characteristics: Exceptional management High barrier to entry Scalable Focused Easily understood Strong sustainable cash flows Strong brand(s) Paladin s share of profit after tax is greater than R10 million READ MORE ABOUT OUR COMPANY AT PSG GROUP LTD PSG Financial Services Ltd 100% PSG Konsult 74% PSG Asset Management 81% Zeder Investments 42% Paladin Capital 81% Capitec Bank 35% PSG Corporate 100% PSG Capital 100% Paladin Capital Financial Services 100% Thembeka Capital 49% Green Square 19% Petmin 11% Erbacon 27% Precrete-Nozala 22% Curro Holdings 76% African Unity Insurance 43% Spirit Capital 24% IQuad Group 44% Protea Foundry 50% TopFix Holdings 28% GRW Holdings 40%

6 4 BOARD OF DIRECTORS JF (Jannie) Mouton Non-executive chairman (64), BComm (Hons), CA(SA), AEP Summary of curriculum vitae Jannie was co-founder and managing director of SMK, whereafter he founded PSG Group and later co-founded Capitec Bank. Jannie is chairman and director of various companies within the PSG Group and also serves on the boards of Pioneer Food Group and Steinhoff International Holdings. PJ (Piet) Mouton Executive director (34), BComm (Maths) Summary of curriculum vitae Piet was appointed as an executive director of PSG Group early in In 1999 he started his career in investment banking in London and in 2004 he was the co-founder and financial director of Arch Equity, which listed later that year on the AltX until it was merged with PSG Group in Prior to his move to PSG Group, Piet was the managing director of Thembeka Capital, a BEE investment company. Piet also serves on the boards of various companies within the PSG Group, including Capitec Bank, Thembeka Capital and PSG Capital. WL (Wynand) Greeff Financial director (41), BCompt (Hons), CA(SA) Summary of curriculum vitae Wynand has been involved within the PSG Group since 2002 and is the financial director of PSG Group Ltd. He serves on various boards within PSG. E de V (Enrico) Greyling Independent non-executive director (68), BA (Hons) Business Economics Summary of curriculum vitae Prior to becoming active at PSG Group, Enrico was a director of FBC Fidelity Bank which is now part of Nedcor. He also served on the board of RMB Holdings as an executive director prior to its merger with FirstRand Bank. During his career as a banker he was, for a time, a board member of the Banking Council of South Africa. Enrico also serves as a non-executive director of Petmin and various other private companies. JA (Johan) Holtzhausen Independent non-executive director (40), Bluris (cum laude), LLB, H Dip Tax Summary of curriculum vitae Johan has been part of PSG Group s private equity investment team for a number of years and also assisted and executed various listings of companies on the JSE. Johan also serves as a non-executive director on the boards of various Paladin Capital investment companies and also serves on the board of PSG Group. KP (Kevin) Harris Independent non-executive director (33), BComm (Hons) (cum laude), CFA Summary of curriculum vitae Kevin s previous work experience includes Old Mutual Specialised Finance where he assisted in the managing of interest rates, repo trading and scrip lending books and at RMB through their equity proprietary trading unit in Johannesburg and London. Kevin currently manages a range of private investment portfolios in his personal capacity. JD (Jacob) Wiese Independent non-executive director (30), BA (Value and Policy Studies) LLB, MIEM Summary of curriculum vitae Jacob is a non-executive director of Shoprite Holdings, an alternate director of Primedia, and the marketing manager of Lourensford and the Lanzerac Wine Portfolio. Jacob obtained his Master s degree in International Economics and Management from Bocconi University in Italy and was admitted as an Advocate of the High Court on 8 May 2009.

7 PALADIN CAPITAL ANNUAL REPORT LETTER TO SHAREHOLDERS SHAPING THE FUTURE... Dear Shareholders, Paladin has had a year of mixed fortunes with a strong increase in its sum of the parts (SOTP) valuation as well as its market price, whilst recurring headline earnings decreased significantly. Paladin s management is mindful of the fact that an increase in the SOTP value is unsustainable in the long run if the earnings performance of its underlying investments does not improve accordingly. SOTP VALUATION February 2009 Rm February 2010 Rm February 2011 Rm Current Rm Share of portfolio % Investments Thembeka ,2 Curro (including loans) ,0 Precrete (including preference share funding to Thembeka) ,0 Petmin ,9 Spirit (including loans) ,1 Protea ,3 African Unity ,8 Energy Partners 16 1,0 Erbacon ,9 GRW ,3 IQuad ,1 Top Fix ,4 Other (or sold investments) Total investments ,0 Net (debt)/cash (104) (25) Performance fee (65) (65) Total SOTP valuation Number of shares in issue (million)* Per share (cents)* Growth (%) (2) * 2009 figure adjusted for 1 to 10 share split

8 6 LETTER TO SHAREHOLDERS (continued) Paladin s SOTP value increased by 47% to 299 cents per share (cps) in the year to February This followed a 65% increase in the previous year from 123 cps to 203 cps. The largest contributors to this increase in value were: The significant increase in Thembeka s intrinsic value following the increase in the market value of Capitec, PSG and the JSE. The sale of CIC at a significant premium to its market price of the previous year. The increase in Curro s value. It is interesting to note that our four largest investments, namely Thembeka, Curro, Precrete and Petmin constitute 82% of Paladin s total investments (the SOTP value excluding cash and the accrued performance fee). We are fortunate that these businesses continue to perform well. This is in contrast to our four investments which have not performed to expectation, namely GRW, Erbacon, IQuad and Top Fix. They, however, constitute less than 10% of our total assets. We are now working more closely together with the management of these companies to ensure that they return to acceptable levels of profitability. market price performance Paladin ALSI AltX Investment value CAGR Investment value CAGR Investment value CAGR Date R000 % R000 % R000 % 1 September February (52) 28 February (21) Paladin s share price since listing has significantly outperformed the JSE ALSI and the AltX index. The initial share price used on 1 September 2009 was R1,53, which takes cognisance of Paladin s rights issue. Recurring headline earnings February February February Percentage composition Rm Rm Rm % Investment Thembeka 4,4 10,1 22,6 30,0 Curro (including loans) 1,3 2,3 3,0 Precrete (including preference share funding to Thembeka) 23,1 19,3 22,2 29,5 Petmin 9,7 10,2 13,6 Spirit (including loans) 0,2 1,5 2,0 Protea 5,9 4,4 5,2 6,9 African Unity 1,2 2,0 4,5 6,0 Erbacon 14,0 16,7 (11,3) (15,0) GRW 3,1 (2,7) (0,6) (0,8) IQuad 6,0 5,6 4,5 6,0 Top Fix 0,2 4,2 1,1 1,5 Management fee (5,2) (16,7) (22,2) Other (or sold investments) 33,3 41,1 29,8 39,5 Before funding 91,2 106,7 75,3 100,0 Funding (13,0) (11,2) (5,5) Recurring headline earnings 78,2 95,5 69,8 Non-recurring (96,2) 121,8 130,1 Headline earnings (18,0) 217,3 199,9 Recurring headline earnings per share (cents) 20,0 19,3 12,1

9 PALADIN CAPITAL ANNUAL REPORT THROUGH EDUCATION Education is an industry in which exceptional growth potential exists More and more South Africans agree that the best investment is a good education Paladin has a 76% interest in Curro, a private school group Curro currently has 12 schools in operation with more than learners, and wishes to expand aggressively over time Curro s 2020 goal is to have 40 schools, more than learners and a profit after tax of R450 million From a recurring headline earnings point of view, Paladin disappointed for a second consecutive year. Recurring headline earnings per share (HEPS) decreased by 37,3% to 12,1 cps in the year to February The 3,5% decrease in the previous year was mainly attributable to an increase in the number of shares in issue following a rights issue, with the capital so raised only invested towards the end of that year. This year a number of our investments have performed significantly below expectations. This is perhaps an indication that the real economy has not yet turned the corner, even though the stock market has recovered. The key contributors to our poor earnings performance can be ascribed to the following: We have two investments in the construction sector, namely Erbacon and Top Fix s scaffolding division. These two businesses have suffered along with the rest of the construction sector. Significant management and operational changes have been implemented and our view is that these businesses should benefit strongly from an improvement in the economy. GRW continues to perform poorly given the strength of the rand and lack of orders which stems from a tough local economy. GRW has, however, won a number of major rail tanker contracts which should significantly improve its future performance. IQuad has disappointed since its listing in 2008, and its earnings have been on a declining trend over the last two years. We have sold our investment in CIC which was a major contributor to our earnings. A substantial portion of the proceeds have subsequently been invested in Curro, which is currently yielding lower returns as a result of the opening of new schools. Schools typically make losses in the initial years with capacity exceeding learner enrolment, and one of Curro s main objectives thus remains to get the schools to break even as quickly as possible. Headline earnings per share decreased by 21,4% to 34,5 cents mainly as a result of a R64,7 million performance fee provision payable to PSG in terms of the management agreement. Attributable earnings per share increased by 69,1% to 61,4 cents as a result of the sale of CIC. These two measures, which are both significantly higher than recurring headline earnings per share, have driven the strong growth in the SOTP value per share. Investment strategy We have reviewed our investment strategy and have decided to move towards a position where we have more influence over fewer but larger investments.

10 8 LETTER TO SHAREHOLDERS (continued) We have learnt from the recent recession that investments occasionally require specialised expertise and more active management assistance. Going forward, we intend to use our available resources to assist our investments in a more focused way. Going forward, we will strive to invest in businesses that have the ability to individually generate an annual profit of more than R100 million. We have consequently enhanced the criteria of a typical business that we would be interested to invest in. These characteristics include: Exceptional management. This is absolutely critical as we believe that great managers can turn around a poor business, while poor managers will eventually destroy a great business. High barriers to entry. Although it is not easy to find, high barriers to entry generally lead to attractive profit margins. Strong brands. Studies have proved that branded products outperform non-branded products as one commands a higher margin for essentially the same product. Products are made in a factory, but brands are created in the mind Walter Landor, founder WPP A brand is a living entity, and it is enriched or undermined cumulatively over time, the product of a thousand small gestures Michael Eisner, former CEO of Walt Disney Scalable. There is no point in having a great business when the market in which it operates is simply too small. The ideal business will have the ability to gain ground in a fragmented market and to become the market leader if not that already. Easy to understand. If you don t understand a company s business model, it is up to chance and management s ability to succeed. Focus. Management must have a clear vision for the business. Their long-term goals must always take priority over short-term opportunistic gains, and they must always act as experts in their chosen field. We intend to have less exposure to cyclical industries going forward. However, we have faith that the management of Paladin s current investments in these sectors will restore these businesses to previous profitability levels and beyond. Corporate action and investing We realised an after-tax profit of R208 million when we sold our 50% investment in CIC to Imperial for R364 million. Having invested R67 million and received R24 million in dividends, CIC was an extraordinary investment with a compounded return of 64,8% over a four-year period. We sold our stake in Lesotho Milling for R26 million. We invested R21 million and received more than R7 million in dividends from this investment. Paladin acquired an additional 26% stake in Curro for R52 million to increase its total interest to 76%. Paladin also increased its interest in certain of its underlying investments: Purchased an additional 10,6 million Petmin shares for R30 million. Purchased an additional 17 million Erbacon shares for R23 million. Purchased an additional 3,8% stake in Spirit Capital for R5 million, and extended R50 million of debt funding to Spirit Capital to help fund the acquisition of the Annique and Honey brands. Annique distributes skin care and beauty products while Honey is a distributor of fashion accessories. What is new? Shortly after year-end, Paladin acquired a 45% interest in Energy Partners, a provider of energy savings solutions. Gerrit (Boel) Pretorius (previous CEO of Reunert) has coinvested with us and serves as the non-executive chairman. Energy Partners strategy in the medium-term is to capitalise on the sizeable energy savings opportunity as opposed to arguably more risky, expensive investments into renewable generation capacity. Energy Partners provides clients with a holistic service offering to develop and implement a longer-term energy strategy which involves meaningful energy savings interventions in the face of multiple electricity price increases. Energy Partners simultaneously contributes to the country as a whole by freeing up capacity on the strained electricity grid and at the same time stands to benefit from the significant Eskom incentives aimed at usage reduction. Energy Partners believes it can save a client 20% to 40% of its energy costs by investing in new technology and

11 PALADIN CAPITAL ANNUAL REPORT AN EDUCATED COMMUNITY WILL IMPROVE THE LONG- TERM WELL-BEING OF SOCIETY changing the behaviour of the workforce in that business. Energy costs are set to double over the next three to five years; so a business with a current electricity bill of R100 million could either do nothing and see its electricity costs increase to R200 million, or contact Energy Partners at info@energypartners.co.za and save up to R80 million. School venture Curro continues to be an exciting opportunity for Paladin. Last year they had five schools with learners. This year they started with 12 schools and learners, and next year they aim to have 16 schools and learners. It remains a fantastic growth story. Each new school requires a significant capital outlay of between R30 million and R70 million, and goes through a J-curve in terms of profitability until a certain number of learners are enrolled. To date, the growth has predominantly been funded with debt. The shareholders have decided to inject significant capital into the business via a listing during June 2011 and subsequently a rights issue to ensure that the debt-equity ratio is brought into line. Management changes With the resignation of the Paladin CEO earlier this year, Piet Mouton has assumed operational responsibility together with the Paladin management team. The PSG Exco remains responsible for managing Paladin s assets and delivering on the Paladin strategy. A word of thanks I would like to thank the management teams of all the companies throughout the Paladin group for their hard work and contribution towards Paladin s results, and my fellow directors and colleagues for their wisdom and insight during the past year. It is much appreciated. Lastly to you, our shareholders; our success will not be possible without your ongoing loyal support. Thank you. Jannie Mouton Chairman Stellenbosch 16 May 2011

12 10 review of operations Curro Holdings (Pty) Ltd (76%) Chief executive officer Chris van der Merwe which have been neglected in the past and where the community can t afford alternatives. There is therefore a healthy demand for schools in more affluent areas serving the growing middle class which is willing to pay for a quality alternative. We believe this trend should exist and increase well into the future. Curro aims to serve this market. Curro s shareholders have decided to list on the JSE which will be followed by a rights issue in order to provide the capacity to develop around three to four additional schools per year for the foreseeable future. Thembeka Capital Ltd (49%) FINANCIAL HIGHLIGHTS Year ended December Revenue (Rm) 34,3 48,6 74,0 EBIT (Rm) 5,8 8,9 9,8 EBIT margin (%) 16,9 18,3 13,2 Headline earnings (Rm) 1,0 1,8 5,2 Growth in headline earnings (%) n/a 80,0 188,9 Curro develops and manages affordable, quality private schools throughout South Africa. Paladin initially acquired 50% of the company in 2009 and has during the current year Paladin increased its investment in Curro to 76%. Performance Curro had another exciting year with its number of learners enrolled increasing by 79.2% from in the 2010 academic year to in 2011 with total number of schools increasing from three in 2009 to the current twelve which included campuses at Roodeplaat, Hazeldean High (Pretoria East), Serengeti Estate (Kempton Park) and Emahlahleni (Witbank) to its portfolio. Profit before tax is consistent with fast growing companies in relative capital intensive industries which has disproportionate finance costs during a strong development phase. Prospects The great demand for education in South Africa, currently place almost insurmountable pressure on the state sector to provide and upkeep schools. Understandably government s finite resources are prioritised on areas Executive chairman KK Combi FINANCIAL HIGHLIGHTS Year ended February Headline (loss)/earnings (Rm) (185,7) 269,8 441,7 Recurring headline earnings (Rm) 7,4 20,6 46,1 Growth in recurring headline earnings (%) 178,4 123,8 Intrinsic value (Rm) 206,3 590, ,8 Intrinsic value per share (Rand) 17,7 43,7 80,3 Growth in intrinsic value per share (%) (58,9) 146,9 83,8 Thembeka s portfolio consists of the following investments at 28 February 2011: Listed investments Percentage holding PSG Group Ltd 6,0 Capitec Bank Holdings Ltd 3,7 JSE Ltd 4,2 IQuad Group Ltd 8,4 MTN Zakhele 1,3 Sasol Inzalo 0,3

13 PALADIN CAPITAL ANNUAL REPORT Unlisted investments Percentage holding Greymatter & Finch (Pty) Ltd 51,0 Bontebok Limeworks (Pty) Ltd 26,0 Precrete-Nozala (Pty) Ltd 26,0 Spirit Capital (Pty) Ltd 25,0 Kaap Agri Ltd 15,0 Green Square Mining and Mining Contracting (Pty) Ltd 20,8 Overberg Agri Ltd 10,2 MGK Business Investments Ltd 11,2 GRW Engineering (Pty) Ltd 25,1 Access Freight Logistics (Pty) Ltd 25,1 BKB Ltd 5,1 Thembeka Capital ( Thembeka ) is a broad-based black owned and controlled investment holding company that focuses on private equity investments and BEE transactions. It has more than 500 black shareholders with more than beneficiaries. Performance Thembeka s intrinsic value continued to increase along with the increase in the share prices of its largest investments. Strong growth in the share price of PSG, Capitec and JSE Ltd boosted Thembeka s intrinsic value by 83,8% to R80,3 per share and headline earnings (which include marked-to-market movements) by 63,7% to R441,7 million. Recurring headline earnings increased by 123,8% to R46,1 million on the back of the continued exceptional performance by Capitec Bank. Prospects Thembeka s diverse portfolio consists of several investments with good growth prospects specifically in the agriculture, food and beverages sectors. Petmin Ltd (11%) Chief executive officer Jan du Preez FINANCIAL HIGHLIGHTS Year ended June Revenue (Rm) 666,9 788,6 489,4 Operating profit (Rm) 117,8 173,9 149,5 Operating margin (%) 17,7 22,1 30,5 Headline earnings (Rm) 77,2 120,7 107,7 Diluted headline earnings per share (cents) 15,3 22,0 19,1 Growth in diluted headline earnings per share (%) 188,7 43,8 (13,2) Petmin is a South African based, JSE and AIM listed minerals, mining and processing company which services the metallurgical and industrial sectors. It currently has two operations, consisting of silica and anthracite mining. Paladin acquired an additional 10,6 million shares in Petmin at R2,83 per share during the year under review. Performance Petmin sold its investment in Springlake Holdings (Pty) Ltd ( Springlake ) during the 2010 financial year which contributed towards the decline in revenue and earnings per share. On a like-for-like basis, Petmin had a fair financial performance with headline earnings per share decreasing by 5% to 19,1 cents, and net cash flow from operating activities up 43% to R321 million. The earnings growth was driven by the strong performance at Somkhele, which delivered 78% of the group s profit before tax, and an operating profit margin improvement from 22,1% to 30,5%. The disposal of the low margin business at Springlake was an important strategic step in streamlining the business and helping management to focus on core business and future growth. Since June 2010, earnings have been maintained, despite a stronger rand and higher strip ratios at Somkhele. The group s conservative marketing and sales strategy of locking in long-term supply agreements assisted Petmin to thrive during the recent economic recession. Petmin continued to grow earnings and remained cash positive with virtually no gearing.

14 12 REVIEW OF OPERATIONS (continued) Prospects With operations ramping up to full production and an anticipated strong rand, Petmin is well on track to achieve good results for the year ending 30 June With organic expansion at Somkhele on track to double the plant capacity and life of mine, and an exciting pipeline of prospective iron ore projects, Petmin remains well positioned for growth with low gearing and significant cash resources. Petmin will continue to actively evaluate new opportunities which meet its stated highly focused commodity and geographic diversification growth strategy in order to maximize shareholder wealth in the short to medium term. Precrete-Nozala (Pty) Ltd (22%) Operating margins decreased as a result of the rising input costs of fuel and electricity and also the mine support and safety divisions which have lower margins. Prospects Management is optimistic about the platinum sector and believes that Precrete is well positioned to gain from the positive outlook in the South African mining sector. Their focus will remain on special projects for mining houses and other industrial blue chips as this will significantly enhance earnings. Erbacon Investment Holdings Ltd (27%) Chief executive officer Piet du Toit FINANCIAL HIGHLIGHTS Year ended February Revenue (Rm) 255,3 265,9 410,6 Operating profit (Rm) 45,0 54,8 64,1 Operating margin (%) 17,6 20,6 15,6 Headline earnings (Rm) 31,7 34,9 44,1 Growth in headline earnings (%) 17,4 10,1 26,4 Precrete specialises in the production and distribution of premixed concrete for construction support and other safety-related mining applications predominantly in the platinum sector. Its wholly owned subsidiary, GFC Construction (Pty) Ltd ( GFC ), focuses on shotcreting which involves applying concrete premixes to the walls of mine shafts. Performance Precrete achieved a 26,4% increase in headline earnings to R44,1 million. This was on the back of strong revenue growth due to higher volumes and prices for both bags and shotcrete. Revenue was further boosted by good results from Precrete s mine support and safety division. Chief executive officer Sean Flanagan FINANCIAL HIGHLIGHTS Year ended February Revenue (Rm) 721,0 834, ,4 Operating profit/(loss) (Rm) 72,7 94,4 (80,7) Operating margin (%) 10,1 11,3 (8,0) Headline earnings/(loss) (Rm) 52,7 65,0 (64,5) Headline earnings/(loss) per share (cents) 40,1 45,1 (33,4) Growth in headline earnings per share (%) 20,4 12,5 n/a Erbacon is a construction company consisting of infrastructure development (Erbacon and Civcon Construction), general construction (Armstrong Construction) and a tool hire division (Bo s Plant Hire). Its services include general civil engineering construction, industrial and processing plants, mining infrastructure and support (both surface and underground) and the design and construction of turnkey industrial projects.

15 PALADIN CAPITAL ANNUAL REPORT Performance Erbacon experienced a challenging year characterised by adverse trading conditions. Headline earnings decreased from a R65 million profit in 2010 to a loss of R64,5 million in The poor performance was predominantly due to a general downturn in the con struction sector which led to reduced margins, as well as significant writeoffs of assets and contracts partially caused by a lack of adequate contract management. Prospects Together with the prospective turnaround of the South African construction sector, Erbacon is expecting to boost performance through their new strategic direction which includes the implementation of a growth strategy underpinned by operational excellence. Erbacon is revisiting all its business divisions to ensure optimisation of profitability and internal controls under the leadership of newly appointed CEO Sean Flanagan (former executive director of Murray & Roberts). GRW Holdings (Pty) Ltd (40%) Performance GRW significantly improved results to deliver headline earnings of R5,3 million. However, it was a challenging year with 35% 40% of tanker sales going to the export market which negatively effected earnings as a result of the strengthening of the rand. Export volumes are strong, but GRW cannot price competitively in the current market. The local market continued to be depressed. Strong performance from its second-hand tanker sales division which generated attractive margins and profits has helped to offset the poor performance of the new tankers division. Prospects GRW is set to benefit from its current restructuring of operations, cost-cutting efforts and the standardisation of its production line which was implemented during the 2010 calendar year. With a strong order book, healthy demand for its tankers and its prospective expansion into the UK, GRW is expecting to show strong revenue and earnings growth. Top Fix Holdings Ltd (28%) Chief executive officer Gerhard van der Merwe FINANCIAL HIGHLIGHTS Year ended June Revenue (Rm) 450,4 434,0 528,1 Operating profit/(loss) (Rm) 40,6 (2,2) 6,2 Operating margin (%) 9,0 (0,5) 1,2 Headline earnings/(loss) (Rm) 23,0 (13,3) 5,3 GRW is a manufacturer of steel and aluminium tankers and specialised liquid containers. Apart from clients in South Africa, it has clients in the UK and the Middle East. Chief executive officer Webber Marais FINANCIAL HIGHLIGHTS Year ended June Revenue (Rm) 227,2 322,5 295,6 Operating profit (Rm) 25,1 36,0 12,7 Operating margin (%) 11,0 11,2 4,3 Headline earnings (Rm) 15,9 22,4 6,3 Headline earnings per share (cents) 8,3 11,0 3,1 Growth in headline earnings per share (%) 260,9 32,5 (71,8) The Top Fix group has been in operation for the past 16 years and focuses on the supply of scaffolding and scaffolding personnel to industrial plants and construction sectors, the supply of outsourced skilled labour to the chemical, petrochemical, power generation, construction

16 14 REVIEW OF OPERATIONS (continued) and coal mining industries, and the supply of safety surveillance and access control equipment to chemical and petrochemical plants. Performance Results for the year ended 30 June 2010 were disappointing with headline earnings declining by 71,8% to 3,1 cents per share. The severe downturn in the construction industry impacted the scaffolding business with operating losses of R6,1 million. Conse quently, goodwill relating to the scaffolding division was impaired resulting in a non-headline loss of R44 million. Personnel outsourcing and safety surveillance contributed R18,7 million to operating profit. Since June 2010, the scaffolding division remained under pressure as a result of the building recession while its personnel outsourcing and safety surveillance divisions continued their strong performance. Prospects The scaffolding division has made a strategic change to focus more deliberately on the petrochemical and energygeneration industries as these offer less cyclical demand due to routine scheduled maintenance. Furthermore, any upturn in the building industry will result in a material increase in profits as the scaffolding division has been restructured to decrease its breakeven turnover. Personnel outsourcing operations will continue to benefit from the local shortage of skilled artisans and is well positioned to take advantage of opportunities in South Africa. Protea Foundry (50%) Chief executive officer Anthoon Rheeders FINANCIAL HIGHLIGHTS Year ended February Revenue (Rm) 56,9 40,3 54,7 Operating profit (Rm) 16,4 12,3 16,9 Operating margin (%) 28,8 30,5 30,9 Headline earnings (Rm) 11,8 8,7 10,2 Growth in headline earnings (%) 49,4 (26,3) 17,2 Protea is a non-ferrous casting operation based in Gauteng. Performance Protea Foundry experienced a good year in the midst of the economic recession with a 17,2% increase in headline earnings and improved operating margins from 30,5% to 30,9%. This was mainly driven by increased volumes and improved copper prices. Prospects Protea has commenced with expansion projects on its factory to increase capacity and available services, which should generate improved revenue and earnings.

17 PALADIN CAPITAL ANNUAL REPORT IQuad Group Ltd (44%) African Unity Insurance Ltd (43%) Chief executive officer Dave Edwards FINANCIAL HIGHLIGHTS Year ended February Revenue (Rm) 81,3 80,0 85,6 Operating profit/(loss) (Rm) 16,2 18,0 (14,8) Operating margin (%) 19,9 22,5 (17,3) Headline earnings (Rm) 14,1 12,9 10,3 Headline earnings per share (cents) 50,5 46,2 37,6 Growth in headline earnings per share (%) (22,9) (8,5) (18,6) IQuad is a specialised outsourcing company that focuses on delivering high-impact strategic outsourcing services such as treasury management, investment incentives and BEE verification services. Performance IQuad has experienced a disappointing year with an operating loss of R14,8 million and a decrease in headline earnings per share of 18,6% to 37,6 cents. The operating loss was mainly due to an impairment of goodwill of R27 million. Investment incentives posted lower headline earnings due to a transition by the Department of Trade and Industry from the SMEDP (Small and Medium Enterprise Development Programme) to the EIP (Enterprise Investment Programme). The Global Trade Solutions division performed well on the back of strong performance in customs duty recovery services and consistent performance by the treasury unit while the Verification Services division continued to perform below expectations. Chief executive officer Carl Kirstein FINANCIAL HIGHLIGHTS Year ended February Premium income (Rm) 22, ,2 Underwriting profit (Rm) 11,6 16,1 52,3 Underwriting margin (%) 52,0 38,3 60,7 Headline earnings (Rm) 2,3 4,6 10,5 Growth in headline earnings per share (%) (34,8) 100,0 128,3 African Unity Insurance provides illness-benefit management and a range of life assurance and funeral schemes for groups and individuals. Performance African Unity has maintained its momentum to generate a much improved R10,5 million in headline earnings over the past the year. The change in focus from sickness and retrenchment benefits to assistance benefits (funeral policies) has been beneficial and yielded strong returns for the 2011 year. The increase in headline earnings is mainly due to a better than expected claims experience from its Road Freight Administrators scheme. Prospects African Unity will continue to expand its client base through organic and acquisitive growth. The company will also aim to grow its group life, disability and medical aid gap cover products. Prospects IQuad has embarked on a restructuring process aimed at streamlining operations and increasing management focus on key opportunities. IQuad is expected to increase its earnings by focusing on high-impact opportunities within its current scope of business while continuing to look for an attractive sizeable acquisition.

18 16 REVIEW OF OPERATIONS (continued) Spirit Capital (Pty) Ltd (24%) Chief executive officers Kevin Homann and Darryl Horney FINANCIAL HIGHLIGHTS Year ended February Headline earnings (Rm) 8,7 7,6 8,7 Growth in headline earnings (%) 17,2 (12,6) 14,5 Spirit s portfolio consisted of the following unlisted investments at 28 February 2011: Percentage holding Spirit Corporate Finance (Pty) Ltd 100 Big Box Containers (Pty) Ltd 70 Ascot Site Solutions (Pty) Ltd 70 Tidy Files (Pty) Ltd 58 Perspex South Africa (Pty) Ltd 50 Xtruded Polymer Solutions (Pty) Ltd 50 Honey Fashion Accessories (Pty) Ltd 50 Annique Skincare Products (Pty) Ltd 50 Xline Aluminium Solutions (Pty) Ltd 40 Cerebos Ltd 12 Performance Spirit Capital increased its headline earnings by 14,5% to R8,7 million. This was mostly due to a good performance from Big Box Containers, Perspex South Africa and Ascot Catering. Xline Aluminium Solutions experienced tough trading conditions which negatively effected earnings. Spirit Capital acquired a 50% stake in both Honey Fashion Accessories (Pty) Ltd and Annique Skincare Products (Pty) Ltd. Prospects Spirit Capital will focus on acquisitive growth within its existing portfolio to enhance its earnings capability. Green Square Mining and Mining Contracting (Pty) Ltd (19%) Managing director Dries Barnard Green Square Mining and Mining Contracting (Pty) Ltd is a mining subcontractor in the Rustenburg area of South Africa. Paladin acquired a 19% interest in Green Square in February 2011 following the acquisition by Green Square of the businesses of two mining subcontracting companies. Performance and prospects No results have been reported for Green Square since the company is newly formed. The company remain focused on platinum mining in the greater Rustenburg area. Spirit Capital was established in 2002 as a niche corporate advisory boutique providing specialist corporate finance services to listed and privately owned companies. In 2006, Spirit Capital took a strategic decision to expand its business focus beyond corporate advisory services into proprietary listed and private equity investments to maximise its value creation opportunities. Spirit Capital is now structured into two strategic business units: private equity and corporate finance.

19 PALADIN CAPITAL ANNUAL REPORT corporate governance Paladin is managed by PSG Group Ltd ( PSG Group ) in terms of a management agreement and adheres to PSG Group s corporate governance policies (for more detail regarding these, refer to PSG Group s annual report at Paladin is committed to the four values underpinning good corporate governance responsibility, accountability, fairness and transparency as also advocated in the King Code of Governance Principles ( King III ). Paladin s corporate governance policies have been applied accordingly during the year under review. The group s major associated companies and subsidiaries are similarly committed having, inter alia, their own audit and risk, and remuneration committees. Due to the size and nature of the company, the board does not consider application of all principles contained within King III appropriate. Where specific principles have not been applied, explanations for these are contained within this section of the annual report. Board of directors There is a clear division of responsibility at board level to ensure a balance of power and authority, such that no one individual has unfettered powers of decision-making. The Paladin board of directors remains autonomous, albeit that there is a management agreement in place between Paladin and PSG Corporate Services (Pty) Ltd ( PSG Corporate Services ). Details of Paladin s directors are provided on page 4 of this annual report. The independence of non-executive directors is considered on an ongoing basis by the board as a whole. Although not all of the non-executive directors are classified as independent in terms of King lll, all of the non-executive directors are independent of thought and action. The board believes that all directors should own shares in the company. A director, as a shareholder, will thus share proportionally in the consequences of any good or bad decision-making. The board met four times during the past year as set out in the table below. Mr JF Mouton fills the role of nonexecutive chairman while Mr PJ Mouton has assumed operational responsibility together with the Paladin management team and he is therefore classified as an executive director. Mr WL Greeff fills the role of financial director. At the next board meeting, consideration will be given to the appointment of a lead independent director. Paladin does not have a nomination committee and director appointments are considered to be a matter for the board as a whole with all appointments being made in a formal and transparent manner. Due to the nature and size of the business, the experience of the directors and the knowledge that directors have regarding the particular business of the company, induction as well as ongoing training and development of directors are not driven through formal processes. Paladin s memorandum of incorporation requires one third of the non-executive directors of the company to retire by rotation and offer themselves for re-election by shareholders at the annual general meeting. In accordance with the company s memorandum of incorporation, Messrs KP Harris and JD Wiese retire by rotation and have offered themselves for re-election at the annual general meeting. Brief curricula vitae for these two directors are included on page 4 of this annual report. The memorandum of incorporation also requires that any director appointed additionally during the year shall retire at the following annual general meeting and shall be eligible for re-election. Accordingly Mr WL Greeff shall so retire and has offered himself for re-election. A brief curriculum vitae for Mr Greeff is included on page 4 of this annual report. Board attendance 13 Apr Jun Oct Feb 2011 JF Mouton (chairman) PJ Mouton WL Greeff* n/a n/a n/a FW Swart** n/a J Bezuidenhout*** n/a n/a n/a E de V Greyling JD Wiese A A KP Harris JA Holtzhausen Present A Absent with apology * Appointed effective 4 November 2010 ** Resigned effective 2 February 2011 *** Resigned effective 19 April 2010 The board s key roles and responsibilities are: Promoting the interests of stakeholders; Formulation and approval of strategy; Retaining effective control; and Ultimate accountability and responsibility for the performance and affairs of the company.

20 18 corporate governance (continued) The board does not conduct regular appraisals of its members and committees. Consideration will be given to same going forward. The board has appointed an audit and risk committee consisting of three independent non-executive directors namely Messrs E de V Greyling (chairman), KP Harris and JD Wiese. Messrs Greyling and Harris have been members since the listing of the company on the JSE Ltd while Mr Wiese was appointed on 14 April The audit and risk committee met twice during the year under review. Audit and risk committee attendance 9 Apr Oct 2010 E de V Greyling (chairman) KP Harris JD Wiese* n/a n/a Present * Appointed on 14 April 2011 The audit and risk committee has formal terms of reference and their report is on page 20 of this annual report. The board has not appointed a remuneration committee as PSG Corporate Services fulfils this role in terms of the management agreement. The remuneration paid to Messrs FW Swart and J Bezuidenhout is disclosed in the directors report on page 24 of this annual report. Messrs WL Greeff, JF Mouton, PJ Mouton and JA Holtzhausen received remuneration from PSG Group for services rendered to PSG Group and its subsidiaries in general. Executive committee The executive committee responsible for the management of Paladin comprises Messrs JF Mouton (chairman), CA Otto, WL Greeff, JA Holtzhausen, PJ Mouton, B van der Linde, PN de Waal, G van Deventer and WE Kitshoff. This committee meets regularly, at least twice a month, and is primarily responsible for the allocation and investing of the company s resources, including capital. Internal control and risk management Internal control and risk management is overseen by the audit and risk committee whose report is included on page 20 of this report. Based on the functions performed by the audit committee and PSG Corporate Services, in terms of the management agreement, the board is confident that the system of internal controls and current risk management processes are effective and aligned with the business needs and that it is not necessary to establish an internal audit function. Based on the size and nature of the business, the committee believes that certain governance mechanisms are not warranted. These include implementation of a combined assurance model, implementation of an IT governance framework and obtaining assurance on the effectiveness of the risk management process. As IT does not play a significant role in the sustainability of Paladin s business at a group level due to its nature and size, the investment and expenditure on IT is insignificant. The board is accordingly satisfied that the current systems of IT governance are appropriate. Integrated reporting and disclosure Although Paladin recognises that investments occasionally require specialised expertise and more active management assistance, Paladin is generally a passive investment company and tends not to get involved in the management of its underlying investments. Part of the philosophy of Paladin is to invest in companies with strong management. Paladin therefore relies on them to apply the principles of King III regarding sustainability reporting and disclosure, to the extent appropriate to their business. Going forward, Paladin will apply the principles of integrated reporting at company level to the extent that such principles are considered appropriate. Social responsibility Paladin also subscribes to the philosophy of black economic empowerment (BEE) and encourages its investments to undertake BEE initiatives too. Paladin has participated and facilitated BEE transactions through its strategic and trusted BEE partner, Thembeka Capital, an associated company of the group. Financial reporting and stakeholder communication Paladin s two major stakeholders are its shareholders and its investments. Ongoing communication and engagement is therefore focused on these groups and detailed below. Financial reports are provided to shareholders twice a year. Details regarding significant transactions undertaken are reported as required by the JSE Listings Requirements. Communication with investment companies is done on an ongoing basis. The annual general meeting serves as platform for interactive communication with stakeholders to the company. The company s communication officer s contact details are available on Paladin s website should stake holders wish to direct queries to the company.

21 PALADIN CAPITAL ANNUAL REPORT ANNUAL FINANCIAL STATEMENTS Report of the audit and risk committee 20 Approval of the annual financial statements 21 Declaration by the company secretary 21 Independent auditor s report 22 Directors report 23 Statements of financial position 26 Income statements 27 Statements of comprehensive income 28 Statements of changes in equity 29 Cash flow statements 31 Accounting policies 32 Notes to the annual financial statements 43 Annexure A Investments 68 Annexure B Segment report 71

22 20 report of the audit and risk committee in terms of section 270A(1)(F) of the companies act (61 of 1973) as amended The audit and risk committee reports that it has considered the matters set out in section 270A(5) of the Companies Act, 61 of 1973, as amended by the Corporate Laws Amendment Act, and is satisfied with the independence and objectivity of the external auditor, PricewaterhouseCoopers Inc. The committee has considered and recommended the fees payable to the external auditor and is satisfied with the extent of non-audit-related services performed. The committee has satisfied itself that the financial function, including the financial director, has appropriate expertise, experience and resources. Based on the information and explanations given by management and discussions with the independent external auditor regarding the results of their audit, the committee is satisfied that there was no material breakdown in the internal financial controls during the financial year under review. The committee has evaluated the financial statements of Paladin Capital Ltd and the group for the year ended 28 February 2011 and, based on the information provided to the committee, considers that the group complies, in all material respects, with the requirements of the Companies Act, 61 of 1973, as amended, and International Financial Reporting Standards. E de V Greyling Chairman 16 May 2011 Stellenbosch

23 approval of the annual financial statements PALADIN CAPITAL ANNUAL REPORT The directors are responsible for the maintenance of adequate accounting records and to prepare annual financial statements that fairly represent the state of affairs and the results of the group. The external auditors are responsible for independently auditing and reporting on the fair presentation of these annual financial statements. Management fulfils this responsibility primarily by establishing and maintaining accounting systems and practices adequately supported by internal accounting controls. Such controls provide assurance that the group s assets are safeguarded, that transactions are executed in accordance with management s authorisations and that the financial records are reliable. The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and in the manner required by the South African Companies Act Appropriate and recognised accounting policies are consistently applied. The audit and risk committee of the group meets regularly with the external auditor, as well as senior management, to evaluate matters concerning accounting policies, internal control, auditing and financial reporting. The external auditor has unrestricted access to all records, assets and personnel as well as to the audit and risk committee. The financial statements are prepared on the going concern basis, since the directors have every reason to believe that the group has adequate resources to continue for the foreseeable future. The financial statements set out on pages 23 to 71 were approved by the board of directors of Paladin Capital Ltd and are signed on its behalf by: JF Mouton Chairman WL Greeff Financial director 16 May 2011 Stellenbosch DECLARATION BY THE COMPANY SECRETARY We declare that, to the best of our knowledge, the company has lodged with the Registrar all such returns as are required of a public company in terms of the Companies Act and that all such returns are true, correct and up to date. PSG Corporate Services (Pty) Ltd Per A Wessels Company secretary 16 May 2011 Stellenbosch

24 22 independent auditor s report to the members of paladin capital ltd We have audited the group annual financial statements and annual financial statements of Paladin Capital Ltd, which comprise the consolidated and separate statements of financial position as at 28 February 2011, and the consolidated and separate income statements, and the consolidated and separate statements of comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes, and the directors report, as set out on pages 23 to 71. Directors responsibility for the financial statements The company s directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and in the manner required by the Companies Act of South Africa, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the consolidated and separate financial position of Paladin Capital Ltd as at 28 February 2011, and its consolidated and separate financial performance and its consolidated and separate cash flows for the year then ended in accordance with International Financial Reporting Standards and in the manner required by the Companies Act of South Africa. PricewaterhouseCoopers Inc. Director: P Burger Registered auditor Cape Town 16 May 2011

25 directors report PALADIN CAPITAL ANNUAL REPORT NATURE OF BUSINESS The company is a private equity company with a bias towards unlisted investments through its wholly owned subsidiary, Paladin Capital Financial Services (Pty) Ltd. OPERATING RESULTS The operating results and the state of affairs of the company and the group are fully set out in the attached income statements, statements of financial position and notes thereto. The group s profit attributable to equity holders amounted to R355 million (2010: R179,6 million). SHARE CAPITAL Details of the authorised and issued share capital appear in note 9 to the financial statements. During the year under review, the following changes to share capital were effected: Shares in issue at beginning of the year Shares issued at R18 per share for a 9,4% stake in Petmin Repurchase of shares issued to the participants of Paladin share incentive scheme at R20,26 per share ( ) Disposal of investment in Mainfin (Pty) Ltd through repurchase of Paladin Capital Ltd shares held by Mainfin (Pty) Ltd shareholders at R17,50 per share ( ) Shares issued to PSG Financial Services Ltd at R12,10 per share in exchange for shares in Thembeka Capital Ltd Total shares prior to share split Share split of 10 Paladin Capital Ltd shares issued for every 1 Paladin Capital Ltd share held Shares issued at R0,0001 per share 100 A renounceable rights offer to Paladin Capital Ltd shareholders at a subscription price of 117 cents per rights offer share, in the ratio of 1 rights offer share for every 3,47828 Paladin Capital Ltd shares held Acquisition of additional stake in Top Fix Holdings Ltd for 0,42424 Paladin Capital Ltd shares for one Top Fix Holdings Ltd share Issue of shares for cash at R2,22 per share Issue of shares at R2,14 per share in exchange for ordinary shares in Curro Holdings (Pty) Ltd DIVIDENDS No dividends were declared during the year under review (2010: Rnil). A dividend of 50 cents per share was paid during the prior financial year relating to the year ended 28 February DIRECTORS AND COMPANY SECRETARY Executive directors PJ Mouton (status changed from non-executive director to executive director on 13 April 2011) WL Greeff (appointed as financial director on 4 November 2010) FW Swart (resigned on 2 February 2011) J Bezuidenhout (resigned on 19 April 2010) Non-executive directors E de V Greyling JA Holtzhausen JF Mouton KP Harris JD Wiese

26 24 directors report (continued) Directors emoluments incurred by the company and its subsidiaries Fees Basic salaries Company contributions Performance related Total 2011 Total 2010 Cash-based remuneration R000 R000 R000 R000 R000 R000 Executive FW Swart J Bezuidenhout Non-executive E de V Greyling KP Harris JD Wiese Total Messrs WL Greeff, JF Mouton, PJ Mouton and JA Holtzhausen receive directors emoluments from PSG Group for services rendered to PSG Group and its subsidiaries. Shareholding of directors: The shareholding of directors in the issued share capital of the company as at 28 February 2011 was as follows: Beneficial Non-beneficial Total shareholding 2011 Total shareholding 2010 Direct Indirect Direct Indirect Number % Number % JF Mouton , ,84 JA Holtzhausen , ,75 FW Swart ,21 PJ Mouton , ,53 E de V Greyling , ,11 J Bezuidenhout ,00 WL Greeff ,04 Total , ,44

27 PALADIN CAPITAL ANNUAL REPORT There were no changes to directors shareholding between 28 February 2011 and the date of this report. Company secretary The company secretary is PSG Corporate Services (Pty) Ltd whose business and postal addresses are as follows: Business Postal 1st Floor, Ou Kollege PO Box Kerk Street Stellenbosch Stellenbosch, HOLDING COMPANY Paladin Capital Ltd s holding company is PSG Financial Services Ltd. The ultimate holding company is PSG Group Ltd. SUBSIDIARIES Details of the company s interest in subsidiaries are set out in Annexure A. SPECIAL RESOLUTIONS OF SUBSIDIARIES Details of special resolutions passed by subsidiaries during the year under review, which are material to the group, are as follows: Paladin Capital Financial Services (Pty) Ltd Amendment to the articles of association to allow the appointment of more than four directors. Paladin Capital Corporate Services (Pty) Ltd Adoption of main business and main objective as well as new memorandum and articles of association. AUDITOR PricewaterhouseCoopers Inc. will continue in office in accordance with Section 270(2) of the Companies Act (61 of 1973) as amended. EVENTS AFTER THE statement of financial position DATE There were no material events between 28 February 2011 and the date of this report.

28 26 statements of financial position as at 28 february 2011 Assets Property, plant and equipment Intangible assets GROUP COMPANY Notes R000 R000 R000 R000 Investment in subsidiary Investment in associated companies Deferred income tax Financial assets Loans and advances Receivables Cash and cash equivalents Total assets Equity and liabilities Equity attributable to owners of the parent Share capital Share premium Other reserves 10 ( ) ( ) (39 285) (39 285) Retained earnings Non-controlling interest Total equity Liabilities Deferred income tax Financial liabilities Borrowings Provisions for other liabilities and charges Trade and other payables Current income tax liabilities Total liabilities Total equity and liabilities

29 income statements for the year ended 28 february 2011 PALADIN CAPITAL ANNUAL REPORT GROUP COMPANY Notes R000 R000 R000 R000 Income Investment income Education income Fee income Other operating income Total income Expenses Administration and other expenses Performance fee Total expenses Share of profits of associated companies Results of operating activities Finance costs 20 (12 784) (13 638) (4 807) Profit/(loss) on disposal of associated companies (61) 400 Profit before taxation from continued operations Taxation 21 (33 039) (15) Profit/(loss) for the year from continued operations (15) Net profit for the year from discontinued operations (15) Profit/(loss) attributable to: Owners of the parent (15) Non-controlling interest (15) Earnings per share (cents) 22 Basic and diluted 61,4 36,3

30 28 statements of comprehensive income for the year ended 28 february 2011 GROUP COMPANY R000 R000 R000 R000 Profit/(loss) for the year (15) Other comprehensive income for the year, net of taxation Share of other comprehensive income of associated companies Total comprehensive income/(loss) for the year (15) Attributable to: Owners of the parent (15) Non-controlling interest (15)

31 statements of changes in equity for the year ended 28 february 2011 PALADIN CAPITAL ANNUAL REPORT Share capital Share premium Other reserves Retained earnings Non controlling interest GROUP R000 R000 R000 R000 R000 R000 Balance at 1 March Comprehensive income Profit for the year Other comprehensive income Share of other comprehensive income of associated companies Total comprehensive income Transactions with owners ( ) (9 903) (1 814) Issue of shares Share issue cost (1 994) (1 994) Disposal/dilution of subsidiaries (1 814) (1 814) Dividend paid (9 903) (9 903) Common control transaction reserve* ( ) ( ) Balance at 28 February ( ) Total Comprehensive income Profit for the year Other comprehensive income Share of other comprehensive income of associated companies Total comprehensive income Other reserve movements of associated companies (1 938) (1 938) Transactions with owners Issue of share capital Share issue cost (42) (42) Acquisition of subsidiary Balance at 28 February ( ) * The common control transaction reserve arose as a result of the Paladin restructuring in the prior year.

32 30 statements of changes in equity (continued) for the year ended 28 february 2011 Share capital Share premium Other reserves Retained earnings COMPANY R000 R000 R000 R000 R000 Balance at 1 March 2009 Comprehensive income Profit for the year Transactions with owners Issue of shares Share issue cost (1 994) (1 994) Other reserve movement (39 285) (39 285) Balance at 28 February (39 285) Total Comprehensive income Loss for the year (15) (15) Transactions with owners Issue of shares Share issue cost (42) (42) Balance at 28 February (39 285)

33 cash flow statements for the year ended 28 february 2011 PALADIN CAPITAL ANNUAL REPORT GROUP COMPANY Notes R000 R000 R000 R000 Cash flows from operating activities Cash generated/(utilised) by operating activities (3 232) (1 806) Interest income Dividend income* Finance costs (12 784) (13 638) (4 807) Taxation paid 27.2 (31 346) (95) Net cash flow from operating activities (3 327) Cash flows from investing activities Acquisition of subsidiaries 27.3 (48 555) Acquisition of/loans advanced to associated companies (80 379) ( ) Acquisition of/loans advanced to subsidiary companies ( ) Proceeds from sale of associated companies Acquisition of intangibles (893) Acquisition of preference shares (3 581) Proceeds from sale of financial assets Proceeds from sale of subsidiaries Proceeds from settlement of preference shares Purchases of property, plant and equipment ( ) Loans (advanced)/repaid (270) 296 (12,168) (12) Net cash flow from investing activities ( ) (12 168) ( ) Cash flows from financing activities Dividends and capital distributions paid to group shareholders (9 903) Increase in borrowings Repayment of borrowings (38 234) ( } Shares issued Net cash flow from financing activities Net increase/(decrease) in cash and cash equivalents (1 590) Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year * The 2010 comparative numbers have been restated by re-allocating dividend income previously included in Cash flows from investing activities to Cash flows from operating activities.

34 32 accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented. BASIS OF PREPARATION The consolidated and company financial statements of Paladin Capital Ltd have been prepared in accordance with International Financial Reporting Standards (IFRS) and the manner required by the Companies Act of South Africa. The financial statements have been prepared under the historical cost convention. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the company s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed further on in the accounting policies. STANDARDS, INTERPRETATIONS AND AMENDMENTS TO PUBLISHED STANDARDS THAT ARE EFFECTIVE FOR THE FIRST TIME IN 2011 New and amended standards adopted by the group Amendments to IFRS 2 Group Cash-settled Share-based Payment Transactions (effective January 2010) The amendment clarifies the accounting for group cash-settled share-based payment transactions. The entity receiving the goods or services shall measure the share-based payment transaction as equity-settled only when the awards granted are its own equity instruments, or the entity has no obligation to settle the share-based payment transaction. The entity settling a share-based payment transaction when another entity in the group receives the goods or services recognises the transaction as equity-settled only if it is settled in its own equity instruments. In all other cases, the transaction is accounted for as cash-settled. The group and company adopted the amendment retrospectively from 1 March IFRS 3 Revised Business Combinations (effective July 2009) The revised standard continues to apply the acquisition method to business combinations but with some significant changes compared with IFRS 3. For example, all payments to purchase a business are recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently remeasured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest s proportionate share of the acquiree s net assets. All acquisition-related costs should be expensed. The group applied the revised standard prospectively from 1 March IAS 27 Revised Consolidated and Separate Financial Statements (effective July 2009) The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in profit or loss. The group applied the revised standard prospectively to transactions with non-controlling interests from 1 March This resulted in a change in accounting policy, since the group previously treated non-controlling interests as parties external to the group and subsequent to the revision treated non-controlling interests as equity holders. IFRIC 17 Distribution of Non-cash Assets to Owners (effective July 2009) This interpretation provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders either as a distribution of reserves or as dividends. IFRS 5 has also been amended to require that assets are classified as held for distribution only when they are available for distribution in their present condition and the distribution is highly probable. The group and company applied the interpretation from 1 March This interpretation had no impact on the current year s reported results. New and amended standards not currently relevant to the group s operations Amendments to IAS 32 Classification of Rights Issues (effective February 2010) Amendments to IAS 39 Financial Instruments: Recognition and Measurement Eligible Hedged Items (effective July 2009) Amendment to IFRIC 9 Reassessment of Embedded Derivatives and IAS 39 Financial Instruments: Recognition and Measurement (effective July 2009)

35 PALADIN CAPITAL ANNUAL REPORT IFRIC 18 Transfers of Assets from Customers (effective July 2009) IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (effective July 2010) AC 504 IAS 19 (AC 116) The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction in the South African Pension Fund Environment (effective April 2009) Improvements to IFRS 2008 (effective July 2009) Improvements to IFRS 2009 (effective July 2009 and January 2010) Improvements to IFRS 2010 (effective July 2010) The implications of these statements have no impact on measurements of assets and liabilities or disclosures in the current or prior years. STANDARDS, INTERPRETATIONS AND AMENDMENTS TO PUBLISHED STANDARDS THAT ARE NOT YET EFFECTIVE Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the group s accounting periods beginning on or after 1 March 2010 or later periods, but which the group has not early adopted, are as follows: Amendments to IFRS 7 Financial Instruments: Disclosures (effective July 2011) IFRS 9 Financial Instruments (effective January 2013) This standard improves and simplifies the approach for classification and measurement of financial assets compared with the requirements of IAS 39. IFRS 9 applies a consistent approach to classifying financial assets and replaces the numerous categories of financial assets in IAS 39, each of which had its own classification criteria. IFRS 9 also results in one impairment method, replacing the numerous impairment methods in IAS 39 that arise from the different classification categories. Amendments to IAS 24 Related Party Disclosures (effective January 2011) Improvements to IFRS 2010 (effective January 2011) Management is in the process of assessing the impact of these amendments and standards on the reported results of the group and the company. GROUP FINANCIAL STATEMENTS The group annual financial statements comprise those of the company, its subsidiaries and associated companies. Subsidiaries Subsidiaries are all entities (including special-purpose entities and collective investment schemes) over which the group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group and are no longer consolidated from the date on which control ceases. The group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest s proportionate share of the acquiree s net assets. If a business combination is achieved in stages, the acquisition date fair value of the acquirer s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date through profit and loss. Investments in subsidiaries are accounted for at cost less impairment. Cost is adjusted to reflect changes in consideration arising from contingent consideration amendments. Cost also includes direct attributable costs of investment.

36 34 accounting policies (continued) The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the group s share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the income statement. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed, where necessary, to ensure consistency with the policies adopted by the group. Investment in subsidiaries in the company financials are carried at cost less provision for impairment. Transactions and non-controlling interests The group treats transactions with non-controlling interests as transactions with equity owners of the group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. When the group ceases to have control or significant influence, any retained interest in the entity is re-measured to its fair value, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss where appropriate. Associated companies Associated companies are all entities over which the group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associated companies are accounted for by the equity method of accounting and are initially recognised at cost. The group s investment in associated companies includes goodwill (net of any accumulated impairment loss) identified on acquisition (see note 4). The results of associated companies are accounted for according to the equity method, based on their most recent audited financial statements or latest management information. Where the associated company is a significant component and the latest available information was unaudited, audit procedures were performed on such information. Equity accounting involves recognising the group s share of its associated companies post-acquisition profits or losses in the income statement, and its share of post-acquisition movements in other comprehensive income, in the statement of comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the group s share of losses in an associated company equals or exceeds its interest in the associated company, including any other unsecured receivables, the group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associated company. Unrealised gains on transactions between the group and its associated companies are eliminated to the extent of the group s interest in the associated companies. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Cross-holdings between the group and its associates are eliminated in accordance with normal consolidation procedure. Associates accounting policies have been changed where necessary to ensure consistency with the policies adopted by the group. Dilution gains and losses arising in investment in associated companies are recognised in the income statement. After applying the equity method, investments in associated companies are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised

37 PALADIN CAPITAL ANNUAL REPORT for the amount by which the asset s carrying value exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. Certain associated companies have year-ends that differ from that of the group. In such circumstances, the results of these companies are either accounted for from the latest management accounts or the latest published results. Loans and preference shares to associated companies are disclosed as part of the carrying amount of the investment. Investments in associated companies are carried at cost less provision for impairment in the company. Accounting for the company s acquisition of the controlling interest in subsidiaries and businesses under common control The IFRS on business combinations (IFRS 3) does not apply to business combinations effected between parties that are ultimately controlled by the same entity, otherwise known as common control transactions. The company has elected to apply the principle of predecessor accounting, as determined by the generally accepted accounting principles in the United States of America, to such transactions. The result of operations for the period is presented as though the acquisition of the company s controlling interest through a transaction under common control had occurred at the beginning of the comparative period. The effects of intercompany transactions have been eliminated in determining the results of operations for the period prior to the acquisition of the controlling interest, meaning that those are on substantially the same basis as the results of operations for the period after the acquisition of the controlling interest. Similarly, the consolidated statement of financial position with related notes has been presented as though the assets and liabilities, recorded at predecessor values, of the combining entities had been transferred at the beginning of the comparative period. Therefore, no restatement of the acquiree s assets and liabilities to fair value was required. Accordingly financial statements and financial information presented for prior periods are restated as if the transaction occurred at the beginning of the comparative period. The difference between the consideration given and the predecessor values is recognised directly in equity in a separate reserve. As a result, no goodwill is recognised on acquisition. SEGMENT REPORTING Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the executive committee that makes strategic decisions. FOREIGN CURRENCY TRANSLATION Functional and presentation currency Items included in the financial statements of each of the company entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency ). The consolidated financial statements are presented in South African rand, which is the company s functional and presentation currency. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at historical cost less accumulated depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

38 36 accounting policies (continued) Depreciation is calculated on the straight-line method at rates considered appropriate to reduce book values to estimated residual values over the useful lives of the assets, as follows: Vehicles and premises equipment Office equipment Computer equipment 5 6 years 5 7 years 3 years Land is not depreciated as it is deemed to have an indefinite life. The residual value of buildings exceeds the carrying value thereof and accordingly no depreciation is provided on same. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. INTANGIBLE ASSETS Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the group s share of the net identifiable assets of the acquired subsidiary/associated company undertaking at the date of acquisition. Goodwill is reported in the statement of financial position as an intangible asset. Goodwill on acquisition of associated companies is included in investments in associated companies. Goodwill is tested annually for impairment and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. The groups of cash-generating units are not larger than operating segments. An excess of the acquirer s interest in the net fair value of acquiree s identifiable assets, liabilities and contingent liabilities arises where the net assets of a subsidiary or associate at the date of acquisition, fairly valued, exceed the cost of the acquisition. This excess arising on acquisitions is taken directly to income. Trademarks Acquired patents, trademarks and licences are shown at cost less accumulated amortisation and impairment. Amortisation is calculated using the straight-line method over their estimated useful lives, which varies from 5 to 20 years and is reassessed annually. The carrying amount of each cash-generating unit is reviewed for impairment when an impairment indicator is identified. Customer lists Acquired customer lists are shown at cost less accumulated amortisation and impairment. Amortisation is calculated using the straight-line method over their estimated useful lives ranging between 5 and 20 years, which reflect the expected life of the book of business acquired. The carrying amount of each cash-generating unit is reviewed for impairment when an impairment indicator is identified. IMPAIRMENT OF NON-FINANCIAL ASSETS Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for

39 PALADIN CAPITAL ANNUAL REPORT which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. FINANCIAL INSTRUMENTS Financial instruments recognised on the statement of financial position include financial assets, receivables, cash and cash equivalents, financial liabilities and trade and other payables. The particular recognition methods adopted are disclosed in the individual policy statements associated with each item. OFFSETTING FINANCIAL INSTRUMENTS Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. FINANCIAL ASSETS The group classifies its financial assets into the following categories: financial assets at fair value through profit or loss and loans and advances. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. Financial assets at fair value through profit or loss This category has two subcategories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Financial assets designated at fair value through profit or loss at inception are those that are managed and whose performance is evaluated on a fair value basis. Information about these financial assets is provided internally on a fair value basis to the group s key management personnel. Loans and advances Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than those that the group intends to sell in the short term. Loans and advances are carried at amortised cost using the effective-interest method. Specific provisions are made against identified doubtful advances. Recognition and measurement of financial assets Purchases and sales of financial assets are recognised on trade date the date on which the group commits to purchase or sell the asset. Financial assets not carried at fair value through profit or loss, are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the group has transferred substantially all risks and rewards of ownership. Financial assets at fair value through profit or loss are subsequently carried at fair value. Realised and unrealised gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are included in the income statement in the period in which they arise. Loans and advances are subsequently carried at amortised cost using the effective-interest method. Interest on loans and advances calculated using the effective-interest method is recognised in the income statement as part of investment income. Dividends on financial assets at fair value through profit or loss are recognised in the income statement as part of investment income when the group s right to receive payment is established. The fair values of quoted financial assets are based on current bid prices. If the market for a financial asset is not active, the group establishes fair value by using valuation techniques. These include the use of recent arm s length transactions, reference to other instruments that are substantially the same, and discounted cash flow analysis refined to reflect the issuer s specific circumstances. The group does not apply hedge accounting.

40 38 accounting policies (continued) Impairment of financial assets Loans and advances are considered impaired if, and only if, there is objective evidence of impairment as a result of events that occurred after initial asset recognition (known as loss events) and these loss events have an adverse impact on the assets estimated future cash flows that can be reliably measured. Objective evidence that loans and advances may be impaired, includes breach of contract, such as a default or delinquency in interest or principal payments. In this regard instalments past due date are considered in breach of contract. The amount of the impairment loss is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Impairment losses are recognised in the income statement, and reversed through the income statement. RECEIVABLES Receivables are initially measured at fair value and subsequently recognised at amortised cost using the effective interest rate method, less provision for impairment. A provision for impairment is established when there is objective evidence that the group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the receivable is impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The movement in the amount of the provision is recognised in the income statement. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash in hand, other deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are included within borrowings on the statement of financial position. SHARE CAPITAL Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from the proceeds, net of tax. Where any group company purchases the company s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the company s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold, reissued or otherwise disposed of, any consideration received is included in equity attributable to the company s equity holders, net of any directly attributable incremental transaction costs and the related income tax effects. FINANCIAL LIABILITIES A financial liability is any liability that is a contractual obligation to deliver cash or another financial asset to another entity. Financial liabilities include borrowings and trade and other payables. Financial liabilities are initially recognised at fair value less transaction costs that are directly attributable to the raising of the funds, for all financial liabilities carried at amortised cost. All financial liabilities measured at fair value through profit or loss are initially recognised at fair value. The best evidence of the fair value at initial recognition is the transaction price (i.e. the fair value of the consideration received) unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective-interest method.

41 PALADIN CAPITAL ANNUAL REPORT Preference shares, which are mandatorily redeemable on a specific date, are classified as liabilities. The dividends on these preference shares are recognised in the income statement as interest expense. CURRENT AND DEFERRED INCOME TAX The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive income or directly in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the reporting date in the countries where the group s subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions, where appropriate, on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the reporting date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associated companies, except where the group controls the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. EMPLOYEE BENEFITS Short-term employee benefits The cost of short-term employee benefits (those payable within 12 months after the service is rendered, such as paid vacation leave and sick leave, bonuses, and non-monetary benefits such as medical care) is recognised in the period in which the service is rendered and is not discounted. Annual leave Employee entitlements to annual leave are recognised when they accrue to employees. An accrual is made for the estimated annual leave as a result of services rendered by employees up to the reporting date. SHARE BASED COMPENSATION The group operates a cash-settled scheme where the calculation of performance fees in terms of the management agreement with PSG Corporate Services (Pty) Ltd is based on the group share price. The fair value of the liability incurred for services received is recognised as an expense. Until the liability is settled, the group re-measures the fair value of the liability at each reporting date and at the date of settlement, with any changes in value recognised in profit or loss for the period.

42 40 accounting policies (continued) PROVISIONS Provisions are recognised when: the group has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as an interest expense. REVENUE RECOGNITION Revenue comprises the fair value of the consideration received or receivable for services in the ordinary course of the group s activities. Revenue is shown net of value added tax, after eliminating revenue within the group. Revenue is recognised as follows: Rendering of services Education income is recognised by reference to the stage of completion of the transaction at the end of the reporting period. No profit is recognised when the outcome of a transaction cannot be estimated reliably. Fee income is recognised when the related company is unconditionally entitled thereto and in the accounting period in which the services are rendered with reference to completion of the specific transaction. No profit is recognised when the outcome of a transaction cannot be estimated reliably. Interest income Interest income for financial assets that are not classified as at fair value through profit or loss is recognised using the effective-interest method. When a receivable is impaired, the group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument and continues unwinding discount as interest income. Interest income from financial assets that are classified as at fair value through profit or loss is included in investment income. Dividend income Dividend income is recognised when the right to receive payment is established. Dividend income from financial assets that are classified as at fair value through profit or loss is included in investment income. LEASES Leases in which a significant portion of the risks and rewards of ownership are 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. BORROWING COSTS Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset until such time as the asset is ready for its intended use. The amount of borrowing costs eligible for capitalisation is determined as follows: Actual borrowing costs on funds specifically borrowed for the purpose of obtaining a qualifying asset less any temporary investment of those borrowings. Weighted average of the borrowing costs applicable to the entity on funds generally borrowed for the purpose of obtaining a qualifying asset. The borrowing costs capitalised do not exceed the total borrowing costs incurred. The capitalisation of borrowing costs commences when: expenditures for the asset have occurred; borrowing costs have been incurred; and activities that are necessary to prepare the asset for its intended use or sale are in progress.

43 PALADIN CAPITAL ANNUAL REPORT Capitalisation is suspended during extended periods in which active development is interrupted. Capitalisation ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. All other borrowing costs are recognised as an expense in the period in which they are incurred. DIVIDEND DISTRIBUTIONS Dividend distributions to the company s shareholders are recognised as a liability in the period in which the dividends are approved by the company s board of directors. SECONDARY TAX ON COMPANIES (STC) South African resident companies are subject to a duel corporate tax system, one part of the tax being levied on taxable income and the other, a secondary tax, on distributed income. A company incurs STC charges on the declaration or deemed declaration of dividends (as defined under tax law) to its shareholders. STC is not a withholding tax on shareholders, but a tax on companies. The STC tax consequence of dividends is recognised as a taxation charge in the income statement in the same period that the related dividend is accrued as a liability. The STC liability is reduced by dividends received during the dividend cycle. Where dividends declared exceed the dividends received during a cycle, STC is payable at the current STC rate on the net amount. Where dividends received exceed dividends declared within a cycle, there is no liability to pay STC. The potential tax benefit related to excess dividends is carried forward to the next dividend cycle as an STC credit. Deferred tax assets are recognised on unutilised STC credits to the extent that it is probable that the group will declare dividends in the following year to utilise such STC credits. CONTINGENCIES A contingent liability is either a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the company or a present obligation that arises from past events but it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount of the obligation cannot be measured with sufficient reliability. These contingent liabilities are not recognised in the statement of financial position but disclosed in the notes to the financial statements. A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. These contingent assets are not recognised in the statement of financial position but are disclosed in the notes to the financial statements if the inflow of financial benefits is probable. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under circumstances. Estimated impairment of goodwill The group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy on goodwill. The recoverable amounts of cash-generating units have been determined based on value in use and fair value less cost to sell calculations. These calculations require the use of estimates (see note 2).

44 42 accounting policies (continued) Equity accounting The group accounts for certain investments as associates although the group holds less than 20 per cent of the issued share capital. This is based on the group s ability to exercise significant influence over the investments through its voting power (both through its equity holding and its representation on the board of directors), its participation in the strategic, financial and operational, decisions of the investments and the fact that the influence is also acknowledged by the investments. Directors valuation of unlisted associated companies Directors valuation of unlisted associated companies are determined with reference to market prices, assessing the fair value of underlying investments as well as the published net asset value or valuation techniques. Valuation techniques used include applying a market related price-earnings ratio to earnings or performing discounted cash flow models to the expected cash flows. The following assumptions are used in the valuation models: Assumptions Range Range Weighted average cost of capital 14% 20% 14% 19% Growth rate 0% 25% 0% 25% Terminal growth rate 5% 6% Risk-free rate 8,8% 8,3% Impairment of investment in associated companies An impairment of investment in associated companies is considered when the fair value is below its carrying value. In determination of whether the decline is significant or prolonged, the following factors may be considered: normal volatility in share price, the financial health of the investee, sector performance, and changes in operational and financing cash flow. An impairment loss is recognised for the amount by which the investment in associated company s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. The value in use is calculated with reference to the assumptions noted above. The underlying market values of investments in listed entities held by associated companies are also considered in assessing the carrying values. The directors are satisfied that the company s investments are fairly stated. Acquisition of associated companies Details regarding significant new investments in associated companies are disclosed in note 4. Furthermore, the group s interest in certain already existing associated companies was also increased. In accounting for these transactions, management had to apply judgement in allocating the purchase price to the identifiable assets and liabilities of the associated companies acquired, or the portion acquired when an additional interest was acquired.

45 notes to the annual financial statements for the year ended 28 february 2011 PALADIN CAPITAL ANNUAL REPORT Vehicles and Land and premises Office Computer buildings equipment equipment equipment Total GROUP R000 R000 R000 R000 R PROPERTY, PLANT AND EQUIPMENT As at 28 February 2011 Cost Accumulated depreciation (25) (416) (767) (570) (1 778) Balance at end of year Reconciliation Balance at beginning of year Additions Depreciation (25) (416) (767) (570) (1 778) Acquisition of subsidiary Balance at end of year Details of land and buildings are available at the registered offices of the relevant group companies. The market value of land and buildings at 28 February 2011 approximates the carrying value. GROUP COMPANY R000 R000 R000 R000 Property pledged as security Land and buildings Vehicles and premises equipment Office equipment 736 Computer equipment Customer Trademarks lists and other Goodwill Total GROUP R000 R000 R000 R INTANGIBLE ASSETS As at 28 February 2011 Cost Accumulated amortisation (806) (109) (915) Balance at end of year Reconciliation Balance at beginning of year Additions Acquisition of subsidiaries Amortisation (806) (109) (915) Balance at end of year

46 44 notes to the annual financial statements (continued) for the year ended 28 february INTANGIBLE ASSETS (continued) Details on impairment tests performed GROUP R000 R000 Curro Holdings (Pty) Ltd The recoverable amount is determined based on the higher of fair value less cost to sell and value-in-use calculations. The key assumptions used for the value-in-use calculations are as follows: % % Risk-free rate 8,8 Terminal value PE multiple 8,0 Discount rate 31,0 The risk-free rate is determined with reference to the risk bond yields. The terminal value PE (price-earnings) multiple has been compared to that of other education companies and is deemed to be reasonable. The discount rate has been determined using the capital asset pricing model. COMPANY R000 R INVESTMENT IN SUBSIDIARY Unlisted shares at cost Paladin Capital Financial Services (Pty) Ltd Refer to Annexure A for further information.

47 PALADIN CAPITAL ANNUAL REPORT GROUP R000 R INVESTMENT IN ASSOCIATED COMPANIES Carrying value of ordinary share investments Listed Unlisted Preference share investments Unlisted Thembeka Crete Holdings (Pty) Ltd The preference shares are secured, carry a dividend rate of prime plus 4% and capital and accrued dividends are redeemable on 1 December The security is 25,83% of Precrete-Nozala (Pty) Ltd issued share capital. 8 Mile Investments 41 (Pty) Ltd The preference shares were secured and carried a fixed dividend rate of 22,2% payable annually on 1 June. The outstanding balance was settled during the year under review. Thembeka Brand Holdings (Pty) Ltd The preference shares were unsecured and carried a fixed dividend rate of 11,85%. The outstanding balance was settled during the year under review. Ordinary and preference share investments

48 46 notes to the annual financial statements (continued) for the year ended 28 february 2011 GROUP R000 R INVESTMENT IN ASSOCIATED COMPANIES (continued) Ordinary and preference share investments Loans GRW Holdings (Pty) Ltd Unsecured loan bearing interest at prime, and is repayable in equal monthly instalments. GRW Holdings (Pty) Ltd Secured loan bearing interest at prime plus 2%. The outstanding balance was repaid during the year under review. AIC Holding Company (Pty) Ltd Unsecured loan, bearing no interest and with no fixed repayment terms. Spirit Capital (Pty) Ltd Unsecured loan (except for R5 million in the prior year which was repaid during the current year) bearing interest at prime plus 1%, and with no fixed repayment terms. Spirit Corporate Finance (Pty) Ltd* Secured loan bearing interest at prime plus 4%, and is repayable on 31 March Spirit Corporate Finance (Pty) Ltd* Secured loan bearing interest at prime plus 6%, and is repayable on 28 February Spirit Corporate Finance (Pty) Ltd* Secured loan bearing interest at 20%, and is repayable on 30 April Green Square Mining and Mining Contracting (Pty) Ltd Unsecured loan bearing no interest and with no fixed repayment terms * A subsidiary company of Spirit Capital (Pty) Ltd

49 PALADIN CAPITAL ANNUAL REPORT GROUP R000 R INVESTMENT IN ASSOCIATED COMPANIES (continued) Loans and preference shares Unlisted Current portion Non-current portion Reconciliation Carrying value at beginning of year Equity accounted earnings Share of profit after tax Impairment charges (47 090) (60 870) Movement in investment value ( ) Dividends received (42 949) (34 697) Acquisitions Disposals ( ) (21 765) Transfer (to)/from subsidiaries (52 220) Share of movement in other comprehensive income of associated companies Other (1 938) Carrying value at end of year Market value of listed investments The group disposed of its stake in CIC Holdings Ltd and Lesotho Milling Company (Pty) Ltd during the year under review. Significant acquisitions during the previous year included an investment in Curro Holdings (Pty) Ltd to the amount of R52 million. The impairment charges recognised on the investment in associated companies were calculated on the basis set out in the accounting policy, and making use of the assumptions set out in the critical accounting estimates and judgements note in the accounting policies. The investment in Erbacon Investment Holdings Ltd, a construction company which was severely affected by the economic recession, was impaired by R34,7 million during the year under review. The investment in GRW Holdings (Pty) Ltd, an aluminium and steel road tanker manufacturer which was also severely affected by the downturn in the economy, was impaired by R52 million during the previous financial year.

50 48 notes to the annual financial statements (continued) for the year ended 28 february INVESTMENT IN ASSOCIATED COMPANIES (continued) Results of operating activities, as presented in the group s income statement, include share of profits of associated companies as a significant part of the group s business activities is performed through associated companies. The comparatives have been presented on a consistent basis. The impairment charges recognised on the investment in associated companies can be allocated to the operating segments as follows: Mining, construction and related services (34 686) (53 079) Services (12 404) Other (7 791) (47 090) (60 870) GROUP COMPANY R000 R000 R000 R000 Refer to Annexure A for further information on associated companies. 5. DEFERRED INCOME TAX Deferred income tax assets Deferred income tax liabilities (18 476) Net deferred income tax (liabilities)/assets (11 096) Deferred income tax assets To be recovered within 12 months To be recovered after 12 months Deferred income tax liabilities To be recovered within 12 months (436) To be recovered after 12 months (18 040) (18 476)

51 PALADIN CAPITAL ANNUAL REPORT DEFERRED INCOME TAX (continued) Deferred tax assets Provisions Tax losses and STC Unrealised losses Income received in advance and other differences Total R000 R000 R000 R000 R000 The movement in deferred tax assets during the year was as follows: GROUP At 1 March Credit/(charges) to income statement At 28 February Credit/(charges) to income statement (980) Acquisition of subsidiary At 28 February COMPANY At 1 March 2009 Credit to income statement At 28 February At 28 February Deferred tax liabilities Revaluations Accelerated capital allowances Total R000 R000 R000 The movement in deferred tax liabilities during the year was as follows: GROUP At 28 February 2010 Credit to income statement 223 (1 688) (1 465) Acquisition of subsidiary (15 402) (1 609) (17 011) At 28 February 2011 (15 179) (3 297) (18 476) The STC liability, should all distributable reserves be paid out, amounts to R52,4 million (2010: R26,1 million). The deferred income tax assets and liabilities were calculated on all temporary differences under the liability method using an effective tax rate of 28% (2010: 28%). For STC credits the rate used was 10% (2010: 10%). The recoverability of the deferred income tax assets were assessed as set out in the accounting policies.

52 50 notes to the annual financial statements (continued) for the year ended 28 february 2011 GROUP COMPANY R000 R000 R000 R LOANS AND ADVANCES Unsecured loans Current portion Non-current portion The unsecured loan in the group carries interest at prime plus 4%. The unsecured loan in the company at 28 February 2011 is an advance to Paladin Capital Corporate Services (Pty) Ltd and carries no interest and have no fixed terms of repayment. 7. RECEIVABLES Trade receivables Prepayments and sundry debtors Current portion Non-current portion CASH AND CASH EQUIVALENTS Cash at bank and money market funds The effective interest rate on short-term deposits was 6,1% (2010: 9%). These deposits are available on call. 9. SHARE CAPITAL Authorised (2010: ) shares with a par value of 0,01 cent each Issued (2010: ) shares with a par value of 0,01 cent each Refer to directors report for the details of shares issued. All shares issued are fully paid. Unissued shares limited to 50% of the number of the company s shares in issue at 28 February 2010, are placed under the control of the directors until the next annual general meeting. The directors are authorised to buy back shares subject to certain limitations and JSE requirements.

53 PALADIN CAPITAL ANNUAL REPORT Common control transaction reserve Other Total GROUP R000 R000 R OTHER RESERVES Balance as at 1 March 2009 Share of movement in reserves of associated companies Common control transaction reserve ( ) ( ) Balance as at 28 February 2010 ( ) ( ) Share of movement in reserves of associated companies (1 938) (1 938) Balance as at 28 February 2011 ( ) ( ) COMPANY Balance as at 1 March 2009 Other (39 285) (39 285) Balance as at 28 February 2010 (39 285) (39 285) Balance as at 28 February 2011 (39 285) (39 285) 11. NON-CONTROLLING INTEREST Total comprehensive income 112 Acquisition of subsidiary GROUP COMPANY R000 R000 R000 R BORROWINGS Non-current Unsecured loans Secured loans Current Bank overdraft Unsecured loans Secured loans Total borrowings The carrying value of short-term borrowings approximates their fair value.

54 52 notes to the annual financial statements (continued) for the year ended 28 february BORROWINGS (continued) Secured loans include cumulative, redeemable preference shares with a carrying value of R110,6 million issued by a subsidiary company and carry an effective dividend rate of 11,4% p.a. fixed. These preference shares are redeemable after five years from the date of issue and are secured by the pledge of listed shares and cash. The balance of secured loans comprises bank borrowings which carry interest ranging from prime less 1,45% to prime plus 4,85% and comprise fixed and floating rates. These loans are secured by property, plant and equipment (see note 1). In the group, the unsecured loans at 28 February 2010 consisted of a loan from PSG Corporate Services (Pty) Ltd and carried interest at prime plus 50 bps. The loan was repaid during March The unsecured loan in the company is from Paladin Capital Financial Services (Pty) Ltd, carries no interest and has no repayment terms. GROUP R000 R PROVISIONS FOR OTHER LIABILITIES AND CHARGES Balance at beginning of year Additional provisions Current portion Non-current portion Movements in the provisions were charged to income. PSG Corporate Services (Pty) Ltd is entitled to a performance fee calculated annually, based on the appreciation of Paladin Capital Ltd s share price, with the first measurement date on 28 February Management deemed it prudent to raise a provision for the performance fee in the amount of R64,7 million (2010: Rnil) based on a price of R2,65 per Paladin share. GROUP COMPANY R000 R000 R000 R TRADE AND OTHER PAYABLES Accounts payable and accruals Deferred revenue Subsidiary company purchase consideration payable Entrance deposits 443 Operating lease liability Current portion Non-current portion

55 PALADIN CAPITAL ANNUAL REPORT GROUP COMPANY R000 R000 R000 R INVESTMENT INCOME Interest income Loans and advances Cash and short-term funds Dividend income Preference shares debt securities Associated companies Investment income EDUCATION INCOME Study fees Other income 294 Fund-raising income FEE INCOME Commissions and fees OTHER OPERATING INCOME* Profit on disposal of equity instruments * The 2010 comparative numbers have been restated to re-allocate Profit/(loss) on disposal of associated companies to the face of the income statement.

56 54 notes to the annual financial statements (continued) for the year ended 28 february 2011 GROUP COMPANY R000 R000 R000 R ADMINISTRATION AND OTHER EXPENSES Expenses by nature Depreciation Land and buildings 25 Vehicles and premises equipment 416 Office equipment 767 Computer equipment 570 Amortisation of intangible assets 915 Operating lease rentals Properties Other 700 Auditor s remuneration Audit services current year 97 underprovision prior year Tax services 109 Salaries, wages and allowances Directors remuneration Impairment charges Investment in subsidiaries 9 Loans and advances Other expenses Management fees Administration fees Professional fees Loss on sale/dilution of investment in subsidiaries and associated companies

57 PALADIN CAPITAL ANNUAL REPORT GROUP COMPANY R000 R000 R000 R FINANCE COSTS Bank overdraft 690 Redeemable preference shares Secured loans Unsecured loans TAXATION Current taxation Current year Prior year Deferred taxation Current year (570) (980) (570) (980) Secondary tax on companies Deferred taxation (680) (1 790) (680) (1 790) (1 580) 15 (1 710) % % % % Reconciliation of rate of taxation South African normal taxation rate 28,0 28,0 28,0 28,0 Adjusted for: Non-taxable income (1,3) (3,2) (42,7) Capital gains tax differential in rates (11,2) Non-deductible charges 5,9 2,9 15,2 Income from associated companies (12,9) (29,4) Secondary tax on companies (10,5) Other 0,8 Effective rate of taxation 8,5 (0,9) 28,0 (10,0) R000 R000 R000 R000 Unutilised STC credits STC credits available Deferred tax asset provided for (1 790) (1 790) (1 790) (1 790) Available for future utilisation

58 56 notes to the annual financial statements (continued) for the year ended 28 february 2011 GROUP R000 R EARNINGS PER SHARE The calculation of earnings per share are based on the following: Total earnings attributable to ordinary shareholders Adjustments (net of non-controlling interest): Net profit on sale/dilution of investments in subsidiaries (17 402) Net profit on sale/dilution of investments in associated companies ( ) (8 189) Impairment of associated companies Impairment of shareholders loans Non-headline items of associated companies (3 604) Headline earnings The calculation of the weighted average number of shares and diluted weighted average number of shares is as follows: GROUP Number of shares 000 Number of shares 000 Number of shares at beginning of year Weighted number of shares issued during the year Weighted number of shares at end of year Basic and diluted Earnings attributable to ordinary shareholders (R000) Headline earnings (R000) Weighted average number of ordinary shares in issue (000) Attributable earnings per share (cents) 61,4 36,3 Headline earnings per share (cents) 34,5 43,9 R000 R DIVIDEND PER SHARE Normal dividend paid No dividends have been declared during the year under review (2010: Rnil).

59 PALADIN CAPITAL ANNUAL REPORT GROUP R000 R CAPITAL COMMITMENTS AND CONTINGENCIES Capital expenditure contracted or authorised but not yet incurred BORROWING POWERS In terms of the company s articles of association, borrowing powers are unlimited. Details of actual borrowings are disclosed in note 12 to the financial statements. 26. RELATED-PARTY TRANSACTIONS Paladin Capital Ltd and its subsidiaries enter into various financial services transactions with fellow subsidiary companies of PSG Group Ltd. These transactions include a range of investment, administrative, advisory and corporate services in the normal course of business. All intergroup transactions have been eliminated on consolidation. The shareholding of directors and the directors remuneration are set out in the directors report. GROUP COMPANY R000 R000 R000 R000 Included in Loans and advances PSG Corporate Services (Pty) Ltd Included in Cash and cash equivalents PSG Money Market Fund Included in Borrowings Paladin Capital Financial Services (Pty) Ltd PSG FutureWealth Ltd PSG Corporate Services (Pty) Ltd Sale of subsidiary Profit on dilution/sale of investment in subsidiary During the prior financial year, Paladin Capital Ltd sold its 74,9% stake in PSG Capital (Pty) Ltd to PSG Group Ltd for a consideration of R25 million. The net asset value of PSG Capital (Pty) Ltd at the date of disposal was R7,3 million. Total profit recognised on the sale was R17,7 million. Purchase of investment During the prior financial year, Paladin Capital Ltd purchased a 9,4% stake in Petmin Ltd from PSG Group Ltd for a consideration of R92 million. The market capitalisation of Petmin Ltd at the date of acquisition was R925 million.

60 58 notes to the annual financial statements (continued) for the year ended 28 february RELATED-PARTY TRANSACTIONS (continued) Contingent liabilities Performance fee PSG Corporate Services (Pty) Ltd GROUP COMPANY R000 R000 R000 R000 Included in Provision for other liabilities and charges Performance fee PSG Corporate Services (Pty) Ltd Included in Trade and other payables Management fee PSG Corporate Services (Pty) Ltd Included in Investment in associated companies During the prior financial year Paladin Capital Ltd increased its investment in Thembeka Capital Ltd through the issue of ordinary shares to PSG Group Ltd at R12,10 per share. GROUP COMPANY R000 R000 R000 R000 Fees, interest and preference dividends paid to companies in the PSG Group PSG Corporate Services (Pty) Ltd Management fee Interest PSG Capital (Pty) Ltd Professional fees Share issue cost PSG FutureWealth Ltd Preference dividends on redeemable preference shares Interest received from collective investment schemes in the PSG Group PSG Money Market Fund 7 002

61 PALADIN CAPITAL ANNUAL REPORT GROUP COMPANY R000 R000 R000 R NOTES TO THE cash flow STATEMENTS 27.1 Cash generated/(utilised) by operating activities Profit before taxation Adjusted for: Depreciation and amortisation Profit on disposal/dilution of investments ( ) (18 451) (1 519) Share of profit from associated companies, net of dividends ( ) ( ) Dividend income (17 468) (18 500) (24 588) Impairment charges Interest paid Interest received (16 355) (2 482) (867) Performance fee Change in working capital Change in receivables Change in trade and other payables (3 232) (3 232) (1 806) 27.2 Taxation paid (Charge)/credit to income statement (33 039) (15) Movement in deferred taxation (570) (1 660) (1 790) Movement in taxation liability (80) 80 (31 346) (95) 27.3 Acquisition of subsidiaries 2011 group acquisitions On 1 July 2009 Paladin acquired 50% of the share capital of Curro Holdings (Pty) Ltd ( Curro ), a provider of private schooling, for R50 million and classified same as an investment in an associated company. On 1 July 2010 Paladin acquired a further 26% interest for R52 million to gain control of Curro. The carrying value and fair value of Curro immediately preceding the acquisition of the controlling stake amounted to R52,2 million and R75 million, respectively. This resulted in a R22,8 million profit with the step-up from an associate to a subsidiary accounted for in the income statement. The acquired business contributed revenues of R38,8 million and net profit of R3,4 million to the group for the period from 1 July 2010 to 28 February Had the acquisition date been 1 March 2010 the contribution to group revenue and net profit would have been R74 million and R5,2 million respectively. On 1 January 2011 Curro acquired a 100% controlling interest in both Aurora College (Pty) Ltd and Plot 100 Bush Hill (Pty) Ltd (collectively referred to as Aurora ) for a total consideration of R42 million. Aurora is principally involved in the private school industry.

62 60 notes to the annual financial statements (continued) for the year ended 28 february 2011 Curro Aurora Total R000 R000 R NOTES TO THE cash flow STATEMENTS (continued) 27.3 Acquisition of subsidiaries (continued) Recognised amounts of identifiable assets acquired and liabilities assumed Property, plant and equipment Trademarks Customer lists Goodwill Cash and cash equivalents Trade and other receivables Deferred income tax (14 436) (14 436) Trade and other payables (9 234) (11 588) (20 822) Long-term debt (80 481) (80 481) Bank overdraft (10 142) (10 142) Total identifiable net assets Non-controlling interest (33 147) (33 147) Transfer from associated company (75 000) (75 000) Goodwill Total consideration Consideration Cash Fair value of equity instruments Paladin Capital Ltd ordinary shares Vendor financing Total consideration Cash consideration paid (51 049) (51 049) Cash and cash equivalents acquired (48 555) (48 555)

63 PALADIN CAPITAL ANNUAL REPORT NOTES TO THE cash flow STATEMENTS (continued) 27.4 Proceeds from sale of subsidiaries 2010 group disposals Disposal of the 74,9% stake in PSG Capital (Pty) Ltd as part of an internal restructuring on 1 March Dilution of the group s 54% interest in AIC Holding Company (Pty) Ltd to 43,2% as at 1 March 2009 and classification as an associated company as from that date. AIC Holding Company (Pty) Ltd PSG Capital (Pty) Ltd Total R000 R000 R000 Net assets of subsidiaries sold (Loss on dilution)/profit on sale of investment in subsidiaries (300) Transfer to investment in associated companies (1 827) (1 827) Cash proceeds on sale Cash and cash equivalents of subsidiaries (2 211) (1 627) (3 838) Net cash flow on disposal of subsidiaries (2 211) GROUP COMPANY R000 R000 R000 R Cash and cash equivalents at end of year Cash and short-term funds Bank overdraft (3 223)

64 62 notes to the annual financial statements (continued) for the year ended 28 february 2011 Shareholders Shares held Number % Number % 28. SHARE ANALYSIS Range of shareholding , , , , , , , ,3 Over , , , ,0 Public and non-public shareholding Non-public Directors 5 0, ,2 Directors of subsidiaries 3 0, ,2 Public , , , ,0 Individual shareholders holding 5% or more as at 28 February 2011 PSG Financial Services Ltd ,3 29. FINANCIAL RISK MANAGEMENT Financial risk factors The group s activities expose it to a variety of financial risks: market risk (in particular cash flow interest rate risk), credit risk and liquidity risk. The group s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the group s financial performance. Risk management is carried out by each major entity within the group under policies approved by the respective boards of directors. Each entity identifies, evaluates and utilises economic hedges to hedge financial risks as appropriate. Each major entity s board of directors provides principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments and investment of excess liquidity. Financial instruments are grouped into the following classes in order to facilitate effective financial risk management and disclosure in terms of IFRS 7 Financial Instruments: Disclosures. The sensitivity analyses presented below are based on reasonable possible changes in market variables for equity prices, interest rates and foreign exchange rates for the group.

65 PALADIN CAPITAL ANNUAL REPORT FINANCIAL RISK MANAGEMENT (continued) Classes of financial assets Unsecured loans 270 GROUP COMPANY R000 R000 R000 R000 Unsecured loans to subsidiary companies in the group Total loans and advances Trade receivables Prepayments and sundry debtors Total receivables Secured preference shares in associated companies Unsecured preference shares in associated companies Secured loans to associated companies Unsecured loans to associated companies Loans to and preference share investments in associated companies Cash and cash equivalents Total financial assets IFRS Classes of financial liabilities Bank overdraft Redeemable preference shares Loans and bonds Total borrowings Accounts payable and accruals Subsidiary/associate purchase consideration payable Other 479 Total trade and other payables Total financial liabilities IFRS

66 64 notes to the annual financial statements (continued) for the year ended 28 february 2011 Loans and receivables GROUP COMPANY R000 R000 R000 R FINANCIAL RISK MANAGEMENT (continued) Financial instruments by category Assets as per statement of financial position Loans and advances Loans to and preference share investments in associated companies Receivables Cash and cash equivalents Liabilities measured at amortised cost GROUP COMPANY R000 R000 R000 R000 Liabilities as per statement of financial position Borrowings Trade and other payables Market risk Market risk is the risk of adverse financial impact due to changes in fair values of future cash flows of financial instruments from fluctuation in interest rates, equity prices and foreign currency exchange rates. Price risk Neither the group nor the company is currently exposed to price risk. Foreign exchange risk Neither the group nor the company is currently exposed to foreign exchange risk. Cash flow and fair value interest rate risk The group s cash flow interest rate risk arises from variable rate preference share investments, loans and advances, long-term borrowings and cash and cash equivalents. The group has currently no exposure to fair value interest rate risk as investments made and preference shares issued at fixed rates are recorded at amortised cost.

67 PALADIN CAPITAL ANNUAL REPORT GROUP COMPANY R000 R000 R000 R FINANCIAL RISK MANAGEMENT (continued) Loans to and preference share investments in associated companies Floating rate Fixed rate Interest-free Loans and advances Floating rate 270 Interest-free Cash and cash equivalents Floating rate Borrowings Floating rate (73 792) (42 203) Fixed rate ( ) Interest-free (2 300) ( ) (42 203) (2 300) Total Floating rate Fixed rate ( ) Interest-free The group manages its cash flow interest rate risk by monitoring interest rates on a regular basis. Based on simulations performed, the impact on post-tax profit of a 2% (2010: 1%) shift in interest rates is analysed in the following table: % 1% 2% 1% increase increase decrease decrease GROUP R000 R000 R000 R000 Impact on post-tax profit (6 096) (897) Credit risk Credit risk arises from cash and cash equivalents, derivative financial instruments, loans and advances, investments in debt securities and receivables. Cash transactions are limited to high-credit-quality financial institutions. In the case of loans and advances, management would take or insist on collateral or other form of securitisation as they deem fit. The table below shows the group s maximum exposure to credit risk by class of asset.

68 66 notes to the annual financial statements (continued) for the year ended 28 february Collateral Collateral Balance fair value Balance fair value GROUP R000 R000 R000 R FINANCIAL RISK MANAGEMENT (continued) Loans and advances 270 Receivables Loans to and preference share investments in associated companies Cash and cash equivalents Loans to associated companies with a face value of Rnil (2010: R7 million) have been fully impaired. Loans are impaired by reference to the net asset value of the debtor and/or discounted cash flow calculations. The credit quality of financial assets can be assessed by reference to external credit ratings (if available) or to historical information about counterparty default rates: GROUP COMPANY R000 R000 R000 R000 F1+ (zaf) A Other non-rated assets The credit risk associated with non-rated assets in the group is considered to be low since R154 million (2010: R142,6 million) of these assets are secured loans while R300,5 million (2010: Rnil) is invested in the PSG Money Market fund. The non-rated assets in the company comprise a loan to a group company and although unsecured the credit risk is therefore considered small. Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, each entity aims to maintain flexibility in funding by keeping committed credit lines available. The tables below analyse the financial liabilities into relevant maturity groupings based on the remaining period at the statement of financial position date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.

69 PALADIN CAPITAL ANNUAL REPORT Carrying value Less than 1 year Between 1 and 5 years Over 5 years GROUP R000 R000 R000 R FINANCIAL RISK MANAGEMENT (continued) At 28 February 2011 Borrowings Trade and other payables At 28 February 2010 Borrowings Trade and other payables Carrying value Less than 1 year Between 1 and 5 years Over 5 years COMPANY R000 R000 R000 R000 At 28 February 2011 Borrowings At 28 February 2010 Trade and other payables Insurance risk Neither the group nor the company had any significant insurance risk at the reporting date. Fair value estimation Paladin Capital Ltd had no assets measured at fair value at year-end. Capital risk management The group s objectives when managing capital are to safeguard the group s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The group s capital comprises total equity as shown in the consolidated statement of financial position plus net debt. Net debt is calculated as total borrowings less cash and cash equivalents as shown in the consolidated statement of financial position. When funding is required management will consider the various forms of paper available for issue taking into account current market conditions, anticipated trends in market indicators and the financial position of the group at the time. Management will accordingly consider issuing ordinary shares by the group s holding company, preference shares, short, long or medium-term borrowings with variable or fixed rates. The directors of the company have authority to issue shares for cash up to 50% of the issued number of ordinary shares.

70 68 ANNEXURE A INVESTMENTS for the year ended 28 February 2011 interest IN subsidiaries Proportion held directly or indirectly by holding company Issued share capital Name of company Nature of business % % R000 R000 Paladin Capital Financial Services (Pty) Ltd Investments Curro Holdings (Pty) Ltd Private school education Paladin Capital Corporate Services (Pty) Ltd Corporate services In addition to the company s contribution to attributable earnings to owners of the parent, R363,5 million (2010: R172,1 million) was contributed by subsidiaries in the group. Information is only disclosed in respect of subsidiaries of which the financial position or results are material. All of the above are incorporated in the Republic of South Africa. INVESTMENT IN ASSOCIATED COMPANIES Proportion held directly or indirectly by holding companies Group carrying value Name of company Nature of business % % R000 R000 Listed CIC Holdings Ltd Agency, sales and merchandising Erbacon Investment Holdings Ltd Construction IQuad Group Ltd Incentive and treasury services Petmin Ltd* General mining Top Fix Holdings Ltd Construction and related services * Significant influence exercised through, inter alia, board representation. Refer to related accounting policy on page 42.

71 PALADIN CAPITAL ANNUAL REPORT INVESTMENT IN ASSOCIATED COMPANIES (continued) Proportion held directly or indirectly by holding companies Group carrying value Name of company Nature of business % % R000 R000 Unlisted African Unity Insurance Ltd*** Insurance Curro Holdings (Pty) Ltd** Education Friedshelf 903 (Pty) Ltd t/a Protea Foundry Non-ferrous casting GRW Holdings (Pty) Ltd Tank container manufacturer Lesotho Milling Company (Pty) Ltd Milling Precrete-Nozala (Pty) Ltd* Mining services Green Square Mining and Mining Contracting (Pty) Ltd Mining subcontractor Spirit Capital (Pty) Ltd Corporate finance Thembeka Capital Ltd Private equity Other * At 28 February 2011 Paladin Capital Ltd held a 31,9% (2010: 31,9%) stake in Thembeka Mining (Pty) Ltd, which owned 41% (2010: 41%) in Precrete-Nozala (Pty) Ltd. Paladin Capital Ltd thus owned an effective 13,1% (2010: 13,1%) in Precrete-Nozala (Pty) Ltd through Thembeka Mining (Pty) Ltd at year-end. Paladin Capital Ltd also has a direct interest in Precrete-Nozala (Pty) Ltd of 9% (2010: 9%), resulting in a total effective interest in Precrete-Nozala (Pty) Ltd of 22,1% (2010: 22,1%). ** During the year a further 26% interest was obtained in Curro Holdings (Pty) Ltd, and therefore it became a subsidiary company. *** At 28 February 2011 the group held a 43% (2010: 43%) stake in AIC Holding Company (Pty) Ltd which owned 100% (2010: 100%) in African Unity Insurance Ltd. Information is only disclosed in respect of associates of which the financial position or results are material. All of the above are incorporated in the Republic of South Africa, except for CIC Holdings Ltd, which is incorporated in the Republic of Namibia, and Lesotho Milling Company (Pty) Ltd, which is incorporated in the Kingdom of Lesotho. Further details of investments are available at the registered offices of the relevant group companies.

72 70 ANNEXURE A INVESTMENTS (continued) for the year ended 28 February 2011 FINANCIAL INFORMATION IN RESPECT OF PRINCIPAL ASSOCIATED COMPANIES Assets Liabilities Revenues Profits/ (losses) R000 R000 R000 R AIC Holding Company (Pty) Ltd Erbacon Investment Holdings Ltd (68 384) GRW Holdings (Pty) Ltd* (3 880) IQuad Group Ltd (17 369) Petmin Ltd* Precrete-Nozala (Pty) Ltd Green Square Mining and Mining Contracting (Pty) Ltd Friedshelf 903 (Pty) Ltd t/a Protea Foundry Spirit Capital (Pty) Ltd Thembeka Capital Ltd Top Fix Holdings Ltd* (37 675) AIC Holding Company (Pty) Ltd CIC Holdings Ltd Curro Holdings (Pty) Ltd** Erbacon Investment Holdings Ltd GRW Holdings (Pty) Ltd* (9 831) IQuad Group Ltd Lesotho Milling Company (Pty) Ltd and Target Investments (Pty) Ltd*** Petmin Ltd* Precrete-Nozala (Pty) Ltd Friedshelf 903 (Pty) Ltd t/a Protea Foundry Spirit Capital (Pty) Ltd Thembeka Capital Ltd Top Fix Holdings Ltd* * GRW Holdings (Pty) Ltd, Top Fix Holdings (Pty) Ltd and Petmin Ltd s year-end is June. Information provided is for the year ended 30 June 2010 (2010: 30 June 2009) ** Curro Holdings (Pty) Ltd year-end is December. Information provided was for the year ended 31 December *** Lesotho Milling Company (Pty) Ltd and Target Investments (Pty) Ltd year-end is September. Information provided was for the year ended 30 September 2009.

73 ANNEXURE B SEGMENT REPORT for the year ended 28 February 2011 PALADIN CAPITAL ANNUAL REPORT The group is organised into six reportable segments, namely: investment companies, services, mining, construction and related services, manufacturing, education and other. These segments represent the major investments of the group. All segments operate mainly in the Republic of South Africa. Income and intersegment income comprise total income per the income statement. Recurring headline earnings are calculated on a see-through basis. The group s recurring headline earnings is the sum of its effective interest in that of each of its underlying investees, regardless of its percentage shareholding. The result is that investments in which Paladin Capital Ltd or an investee holds less than 20% and are generally not equity accountable in terms of accounting standards, are included in the calculation of our consolidated recurring headline earnings. Marked-to-market fluctuations are excluded. The chief operating decision-maker (the executive committee) evaluates the following information to assess the segments performance: Income Intersegment income Recurring headline earnings Nonrecurring headline earnings Headline earnings Net asset value R000 R000 R000 R000 R000 R000 For the year ended 28 February 2011 Investment companies Services Mining, construction and related services Manufacturing Education Other 945 (16 728) (64 735) (81 463) (72 867) Before funding Funding (5 503) (5 503) Total Non-headline Attributable earnings For the year ended 28 February 2010 Investment companies Services Mining, construction and related services (2 459) Manufacturing Education Other 1 810* (6 616) (4 423) (1 696) Before funding Funding (11 156) (11 156) (37 145) Total Non-headline (37 695) Attributable earnings * The prior year amount has been restated to reflect the re-allocation referred to in note 18.

74 72 administration Details of Paladin Capital Ltd Details of ultimate holding company Registration number: 2007/032836/06 PSG Group Ltd Share code: PLD Registration number: 1970/008484/06 ISIN code: ZAE Share code: PSG ISIN code: ZAE Secretary and registered office PSG Corporate Services (Pty) Ltd Details of holding company (Registration number: 1996/004840/07) PSG Financial Services Ltd 1st Floor, Ou Kollege (Registration number: 1919/000478/06) 35 Kerk Street 1st Floor, Ou Kollege Stellenbosch, Kerk Street (PO Box 7403, Stellenbosch, 7599) Stellenbosch, 7600 Telephone: (PO Box 7403, Stellenbosch, 7599) Facsimile: Corporate advisor Legal advisor PSG Capital (Pty) Ltd Cliffe Dekker Hofmeyr Inc. Designated advisor Transfer secretaries Questco Sponsors (Pty) Ltd Computershare Investor Services (Pty) Ltd (Registration number: 2004/003647/07) Auditors Ground Floor PricewaterhouseCoopers Inc. 70 Marshall Street Johannesburg, 2001 Principal banker (PO Box 61051, Marshalltown, 2107) First National Bank Website address SHAREHOLDERS DIARY Financial year-end Profit announcement Annual general meeting February 13 April 15 June

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