SALIENT FEATURES Year ended Year ended 31 December 31 December 2003 2002 Financial performance (R'000) Revenue 92 495 97 209 Headline earnings 12 576 17 035 Share performance Headline earnings per share (cents) 14,76 20,38 Net cash per ordinary share (cents) 58,35 45,25 Net asset value per share (cents) 72,89 78,53 Net tangible asset value per share (cents) 72,89 18,60 Shares in issue (000) Weighted average number of shares 85 210 83 577 Diluted weighted average shares in issue 88 084 84 540 Total number of shares in issue 85 433 85 905 Share price (cents) Year end 76 115 High 200 415 Low 40 53 MICROmega annual report 2003 1
GROUP PROFILE as at 1 June 2004 MICROmega Holdings Limited Reg. No. 1998/003821/06 100% MICROmega Securities (Pty) Limited Reg. No. 1996/011565/07 50% 100% 100% 100% 100% MICROmega Revenue Management Services (Pty) Limited Reg. No. 1980/003268/07 Intermap (Pty) Limited Reg. No. 2000/006169/07 MICROmega Treasury Solutions (Pty) Limited Reg. No. 1998/012363/07 MICROmega Investment Portfolio (Pty) Limited Reg. No. 1998/014652/07 MICROmega Investments (Pty) Limited Reg. No. 1998/014654/07 100% 100% 100% TTSA Securities (Pty) Limited Reg No. 1997/010287/07 SA International & Capital Market Brokers (Pty) Limited Reg. No. 1996/011180/07 Man & Mun Services (Pty) Limited Reg. No. 1993/001112/07 Directors MICROmega HOLDINGS LIMITED Mr I G Morris Chairman Mr W E Rosenberg Chief Executive Officer Mr A W Browne Chairman: Audit Committee Mr R Lewin Chairman: Remuneration Committee Mr F J Pretorius Executive MICROmega SECURITIES (PROPRIETARY) LIMITED Mr W E Rosenberg Chairman Mr A Vercueil Managing Mr A W Browne Executive Mr R Gibbs Non-Executive MICROmega REVENUE MANAGEMENT SERVICES (PROPRIETARY) LIMITED Mr W E Rosenberg Chairman Mr F J Pretorius Managing Mr S August Executive Mr C Matjila Non-Executive Mr I Isaacs Non-Executive Mr M Ramollo Non-Executive INTERMAP (PROPRIETARY) LIMITED Mr W E Rosenberg Chairman Mr R Lewin Managing Mr G de Laborde Executive Ms L E Mfulwane Non-Executive Mr D Carson Independent Non-Executive MICROmega TREASURY SOLUTIONS (PROPRIETARY) LIMITED Mr W E Rosenberg Chairman Mr C J Holroyd Executive MICROmega INVESTMENTS (PROPRIETARY) LIMITED Mr W E Rosenberg Chairman Mr C J Holroyd Executive MICROmega INVESTMENTS PORTFOLIO (PROPRIETARY) LIMITED Mr W E Rosenberg Chairman Mr C J Holroyd Executive 2
CHAIRMAN S REPORT MICROmega was listed under the financial services sector on the main board of the Johannesburg Securities Exchange South Africa on 1 December 1999. From the outset MICROmega has maintained as its core principle, an independent intermediary status in respect of its trading activities. By this we mean that MICROmega is not dependent on principle trading activities or speculative investments in the financial markets to generate earnings. This principle ensures that shareholders funds are not at risk when generating earnings growth. It further means that MICROmega is not dependent on financial market movements such as interest rates or foreign currency movements to generate income. MICROmega Securities (formerly SA Money Brokers) has been a subsidiary of the group since 1999. MICROmega Securities is South Africa s leading inter-dealer broker, facilitating approximately 35% of the total volume traded between the local and international banks, in products such as government bonds, the local currency and derivative instruments. This business initially took advantage of broking opportunities between financial institutions; with the passage of time we have evolved into a business that is critically important as a liquidity service provider in the South African financial markets. The advancements in automated trading systems and enhanced international market practices have improved access to the financial markets, regulated the environment under which interdealer brokers operate and contributed to the need for and sustainability of MICROmega Securities in both the local and financial markets. In July 2001 MICROmega acquired MICROmega Revenue Management Services (formerly Man and Mun). Whilst on the face of it the acquisition of a public sector revenue management business does not appear to be an exciting opportunity, the business brought with it a number of strategic advantages, such as a 19% market share in Local Authorities in South Africa, which will be critically important in ensuring that MICROmega have the ability to access and provide risk management solutions into this sector. The business has enjoyed a compounded growth in earnings of 73% over the past two and a half years. This growth is attributed to the demand by Local Government for improved revenue recognition and income generation. The results for the year under review reflect a business that has been focused on securing clients, building capacity and implementing operational efficiency. We have now taken the next step forward and the group is now focused on extracting value from their strategic position and target markets. This will ensure growth in earnings for our shareholders. To the 412 people that are employed in MICROmega we thank you for your loyalty, enthusiasm and hard work. In January 2001 MICROmega acquired South Africa s dominant debt rating agency, Global Credit Rating Co. Following closely on the heels of this acquisition was an aggressive marketing drive by the US based international rating agencies into South Africa. An inability to secure a co-operative relationship with these agencies resulted in the decision in October 2003 by MICROmega to sell the ratings business. Whilst there was disappointment in MICROmega s inability to stave off the international competition, our shareholders benefited by R20 million from this acquisition and subsequent disposal. MICROmega annual report 2003 3
CORPORATE GOVERNANCE The directors of MICROmega fully endorse and are committed to exercising the principles of transparency, integrity and accountability as advocated in the King Report II on Corporate Governance. The directors realise the importance of good corporate governance and have applied the Code with all variances being disclosed. Good corporate governance incorporates the adoption and monitoring of sound effective systems of internal control, the assessment and management of business risk and the definition and implementation of appropriate business procedures. BOARD OF DIRECTORS The board of MICROmega Holdings Limited meets regularly, to evaluate performance, assesses risk and reviews the strategic direction of the group. All directors retain full and effective control over the affairs of the company and monitor management. Composition The composition of the board ensures that a range of skills and knowledge are available to advise on and implement key decisions, to ensure that it retains proper direction and control of the company. The board as a whole is involved in the process of nomination, selection and the appointment of directors. The directors are selected on the basis of their skill, knowledge, business acumen and contribution to the company. The board currently comprises five executive directors. As of 1 June 2004, Mr I G Morris is Chairman and Mr W E Rosenberg Chief Executive Officer. The board is fully aware of the requirement of the Code to appoint non-executive directors. It is not due to a lack of commitment or interest on the part of the board to appoint non-executive directors, but more the desire by the board to appoint the appropriate, independent, willing individuals that will benefit the company in the future. As a result of the board being constituted by executive directors, the company was unable to comply with the recommendation in respect of the composition of the audit and remuneration committees. During the accounting period and up to the date of this report, the board met eight times, the following being the dates, major items on the agenda and the number of attending directors. Date Agenda Executive 16 May 2003 Report on results for the year ended 31 December 2002; approval of the preliminary results 4 14 August 2003 Approval of the interim results for the six months ended 30 June 2003 4 3 December 2003 Review of subsidiary companies operations: MICROmega Securities & MICROmega Revenue Management Services 4 22 January 2004 Approval of the disposal of Global Credit Rating Limited 4 6 February 2004 Approval of the acquisition of Intermap (Pty) Limited 4 18 February 2004 Appointment of Mr R Lewin as executive director; resignation of Mr G M Kelly as an executive director 3 30 March 2004 Report on group and subsidiary results for the year ended 31 December 2003 4 01 June 2004 Appointment of Mr I G Morris as Chairman, Mr W E Rosenberg as Chief Executive Officer, resignation of R Gibbs an executive director 4 BOARD COMMITTEES To assist the board in discharging its collective responsibilities for corporate governance, several committees have been established to which certain of the board s responsibilities have been delegated. These committees all have specific terms of reference and are accountable to the board. The committees comprise directors who have a blend of skills and experience and other qualities appropriate to their roles. Board committees currently in place are: 4
CORPORATE GOVERNANCE Audit committee The audit committee has been delegated powers by the board. These powers clearly set out the responsibilities and authority together with the structures and processes of the committee. During the year under review the audit committee has addressed its responsibilities in terms of its delegated powers. The primary objective of the audit committee is to promote the overall effectiveness of corporate governance in the group. Its objectives include: Ensuring that integrity of the group s accounting and financial reporting systems; Ensuring the appropriate systems are in place for monitoring risk, financial control and compliance with the law and codes of conduct; Evaluating the effectiveness of the risk and compliance management functions in the group; Maintaining transparent appropriate relationships with external auditors; Reviewing the scope and quality of statutory audit and the independence and objectivity of the auditors; Reviewing interim and annual financials statements before approval by the board; Reviewing reports from external auditors; Approval of audit fees. The audit committee is currently chaired by Mr A W Browne and comprises a further four directors. The committee meets at least four times a year and is attended by senior management and the external auditors by invitation. Remuneration committee The remuneration committee is responsible for determining the terms of employment and remuneration of the group s executive directors and senior management; this includes assessment of specific rewards. The committee ensures that the group remunerates and incentivises senior management fairly, taking all circumstances into account. The committee is further responsible for the remuneration strategy of the group as approved by the board. Mr R Lewin currently chairs the remuneration committee. INTERNAL CONTROL SYSTEM The group maintains systems of internal control over the financial reporting and for the safeguarding of assets (against unauthorised acquisition, use or disposal). These systems are designed to provide reasonable assurance to the group s management and board of directors that reliable financial statements are prepared. Corrective action is taken to address and control deficiencies in control systems, as and when these are identified. There are inherent limitations to the effectiveness of any system of internal control, including the possibility of human error and circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation and safeguarding of assets. RISK MANAGEMENT The group s audit committee is responsible for addressing all operational and financial risk, together with risk funding. GOING CONCERN The directors are satisfied that there is no reason to believe that the group will not continue in operation for the forthcoming year. EMPLOYMENT EQUITY The group is committed to create a workplace in which individuals of ability can develop rewarding careers at all levels, regardless of their background, religion, race or gender. ETHICS The board of directors and the management of the group are committed to exercising and maintaining high ethical standards. A culture of high ethical integrity standards has been developed and flourishes amongst all levels of employees and directors. Honesty and integrity is expected from all employees and all suppliers. DIRECTORS CONTRACTS OF EMPLOYMENT No director has a contract of employment in excess of a period of three years. SHAREHOLDERS COMMUNICATION The board of directors is committed to continued improvement of communication with shareholders. LPC Manhattan, the company s sponsor, continues to help and improve all levels of communication. MICROmega annual report 2003 5
DIRECTORS APPROVAL The financial statements which appear on pages 8 to 35 were approved by the board of directors on 1 June 2004 and signed on their behalf by: Mr I G Morris Chairman Mr W E Rosenberg Chief Executive Officer CERTIFICATION BY COMPANY SECRETARY In terms of section 268 G (d) of the Companies Act 1973, as amended, I certify that the company has lodged with the Registrar of Companies all such forms as are required of a public company in terms of the Companies Act and further that such returns are true, correct and up to date. Mr C J Holroyd Secretary 1 June 2004 6
REPORT OF THE INDEPENDENT AUDITORS TO THE SHAREHOLDERS OF MICROmega HOLDINGS LIMITED AND ITS SUBSIDIARY COMPANIES We believe that our audit provides a reasonable basis for our opinion. We have audited the annual financial statements of MICROmega Holdings Limited and its subsidiary companies set out on pages 8 to 35 for the year ended 31 December 2003. These financial statements are the responsibility of the group's directors. Our responsibility is to express an opinion on these financial statements based on our audit. SCOPE We conducted our audit in accordance with statements of South African Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement. An audit includes: examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. AUDIT OPINION In our opinion, the financial statements fairly present, in all material respects, the financial position of the group at 31 December 2003 and the results of its operations and cash flows for the year then ended in accordance with South African Statements of Generally Accepted Accounting Practice, and in the manner required by the Companies Act in South Africa. R W Irish Alliott Inc. Registered Accountants and Auditors Randburg 1 June 2004 MICROmega annual report 2003 7
REPORT OF THE DIRECTORS for the year ended 31 December 2003 The directors present their report for the year ended 31 December 2003. This report forms part of the audited financial statements. GENERAL REVIEW The group's business and operations and the results thereof are clearly reflected in the attached financial statements. NATURE OF BUSINESS The group provides financial services. These services include inter dealing broking, revenue management services and for the ten month period ended 31 October 2003, debt ratings. These services are provided in both the domestic and international markets and extend across a diverse client base ranging from international investment banks to the small corporate market. In addition the group is the largest provider of revenue management services to local authorities in South Africa. STATEMENTS OF RESPONSIBILITY The directors are responsible for the maintenance of adequate accounting records and the preparation and integrity of the financial statements and related information. The auditors are responsible to report on the fair presentation of the financial statements. The financial statements have been prepared in accordance with generally accepted accounting practice and in the manner required by the Companies Act, 1973. The directors are also responsible for the group's system of internal control. These controls are designed to provide reasonable, but not absolute, assurance as to the reliability of the financial statements, and to adequately safeguard, verify and maintain accountability of assets, and to prevent and detect misstatement and loss. Nothing has come to the attention of the directors to indicate any material breakdown of these controls, procedures and systems has occurred during the year under review. DIVIDENDS No dividends were declared or recommended during the year. SHARE CAPITAL The changes in the issued share capital of the company during the year under review were as follows: On 21 October 2003, the company withdrew 747 463 ordinary shares of 1 cent each at a premium of R3,79 per share from the issued share capital in terms of a buy back. On 22 October 2003, 276 300 shares of 1 cent each were issued at a premium of 49 cents per share to the previous shareholders of Man & Mun Services (Proprietary) Limited, upon meeting profit warranties in terms of the purchase agreement. PROPERTY, PLANT AND EQUIPMENT The changes in the property, plant and equipment during the year or any changes in the policy relating to their use are set out in the attached financial statements and do not, in our opinion, require further comments. SUBSEQUENT EVENTS With effect from 1 January 2004, the company acquired the entire share capital of Intermap (Proprietary) Limited for a consideration of R11 million, which is made up of 1,6 million shares and cash of R9,4 million. The consideration is directly related to future profit warranties. The group restructured its board of directors on 1 June 2004, to split the role of Chairman and Chief Executive Officer. I G Morris was appointed Chairman and W E Rosenberg Chief Executive Officer. The financial statements have been prepared on a going concern basis, since the directors have every reason to believe that the group has adequate resources in place to continue for the foreseeable future. 8
REPORT OF THE DIRECTORS DIRECTORS The directors of the company during the accounting period and up to the date of this report were as follows: Mr I G Morris Chairman Resigned 17 March 2003 Appointed 1 June 2004 Mr W E Rosenberg Chief Executive Officer Appointed 1 June 2004 Mr A W Browne Chairman: Audit Committee Appointed 26 March 2003 Mr R Lewin Chairman: Remuneration Committee Appointed 18 February 2004 Mr F J Pretorius Executive Appointed 26 March 2003 Mr M M Ngoasheng resigned on 26 March 2003. Mr A G Fletcher resigned on 3 April 2003. Mr J E Newbury resigned on 3 April 2003. Mr G M Kelly, appointed on 26 March 2003, resigned on 18 February 2004. Mr R Gibbs, appointed on 26 March 2003, resigned on 1 June 2004. SECRETARY The secretary of the company is Mr C J Holroyd, whose business and postal addresses are: Block 3 Chislehurston Office Park 19 Impala Road Chislehurston Sandton 2196 Private Bag X9966 Sandton 2146 Mr A W Browne resigned on 1 June 2004. SUBSIDIARIES Number of shares in Percentage Shares at Due by issue holding cost subsidiaries % R 000 R 000 MICROmega Securities (Proprietary) Limited and its subsidiary companies 100 000 100 88 555 3 973 MICROmega Revenue Management Services and its subsidiary company 120 000 50 264 11 388 MICROmega Investments (Proprietary) Limited 135 100 92 725 MICROmega Investment Portfolio (Proprietary) Limited 135 100 92 725 MICROmega Treasury Solutions (Proprietary) Limited 943 100 1 092 89 003 17 903 MICROmega annual report 2003 9
BALANCE SHEET 2003 2002 2003 2002 at 31 December 2003 Note R 000 R 000 R 000 R 000 Assets Non-current assets 23 586 72 718 132 403 141 050 Property, plant and equipment 3 3 905 4 693 453 707 Goodwill 4 51 483 Deferred taxation 5 10 682 4 584 9 412 Investment in subsidiaries 6 89 003 116 003 Investment in associates 7 77 1 089 Long-term investments 8 353 1 573 100 1 347 Loans receivable 9 8 569 9 296 8 421 8 411 Amounts owing by group companies 10 25 014 14 582 Current assets 62 375 47 304 18 380 1 036 Short-term investments 8 1 574 130 1 574 100 Accounts receivable 7 427 8 305 113 531 Current portion of loans receivable 9 3 117 3 117 Taxation 407 Bank and cash 49 850 38 869 13 576 405 Total assets 85 961 120 022 150 783 142 086 Equity and liabilities Capital and reserves 62 275 67 458 135 342 115 178 Share capital 11 174 180 168 459 165 755 168 459 Non-distributable reserve 12 (1 479) Accumulated loss (111 905) (99 522) (30 413) (53 281) Non-current liabilities 400 18 694 7 511 15 956 Amounts owing to group companies 13 7 111 5 688 Borrowings 14 400 18 694 400 10 268 Current liabilities 23 286 33 870 7 930 10 952 Taxation 1 616 Accounts payable 12 834 10 292 1 441 661 Current portion of borrowings 14 468 900 468 Income received in advance 2 252 Provisions 15 9 984 18 810 6 021 10 291 Total equity and liabilities 85 961 120 022 150 783 142 086 Net asset value per share (cents) 72,89 78,53 158,42 134,08 Net tangible asset value per share (cents) 72,89 18,60 158,42 134,08 Total ordinary shares in issue ('000) 11 85 433 85 905 85 433 85 905 10
INCOME STATEMENT 2003 2002 2003 2002 for the year ended 31 December 2003 Note R 000 R 000 R 000 R 000 Revenue 16 92 495 97 209 5 552 4 470 Other income 17 016 7 324 3 936 Operating costs (134 177) (115 607) (14 520) (8 631) Operating loss 17 (24 666) (11 074) (8 968) (225) Investment income 18 3 612 3 128 18 156 4 842 Finance costs 19 (3) (17) (2) (3) Income from associates (124) 201 (Loss)/profit before taxation (21 181) (7 762) 9 186 4 614 Taxation 20 4 528 (7 087) 9 412 (665) (Loss)/profit after taxation (16 653) (14 849) 18 598 3 949 Minority interest 320 (Loss)/profit attributable to ordinary shareholders (16 653) (14 529) 18 598 3 949 Exceptional items 21 4 270 (4 270) 4 270 (4 270) Net (loss)/profit (12 383) (18 799) 22 868 (321) Reconciliation of headline earnings Amortisation of goodwill 50 415 35 397 Capital profit on sale of subsidiaries (13 858) (3 833) 11 490 (2 475) Deferred tax credit (7 328) (9 412) Exceptional items (4 270) 4 270 (4 270) 4 270 Headline earnings 12 576 17 035 20 676 1 474 Headline earnings per share (cents) 22 14,76 20,38 24,26 1,76 (Loss)/earnings per share (cents) 22 (14,53) (22,49) 26,84 (0,38) Fully diluted (loss)/earnings per share (cents) 22 (14,06) (22,24) 25,96 (0,38) Weighted average shares in issue ('000) 22 85 210 83 577 85 210 83 577 Diluted weighted average shares in issue ('000) 22 88 084 84 540 88 084 84 540 Total ordinary shares in issue ('000) 11 85 433 85 905 85 433 85 905 MICROmega annual report 2003 11
STATEMENT OF CHANGES IN EQUITY Share Share Non-distribu- Accumulated capital premium table reserve loss Total for the year ended 31 December 2003 R 000 R 000 R 000 R 000 R 000 Balance at 01 January 2002 764 133 521 (2 392) (62 157) 69 736 Net loss for the year as restated (18 799) (18 799) Scrip dividends 29 11 237 (11 266) Dividends (5 317) (5 317) Revaluation of foreign entity's distributable reserves 1 983 (1 983) Foreign currency translation reserve (1 070) (1 070) Issue of share capital 66 22 934 23 000 Share issue expenses (92) (92) Restated balance at 01 January 2003 859 167 600 (1 479) (99 522) 67 458 Balance as previously stated 859 167 600 (1 479) (104 962) 62 018 Correction of fundamental error (refer note 2) 5 440 5 440 Net loss for the year (12 383) (12 383) Foreign currency translation reserve 1 479 1 479 Issue of share capital 2 8 559 8 561 Reduction of share capital (7) (2 833) (2 840) Balance at 31 December 2003 854 173 326 (111 905) 62 275 Share Share Accumulated capital premium loss Total R'000 R'000 R'000 R'000 Balance at 01 January 2002 764 133 521 (36 377) 97 908 Net loss for the year (321) (321) Scrip dividends 29 11 237 (11 266) Dividends (5 317) (5 317) Issue of share capital 66 22 934 23 000 Share issue expenses (92) (92) Restated balance at 01 January 2003 859 167 600 (53 281) 115 178 Balance as previously stated 859 167 600 (58 721) 109 738 Correction of fundamental error (refer note 2) 5 440 5 440 Net profit for the year 22 868 22 868 Issue of share capital 2 134 136 Reduction of share capital (7) (2 833) (2 840) Balance at 31 December 2003 854 164 901 (30 413) 135 342 12
CASH FLOW STATEMENT 2003 2002 2003 2002 for the year ended 31 December 2003 Note R 000 R 000 R 000 R 000 Cash flows from operating activities 10 043 11 450 21 148 208 Cash generated by operating activities 26.1 10 850 21 786 2 994 1 351 Investment income 3 426 3 120 1 516 842 Finance costs (3) (17) (2) (3) Dividends received 62 209 16 640 4 000 Dividends paid 26.2 (5 317) (5 317) Taxation paid 26.3 (4 292) (7 666) Secondary tax on companies paid 26.4 (665) (665) Cash flows from investing activities 16 333 (12 998) 16 263 (10 982) Expenditure to maintain operating capacity Property, plant and equipment acquired (835) (475) (10) (9) Goodwill acquired (1 033) (357) Proceeds of disposals of property, plant and equipment 341 370 Proceeds of disposals of goodwill 2 506 Proceeds of disposals of subsidiaries 26.5 14 011 5 420 Proceeds of disposals of investments 1 758 1 758 Expenditure for expansion Subsidiaries acquired 26.6 (405) (19 467) 15 510 (16 525) Investment in associates 1 012 (804) Investments 736 763 2 991 Other investments 557 803 Cash flows from financing activities (15 395) (916) (24 240) 10 801 Capital raised 5 721 22 908 (2 704) 22 908 Loans raised 727 1 891 15 258 Loans repaid (21 843) (23 824) (23 427) (27 365) Increase/(decrease) in bank and cash 10 981 (2 464) 13 171 27 Bank and cash at beginning of the year 38 869 41 333 405 378 Bank and cash at end of the year 49 850 38 869 13 576 405 MICROmega annual report 2003 13
NOTES TO THE FINANCIAL STATEMENTS at 31 December 2003 1. BASIS OF PREPARATION The financial statements are prepared in accordance with South African Statements of Generally Accepted Accounting Practice. The financial statements are prepared under the historical cost convention except as modified by the revaluation of certain assets. The following are the principal accounting policies of the group which are consistent with those of the previous year, except as otherwise indicated: 1.1 Revenue recognition Revenue represents income derived from net broking services, risk management services and rating services. Revenue is recognised on an accrual basis or in accordance with the billing cycle of the relevant agreements. 1.2 Basis of consolidation The consolidated financial statements incorporate the financial statements of the holding company and of its subsidiaries. The results of the subsidiaries are included from the dates effective control was acquired and up to the dates effective control ceased. All significant intra-group transactions and balances have been eliminated on consolidation. 1.3 Goodwill Goodwill represents the difference between the cost of an acquisition and the fair value of net tangible assets of subsidiaries at the date of acquisition. Goodwill is amortised over the lesser of the profit warranty period associated with the specific acquisition or five years. In the event of a permanent impairment in the value of a subsidiary, the relevant unamortised balance is written off. 1.4 Associates An associate is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor. Interests in associates are accounted for using the equity method, less impairment losses. 1.5 Investments Short-term investments Short-term investments comprising listed and unlisted investments are those expected to be disposed of within twelve months. They are stated at fair value and are written down for any permanent impairment in value. Long-term investments Investments in endowment policies are revalued annually to fair value, determined by reference to market values. Listed shares are shown at market value. Where the directors believe there is an insufficient market for trading the number of shares held by the company, the shares are shown at cost. The investment in the Bond Exchange represents the cost of the Bond Exchange Seat which enables the company to trade on the Bond Exchange. 1.6 Property, plant and equipment Property, plant and equipment are stated at historical cost. Depreciation is calculated to write off the cost of property, plant and equipment on a straight-line basis over their expected useful lives. 14
NOTES TO THE FINANCIAL STATEMENTS at 31 December 2003 1. BASIS OF PREPARATION (continued) 1.6 Property, plant and equipment (continued) The depreciation rates applicable to each category of property, plant and equipment are as follows: Motor vehicles 20,00 % Furniture and fittings 10,00 % Dealing room equipment 20,00 % Office equipment 20,00 % Computer equipment 33,33 % Leasehold improvements 10,00 % The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount. 1.7 Taxation Deferred taxation is provided using the balance sheet liability method on all temporary differences between the carrying amounts for financial reporting purposes and the amounts used for taxation purposes, except for differences relating to goodwill which is not deductible for taxation purposes and the initial recognition of assets or liabilities which affect neither accounting nor taxable profit or loss. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the associated unused tax losses and deductible temporary differences can be utilised. Deferred taxation is calculated using taxation rates that have been enacted at the balance sheet date. The effect on deferred taxation of any changes in taxation rates is recognised in the income statement in the year in which the change occurs, except to the extent that it relates to items previously charged or credited directly to equity. Secondary Taxation on Companies is provided in respect of dividends declared net of dividends received or receivable and is recognised as a taxation charge for the year. 1.8 Provisions Provisions are recognised when the group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Employee entitlements to annual leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up to the balance sheet date. 1.9 Employee benefits Defined contribution plans Certain group companies contribute to a defined contribution plan. Contributions to the defined contribution plan in respect of service in a particular period are recognised as an expense in that period. 1.10 Financial instruments Financial instruments carried on the balance sheet include cash and bank balances, investments, receivables, trade creditors and borrowings. The instruments are generally carried at their estimated fair value. The particular recognition methods adopted are disclosed in the individual policy statements associated with each item. 1.11 Related party transactions All intergroup transactions are eliminated on consolidation. Related party transactions are concluded at arm's length in the ordinary course of business. 1.12 Cash flows For the purpose of the cash flow statement, cash includes cash on hand, deposits held on call and bank overdrafts. MICROmega annual report 2003 15
NOTES TO THE FINANCIAL STATEMENTS at 31 December 2003 1. BASIS OF PREPARATION (continued) 1.13 Leased assets Leases of assets under which all the risks and benefits of ownership are effectively retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease. 1.14 Translation of foreign currencies Transactions Foreign currency transactions are recorded, on initial recognition in Rand, by applying to the foreign currency amount the exchange rate between the Rand and the foreign currency at the date of the transaction. At each balance sheet date: (a) foreign currency monetary items are reported using the closing rate, (b) non-monetary items, which are carried in terms of historical cost denominated in a foreign currency, are reported using the exchange rate at the date of the transaction, and (c) non-monetary items which are carried at fair value denominated in a foreign currency are reported using the exchange rates that existed when the values were determined. Exchange differences arising on the settlement of monetary items or on reporting an enterprise's monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, are recognised as income or expenses in the period in which they arise. Foreign entities In translating the financial statements of a foreign entity for incorporation in the financial statements, the following procedures are used: (a) The assets and liabilities, both monetary and non-monetary, of the foreign entity are translated at the closing rate. (b) Income and expense items of the foreign entity are translated at exchange rates at the dates of the transactions. (c) All resulting exchange differences are classified as equity until the disposal of the net investment. Disposal of a foreign entity On the disposal of a foreign entity, the cumulative amount of the exchange differences that have been deferred and relate to that foreign entity are recognised as income or expenses in the same period in which the gain or loss on disposal is recognised. 1.15 Segmental reporting Segment information is reported using the accounting policies adopted by the group. Business segments are based on core business activities, this forms the basis of the primary segmental analysis. No secondary, geographical segmental analysis has been included as geographical location does not play a significant role in the group s operations and thus this information will not be beneficial. Segment revenue Segment revenue represents the gross value of services invoiced excluding value added taxation, which is directly attributable and reasonable allocated to each business segment. Investment income generated from investments is included in the Investment Activities segment. Segment results Segment result equals segment revenue less segment expenses before any adjustment for minorities interest. Segment assets and liabilities Segment assets and liabilities include direct and reasonable allocable operating assets, investment in associates and liabilities. 16
NOTES TO THE FINANCIAL STATEMENTS at 31 December 2003 2. Fundamental error 2.1 MICROmega Revenue Management Services (Proprietary) Limited On 1 January 2002, 50% of MICROmega Revenue Management Services (Proprietary) Limited was sold to an empowerment partner, Kopano Utilities (Proprietary) Limited. This sale was conditional upon the achievement of certain benchmarks by the empowerment partner. As at 31 December 2002, the predetermined benchmarks were not achieved, and in accordance with the original agreement, the transaction collapsed. As a result MICROmega Revenue Management Services (Proprietary) Limited was accounted for as a wholly owned subsidiary in the 2002 annual financial statements. Subsequent negotiations with the empowerment partner have resulted in the original contract being re-instated with effect from 1 January 2002. Consequently, the annual financial statements for the year ended 31 December 2002 have been restated to recognise this outcome. The effect of the fundamental error on the previously reported accumulated loss is as follows: 2003 2002 2003 2002 R'000 R'000 R'000 R'000 Accumulated loss as previously reported (104 962) (58 721) Fundamental error Gross 5 420 5 440 Taxation 20 - Net effect 5 440 5 440 Restated accumulated loss (99 522) (53 281) This has resulted in a decrease in the previously reported loss per share from 29,00 cents to 22,49 cents. This has resulted in a decrease in the previously reported loss per share from 6,89 cents to 0,38 cents. MICROmega annual report 2003 17
NOTES TO THE FINANCIAL STATEMENTS at 31 December 2003 3. PROPERTY, PLANT AND EQUIPMENT 2003 2002 Accumulated Carrying Accumulated Carrying Cost depreciation value Cost depreciation value R'000 R'000 R'000 R'000 R'000 R'000 Owned assets Land and buildings 911 911 911 911 Motor vehicles 1 122 754 368 1 074 720 354 Furniture and fittings 2 945 1 733 1 212 2 941 1 496 1 445 Dealing room equipment 2 883 2 171 712 2 877 1 838 1 039 Office equipment 466 235 231 445 249 196 Computer equipment 5 045 4 700 345 5 427 4 871 556 Leasehold improvements 659 533 126 659 467 192 14 031 10 126 3 905 14 334 9 641 4 693 The carrying amounts of property, plant and equipment can be reconciled as follows: 2003 Carrying Carrying value value at beginning at end of year Additions Disposals Depreciation of year R'000 R'000 R'000 R'000 R'000 Owned assets Land and buildings 911 911 Motor vehicles 354 275 (66) (195) 368 Furniture and fittings 1 445 72 (26) (279) 1 212 Dealing room equipment 1 039 6 - (333) 712 Office equipment 196 158 (43) (80) 231 Computer equipment 556 324 (100) (435) 345 Leasehold improvements 192 (66) 126 4 693 835 (235) (1 388) 3 905 18
NOTES TO THE FINANCIAL STATEMENTS at 31 December 2003 3. PROPERTY, PLANT AND EQUIPMENT (continued) 2003 2002 Accumulated Carrying Accumulated Carrying Cost depreciation value Cost depreciation value R'000 R'000 R'000 R'000 R'000 R'000 Owned assets Furniture and fittings 435 217 218 435 173 262 Office equipment 182 95 87 177 59 118 Computer equipment 453 392 61 461 265 196 Leasehold improvements 441 354 87 441 310 131 1 511 1 058 453 1 514 807 707 The carrying amounts of property, plant and equipment can be reconciled as follows: 2003 Carrying Carrying value value at beginning at end of year Additions Depreciation of year R'000 R'000 R'000 R'000 Owned assets Furniture and fittings 262 (44) 218 Office equipment 118 5 (36) 87 Computer equipment 196 5 (140) 61 Leasehold improvements 131 (44) 87 707 10 (264) 453 2003 2002 2003 2002 R'000 R'000 R'000 R'000 Freehold land and buildings comprise: Land and buildings situated on Erf 581 and Erf 582, Elsburg Extension 1, Registration Division I.R. the province of Gauteng. At cost 2001 911 911 The land and buildings are jointly owned by MICROmega Investments (Proprietary) Limited and MICROmega Investment Portfolio (Proprietary) Limited. MICROmega annual report 2003 19
NOTES TO THE FINANCIAL STATEMENTS at 31 December 2003 4. GOODWILL 2003 2002 Accumulated Carrying Accumulated Carrying Cost amortisation value Cost amortisation value R'000 R'000 R'000 R'000 R'000 R'000 Goodwill 99 298 99 298 128 817 77 334 51 483 The carrying amounts of goodwill can be reconciled as follows: Carrying Subsidiaries Carrying value acquired value at beginning at carrying at end of year Additions value Disposals Amortisation of year 2003 R'000 R'000 R'000 R'000 R'000 R'000 Goodwill 51 483 1 033 405 (2 506) (50 415) 2003 2002 2003 2002 R'000 R'000 R'000 R'000 5. DEFERRED TAXATION Balance at beginning of year 4 584 6 345 Movements during year attributable to: Temporary differences 6 797 (1 761) 9 412 Disposal of subsidiary (699) Balance at end of year 10 682 4 584 9 412 The balance comprises: Capital allowances 81 82 Provisions 1 189 1 947 Assessed losses 9 412 2 181 9 412 Income received in advance 374 10 682 4 584 9 412 20
NOTES TO THE FINANCIAL STATEMENTS 2003 2002 2003 2002 at 31 December 2003 R'000 R'000 R'000 R'000 6. INVESTMENT IN SUBSIDIARIES Shares at cost 89 003 116 003 7. INVESTMENT IN ASSOCIATES Associate companies 77 1 089 Associate companies Equity accounted GCM Meter Services (Proprietary) Limited 50% interest in the unlisted shares of GCM Meter Services (Proprietary) Limited, a company involved in meter reading services. Carrying value of investment: Retained earnings since acquisition 77 201 Summary financial information of GCM Meter Services (Proprietary) Limited Assets Current 88 533 88 533 Equity and liabilities Equity and reserves 74 402 Current liabilities 14 131 88 533 Net (loss)/profit (19) 402 GlobalMicroRate Africa Limited 34% interest in the unlisted shares of GlobalMicroRate Africa Limited, a company registered in Mauritius involved in ratings of Micro Finance Institutions. Carrying value of investment: Shares at cost 1 Retained earnings since acquisition 83 84 MICROmega annual report 2003 21
NOTES TO THE FINANCIAL STATEMENTS 2003 2002 2003 2002 at 31 December 2003 R'000 R'000 R'000 R'000 7. INVESTMENT IN ASSOCIATES (continued) Summary financial information of GlobalMicroRate Africa Limited Assets Current 840 840 Equity and liabilities Equity and reserves 247 Non-current liabilities 43 Current liabilities 550 840 Net profit 247 Global Credit Rating Co. (Nigeria) Limited 34% interest in the unlisted shares of Global Credit Rating Co. (Nigeria) Limited, a company registered in Nigeria involved in ratings of Micro Finance Institutions. Carrying value of investment: Shares at cost 804 8. LONG-TERM INVESTMENTS Listed shares 136 100 Unlisted shares 217 1 573 1 347 353 1 573 100 1 347 Number of ordinary shares The group held the following investments: 2003 2002 2003 2002 Listed shares Sanlam Limited 4 011 Spectrum Shipping Limited 4 940 000 4 940 000 R'000 R'000 R'000 R'000 Unlisted investments Bond Exchange 217 217 Timeshare 9 Endowment policies 1 347 1 347 217 1 573 1 347 Endowment policies maturing in the forth coming financial year are classified as short-term investments. 22
NOTES TO THE FINANCIAL STATEMENTS 2003 2002 2003 2002 at 31 December 2003 R'000 R'000 R'000 R'000 9. LOANS RECEIVABLE Enigma Holdings Limited 6 117-6 117 Kopano Utilities (Proprietary) Limited 5 421 5 421 5 421 5 421 D J Nagle 3 769 2 990 F J Pretorius 148 106 11 686 9 296 11 538 8 411 Less: Current portion included in current portion of loans receivable 3 117 3 117 8 569 9 296 8 421 8 411 The loan to Enigma Holdings Limited bears interest at the prime overdraft rate as determined by FirstRand Bank Limited. It is repayable in two equal annual instalments as follows: 31 October 2004 R3 million 31 October 2005 R3 million Interest is paid semi annually in arrears. The loan is secured by 3 million shares in MICROmega Holdings Limited. The loan to Kopano Utilities (Proprietary) Limited is unsecured, interest free and is repayable 60 months from 1 January 2002. The loan to D J Nagle was made of up of an amount of R928 332 due in respect of the sale of the net assets of Consolidated African Technologies and R2 840 359 which was settled by the cancellation of 747 463 shares issued at R3,80. The cancellation of the shares was approved by the shareholders at the AGM and the JSE Securities Exchange South Africa on 21 October 2003. The loan to F J Pretorius is unsecured, bears interest at the prime lending rate and is repayable in monthly instalments of R6 000. MICROmega annual report 2003 23
NOTES TO THE FINANCIAL STATEMENTS 2003 2002 2003 2002 at 31 December 2003 R'000 R'000 R'000 R'000 10. AMOUNTS OWING BY GROUP COMPANIES MICROmega Securities (Proprietary) Limited 4 000 TTSA Securities (Proprietary) Limited 11 084 MICROmega Revenue Management Services (Proprietary) Limited 11 388 8 134 MICROmega Treasury Solutions (Proprietary) Limited 1 092 998 MICROmega Investments (Proprietary) Limited 725 725 MICROmega Investment Portfolio (Proprietary) Limited 725 725 25 014 14 582 The loan to TTSA Securities (Proprietary) Limited is unsecured, bears interest at the call account rate and has no fixed terms of repayment. The remaining loans are unsecured, interest free and have no fixed terms of repayment. 11. SHARE CAPITAL Authorised 100 000 000 ordinary shares of 1 cent each 1 000 1 000 1 000 1 000 Issued 85 433 365 (2002: 85 904 528) ordinary shares of 1 cent each 854 859 854 859 Share premium 173 326 167 600 164 901 167 600 174 180 168 459 165 755 168 459 The directors are authorised, until the forthcoming annual general meeting, to dispose of the unissued shares for any purpose and upon such terms and conditions as they deem fit, subject to the provision of section 221 and 222 of the Companies Act and the requirements of the JSE Securities Exchange South Africa. 24
NOTES TO THE FINANCIAL STATEMENTS 2003 2002 2003 2002 at 31 December 2003 R'000 R'000 R'000 R'000 12. NON-DISTRIBUTABLE RESERVE Balance at beginning of year (1 479) (2 393) Movement during year: Foreign currency translation reserve realised on the disposal of subsidiary 1 479 Foreign currency translation (1 070) Revaluation of foreign entity's opening distributable reserves 1 984 Balance at end of year (1 479) Comprising: Foreign currency translation reserve (1 479) 13. AMOUNTS OWING TO GROUP COMPANIES SA International & Capital Market Brokers (Proprietary) Limited 7 111 4 566 Global Credit Rating Co. (Proprietary) Limited 1 122 The loans are unsecured, interest free and have no fixed terms of repayment. 7 111 5 688 14. BORROWINGS Vendors loans 868 10 268 868 10 268 The amount due to vendors represents the balance of the purchase consideration owing in respect of acquisitions. The loans are settled through the issue of shares and cash resources over the profit warranty periods. NASASA Trust 900 The loan was unsecured, interest free and repayable in monthly instalments of R100 000. MICROmega Treasury Solutions (Proprietary) Limited 8 426 The loan to MICROmega Treasury Solutions (Proprietary) Limited was converted to capital during the year. 868 19 594 868 10 268 Less: Current portion included in current portion of borrowings (468) (900) (468) 400 18 694 400 10 268 MICROmega annual report 2003 25
NOTES TO THE FINANCIAL STATEMENTS Unused Carrying amounts Carrying amount at Used reversed amount beginning during during at end of year the year the year of year at 31 December 2003 R'000 R'000 R'000 R'000 15. PROVISIONS Provision for claims 9 805 (3 784) 6 021 Provision for leave pay 3 735 (772) 2 963 Provision for deal differences 1 000 1 000 Provision for restructuring 4 270 (4 270) 18 810 (772) (8 054) 9 984 Provision for claims 6 021 6 021 Provision for restructuring 4 270 (4 270) 10 291 (4 270) 6 021 2003 2002 2003 2002 R'000 R'000 R'000 R'000 16. GROSS REVENUE Gross revenue comprises turnover, which excludes value-added tax and represents the invoiced value of services supplied. 17. OPERATING LOSS Operating loss is stated after: Income Profit on disposals of property, plant and equipment 106 26 Profit on sale of subsidiaries 13 858 3 833 (11 490) 2 475 Expenditure Auditors' remuneration 685 403 354 117 Audit fee 470 285 225 100 Prior year under-provision 111 19 75 Other services 104 99 54 17 Depreciation 51 803 36 959 264 276 Property, plant and equipment 1 388 1 562 264 276 Amortisation of goodwill 50 415 35 397 Lease rentals Premises 2 131 2 738 7 11 Loss on foreign exchange 2 080 49 26
NOTES TO THE FINANCIAL STATEMENTS 2003 2002 2003 2002 at 31 December 2003 R'000 R'000 R'000 R'000 18. INVESTMENT INCOME Interest income Interest received 3 426 3 120 1 516 842 Dividend income Dividends received from listed companies 1 8 Dividends received from unlisted companies 185 Dividends received from subsidiaries 16 640 4 000 186 8 16 640 4 000 3 612 3 128 18 156 4 842 19. FINANCE COSTS Interest paid 3 17 2 3 20. TAXATION South African normal tax Current tax 2 269 4 655 Deferred tax Current year (6 797) 1 760 (9 412) Prior year adjustments 7 (4 528) 6 422 (9 412) Secondary tax on companies 665 665 Tax for the year (4 528) 7 087 (9 412) 665 Reconciliation of rate of taxation % % % % South African normal tax rate 30,00 30,00 30.00 30.00 Adjusted for: Exempt income (6,07) (0,38) (14,86) (25,50) Utilisation of assessed losses (7,77) 0,53 (15,14) Foreign taxation (6,20) Secondary tax on companies 2,84 4,38 Effective rate 16,16 26,79 8,88 21. EXCEPTIONAL ITEMS Restructuring costs 4 270 (4 270) 4 270 (4 270) The provision raised in the prior year to protect the company from the impact of negative publicity surrounding the previous directors has been reversed (refer note 15). MICROmega annual report 2003 27
NOTES TO THE FINANCIAL STATEMENTS at 31 December 2003 22. EARNINGS PER ORDINARY SHARE The calculation of loss per ordinary share of 14,53 cents (2002: 22,49 cents) is based on the net loss attributable to ordinary shareholders of R12 382 579 (2002: R18 797 340) and a weighted average of 85 210 053 (2002: 83 576 740) ordinary shares in issue throughout the year. The calculation of diluted loss per ordinary share of 14,06 cents (2002: 22,24 cents) is based on net loss attributable to ordinary shareholders of R12 382 579 (2002: R18 797 340) and a diluted weighted average of 88 083 569 (2002: 84 540 102) ordinary shares in issue throughout the year. Reconciliation between weighted average ordinary shares and diluted weighted average ordinary shares: 2003 2002 Weighted average ordinary shares 85 210 053 83 576 740 Share options 2 522 816 336 362 Shares to be issued for acquisition of subsidiaries 350 700 627 000 Weighted average diluted ordinary shares 88 083 569 84 540 102 The calculation of headline earnings per share of 14,76 cents (2002: 20,38 cents) is based on earnings of R12 575 625 (2002: R17 037 105) and a weighted average of 85 210 053 (2002: 83 576 740) ordinary shares in issue throughout the year. Reconciliation between earnings and headline earnings: Loss before Minorities Exceptional Net profit taxation Taxation interest item 2003 2002 R'000 R'000 R'000 R'000 R'000 R'000 Per the financial statements (21 181) 4 528 4 270 (12 383) (18 799) Amortisation of goodwill 50 415 50 415 35 397 Capital profit on sale of subsidiaries (13 858) (13 858) (3 833) Deferred tax credit (7 328) (7 328) Exceptional item (4 270) (4 270) 4 270 15 376 (2 800) 12 576 17 035 28