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notes to the financial statements (11-20)

for the year ended 31 August 2006
        Group   
    2006   2005  
    R’000   R’000  

11

Goodwill

       
  Balance at the beginning of the year 83 950   98 280  
  Additional goodwill payments 1 254   2 484  
  Impairment ( 1 254)   ( 16 814)  
  Balance at the end of the year 83 950   83 950  
  Goodwill comprises:        
     UPD 83 950   83 950  

The additional goodwill acquired during the year related to the excess of the purchase consideration over the fair value of a store acquired during the year. Projected short-term cash flows indicate that the goodwill is impaired.
In accordance with the group’s accounting policies, an impairment test of the remaining goodwill has been performed. 
The goodwill relating to UPD is attributable to the wholesale and distribution business of UPD as a cash-generating unit. 
The recoverable amount was determined based on the fair value less costs to sell.

The following key assumptions were made in determining the fair value less costs to sell: 
i)  A forecast horizon of ten years was used as the business is considered likely to operate for at least this period (ignoring any potential change to medicine regulations or other legislation). 
ii)  A required rate of return of 21.9%, being the prime rate of interest, adjusted for an investor’s estimated marginal tax rate and the risk in variability of the final valuation, which includes an assessment of industry risk and country risk. 
iii)  Selling costs of 1.0% of the gross valuation based on consultations with valuation experts. 
iv)  The net asset value of the business will be realised on disposal. 
v)  Secondary Tax on Companies remains at 12.5%.

The tests performed did not indicate any impairment as at year-end.
The conclusion based on the valuation performed by management was not particularly sensitive to any of the above assumptions.
 

     Company   Group  
    2006   2005   2006   2005  
    R’000   R’000   R’000   R’000  

12

Deferred tax assets/(liabilities)

               
  Deferred tax assets 3 587   557   24 363   73 750  
  Deferred tax liabilities     (45 669)   (37 820)  
    3 587   557   (21 306)   35 930  
  Balance at the beginning of the year 557     35 930   23 612  
  Capital gains tax     (9 396)   (8 054)  
  Employee obligations     (1 429)   (141)  
  Income and expense accrual     19 947   1 171  
  Inventory     (45 364)   5 596  
  Onerous leases     (1 323)   1 013  
  Operating lease accrual     4 490   1 860  
  Property, plant and equipment     (10 842)   (4 224)  
  STC credits 3 030     3 030    
  Tax losses   557   (6 278)   20 368  
  Trademarks     (8 991)   (5 271)  
  Other     (1 080)    
  Balance at the end of the year 3 587   557   (21 306)   35 930  
  Arising as a result of:                
  Capital gains tax     (26 840)   (17 444)  
  Employee obligations     4 004   5 433  
  Income and expense accrual     35 424   15 477  
  Inventory     6 495   51 859  
  Onerous leases     4 275   5 598  
  Operating lease accrual     29 296   24 806  
  Property, plant and equipment     (38 966)   (28 124)  
  STC credits 3 030     3 030    
      Tax losses 557   557   61 018   67 296  
  Trademarks     (97 962)   (88 971)  
    Other     (1 080)    
  Balance at the end of the year 3 587   557   (21 306)   35 930  
  The capital gains deferred tax liability arises on the revaluation of forward purchases of shares by certain subsidiary companies in other subsidiary companies.
 
In respect of the deferred tax assets raised relating to subsidiary companies, the directors consider that sufficient future taxable income will be generated by those subsidiary companies to utilise the deferred tax assets recognised. The tax losses relate primarily to four pharmacy-owning subsidiaries. The companies in question have generated taxable income in the current year to utilise the assessed losses which indicates that it is likely that the deferred tax assets relating to these assessed losses will be realised.
 

Group
2006   2005  
    R’000   R’000  

13

Loans receivable

       
Amount owing by New Clicks Foundation (see note 13.1) 5 021   5 021  
Amount owing by Intercare Managed Healthcare (Proprietary) Limited (see note 13.2) 50 844   47 707  
Amounts owing by Share Trust participants (see note 13.3) 20 939   15 414  
Total loans receivable 76 804   68 142  
Short-term portion included in current assets (1 481)    
Non-current loans receivable 75 323   68 142  
13.1  The loan to New Clicks Foundation is unsecured, interest free and no fixed date for repayment has been determined.
 
13.2 

The loan to Intercare Managed Healthcare (Proprietary) Limited (“Intercare”) was settled on 31 August 2006. Intercare was previously a partially-owned subsidiary of the group. In order for Intercare to settle the loan, it was necessary for the group to guarantee certain facilities amounting to R50 million that Intercare has with its bankers. As the group has substantially retained the risks and rewards related to the financial instrument by issuing the above-mentioned guarantee, the group continues to recognise the financial asset. A corresponding financial liability amounting to R50 million has been raised (see note 20).

The terms of the loan between Intercare and its bankers include a fixed repayment schedule over the next six years. R25 million of the loan is subject to fixed interest at 11.92% and the remainder at a floating rate of the prime borrowing rate of interest less one per cent. The amortisation of the loan receivable and the related interest will be congruent with settling of the loan payable by Intercare to its bankers.

In the event that Intercare defaults on its loan with its bankers, the group would be required to settle any remaining obligation. The group has a general notarial bond over certain movable assets belonging to Intercare as partial security in respect of this receivable.
 

13.3 The Share Trust loans with participants are interest free and secured by the shares in the company issued to participants, delivery of which is delayed in terms of the rules of the scheme (see note 18).
Group   
2006   2005  
  R’000   R’000  

14

Inventories 

     
Inventories comprise:         
Goods for resale 1 383 150 1 435 895  
  Goods in transit 60 011   4 195  
  1 443 161   1 440 090  
Inventories stated at net realisable value 64 984   59 716  
The value of inventories stated at net realisable value is determined based on management’s best estimate of the likely selling price at which the inventories in question can be sold in the ordinary course of business net of directly attributable selling costs.  

    Group   
    2006   2005  
    R’000   R’000  

15

Trade and other receivables

       
  The following are included in trade and other receivables:        
  Trade receivables        
       Gross trade receivables 714 677   422 340  
    Impairment (36 623)   (48 111)  
678 054   374 229
  Prepayments 7 601   28 247  
  Other income accruals 82 400   69 423  
  Other 24 502   8 456  
  792 557   480 355
 

Prepayments in the prior year include payments to foreign suppliers in advance of import purchases being received and payments in respect of certain capital items not yet completed and capitalised.

The impairment is determined based on information regarding the financial position of each trade receivable as at year-end. No consideration is taken of trade receivables that may become bad in the future.
 

    Group  
    2006   2005  
    R’000   R’000  

16

Derivative financial assets/(liabilities)

       
  Derivative financial assets        
  Balance at the beginning of the year 14 749   2 422  
  Purchase of share option hedge 3 965   18 390  
  Realised gain on forward exchange contracts recognised in profit   (1 654)  
  Realised gain on interest rate swap contracts recognised in profit (304)   (768)  
  Unrealised gain on forward exchange contracts recognised in profit 6 080    
  Unrealised gain on interest rate swap contracts recognised in profit 3 088   304  
  Change in fair value of share option hedge recognised in profit 8 323   (3 945)  
  Balance at the end of the year 35 901   14 749  
  The balance at the end of the year comprises:        
  Share option hedge 26 733   14 445  
  Forward exchange contracts 6 080    
    Interest rate swap contracts 3 088   304  
    35 901   14 749  
  Derivative financial liabilities        
  Balance at the beginning of the year (2 500)    
  Realised loss on forward exchange contracts recognised in profit 2 500    
  Unrealised loss on forward exchange contracts recognised in profit   (2 500)  
  Balance at the end of the year   (2 500)  
  The balance at the end of the year comprises:        
    Forward exchange contracts   (2 500)  

Interest rate contracts and forward exchange contracts are revalued at year-end by an independent external valuator based on the market value of similar contracts.

The share option hedge serves as a hedge in respect of the group’s obligation in terms of share appreciation rights granted to employees as more fully described in note 21.1. The derivative has been valued by an independent external valuator using the Binomial option pricing model.
 

    Group  
    2006   2005  
    R’000   R’000  

17

Share capital and share premium

       
  Authorised        
  600 million (2005: 600 million) ordinary shares of one cent each 6 000   6 000  
  Issued ordinary shares and premium        
  355.488 million (2005: 370.260 million) ordinary shares of one cent each 3 555   3 703  
  Share premium – group 815 791 964 077  
  Share premium – company 817 911 966 197  

The unissued shares are under the control of the directors until the next annual general meeting, subject to an undertaking by the directors that such authority will only be used to issue shares in terms of the company’s obligations under the staff share option scheme (see note 18).

Preliminary expenses of R2.1 million were written off against the share premium of a subsidiary company on the acquisition of certain businesses in 1996 giving rise to the difference in the share premium between the group and company.

  Group  
  2006   2005  
  ’000   ’000  
Reconciliation of gross number of shares in issue to net number of shares in issue        
Gross number of shares in issue at the end of the year 355 488   370 260  
Treasury shares held at the end of the year (7 875)   (29 741)  
Net number of shares in issue at the end of the year 347 613   340 519  
         
  R’000   R’000  
Of the shares in issue, the group holds the following as treasury shares:        
Shares purchased by a subsidiary – 5.066 million (2005: 26.932 million) ordinary shares of one cent each – cost 46 784   226 874  
Shares held by the Share Trust – 2.809 million (2005: 2.809 million) ordinary shares of one cent each – cost 22 840   22 804  
  69 624   249 678  
During the year the group cancelled 26 931 767 ordinary shares of one cent each previously held as treasury shares by a subsidiary. Of the total cost of R226.8 million, R43.6 million was deducted from distributable reserves, R0.3 million from share capital and the balance of R182.9 million was deducted from share premium.

18

Share option reserve

New Clicks Holdings Share Trust (“the Share Trust”)
The aggregate number of shares and share options that may be utilised for the purposes of the Share Trust is 20% of the aggregate of the company’s issued share capital and the number of share options granted.
  Group  
  No. of shares   No. of shares  
  2006   2005  
  ’000   ’000  
Shares and share options available for allocation to employees        
Balance at the beginning of the year 83 945   83 762  
(Decrease)/increase as a result of net number of shares cancelled and share options (forfeited)/granted during the year (5 675)   183  
Balance at the end of the year 78 270   83 945  
Shares allocated and options granted to employees        
Shares        
Balance at the beginning of the year 2 526   3 146  
Delivered to participants (1 613)   (620)  
Balance at the end of the year 913   2 526  
Options        
Balance at the beginning of the year 49 463   57 601  
Granted to participants   4 650  
Delivered to participants (12 160)   (9 055)  
Options forfeited by participants (1 442)   (3 733)  
Balance at the end of the year 35 861   49 463  
Total shares allocated and options granted 36 774   51 989  
         
Details of share option allocations:                      
      Balance at the   Granted   Delivered   Forfeited   Balance at  
      beginning   during   during   during   the end of  
Issue date Price   of the year   the year   the year   the year   the year  
October 1998 R3.50   1 502 453     (495 250)     1 007 203  
January 1999 R5.35   15 395 850     (6 825 350)     8 570 500  
July 1999 R7.80   3 545 000     (525 000)     3 020 000  
September 2000 R9.30   7 360 000     (1 180 000)   (50 000)   6 130 000  
April 2001 R7.40   5 598 000     (974 000)   (80 000)   4 544 000  
July 2002 R6.70   4 102 500     (952 500)   50 000   3 200 000  
October 2002 R5.70   250 000     (125 000)     125 000  
January 2003 R6.50   2 050 000     (710 000)   (425 000)   915 000  
June 2003 R5.90   20 000         20 000  
August 2003 R6.30   4 489 000     (372 500)   (487 500)   3 629 000  
October 2003 R7.10   500 000         500 000  
June 2005 R7.50   3 500 000       (400 000)   3 100 000  
August 2005 R8.32   1 150 000       (50 000)   1 100 000  
Total     49 462 803     (12 159 600)   (1 442 500)   35 860 703  
The share option scheme operates on a deferred delivery basis, with participants entitled to take delivery of 50% of the shares after three years and the balance after five years, subject to a maximum of ten years.

      Fair value of share-based payments in respect of options
Options granted after 7 November 2002 that had not vested at 1 January 2005 have been valued using the Binomial option pricing model by an independent, external valuator. The fair value of the options determined at the grant date are amortised over the vesting period to the extent that the options are ultimately exercised or are expected to be exercised.
The assumptions used in estimating the fair values at grant date are listed below:              
                  Expected  
  Share price at   Risk-   Dividend   Expected   exercise  
Options granted grant date (R)   free rate (%)   yield (%)   volatility (%)   rate (%)  
January 2003 – 3-year vesting period 6.50   10.50   2.70   36.00   27.73  
January 2003 – 5-year vesting period 6.50   10.70   2.70   37.00   27.73  
June 2003 – 3-year vesting period 5.80   9.60   3.10   36.00   86.85  
June 2003 – 5-year vesting period 5.80   9.64   3.10   37.00   86.85  
August 2003 – 3-year vesting period 6.64   9.11   3.20   36.00   59.11  
August 2003 – 5-year vesting period 6.64   9.66   3.20   37.00   59.11  
October 2003 – 3-year vesting period 7.00   8.38   3.40   35.00   86.85  
October 2003 – 5-year vesting period 7.00   8.75   3.40   36.00   86.85  
June 2005 – 3-year vesting period 7.60   7.53   3.70   30.00   86.85  
June 2005 – 5-year vesting period 7.60   7.84   3.70   32.00   86.85  
August 2005 – 3-year vesting period 8.40   7.68   3.70   30.00   86.85  
August 2005 – 5-year vesting period 8.40   7.93   3.70   32.00   86.85  

The risk-free rate is the implied yield available on zero-coupon South African government bonds, with a remaining term equal to the expected term of the option being valued (based on the option’s remaining contractual life and taking into account the effects of expected early exercise). Bond yields used are those published by the Bond Exchange of South Africa.

The dividend yield is the historical two-year average dividend yield as of the grant date, which has been converted to a continuously compounded dividend yield.

The expected volatility is the historic annualised standard deviation of the continuously compounded rates of return on the share, based on the most recent period as of the grant date that is commensurate with the expected term of the share option.

The expected exercise rate is based on the historic trend of option forfeitures and excludes options already exercised. The value of options already exercised are reflected in the share option reserve in addition to the value of options that are expected to be exercised based on the expected exercise rate.

The share option reserve recognises the cost at fair value of options issued to employees.        
   Group  
  2006   2005  
  R’000   R’000  
Share option reserve        
Balance at the beginning of the year 14 414   9 035  
Share option cost charged to profit 5 623   5 379  
Balance at the end of the year 20 037   14 414  
Represented by:        
   Estimate of options not yet vested but expected to vest 15 371   12 954  
   Options vested and not forfeited 4 666   1 460  
  20 037   14 414  
       Group  
    2006   2005  
    R’000   R’000  

19

Non-distributable reserve

       
  Non-distributable reserve comprises:        
    Unrealised gain on the translation of assets and liabilities of subsidiaries whose financial statements are denominated in foreign currencies 618   508  
           

20

Interest-bearing loans and borrowings

       
  The contractual terms of the group’s interest-bearing loans and borrowings are detailed below.  
  More information about the group’s treasury, foreign exchange and interest-rate risk policies is given in note 27.  
           
        Group  
    2006   2005  
    R’000   R’000  
  Secured loans bearing interest at fixed rates        
  Interest rate                         Date repayable        
  16.15% per annum               February 2006   11 561  
  16.92% per annum               February 2006   1 164  
  18.45% per annum               October 2006 1 296   9 053  
  15.41% per annum               August 2010 52 313   61 200  
  Total secured loans bearing interest at fixed rates 53 609   82 978  
  These loans are secured by a pledge of shares in certain property-owning subsidiaries.        
           
  Loan – bearing interest at prime less 1% per annum, repayable by August 2010 11 784   18 709  
  This loan is secured by mortgage over certain property (see note 8)        
           
  Finance leases, repayable over the next three years 3 089   3 997  
  These lease liabilities are secured by the related leased items (see note 8)        
           
  Unsecured loan – bearing interest at JIBAR plus 2.2% per annum, repayable by August 2006   20 278  
           
  Unsecured loan – bearing interest at a fixed 11.65% per annum, repayable by August 2008 95 224 134 745  
           
  Financial liability (see note 20.1) 50 000    
  Total interest-bearing loans and borrowings 213 706 260 707  
  Amount repayable within one year included in current liabilities (62 851)   (93 024)  
  Non-current interest-bearing loans and borrowings 150 855   167 683  
20.1 Financial liability

The financial liability has been raised in respect of a loan advanced to Intercare by Intercare’s bankers. Although the loan receivable detailed in note 13.2 has been settled, as the group still retains substantially all of the risks and rewards relating to the receivable through the issuance of a guarantee, the receivable has not been derecognised. The proceeds received on the settlement of the receivable have thus been recognised as a financial liability. The repayment terms of this loan are the same as the terms applicable to the receivable.

Unrecognised financial liability
In the group financial statements, the group has not recognised the following financial liability:
A subsidiary has entered into a loan arrangement with a finance company in terms of which the subsidiary borrowed R260 million. The loan is repayable in August 2008 and interest is payable at 11.65% nominal rate per annum, compounded monthly. This unrecognised financial liability is offset by the unrecognised financial asset reflected in note 28. Interest of R24.2 million (2005: R24.2 million) has been offset against dividends received on the unrecognised financial asset reflected in note 28.