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notes to the financial statements (21-30)

for the year ended 31 August 2006
        Group      
    Share   Post-retirement      
    appreciation   medical      
    rights   obligations      
    (note 21.1)   (note 21.2)   Total  
      R’000   R’000   R’000  

21

Employee benefits

           
  Long-term employee benefits            
  Balance at 1 September 2004   15 253   15 253  
  Change in fair value of cash-settled obligation taken to profit 662     662  
  Current service cost   663   663  
  Benefit payments   (204)   (204)  
  Interest cost   1 181   1 181  
  Actuarial gain   (98)   (98)  
  Balance at 31 August 2005 662   16 795   17 457  
  Change in fair value of cash-settled obligation taken to profit 9 146     9 146  
  Current service cost   639   639  
  Benefit payments   (254)   (254)  
  Interest cost   1 128   1 128  
  Balance at 31 August 2006 9 808   18 308   28 116  
21.1 Share appreciation rights

During the prior year, the group made six million share appreciation rights available to certain employees. Three million of these rights vest after a period of three years and the remaining three million vest after a period of five years from the grant date. During the current year, the group made a further one million share appreciation rights available to certain employees. Five hundred thousand of these rights vest after a period of three years and the remaining five hundred thousand vest after a period of five years from the grant date.
 
The “exercise price” of the share appreciation rights varies depending on the performance of the company’s share price as detailed below.

   
        7 April 2005 tranche 11 May 2006 tranche  
        “Exercise       “Exercise  
  Share price on vesting date (R)   price” (R) Share price on vesting date (R)   price” (R)  
Three-year rights greater than 12.71   8.36 greater than 16.04   10.55  
  greater than 14.45   4.18 greater than 18.23   5.27  
  greater than 16.33   0.01 greater than 20.61   0.01  
Five-year rights greater than 16.81   8.36 greater than 21.22   10.55  
  greater than 20.80   4.18 greater than 26.25   5.27  
  greater than 25.51   0.01 greater than 32.20   0.01  
As the group’s liability in respect of these share appreciation rights is dependent on the future performance of the company’s share price, a derivative hedge has been acquired to limit the extent of the exposure. The hedging instrument covers all exposure where the notional exercise price is R4.18 per share or above or R5.27 per share or above in respect of the 7 April 2005 and 11 May 2006 tranches respectively. In addition to the cost of the hedge detailed in note 16, in the event that the highest target share price is achieved, the group’s maximum further exposure in terms of the share appreciation rights is R30.3 million.
 
The obligation in respect of these cash-settled share-based payments has been computed based on the fair value of the notional options at year-end as determined by independent external professional valuators using the Binomial option pricing model, amortised over the vesting period of the rights.
 
The following key assumptions have been made: 
i)  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. 
ii)  The risk-free rate on the valuation date was the financial institution who performed the valuation’s lending rate for the expected life of the option. 
iii)  Distribution per share was assumed at 31 cents, 34 cents, 36 cents, 39 cents and 42 cents per share for the financial years 2006, 2007, 2008, 2009 and 2010 respectively.
21.2 Post-retirement medical obligations
The group subsidises a portion of the medical aid contributions of certain retired employees.
 
An actuarial valuation of the Clicks Medical Aid scheme has determined that the unfunded liability in respect of pensioner post-retirement medical benefits amounts to R18.3 million (2005: R16.8 million). Provision has been made for the full unfunded liability.
 
The principal actuarial assumptions at the last valuation date (9 September 2005) are: 
i)  A discount rate of 8.0% per annum 
ii)  General increases to medical aid contributions of 6.0% 
iii)  A retirement age of 65
iv)  Husbands are on average three years older than their spouses 
v)  Mortality of pensioners determined in accordance with PA90 ultimate tables 
vi)  Mortality of in-service members determined in accordance with SA 56-62 ultimate table, with females rated down three years
 

     Short-term employee benefits                    
          Group          
  Leave pay   Bonus   Termination   Overtime      
  accrual   accrual   settlements   accrual   Total  
  R’000   R’000   R’000   R’000   R’000  
Balance at 1 September 2004 35 469   24 524     1 122   61 115  
Charge included in profit 2 893   1 865   5 412     10 170  
Balance at 31 August 2005 38 362   26 389   5 412   1 122   71 285  
Charge included in profit 8 347   18 589   6 709   545   34 190  
Balance at 31 August 2006 46 709   44 978   12 121   1 667   105 475  

The leave pay accrual is based on actual leave days per employee multiplied by the employee’s current total daily cost to the company.
 
The bonus accrual includes a guaranteed thirteenth cheque and an incentive bonus based on the group’s performance. The accrual is provided for all employees who qualify in respect of the expected cash payment.
 
The termination settlements relate to two former directors of the group and are due to be settled in the 2007 financial year.
 
The overtime accrual is in respect of overtime worked in August which is paid in September.

Pension and provident funds
     Four funds, which are registered and governed in terms of the Pension Funds Act, 24 of 1956, are operated by the group. 
These funds are:
  – the Clicks Group Retirement Fund;
  – the Clicks Group Negotiated Pension Fund;
  – the Clicks Group Negotiated Provident Fund; and
  – the New UPD Corporate Selection Pension Fund.

In addition to the above funds, employees of UPD can elect to join the SACCAWU National Provident Fund or Chemical Industries National Provident Fund, which are not operated by the group. PM&A employees can elect to join either the Rainmaker Pension Fund or the Rainmaker Provident Fund. Neither of these are operated by the group. All permanent full-time staff members are obliged to join, at their choice, one of the funds.
 
The funds are all defined contribution funds.
 
Employee and company contributions to the above funds are included in employment costs detailed in note 4.

    Group  
    2006   2005  
    R’000   R’000  

22

Operating lease liability

       
  Operating lease accrual 101 145   85 506  
  Operating leases with fixed escalations are charged to the income statement on a straight-line basis.        
  The associated provision will reverse during the latter part of each lease term when the actual cash flow exceeds the income statement charge.        
           
  Operating lease commitments        
  The group leases all its retail premises and certain of its pharmaceutical distribution centre sites under operating leases. The lease agreements for the group provide for minimum payments together, in certain instances, with further annual payments determined on the basis of turnover.        
           
  Future minimum lease payments under non-cancellable operating leases due        
  – Not later than one year 299 488 268 374  
  – Later than one year, not later than five years 814 393 749 487  
  – Later than five years 354 427   323 190  
    1 468 308   1 341 051  

23

Trade and other payables

       
  The following are included in trade and other payables:        
  Trade payables 1 367 455 1 341 064  
  Non-trade payables and accruals 122 931   29 035  
    1 490 386   1 370 099  
 
Group
    ClubCard       Provision for      
    discount   Gift voucher   onerous      
    provision   provision   contracts      
    (note 24.1)   (note 24.2)   (note 24.3)   Total  
       R’000   R’000   R’000   R’000  

24

Provisions

               
  Balance at 1 September 2004 14 306   4 543   15 282   34 131  
  Provisions made during the year included in cost of merchandise 61 573       61 573  
  Provisions utilised during the year (57 870)       (57 870)  
  Movement in provision during the year recognised in cost of merchandise   235     235  
  Movement in provision during the year recognised in occupancy costs     4 021   4 021  
  Balance at 31 August 2005 18 009   4 778   19 303   42 090  
  Provisions made during the year included in cost of merchandise 70 566       70 566  
  Provisions utilised during the year (65 757)       (65 757)  
  Movement in provision during the year recognised in cost of merchandise   (920)     (920)  
  Movement in provision during the year recognised in occupancy costs     (4 563)   (4 563)  
  Balance at 31 August 2006 22 818   3 858   14 740   41 416  
24.1 ClubCard discount provision

The provision for ClubCard discount is determined based on the value of unredeemed vouchers in issue as well as the value of discount on qualifying sales that has not been converted into vouchers.
Based on the historic redemption rate, it is assumed that 82% of all vouchers in issue are ultimately redeemed. Estimates are made based on historic trends regarding the value of discount on qualifying sales that will ultimately convert into vouchers issued.
The equivalent cost of inventory relating to the sales value of the unredeemed vouchers and qualifying discount not yet converted to vouchers is estimated based on the margin in closing inventory for the Clicks brand and the provision is raised in respect of this cost.

24.2 Gift voucher provision
The provision for gift voucher obligations is determined based on the total value of vouchers sold during the year, net of vouchers redeemed.
24.3 Provision for onerous contracts
   

Onerous contracts are identified where the present value of future obligations in terms of the contracts in question exceeds the estimated benefits accruing to the group from the contracts.
The provision relates to certain leases where the site is either vacant or the commercial activity on the site is incurring losses.
Future cash flows are determined in accordance with the contractual lease obligations and are adjusted by market-related sublet rentals and discounted at a rate of 15% (which is the group’s risk-adjusted pre-tax weighted average cost of capital rate).
The provision is further reduced to the extent that an operating lease accrual has already been recognised (see note 22).

 

Group
2006   2005  
    R’000   R’000  

25

Distributions to shareholders

       
Previous year final cash dividend – 18.5 cents per share paid 19 December 2005 
(2005: 22.5 cents per share paid 20 December 2004)
68 576   82 328  
Current year interim cash distribution out of share premium – 11.2 cents per share paid 
3 July 2006 (2005: cash dividend of 11.2 cents per share paid 27 June 2005)
39 568   41 312  
Total distributions to shareholders 108 144   123 640  
Distributions on treasury shares (5 821)   (11 175)  
Distributions paid outside the group 102 323   112 465  

On 1 November 2006, the directors approved the final proposed distribution of 22.0 cents per share comprising a final cash dividend of 6.8 cents per share and a distribution out of share premium of 15.2 cents per share, to be paid on 18 December 2006.
 
Dividend policy
The board of directors have maintained the distribution cover at 2.2 times. The distribution cover was 2.2 times in the prior year based on the results presented in accordance with South African Statements of Generally Accepted Accounting Practice, but has reduced to 2 times after the restatement due to the conversion to IFRS.
 
For further details refer to the Directors’ Report and shareholders’ information.

      Group  
      2006   2005  
      R’000   R’000  

26

Cash flow information

       
  26.1 Cash generated by operations        
    Operating profit before financing costs 387 347   305 347  
    Adjustment for:        
        Depreciation and amortisation 108 602   104 734  
        Equity-settled share option costs 5 623   5 379  
        Fair value adjustment – derivative (8 323)   3 945  
        Goodwill impairment 1 254   16 814  
        Impairment of property, plant and equipment 3 159   6 143  
        Loss on disposal of property, plant and equipment 1 209   270  
        Operating lease accrual 15 639   9 018  
        Reversal of previous unrealised foreign exchange loss (2 500)    
         Unrealised foreign exchange (gain)/loss (6 080)   2 500  
      505 930   454 150  
    Working capital changes        
        Increase in inventories (3 071)   (190 757)  
        Increase in trade and other receivables (312 202)   (50 107)  
        Acquisition of derivative financial instruments (3 965)   (18 390)  
        Increase in trade and other payables 120 397   42 436  
        Increase in employee benefits 44 849   12 374  
         (Decrease)/increase in provisions (674)   7 959  
      (154 666)   (196 485)  
      351 264   257 665  
  26.2 Tax paid        
    Income tax receivable at the beginning of the year 24 530   5 618  
    Current tax provided (26 902)   (90 346)  
    Income tax receivable at the end of the year (68 929)   (24 530)  
      (71 301)   (109 258)  
  26.3 Proceeds from the issue of share capital        
    Shares issued 74 583   57 334  
    Share issue expenses (189)   (273)  
      74 394   57 061  
  26.4 Cash and cash equivalents        
    Cash on hand and at bank 40 111   60 311  
    Bank overdraft (47 000)   (13 903)  
      (6 889)   46 408  
 

27

Financial instruments

Treasury risk management
Executive management meet on a regular basis to analyse currency and interest rate exposures and re-evaluate treasury management strategies. The group entered into certain interest rate swap agreements in respect of certain fixed rate long-term borrowings and certain floating rate short-term borrowings. The group has fair valued these contracts and included the value in derivative financial instruments (see note 16).

Foreign exchange risk management
The group is exposed to foreign currency risk as it imports merchandise. This risk is mitigated by entering into forward exchange contracts. These contracts are matched with anticipated future cash flows in foreign currencies. The group does not use forward exchange contracts for speculative purposes.
 
At 31 August 2006, the group had open forward exchange contracts to purchase US$11.5 million, £0.6 million and €2.4 million within five months after year-end at rates varying between R6.08 and R7.14 to the US dollar, R13.09 and R13.45 to the UK pound and R8.82 and R9.25 to the Euro. The group also had open forward exchange contracts to sell US$0.5 million and £0.3 million within two months after year-end at rates varying between R7.11 and R7.17 to the US dollar and R12.90 and R13.65 to the UK pound. The group has fair valued these contracts (see note 16).
 
Credit risk management 
The group is exposed to credit risk in respect of its trade receivables, short-term cash investments and loan receivables. Management have a formal credit policy in place. In respect of trade receivables, credit limits are assigned based on credit checks. Credit guarantee insurance also exists for certain significant trade receivable balances. Short-term cash investments are placed with large reputable financial institutions of high credit standing. Loans to third parties are advanced after comprehensive risk assessments have been performed.
 
The group’s maximum exposure to credit risk is represented by the carrying value of its financial assets disclosed in the balance sheet as well as the contingent liabilities referred to in note 31.

Interest rate risk                      
    Group 2006  
    Maturity of interest-bearing asset/liability   Non-      
    1 year   1 to   Over   interest      
    or less   5 years   5 years   bearing   Total  
  Interest terms R’000   R’000   R’000   R’000   R’000  
Assets                      
Loans receivable Variable to prime 553   13 696   11 595     25 844  
Loans receivable Fixed 928   20 784   3 288       25 000  
Loans receivable         25 960   25 960  
Trade and other receivables         792 557   792 557  
Cash and cash equivalents Variable to prime 40 111         40 111  
Derivative financial assets         35 901   35 901  
Total financial assets   41 592   34 480   14 883   854 418   945 373  
Liabilities                      
Interest-bearing loans and borrowings Fixed 12 539   62 782   3 288     78 609  
Interest-bearing loans and borrowings Variable to prime 50 312   73 190   11 595     135 097  
Bank overdraft Variable to prime 47 000         47 000  
Trade and other payables         1 490 386   1 490 386  
Total financial liabilities   109 851   135 972   14 883   1 490 386   1 751 092  
Net financial liabilities   (68 259)   (101 492)     (635 968)   (805 719)  

Fair values of financial instruments
At 31 August 2006, the carrying amounts of trade and other receivables, cash and cash equivalents, trade and other payables and bank overdraft approximate their fair values due to their short-term maturities. Derivatives are carried at fair values determined by external, independent experts. As the terms of other financial instruments are consistent with similar financial instruments concluded at arm’s length, management consider their carrying amounts to approximate their fair values.

Company
         2006  

2005

 
    R’000   R’000

28

Unlisted investment

2 600 redeemable cumulative non-participating preference shares at 9.32% in Sechold Finance Services (Pty) Ltd 260 000    260 000

The directors’ valuation of the investment at 31 August 2006 is R260 million.
 
Unrecognised financial asset
In the group financial statements, the group has not recognised the following financial asset:
New Clicks Holdings Limited (“NCH”) purchased a R260 million preference share investment which carries a 9.32% dividend coupon rate and is redeemable on 22 August 2008. For security of the company’s preference share investment, the finance company referred to in note 20 has pledged its loan receivable from a subsidiary of NCH in the event of a default in terms of the preference share arrangement. For security of the subsidiary company’s loan, NCH has pledged its preference share investment to the finance company in the event of default of the loan. This unrecognised financial asset is offset by the unrecognised financial liability referred to in note 20. The dividend received of R24.2 million (2005: R24.2 million) has been offset against interest on the unrecognised financial liability referred to in note 20.

Group
         2006  

2005

 

29 

Employee statistics

     
  Number of permanent employees 9 058  

8 947

 
  Headline earnings per employee (R) 27 778  

  22 413

 
  Staff turnover:      
  Total employees at the beginning of the year 8 947  

9 011

 
  Add: Recruitments 2 252  

  1 727

 
      11 199  

10 738

 
  Less: Resignations (1 683)  

  (1 354)

 
    Deaths (35)  

  (27)

 
    Dismissals (314)  

  (294)

 
    Retirements (17)  

  (25)

 
    Retrenchments (92)  

(91)

 
  Total employees at the end of the year 9 058  

8 947

 
           
      Group  
      2006   2005  
      R’000  

  R’000

 

30 

Capital commitments

     
  Capital expenditure approved by the directors      
  Contracted 13 294  

80 347

 
  Not contracted 147 306  

  83 687

 
      160 600  

164 034

 
  To be financed from borrowings and internally generated funds.