annual report 2008

annual financial statements: notes to the annual financial statements
for the year ended 31 March 2008


    Group
      2008 2007  
      Rm Rm  
11. Deferred taxation                             
  Balance at the beginning of the year   (77.5) (68.8)  
  Movement for the year attributable to:        
  Income statement charge/(credit)   103.9 (13.2)  
  Deferred tax on fair value adjustment in equity   (12.0) 4.5  
  Balance at the end of the year   14.4 (77.5)  
           
  This balance comprises:        
  Capital allowances   28.4 40.8  
  Debtors allowances   19.5 (83.3)  
  Income and expense recognition   2.2 1.9  
  Other provisions   (35.7) (36.9)  
  Balance at the end of the year   14.4 (77.5)  
  Disclosed as:        
  Deferred tax asset   – (102.9)  
  Deferred tax liability   14.4 25.4  
      14.4 (77.5)  
           
12. Retirement benefits        
  Amounts recognised in the balance sheet        
  Defined benefit retirement plan liability      16.9 27.1  
  Post-retirement healthcare benefits      40.8 40.5  
         57.7 67.6  
           
  Retirement plans

The group operates a number of retirement funds, all of which are held separate from the group’s assets. There are three defined contribution funds, namely the Lewis Stores Provident Fund; the Lewis Stores Namibia Provident Fund for Namibian employees; and the SACCAWU Provident Fund for employees belonging to SACCAWU Trade Union. In addition, there are two defined benefit funds, namely the Lewis Stores Group Pension Fund which was closed to new members on 1 July 1997; and the Lewis Stores Retirement Fund for executive management. Both defined benefit plans are registered under the Pension Funds Act No. 24 of 1956.

       
  The number of employees on these plans are as follows: No. of Employees
  Lewis Group Pension Fund   311 350  
  Lewis Stores Retirement Pension Fund   32 27  
  SACCAWU Provident Fund   583 593  
  Lewis Stores Provident Fund   2 888 2 863  
  Lewis Stores Namibia Provident Fund   118 100  
           
  Defined benefit plans        
  The defined benefit funds are final salary defined benefit plans. These schemes are valued by an independent actuary on an annual basis in terms of IAS 19 using the projected unit credit method. The latest valuation was carried out as at 1 January 2008.        
      2008 2007  
      Rm Rm  
  Amounts recognised in the balance sheet        
  Present value of obligations   345.8 303.2  
  Fair value of plan assets   (362.1) (305.6)  
      (16.3) (2.4)  
  Unrecognised actuarial gains   33.2 29.5  
  Defined benefit retirement plan liability   16.9 27.1  
           
  Amounts recognised in the income statement        
  Current service cost   11.1 13.3  
  Interest cost   25.5 19.9  
  Expected return on plan assets   (30.6) (22.5)  
  Net actuarial losses recognised in the year   1.6 –  
  Total included in staff costs   7.6 10.7  
           
  Movement in retirement benefit liability        
  Present value at the beginning of the year   27.1 34.6  
  Income statement charge   7.6 10.7  
  Contributions paid during the year   (17.8) (18.2)  
  Present value at the end of the year   16.9 27.1  
           
  Present value of defined benefit obligations        
  Beginning of year   303.2 269.9  
  Current service cost   11.1 13.3  
  Interest cost   25.5 19.9  
  Employee contributions   1.8 1.9  
  Benefit payments   (18.1) (24.6)  
  Actuarial loss   22.3 22.8  
  End of year   345.8 303.2  
           
  Fair value of defined benefit plan assets        
  Beginning of year   305.6 252.2  
  Employee contributions   1.8 1.9  
  Employer contributions   17.8 18.2  
  Expected return   30.6 22.5  
  Benefit payments   (18.1) (24.6)  
  Actuarial gain   24.4 35.4  
  End of year   362.1 305.6  
           
  Principal actuarial assumptions used were as follows:        
  Discount rate   9.50% 8.50%  
  Expected return on plan assets   10.00% 10.00%  
  Inflation rate   6.50% 5.25%  
  Future salary increases   7.75% 6.25%  
  Future pension increases   6.50% 5.25%  
  Assumptions regarding future mortality experience are based on advice, published statistics and experience. The average life expectancy in years of a pensioner retiring at age 65 on valuation date is as follows:         
  Male   12.6 years 15.9 years  
  Female   14.0 years 19.8 years  
  Actual return on plan assets   18.2% 20.8%  
  The employer’s future contribution is set on an annual basis in consultation with the fund’s actuary.        
  Defined contribution plans        
  For defined contribution plans, the group pays contributions to the funds on a contractual basis. Once the contributions have been paid, the group has no further payment obligations.        
  Defined contribution plan costs   17.5 16.3  
  Post-retirement healthcare benefits        
  The group provides a subsidy of medical aid contributions to retired employees. Only those employees employed prior to 1 August 1997 qualify for this benefit. The liability was valued as at 31 March 2008 by a qualified actuary in accordance with the requirements of IAS 19. The group has a commitment to meet these unfunded benefits.        
  Amounts recognised in the income statement        
  Current service cost   0.9 0.8  
  Interest cost   2.9 2.8  
  Actuarial gain   (1.6) (2.4)  
  Income statement charge   2.2 1.2  
           
  Movement in post-retirement healthcare liability        
  Present value of liability at the beginning of the year   40.5 41.2  
  Charged to income statement   2.2 1.2  
  Employer benefit payments   (1.9) (1.9)  
  Post-retirement healthcare benefits liability   40.8 40.5  
           
  Present value of post-retirement healthcare obligations        
  Beginning of year   40.5 41.2  
  Current service cost   0.9 0.8  
  Interest cost   2.9 2.8  
  Benefit payments   (1.9) (1.9)  
  Actuarial gain   (1.6) (2.4)  
  End of year   40.8 40.5  
           
  Principal actuarial assumptions used were as follows:        
  Healthcare inflation rate   5.50% 4.75%  
  CPI inflation   5.50% 4.75%  
  Discount rate   8.75% 7.75%  
  Average retirement age (years)   63 63  
  Sensitivity   Increase Decrease  
  The effects of a 1% movement in the assumed medical aid inflation rate were as follows:        
  Effect on aggregate of the current service and interest cost   0.7 (0.6)  
  Effect on defined benefit obligation   5.6 (4.6)  
      Obligation Experience
adjustments 
gain/(loss)		  
  Trends        
  The trends of the present value of the obligation and experience adjustments are as follows:        
      2008   40.8 0.2  
      2007   40.5 2.4  
      2006   41.2 4.9  
      2005   34.7 (2.7)  
      2004   30.8 2.0  
      2003   29.5    
      2008 2007  
      Rm Rm  
13. Trade and other payables        
  Trade payables   59.6 91.6  
  Accruals and other payables   107.3 94.0  
  Due to reinsurers   102.7 76.1  
  Insurance provisions   32.8 26.0  
      302.4 287.7  
           
14. Overdrafts and short-term interest-bearing borrowings        
  These borrowings are unsecured. The average closing interest rate on these borrowings was 12.76% (2007: 9.25%)   703.4 429.3  
      703.4 429.3  
           
15. Insurance premiums earned        
  Gross insurance premiums   615.3 495.4  
  Reinsurance commission   203.4 157.9  
  Reinsurance premiums   (254.5) (188.6)  
      564.2 464.7  
           
16. Cost of merchandise sales        
  Purchases   1 272.2 1 211.7  
  Movement in inventory   (0.1) (17.7)  
  Cost of merchandise sales   1 272.1 1 194.0  
  Merchandise gross profit   617.6 614.8  
           
17. Directors and employees        
  17.1  Employment costs        
    Salaries, wages, commissions and bonuses   466.3 449.3  
    Retirement benefit costs   27.3 28.2  
    Share-based payments   6.7 4.0  
    Other employment costs   3.9 4.1  
        504.2 485.6  
             
  17.2  Share-based payments        
    As the fair value of the services received cannot be measured reliably, the services have been valued by reference to the fair value of shares and options granted. The fair value of such options and shares is measured at the grant date using the Black-Scholes model.

In terms of IFRS 2, share-based payments are required to be expensed over the vesting period. Any accelerated vesting of the awards and options requires immediate recognition of the unrecognised portion.

       
    Value of services provided:        
    In respect of share awards and options granted subsequent to date of listing (refer note 17.3)   6.7 4.0  
             
        R R  
    Significant assumptions used were:        
      Weighted average share price   56.40 46.59  
      Weighted average exercise price (for options only)   n/a n/a  
      Weighted average expected volatility   42.6% 38.3%  
      Weighted average expected dividend yield   4.4% 4.9%  
      Weighted average risk-free rate (bond yield curve at date of grant)   8.7% 8.6%  
    The volatilities for the options granted after the date of the listing were based on the volatility of Lewis’ share price from the date of listing to the date of granting the share awards and options.        
  17.3 Share incentive schemes        
    The employee share incentive schemes are in operation for employees, executives and directors holding salaried employment office. The aggregate number of shares which may be utilised for these schemes shall not exceed 10% of the issued share capital of the company.        
    Lewis Executive Share Option Scheme   No. of shares and options  
    Share options are granted to selected executives. The exercise price of the options is the average market price for the last three days, including the date of the grant or, in respect of options granted at date of listing, the listing price of the group’s shares. Options vest between three and five years and must be exercised within ten years after been granted. In terms of the scheme’s rules, the options vest immediately, should there be a change in control.        
    Beginning of year   662 416 841 271  
    Granted   – –  
    Forfeited   – (89 432)  
    Vested and exercised by payment of consideration   (662 416) (89 423)  
    End of year   – 662 416  
             
        R R  
    Average exercise price of outstanding options   n/a 28.00  
    Lewis Executive Performance Scheme        
     In terms of the scheme, senior executives have been offered the right to acquire shares of the group for no consideration subject to the achievement of performance targets. The shares will vest after three years and is conditional upon the executive still being in the employ of the company other than in the event of death, ill health, retirement or retrenchment.

The performance targets are set by the Remuneration and Nomination Committee and are approved by the board. These targets will be set at the beginning of each of the three years and a proportionate number of the shares granted will be allocated to each year.

No performance shares will accrue if the group achieves less than 90% of target. Any achievement between 90% and 100% of target will result in a proportionate accrual of shares weighted towards 100% of target.

       
    Beginning of year   185 639 –  
    Granted   184 270 205 400  
    Forfeited   (52 648) (19 761)  
    Vested   (22 949) –  
    End of year   294 312 185 639  
             
    Lewis Co-investment Scheme        
    Senior executives are eligible for an annual bonus based on achievement of performance targets. These eligible executives can elect to invest all or part of their net bonus in the group’s shares (“invested shares”).

These shares are deferred for three years and matching shares equal to the before tax bonus are awarded for no consideration at the end of the period. The matching share award will lapse, should the executive terminate his or her employment before the completion of the three-year period other than in the event of death, ill health, retirement or retrenchment.

        
    The grant in respect of the matching share option is as follows:        
    Beginning of year   89 322 –  
    Granted   88 179 111 329  
    Forfeited   (3 393) (14 672)  
    Vested   (6 787) (7 335)  
    End of year   167 321 89 322  
             
    Invested shares paid for through the investment of executives’ net bonuses amounted to 106 498 shares (2007: 53 592 shares). These shares are held by the Trust on the executives’ behalf.        
        2008 2007  
        R R  
  17.4 Directors’ emoluments        
    Non-executive directors – fees as directors        
    D M Nurek   495 000 440 000  
    H Saven   341 000 310 000  
    B van der Ross   253 000 230 000  
    F Abrahams   253 000 210 000  
        1 342 000 1 190 000  
             
    Executive director – A J Smart (paid by subsidiary)        
    Salary   2 240 000 2 000 000  
    Bonuses   2 000 000 1 690 000  
    Contributions to pension scheme   358 400 320 000  
    Contribution to medical aid   42 000 37 362  
    Other material benefits   158 400 158 400  
    Gains on options   4 799 673 –  
        9 598 473 4 205 762  
             
    Executive director – L A Davies (paid by subsidiary)        
    Salary   1 100 000 n/a  
    Bonuses   900 000 n/a  
    Contributions to pension scheme   176 000 n/a  
    Contribution to medical aid   50 475 n/a  
    Other material benefits   161 520 n/a  
    Gains on options   1 094 652 n/a  
        3 482 647 n/a  
             
    Gains on options – executive directors     2008  
    A J Smart        
        Options exercised     219 428  
        Offer date   4 October 2004  
        Date exercised     25 May 2005  
        Date of release from undertakings not to dispose of shares   12 November 2007  
        Exercise price (R)     28.00  
        Exercise cost (R)     6 143 984  
        Sale proceeds/market value of shares transferred (R)     10 943 657  
        Gain     4 799 673  
    L A Davies        
        Options exercised     50 000  
        Offer date   4 October 2004  
        Date exercised     26 May 2005  
        Date of release from undertakings not to dispose of shares   12 November 2007  
        Exercise price (R)     28.00  
        Exercise cost (R)     1 400 000  
        Sale proceeds (R)     2 494 652  
        Gain     1 094 652  
        2008 2007  
      No. of shares/options  
    Outstanding share awards and options – executive directors
Share options awarded under the Lewis Executive Share Option Scheme vested as a consequence of the disposal of its controlling interest by GUS in the prior year. The exercise price of these options is R28.00. In terms of a written undertaking, the directors agreed not to dispose of any shares they may become entitled to under these awards prior to 1 October 2007.		        
        A J Smart   – 219 428  
        L A Davies   – n/a  
    Share awards under Lewis Executive Performance Scheme granted (refer note 17.3):        
    Granted on 30 June 2006:        
        A J Smart   44 753 44 573  
        L A Davies   22 287 n/a  
    Granted on 11 June 2007:        
        A J Smart   34 718    
        L A Davies   17 049    
    Matching share options under Lewis Co-investment Scheme:        
    Granted on 30 June 2006:        
        A J Smart   36 344 36 344  
        L A Davies   12 044 n/a  
    Granted on 19 June 2007:        
        A J Smart   30 756    
        L A Davies   13 840    
    The Trust holds 55 789 shares (2007: 21 806 shares) on their behalf by virtue of the investment of their bonuses into the scheme.        
        2008 2007  
        Rm Rm  
  17.5 Remuneration of Key Executives        
    Salary   7.3 7.7  
    Bonus   6.3 5.7  
    Termination benefits   – 1.6  
    Retirement and medical contributions   1.5 1.5  
    Other benefits   0.7 0.6  
        15.8 17.1  
             
    Key executives comprise the directors of Lewis Stores (Pty) Ltd, the main operating subsidiary.         
           
           
18. Lease commitments                                                    
  The group leases the majority of its properties under operating leases. The lease agreements of certain store premises provide for a minimum annual rental payment and additional payments determined on the basis of turnover.        
  Payments on a cash flow basis:        
  Within one year   90.4 78.1  
  Two to five years   208.7 208.3  
  Over five years   – 1.2  
      299.1 287.6  
           
  Payments on a straight-line basis:        
  Within one year   92.0 81.9  
  Two to five years   193.7 196.3  
  Over five years   0.1 1.0  
      285.8 279.2  
           
19. Operating profit is stated after        
  Initiation and service fees on accounts receivable   95.7 36.7  
  Surplus on disposal of property, plant and equipment   4.5 3.8  
  Depreciation        
  Owned assets   40.9 38.5  
  Leased assets   – 0.4  
      40.9 38.9  
           
  Fees payable:        
  Investment management fee – insurance investments   1.8 1.6  
  Outsourcing of IT function   28.7 27.7  
      30.5 29.3  
           
  Operating lease payments on a cash flow basis   105.9 92.6  
  Lease adjustment   4.9 2.1  
  Operating leases on a straight-line basis   110.8 94.7  
           
  Auditors’ remuneration        
  Audit fees – current year   1.4 1.0  
  – prior year underprovision   0.2 0.1  
  Other services   0.3 0.6  
      1.9 1.7  
           
20. Investment income        
  Interest – insurance business   42.3 35.5  
  Dividends from listed investments – insurance business   7.3 5.6  
  Realised profit on disposal of insurance investments   22.1 1.6  
      71.7 42.7