Find the potential.
2002 Annual Report
Making it happen
Contents
03 / Culture and philosophy05 / Group evolution and structure
09 / Key financial highlights
15 / Board of directors
19 / Chairman's statement
23 / Chief executive officer's report
29 / Operational review
39 / Corporate governance
51 / Corporate social responsibility
and investment
55 / Annual financial statements
Imagination breeds freedom
Culture and philosophy
Our philosophy and
culture is the foundation
on which our business is
built. It is a common
thread that binds us
together and dictates the
way we do things It
motivates us to think
beyond the conventional,
to constantly learn and
to execute with
commitment to achieve
the extraordinary.
Adapt to a changing world
Group evolution and structure
1996 / Corpgro was born. Corpfood and Corpbuild were acquired.1997 / Corpcom was created.
Corpgro listing was transferred to industrial holdings sector. Corpcapital, a niche financial services
company was established and listed, focused on investment banking.
Corpcom was listed in the media sector of the JSE Securities Exchange.
1998 / Corpcapital acquired 49% of Fulcrum Science and Technology Bank.
Corpgro acquired 26% of Macadams.
1999 / The corporate finance division of Corpcapital was established.
Fulcrum Bank was renamed Corpcapital Bank and the property asset management and consulting
division of Corpcapital Bank was established.
2000 / Corpgro's listing was transferred to the financial services sector. Group operations were
consolidated under one roof at 2 Arnold Road. Redefine Property Fund was listed.
The group developed several innovative financial products including Satrix 40. The group
committed to achieving one merged listed entity.
Corpgro acquired a further 54% of Macadams.
2001 / Corpgro disposed of 67% of Corpcom to an international consortium retaining a one third
interest.
Corpcapital Limited (formerly Corpgro Limited) became the sole listed group company after
completion of the merger.
2002 / The group announced the termination of its banking related businesses and the focus on its
/ proven core compentencies in investment banking and allied activities.
Group evolution and structure
Corpcapital Limited (Continuing Activities)2002 / 2001 / 2000 / 1999 / 1998 / 1997
Proprietary consolidated
investments
Investment banking and
private equity
Corporate finance
Property asset management
and consulting
Financial products
Hedge funds
and arbitrage
Important to note
Key financial highlights
Key financial highlights
Year ended 31 AugustGroup results / 2002 / 2001*
Total income (R'000) / 297 463 / 459 271
Profit before tax and exceptional items (R'000) / 146 364 / 309 688
Headline earnings (R'000) / 136 926 / 145 184
Headline earnings per share (cents) / 36.5 / 54.3
Ordinary dividend per share (cents) / 12.5 / 12.0
Cost to income ratio (%) / 50.8 / 32.6
Annuity and fee income % of total income (%) / 74.0 / 64.5
* Pro forma comparatives in respect of income statement
FINANCIAL RESULTS
Material aspects of the financial results and their effects on the financial statements are explained below.
ACCOUNTING TREATMENT OF INVESTMENTS
Following the merger of Corpgro, Corpcapital and Corpcapital Bank, the group has adopted consistent principles of classification and accounting treatment of investments.This treatment was adopted from I September 2001 and introduced in the interim results to February 2002.
Investments in subsidiaries, associates or joint ventures where the group has significant influence, and control is not intended to be temporary, are consolidated or equity accounted in terms of AC132 or AC110. All other investments are accounted for at fair value.
The effect of this consistent treatment is that certain investments that were previously accounted for at fair value are now equity accounted. As a result the valuation of investments is more conservative, subjectivity is removed from income recognition, the volatility of earnings is decreased and reporting is more transparent.
Pro forma comparatives for 2001 have been given for ease of reference. Note 37 of the annual financial statements on page 92 shows the comparative carrying values of investments now treated as associates.
Unrealised gains or losses in the value of these associates are not shown in the income statement and the group's share of their pre tax earnings or losses are shown as equity accounted income.The group's share of associates' tax, exceptional items and
Key financial highlights
goodwill amortisation or impairment are shown on the relevant lines in the group income statement. Deferred taxation previously raised on the unrealised gains on investments has been largely reversed.
The portion of the carrying value of proprietary investments in associates in excess of net asset value as at I September 2001 is shown as goodwill and amortised over its estimated useful life in the group income statement.The group amortises technology investments over three years and the remaining investments over periods between five and ten years. Note 8 to the financial statements on page 76 shows the remaining value of unamortised goodwill.
Goodwill in associates has been assessed for impairment at the end of the financial year Impairment of goodwill in respect of Aqua, Cytech and OneLogix has been written off as detailed in Note 27 to the financial statements on page 85. These investments are carried at their recoverable amount, which is the higher of net selling price or value in use.
SHARES HELD BY CONSOLIDATED ENTITIES
Following the merger the group employee share trusts are controlled entities and accordingly were consolidated from I September 2001. At 3 I August 2002, the trusts held 63.5 million shares in Corpcapital Limited. {1.3 million shares were purchased in the current financial year by the trusts at a cost of R19.1 million.The consolidation of the share trusts had the effect of removing the loans to the share trusts, included in advances in 2001, from the group's balance sheet
Together with buybacks during the year of 28.5 million shares purchased at a cost of R46.6 million, held by a subsidiary, this had the effect of reducing the net asset value of the group by R229.8 million and the effective number of shares in issue to 348.2 million at 3 I August 2002.
Shares held by consolidated entities have been deducted from "ordinary shareholders' equity" in the balance sheet and details are shown in Note I 3 to the financial statements on page 79.
CONTINUING AND DISCONTINUING ACTIVITIES
The group's decision to cease deposit taking activities and relinquish its banking licence necessitated the discontinuance of all deposit taking related businesses. The group income statement on pages 70 and 71 shows the split between continuing and discontinuing activities. In addition, the operational review on pages 30 to 37 deals separately with continuing and discontinuing activities.
Segmental information is given for continuing and discontinuing activities in Note
29 to the financial statements onpage 87.
The profit (or loss) before tax and exceptional items in respect of discontinuing activities shown on page 71 represents the profits or losses incurred in the ordinary course of these activities.
The exceptional items shown on discontinuing activities comprise the termination and closure costs as well as any asset impairments or losses on realisation. Impairment tests are specifically required by South African Statements of GAAP in the case of a discontinuance. Full details of exceptional items and the discontinuance are given in Note 30 to the financial statements on page 88.
The process of realising the specialised finance assets of the group, which are a major part of the discontinued operations, will continue for an extended period and the group will continue to report the earnings of continuing and discontinuing activities separately in future periods as required by South African Statements of GAAP.
Five year review
at 31 AugustGroup / 2002# / 2001* / 2000 / 1999 / 1998
Headline profit before tax and
exceptional items (R'000) / 146 364 / 309 688 / 350 899 / 260 661 / 115 955
Headline earnings (R'000) / 136 926 / 145 184 / 151 714 / 120 625 / 69 381
Headline EPS (cents) / 36.5 / 54.3 / 60.3 / 48.2 / 30.1
Ordinary DPS (cents) / 12.5 / 12.0 / 10.5 / 9.0 / 7.0
Return on equity (%) / 12 / 20 / 26 / 24 / 25
Cash and short-term funds (R'000) / 454 427 / 435 911 / 460 548 / 602 120 / 571 431
Ordinary shareholders' equity (Rm) / 1 237 / 1 358 / 578 / 453 / 427
Shares held by consolidated entities (Rm) / 230 / - / - / - / -
Total shareholders' equity (Rm) / 1 017 / 1 365 / 1 218 / 1 025 / 864
Shares in issue excluding shares held
by consolidated entities (000) / 348 241 / 440 265 / 251 588 / 251 588 / 215 882
NAV per share (cents) / 289.2 / 308.4 / 229.8 / 241.3 / 173.7
Total shares in issue (000) / 440 265 / 440 265 / 251 588 / 251 588 / 245 882
Closing share price (cents) / 132 / 225 / 162 / 350 / 285
Market capitalisation (R'000) / 581 150 / 990 596 / 407 573 / 874 230 / 698 404
# Refer to page 71 for split between continuing and discontinuing operations * Pro forma comparatives in respect of income statement
Five year review
Total shareholders’ equity,ordinary shareholders’ equity, minority shaeholders’interest and NAV per share
Ordinary shareholders' equity minority shareholders’interest
Shares held by consolidated entities NAV per share
Think creatively. Act decisively.
Board of directors
Board of directors
FROM LEFT TO RIGHT:
WIM TRENGOVE (52) † -
BCom, LLB Appointed in 2001
NEIL LAZARUS (44) † BA, LLB
Appointed in 2001
BENJI LIEBMANN (48)
BProc
Appointed in 1996
ERROLGROLMAN (51) BCom, FCII Appointed in 1996
ERIC ELLERINE (68)
Chairman
Appointed Director in 1996
Appointed Chairman in 2001
MARTIN SACKS (32) BCom, BAcc, CA(SA) Managing Director Appointed Director in 1997 Appointed Managing Director in 2001
TOM WIXLEY (62) -† BCom, CA(SA) Appointed in 2002
BARRY KALKHOVEN (50)
BCom
Appointed in 2001
JEFF LIEBESMAN (50) BCom, BAcc, CA(SA) Chief Executive Officer Appointed in 1996
NIC FRANCOS (61)
BCom
Appointed in 1996
•Audit Committee
Remuneration Committee
† Corporate Governance Committee
•Non-executive Directo
A word or two.
Chairmans Statement
ERIC ELLERINE Chairman
With the merger of Corpgro, Corpcapital and Corpcapital Bank towards the end of last year the group entered the financial year anticipating continuing growth of its niche banking and related activities. A series of unforeseeable misfortunes suffered by other second tier banks threw the industry into crisis. Confidence in the sector was lost.
Fortunately the group reacted quickly and decisively to its fundamentally altered circumstances. It was resolved to terminate all banking and related activities. This decision was implemented efficiently in cooperation with the regulators and as a result all deposits have been paid on due date.
While facing and dealing with these changing circumstances there were equally fundamental changes occurring in global economic conditions with emphasis on the financial services and investment markets. These global events have resulted in changes in the status and the operations of industry stalwarts that were not previously imagined possible. The effects have been felt by the group.
It is commendable that in these extremely difficult micro and macro economic conditions Corpcapital has emerged with a balance sheet in good health and a redirected strategy befitting current and anticipated economic conditions. This is a tribute to the group's agility in identifying and accepting fundamental change and acting effectively on its decisions.
Chairman’s statement
Although, for the best part of the year, activities were focussed on protecting liquidity and honouring commitments to depositors, whilst operating in falling equity markets, particularly in the information technology sector, the group delivered financial results which were in the circumstances acceptable. For this credit must be given to the spread of its investments and some exceptional performances where group executives have played an important role, influencing strategy and operational improvements.
In particular the property asset management & consulting division once again showed excellent results, the proprietary hedge funds & trading division was highly successful despite volatile markets and remarkably good performance was delivered by proprietary consolidated investments Corpbuild, Macadams and Universal Food Systems.
The group is committed to best practices of corporate governance, transparency, communication with stakeholders and social responsibility. As independent non-executive directors we are grateful for the contribution of Wim Trengove SC and Tom Wixley who chair our corporate governance and audit committees and I would like to thank them for their meaningful assistance.
I commend the chief executive, the executive directors and the management team for their decisive actions, their commitment and their effectiveness in dealing with turbulent circumstances.They have weathered the storm and maintained a solid platform for the future.
While I anticipate another challenging year, the group's focus on its proven core competence within an appropriate infrastructure should enable it to regain its good record for building shareholder value
Eric Ellerine
Chairman
22 October 2002
Securing the future.
Chief executive officer ‘s report
JEFF LIEBESMAN Chief Executive Officer
OVERVIEW
At the outset of the financial year our primary objective was to implement the strategy of the merger to establish a bank centric group which would build assets and annuity income funded through growth in deposits.
At the beginning of the second half of the financial year the failures of other unrelated second tier banks Unifer and Saambou, Fitch IBCA issuing a negative watch rating on most of the remaining second tier banks and the liquidity issues at BOE caused unprecedented and unforeseeable systemic erosion of confidence in the sector. Virtually instantaneously the immediate and foreseeable prospects of retaining and growing our deposits were destroyed.
In response it was resolved to terminate banking and related activities and implement a defensive strategy for maintaining liquidity, ensuring the repayment of all existing deposits and preserving shareholder value. This entailed the reluctant sale of assets, closure of divisions and retrenchment of staff.
These actions ensured that all deposits have been paid on due date and in compliance with all regulatory requirements. It is a noteworthy commendation to management that this was achieved without support from shareholders or the commercial banking community.
Chief executive officer's report
Inevitably the cost of achieving stability was that liquidity and management time which would have been utilised more productively elsewhere, were sacrificed. Immediate stability and a sustainable business model were achieved at the cost of maintaining the group's record of growth in earnings.
Fundamentally altered circumstances have resulted in a return to our core competencies with our continuing operations comprising investment banking and private equity, property asset management and consulting, corporate finance, hedge funds & arbitrage and financial products. We have discontinued all deposit taking and related activities.
We are in the final stages of formally relinquishing our banking status. We are similarly in the final stages of streamlining our business to ensure that our continuing operations proceed off a lean and efficient platform.
REPORTING
These results reflect the first year-end results of the group following the merger. Our results, and this report, have been prepared to reflect the changes to our operations and show the results split between continuing and discontinuing operations with pro forma figures calculated for ease of comparison.
FINANCIAL PERFORMANCE
Headline earnings per share for continuing operations of 56.9 cents was slightly ahead of the 2001 pro forma HEPS of 54.2 cents per share. An unsustainably low tax rate for the period contributed positively to HEPS. While the overall results for the group are disappointing, they reflect the effects of the discontinued operations, the difficult trading conditions, the effects of the global meltdown in technology markets and the allocation of financial resources and management time to the protection of shareholder value at the expense of growth.
Our decision to discontinue certain operations resulted in closure costs of R11.1 million and asset impairments and losses on sale of R28.4 million. Discontinued operations incurred a headline loss of R72 million or 20.4 cents per share primarily as a result of significant losses of R52 million in treasury and write downs of R22 million in the microlending operation.The loss includes overheads in discontinuing operations of R43 million, most of which will not recur going forward. Merchant Factors, which performed well during the year was sold at the end of August 2002.
Our closing balance sheet reflects the simplification of the group's business and the move away from banking related activities. After consolidation of shares held by consolidated entities (in aggregate R229.8 million, which comprises 2 I % of the total issued shares of Corpcapital Limited), group net asset value exceeds R1 billion.
We remain highly liquid with a strong cash position.
OPERATIONS
Investment banking & private equity, property asset management & consulting and hedge funds & arbitrage performed well.
Two investments in particular, Macadams and Corpbuild, had an exceptional year growing headline earnings by over I 00% and 57% respectively, taking advantage of favourable export conditions and buoyant trading conditions. Unfortunately, the proceeds from the sale of our stake in Corpcom (now Clear Channel Independent) had to be used to provide group liquidity and therefore could not be optimally deployed. Forza and certain unlisted private equity holdings made excellent equity accounted contributions.
The impact of the meltdown in global technology markets impacted negatively on our technology investments including Aqua, Cytech and the technology activities of OneLogix with the related impaired goodwill written off.
Property asset management & consulting continued to generate strong annuity and fee income with assets under management growing to R5.4 billion.
Hedge funds & arbitrage took advantage of volatile markets and a disciplined approach to achieve an exceptional return on capital.
Corporate finance performed in line with subdued market conditions while growing its client base and winning some important mandates.
Continued nervousness in the retail markets impacted negatively on Financial products while weak markets and continued uncertainty over asset swaps contributed to diminishing demand.