OVERVIEW

VenFin once again achieved a steady increase in headline earnings per share to 151.4 cents for the year ended 30 June 2004, 16.3% up from 130.2 cents in 2003. These results were achieved despite difficult market conditions and the negative impact of the strengthening of the rand on the translation of VenFin’s offshore earnings into the local currency.

Most of VenFin’s investments contributed satisfactorily to headline earnings with Vodacom once again the biggest contributor, increasing its contribution to R480 million (2003: R376 million). Sabido Investments (Proprietary) Limited’s (e.tv’s) contribution to headline earnings amounted to R22 million for the year under review, from an equity-accounted loss of R24 million in 2003, resulting in a positive effect of R46 million year-on-year.

The composition of VenFin’s balance sheet has changed due to the consolidation of R&V Holdings Limited (R&V) and Intervid Limited (Intervid) from 30 June 2004. The main difference being that the cash holding in R&V, previously disclosed as part of the carrying value of the investment in R&V, is now disclosed in the cash balance on 30 June 2004.

As a result of the share repurchase programme, 38 500 002 VenFin ordinary shares were cancelled at the end of the financial year. These shares were subsequently delisted. The number of listed ordinary VenFin shares on

COMPOSITION OF REVENUE AND HEADLINE EARNINGS

The group’s main sources of earnings were:

• Vodacom (15.0% interest), which contributed approximately 65% (2003: 57%) to headline earnings
• R&V, which contributed 24% (2003: 32%) to headline earnings
• Net interest income from cash resources, which contributed 9% (2003: 19%) to group earnings

ASSOCIATED COMPANIES

Vodacom
Vodacom has performed well, with headline earnings of R3 133 million (2003: R2 308 million) and an EBITDA margin (earnings before interest, tax, depreciation and amortisation) of 33.1% (2003: 33.9%) for its year ended 31 March 2004. Vodacom South Africa saw a record number of five million new gross connections to 31 March 2004.

The level of connections is the highest since the inception of Vodacom in 1994.

e.tv e.tv performed well in tough trading conditions as it consolidated its market position in South Africa.

For its financial year ended 31 March 2004, revenue increased by 7.6% from R467.6 million in 2003 to R503.2 million, while the company reported a maiden profit of R31.4 million (2003: R117.8 million loss). This was primarily achieved through its ability to convert the strong audience share position into commercial market share.

e.tv turned cash flow positive at operational level for the year ended 31 March 2004.

Tracker
Tracker showed excellent revenue growth of 36.3% for the year ended 30 June 2004, mainly due to its rapidly growing monthly subscription-based income stream.

Earnings for the year to 30 June 2004 increased by a healthy 105.4% to R50.3 million (2003: R24.5 million), mainly as a result of better cost efficiencies on the higher revenue base.

Psitek
Psitek’s revenue and earnings growth of the past years has decreased during the year under review, mainly due to the company’s market sectors maturing, additional effort and costs incurred to fast-track access to and growth in new markets, and new competitors entering the market.

Intervid
Intervid posted disappointing results for the year ended 30 June 2004. The turnaround programme being implemented is affecting revenue growth. However, a corresponding cutting of overheads had a positive effect on the bottom line. Revenue dropped by 42.9% from R446.2 million in 2003 to R255.0 million, and the loss from operations decreased by 39.9% from R203.9 million in 2003 to R122.5 million.

SAIL
Although SAIL’s revenue increased by only 0.9% during its financial year ended 31 December 2003, it achieved through the restructuring process and cost-cutting exercise in 2003 a 91% increase in earnings before finance costs to R17.3 million (2002: 9.0 million). This trend continued during its interim period to 30 June 2004, with a 171% increase in earnings before finance costs to R9.4 million (2003: R3.5 million).

GenuOne
GenuOne increased its customer base from 25 to 38 during the year under review. Although revenues grew by 73%, gross margins were below budget, which resulted in GenuOne not achieving budgeted profitability. However, it still managed to reduce its losses to $2.5 million (2003: $5.8 million) for the year under review.

SUBSIDIARIES

Corporate
Corporate consists of wholly-owned subsidiaries administered at head office level as well as offshore subsidiaries managed and administered offshore, via Switzerland. Activities include treasury functions, receiving and paying of administration fees and other investing activities.

The contribution of net interest income to headline earnings decreased by 45.3% to R70 million (2003: R128 million), mainly due to a lower average local cash balance, resulting from the share repurchase programme.

Dividends received from other investments contributed R12 million (2003: R20 million) to headline earnings.

Net fees paid to M&I Management Services (Proprietary) Limited (M&I) for management and support services rendered during the year amounted to R40 million (2003: R39 million) on a pre-tax basis and constituted 0.400% (2003: 0.442%) of the market capitalisation of VenFin, calculated on a monthly basis.

IMPAIRMENT OF INVESTMENTS AND GOODWILL

Provision for impairment of investments and goodwill amounting to R208 million has been made, of which the most significant are the following:

An impairment provision amounting to R156 million has been made against the carrying value of the unamortised goodwill created on the investment in Intervid Limited to reflect the risks associated with the total investment in the Intervid group.

An impairment provision amounting to R25 million has been made against the unamortised goodwill created on the investment in SAIL, to reflect the decrease in the share price during the year under review.

CURRENCY EFFECTS

A significant portion of VenFin’s headline earnings is derived from foreign denominated income, mainly in euros, US dollars and pound sterling.

During the latter part of the year under review the rand has strengthened significantly against these currencies as can be seen in the closing rates from the table below.

At constant average exchange rates (i.e. 2003 average rates) the effect on headline earnings for the current year would have been negative to the amount of R26 million.

Assuming the average rate for the year to 30 June 2004 is equal to the current €/R, $/R and £/R spot rate, which depicts a stronger rand compared to the average for the past year, it will result in an unfavourable currency impact during the new financial year.

The strengthening of the rand against the major currencies has resulted in negative exchange rate differences on translation of the value of foreign entities into SA rand amounting to R1.026 billion (2003: R1.345 billion), which were debited directly to reserves.

EARNINGS PER SHARE

Headline earnings
Headline earnings for the year to 30 June 2004 increased by 11.3% from R665 million to R740 million.

However, the headline earnings per share for the year under review increased by 16.3% to 151.4 cents from 130.2 cents. The difference in the percentage increase (5.0 percentage points) reflects the positive effect of the share repurchase programme during the year under review. The weighted number of shares in issue, which was used to determine headline earnings per share, decreased to 488 922 237 (2003: 510 601 673).

The main drivers of this increase were:

• Vodacom, whose contribution to headline earnings increased by 27.7%, from R376 million to R480 million
• The continued turnaround of e.tv during the year under review. The contribution of e.tv to headline earnings amounted to R22 million, compared to a loss of R24 million during the comparative year
• Tracker, whose contribution to headline earnings increased by 100%, from R8 million to R16 million during the year under review
• Reduced attributable losses at GenuOne during the year under review, from R22 million to R6 million

Basic earnings
Basic earnings per share decreased by 23.9% to 88.4 cents (2003: 116.1 cents). Basic earnings reflect earnings after goodwill amortisation, impairments of non-financial assets and non-recurring exceptional items.

During the current year attributable after-tax non-recurring exceptional items amounted to R24 million profit (2003: R349 million profit). Included in the exceptional items is a net capital surplus on the sale of the Richemont A units amounting to R20 million (2003: Net capital surplus on the sale of the Richemont depositary receipts amounted to R348 million).

Diluted earnings
As disclosed in note 17 to the financial statements, the diluted earnings per share is calculated by adjusting the weighted number of shares for the dilutive effect of the shares offered to participants by The VenFin Share Scheme. The shares so determined, amounted to 1 218 676 (2003: 349 015) and were added to the weighted number of issued shares. Dilution in future years will be affected by the share price performance.

NET ASSET VALUE

As an investment holding company, management believes the growth in the value of VenFin’s net assets is an important indicator of its relative performance.

Neither the book value of net assets shown in the balance sheet nor the share price necessarily reflects the true or underlying value of the group.

The underlying value of VenFin includes the fair value of financial instruments (which is included in book value) as well as the valuation of associated companies, either at listed market value or, in the case of unlisted investments, at directors’ valuation.

The following factors, or a combination of them, were taken into account in determining the directors’ valuations of the unlisted investments:

• Market value and earnings yield of similar listed shares, discounted for limited tradeability of the unlisted shares
• Growth potential and risk factors
• Underlying net asset value
• Profit history
• Cash flow projections

The net asset value, at market value and directors’ valuation of investments, increased by 7.1%, from R12 096 million to R12 949 million at 30 June 2004, mainly reflecting the increase in the value of Vodacom.

The net asset value per share, at market value and directors’ valuation of investments on 30 June 2004, amounted to R28.80 compared to R24.17 per share at 30 June 2003, an increase of 19.2% year-on-year. The number of shares in issue at 30 June 2004, used to determine the net asset value per share, mounted to 449 562 597 (2003: 500 353 036), reflecting the effect of the share repurchase programme.

Compared to the closing market price of R19.88 (2003: R16.80) prevailing at year-end, the share price trades at a 31.0% discount (2003: 30.5% discount) to VenFin’s net asset value, at market value and directors’ valuation of investments.

The table below gives a more detailed composition of the underlying net asset value.

COMPOSITION OF NET ASSET VALUE (R MILLION)

INVESTMENT REPORT

New investments
VenFin receives investment inquiries through a number of sources, including our sister companies and their networks, our advisors, our existing investee companies as well as through general awareness of the company in the venture capital markets. In addition, the investment team proactively investigates the investment market for new opportunities.

In the year under review, VenFin received approximately 180 new investment applications. Of these applications, 93 investment opportunities were assessed at a desktop level and the investment team undertook five detailed investigations of new investments. A number of proactive investment opportunities were also investigated, of which one, FrontRange Solutions, was concluded.

In addition to new investments, VenFin performed detailed due diligences on two existing portfolio companies with a view to making an investment decision regarding the current holding. The investment team also supported a number of investee companies with restructuring efforts, BEE transactions and general corporate activities.

In order to strengthen its network globally, VenFin made additional investments in two equity capital funds, one in China and one based in Hong Kong. In addition to providing VenFin shareholders with access to high-growth opportunities in markets that they otherwise would not have access to, these investments provide VenFin and its investees with access to networks and expertise in markets outside South Africa. These funds complement VenFin’s existing investment in Israeli/US-based Veritas.

Investment evaluation process
VenFin follows a rigorous investment evaluation process before a new investment is made. A similar rigorous process is also applied to any follow-on investments.

The investment process consists of the following steps:

• an initial high level assessment of the opportunity, followed by
• a presentation and/or report to the VenFin Executive Committee, whereafter
• a term sheet is negotiated with the potential investee, followed by
• a full due diligence process, whereafter
• a full report is presented to the VenFin Executive Committee and, should consensus be reached,
• a full presentation and recommendation to the VenFin Board.

The investment process includes a detailed due diligence on the investment opportunity. The due diligence process typically involves two investment executives and includes, inter alia, financial and legal due diligence, management interviews, market assessment, competitive analysis, customer and partner interviews.

The VenFin Executive Committee meets each month to discuss the existing portfolio and consider new investment opportunities.

The main criteria used by the investment team when considering an investment are:

• Quality and balance of the incumbent management team and their previous experience in the type of business they are pursuing
• Potential impact on VenFin’s net asset value
• Barriers to entry, such as intellectual property, licences, first mover advantage
• Opportunity to internationalise the business
• The value VenFin can add to the investee, be it through its own management team, sister companies or investee network

Monitoring and adding value to investments
VenFin’s aim is to provide strategic input and direction to its companies. This is done through board representation and frequent interaction and facilitation with portfolio companies. Each year VenFin also holds an investee conference to which each portfolio company is invited. The aim of the conference is to facilitate potential portfolio synergies.
Monitoring of investments takes place through representation on relevant board committees and, where possible, VenFin builds in rights via shareholders’ agreements.

CHANGES TO INVESTMENT PORTFOLIO

The most significant changes to VenFin’s investment portfolio during the year ended 30 June 2004 were:

R&V Holdings Limited (R&V)
With effect from 30 June 2004, VenFin and Compagnie Financière Richemont SA (Richemont) restructured their interests in the R&V group of companies.

The effect of this restructuring is that R&V and certain subsidiary companies that were not sold to Richemont, became wholly-owned subsidiary companies of VenFin, resulting in the £100 million Alexander Forbes Bonds; the $100 million Dimension Data Bond and R1 675 million cash coming under the direct control of VenFin from 30 June 2004. However, R&V’s earnings were still equity-accounted at 33.3% for the year under review.

Repurchase of VenFin shares
VENFIN SECURITIES (PROPRIETARY) LIMITED (VENFIN SECURITIES)
VenFin’s wholly-owned subsidiary, VenFin Securities, acquired a further 51 018 039 ordinary VenFin shares at an average price of R19.82 per share for R1 011 million. After the sale of 8 896 346 shares to the Trust during July 2003 and 38 500 002 shares to VenFin Limited, the number of shares held as treasury shares on 30 June 2004, was 25 268 657, or 5.6% of the issued ordinary shares of 1 cent each.

Since the repurchase programme started in the 2002 financial year, a total of 72 665 005 ordinary shares (16.2% of the issued ordinary shares of 1 cent each) were acquired at an average price of R18.94 per share.

VENFIN LIMITED (VENFIN)
VenFin repurchased 38 500 002 VenFin ordinary shares (7.9% of the issued ordinary shares) at an average price of R19.58 per share, from VenFin Securities for a total consideration of R754 million. These shares were subsequently cancelled.

Intervid Limited (Intervid)
VenFin purchased a further 44 321 314 Intervid shares at 34 cents per share for a total consideration of R15 million. On 30 June 2004, VenFin’s interest in Intervid was 64.9%, which resulted in Intervid becoming a subsidiary.

FrontRange Limited (FrontRange)
VenFin invested R38 million in JSE-listed FrontRange, a developer of customer relationship management software solutions with a worldwide presence. At 30 June 2004, VenFin’s effective interest in FrontRange was 11.1%.

SAIL Group Limited (SAIL)
During the year ended 30 June 2002, it was reported that SAIL, in co-operation with VenFin, entered into an empowerment transaction with AKA Capital in terms of which VenFin sold 20 million of its SAIL shares to AKA Capital. On 31 December 2003 this transaction was partially reversed and 18 million SAIL shares were transferred back to VenFin. At 30 June 2004 VenFin’s interest in SAIL amounted to 25.8%.

Idion Technology Holdings Limited (Idion)
On 14 May 2004 VenFin acquired a further 28.96% interest in Idion for R69 million. This interest was part of the 42.58% shareholding in Idion, previously held by DataMirror Corporation.

At 30 June 2004 VenFin’s effective interest in Idion was approximately 35.0%. The investment in Idion, previously classified as an investment available-for-sale, is now classified as an investment in an associated company.

Richemont A units
During September 2003, RGH Investments Limited, a wholly-owned foreign subsidiary of VenFin, sold 2.2 million Richemont A units for R321 million. A capital surplus of R20 million was realised. At 30 June 2004, VenFin’s interest in Richemont was 0.4%.

Equity funds

GEMS ORIENTAL AND GENERAL FUND II (GEMS)
VenFin invested $7.6 million in GEMS, an equity fund investing in businesses in the Asia Pacific region. GEMS provides an alternative source of capital for well-managed and well-positioned companies in need of equity for strategic growth, acquisitions or market expansion. A further $4.9 million has been committed to the fund.

MILESTONE CHINA OPPORTUNITIES FUND I L.P. (MILESTONE CHINA)
VenFin invested $500 000 in Milestone China, an equity fund investing in well-established, high-growth companies seeking expansion or acquisition capital in China. On 30 June 2004 a further $500 000 was committed to the fund.

VERITAS VENTURE PARTNERS (CAYMAN) L.P. (VERITAS)
VenFin invested a further $300 000 in Veritas. On 30 June 2004 the total investment in the fund amounted to $600 000. VenFin has committed a further $900 000 to the fund.

Subsequent to the year-end:

£100 million Alexander Forbes Exchangeable Bonds (the Bonds)
VenFin has reached an agreement with the Board of Alexander Forbes Limited (Alexander Forbes) regarding the Bonds, only eligible for redemption on 15 September 2005 (the transaction). In terms of the transaction, the Bonds will be sold to Alexander Forbes for a cash payment of GBP12.5 million and R1 159.5 million. VenFin has agreed to use the latter amount to subscribe for 114.8 million Alexander Forbes shares. This will result in VenFin holding an effective 24.96% of the enlarged share capital of Alexander Forbes.

VenFin is of the view that the transaction will be the most beneficial for VenFin shareholders in the medium term by enabling Alexander Forbes to grow its international business more aggressively than the current status quo. The transaction was approved by Alexander Forbes shareholders on 6 September 2004.

Intervid scheme of arrangement
Subsequent to the approval by the Competitions Authorities for VenFin to become the majority shareholder in Intervid, VenFin proposed a scheme of arrangement in terms of section 311 of the Companies Act, 1973 (Act 61 of 1973), as amended, between Intervid and its shareholders, other than VenFin and its subsidiaries (the scheme). In terms of this scheme VenFin will acquire all the Intervid shares it does not already own for a cash consideration of 34 cents, or one VenFin share for every 60 Intervid shares held. The scheme was approved by the requisite majority of scheme members on 27 July 2004, and on 5 August 2004 the High Court granted an order sanctioning the scheme. The consideration consisted of R9 million and 99 458 VenFin shares. Intervid was delisted on 24 August 2004.

SAIL Group Limited (SAIL)
On 1 September 2004, VenFin Media Beleggings (Proprietary) Limited, as member of a consortium consisting of SACTWU Investment Group (Proprietary) Limited and members of the SAIL management team, made an offer for the shares held by the minority shareholders of SAIL. The offer price for the proposed purchase is two-tiered: long-term shareholders Nedbank and Luna Corporation have been offered 40.48c per ordinary share, while all the other remaining shareholders have been offered 42c per share.

This transaction is subject to the fulfilment of certain suspensive conditions.

VenFin’s interest in SAIL will change to approximately 37% after this transaction.

Milestone China
During August 2004, VenFin committed a further $4 million to the fund. $2 million was subsequently invested in the fund. The total investment to date amounted to $2.5 million.

CASH FLOWS

Net cash inflow from operating activities increased to R135 million (2003: R128 million). This operating cash flow includes net interest and dividends received from cash and other investments. Total dividends received from associated companies and other investments for the year under review, amounted to R341 million (2003: R112 million). R123 million was utilised to pay a dividend of 25 cents per share.

A total of R1 187 million (2003: R789 million) was invested during the year under review. Of this amount, R1 015 million was utilised to repurchase 10.5% of the issued listed shares of VenFin, R69 million to acquire a 28.9% interest in Idion, R38 million for a 11.1% stake in FrontRange.

Proceeds on the disposal of investments amounted to R324 million (2003: R943 million), and includes the net proceeds on the disposal of Richemont A units.

Cash and cash equivalents amounted to R2 389 million (2003: R1 414 million) at year-end. This amount is made up as follows:

DISTRIBUTION TO SHAREHOLDERS

Repurchase of VenFin shares
As mentioned previously, VenFin Securities acquired during the year under review 51 018 039 (2003: 14 246 966) ordinary VenFin shares at an average price of R19.82 (2003: R16.02) per share for a total R1 011 million (2003: R228 million).

Since the repurchase programme started in the 2002 financial year, a total of 72 665 005 ordinary shares were repurchased at an average price of R18.94 per share.

Dividend
A dividend of 32.5 cents (2003: 25.0 cents) per share has been declared.

This dividend is covered 4.7 times (2003: 5.2 times) by headline earnings and 2.3 times (2003: 1.5 times) by cash earnings. Cash earnings is calculated by adding to the headline earnings the dividends received from associated companies and subtracting the equity-accounted headline earnings from associated companies.

FINANCIAL POSITION

VenFin has a strong balance sheet with no gearing and with shareholders’ funds totalling R7 033 million (2003: R8 205 million) on 30 June 2004. The decrease in shareholders’ funds is mainly attributable to the repurchase programme and cancellation of VenFin shares as well as the negative currency translation effect due to the strengthening of the rand.

This strong financial position enables VenFin to move swiftly should any potential investment opportunities arise.

At 30 June 2004 the underlying assets of R&V, now classified as a controlled foreign company, came under the direct control of VenFin. The interest income earned on the cash and bonds will in future years be subject to South African income tax.

ACCOUNTING DEVELOPMENTS

The accounting policies applied during the current financial year are consistent with those of the previous year, with the exception of the consolidation of The VenFin Share Trust and the implementation of the South African Statement of Generally Accepted Accounting Practice, AC 140: Business Combinations.

AC 140

With effect from 1 April 2004, VenFin adopted AC 140: Business Combinations. In terms of the provisions of this accounting statement, goodwill arising from a business combination for which the agreement date is on or after 31 March 2004, will not be amortised, but be carried at cost less accumulated impairment losses.

Due to the fact that the comparative figures are not restated under the transitional provisions of AC 140, certain items are not directly comparable on a line-for-line basis with those of the prior financial years.

As from 1 July 2004 (i.e. 2005 financial year) all goodwill arising before 1 April 2004 will also be treated in accordance with AC 140.

Consolidation of The VenFin Share Trust (the “trust”)
In terms of the latest rules of the JSE Securities Exchange South Africa, companies are obliged to consolidate share incentive trusts under certain circumstances. 8 668 746 (2003: Nil) ordinary shares held in the trust for participants are accounted for as treasury shares and are now also deducted from the issued number of shares in determining the weighted average number of shares. The cost price of the shares has been deducted from the group’s equity.

As the trust held no shares in 2003, the comparative figures have not been restated.

CONCLUSION

The contribution of the financial staff at M&I, VenFin and from our investee companies has been invaluable during this year under review. I thank you for all your efforts.

Jan Durand
Financial Director