1999 Annual Report

Notes to and forming part of the Financial Statements
for the year ended 31 July 1999

1. STATEMENT OF ACCOUNTING POLICIES

These financial statements are presented and prepared in accordance with the Financial Reporting Act 1993 and the Companies Act 1993. The Parent Company’s financial statements are for Strathmore Group Limited as a separate entity and the consolidated financial statements are for the Strathmore Group, which includes its subsidiaries and its associate entity as disclosed in Notes 8 and 9. The Parent Company is a company registered under the Companies Act 1993 and is an issuer in terms of the Securities Act 1978.

A GENERAL ACCOUNTING POLICIES

The general accounting policies recognised as appropriate for the measurement and reporting of results, cash flows and financial position under the historical cost method, as modified by the revaluation of certain assets, have been followed in the preparation of these financial statements.

B PARTICULAR ACCOUNTING POLICIES

The following particular accounting policies, which significantly affect the measurement of financial performance, financial position and cash flows have been applied:

(i) Revenue

Revenue shown in the Statement of Financial Performance is comprised of the amounts received and receivable by the Group for interest income, gross sale proceeds from shares, and goods supplied to customers in the ordinary course of business. Dividend income is accounted for on a cash basis.

(ii) Principles of Consolidation

The consolidated financial statements are prepared from the financial statements of the Parent Company and its subsidiaries as at 31 July 1999 using the purchase method. The consolidated Statement of Financial Performance includes the Group’s share of the tax-paid results of the associate entity as disclosed by their most recent financial statements.

The equity method has been used for the associate entity in which the Group has a significant, but not controlling interest.

All significant transactions between Group companies are eliminated on consolidation.

(iii) Goodwill

The excess of cost over fair value of the assets of subsidiary and associate entities is capitalised as goodwill and is amortised to the Statement of Financial Performance over its useful life.

(iv) Investments

Shares in listed and unlisted companies are stated at the lower of cost, or where in the Directors’ view there has been a permanent diminution in value, Directors’ assessment of fair value.

The fair value of investments is stated at quoted market prices if available. Otherwise fair value is estimated by the Directors on the basis of financial and other information.

(v) Fixed Assets

The cost of purchased fixed assets is the value of consideration given to acquire the assets and the value of other directly attributable costs which have been incurred in bringing the assets to the location and condition necessary for their intended use. All fixed assets are stated at estimated net realisable value where this is lower than depreciated cost.

(vi) Depreciation

Depreciation is provided on a diminishing value basis on all tangible fixed assets, at rates allowed by the Inland Revenue Department. Major depreciation rates used for Office Furniture and Equipment is 20-50%dv.

(vii) Research & Development

Costs incurred on all research and development projects are written off as incurred, except that development costs are capitalised to the extent that such costs are expected to be recoverable. Capitalised costs are then amortised over a maximum of three years and recognised as an expense so as to reflect the estimated life the product could be marketed before becoming obsolete.

(viii) Income Tax

The Group follows the liability method of accounting for deferred taxation.

The taxation charge against the surplus for the year is the estimated liability in respect of that surplus after allowance for permanent differences. This is the comprehensive basis for the calculation of deferred taxation.

Future taxation benefits attributable to timing differences or losses carried forward are recognised in the financial statements only when there is virtual certainty that the benefit of the timing differences or losses will be utilised by the Group.

(ix) Goods and Services Tax (GST)

The statement of financial performance and statement of cash flows have been prepared so that all components are stated exclusive of GST. All items in the statements of financial position are stated net of GST, with the exception of receivables and payables, which include GST invoiced.

(x) Foreign Currencies

Foreign currency transactions are recorded at the exchange rates in effect at the date of the transaction. Monetary assets and liabilities arising from trading transactions in foreign currencies are translated at closing rates. Gains and losses due to currency fluctuations on these items are included in the Statement of Financial Performance.

(xi) Statement of Cash Flows

The following are the definitions of the terms used in the Statement of Cash Flows:

(a) Cash is considered to be cash on hand, current accounts in banks net of bank overdrafts, bank call or short term deposits, and commercial bills.

(b) Investing activities are those activities relating to the acquisition, holding and disposal of fixed assets and of non current investments.

(c) Financing activities are those activities which result in changes in the size and composition of the capital structure of the Group. This includes both equity and debt not falling within the definition of cash.

(d) Operating activities include all transactions and other events that are not investing or financing activities.

(xii) Comparatives

Certain comparative information has been reclassified in order to provide a more appropriate basis for comparison.

C CHANGES IN ACCOUNTING POLICIES

There have been no changes in accounting policies this year.

3. TAXATION & LOSSES AVAILABLE TO CARRY FORWARD

No taxation is payable (1998 – nil), as the Company and Group have tax losses available to carry forward and offset against current year taxable income. Due to changes in shareholders post year end, the Company and Group will no longer be able to meet the continuity requirements relating to tax losses. Consequently the Company and Group will not be able to carry forward past tax losses beyond September 1999 to offset against any assessable income in future years.

The estimated amount of losses available as at balance date are:

At 31 July 1999 the Imputation Account had a credit balance of $3,000 (1998 – $2,000) and the movements during the year are reflected in the above statement.

4. PAID UP SHARE CAPITAL

All ordinary shares rank equally with one vote attached to each fully paid share.

5. RESERVES

6. FIXED ASSETS

The Group's long-term investments are held by Strathmore Investments Ltd. The loan advance from Strathmore Group to Strathmore Investments Ltd to fund these investments is stated at estimated realisable value. Subsequent to year end the Group sold its investment in its associate Wellington Drive (see note 15).

9. INVESTMENT IN SUBSIDIARIES

Strathmore Investments Limited. Incorporated on 2 July 1996, this Company is 100% owned. It holds the Group’s investment in Wellington Drive Technologies Limited. It also held the investment in CES Communications Limited which were sold in June 1999. Funds advanced to Strathmore Investments Limited are unsecured, repayable on demand and interest free.

CES Communications Limited. On 9 June 1999 Strathmore Investments Limited sold its interests in CES Communications. From 1 May 1998 to this date Strathmore owned 52.7% of CES. The company had equity accounted the results of CES Communications up to 30 April 1998, and consolidated the results thereafter until 9 June 1999. CES Communications Limited has a 31 July balance date.

These foreign currency deposits are not covered by forward exchange contracts and have been translated at the above closing rates.

11. RELATED PARTY DISCLOSURES

Dr R. J. Thomson (previously a director of the Company) is a director of Wellington Drive Technologies Limited. The parent advanced (and was repaid) $165,000 to Wellington Drive on a short-term unsecured basis. Interest of 15% was payable, which the Directors believe to be on normal commercial terms.

Dr R. J. Thomson and Dr G. A. Thomson (previously directors of the Company) were directors of CES Communications Limited prior to June 1999. During the year Strathmore Investments advanced $81,386 to CES on a short-term basis. As part of the arrangement for the sale of CES shares this debt was forgiven plus any accrued interest thereon.

The Steele Trust in which Dr R. J. Thomson and Dr G. A. Thomson (former directors of the company) are trustees and have interests in, purchased from the parent loan advances to Mr K. Stokes totalling $35,000 and short-term investments for $14,082. These transactions were completed and market value and have been settled for cash.

The Parent Company has entered into certain transactions with its subsidiary, see note 9. The outstanding balance at year end is disclosed in the Statement of Financial Position.

12. SEGMENT INFORMATION

Industry Segments. The Group operates primarily in the investment sector and prior to 9 June 1999 had interests in communications technology via its investment in CES Communications Limited. There were no transactions between industry segments whatsoever.

Geographic Segments. The Group operates in New Zealand only.

13. OPERATING LEASE OBLIGATIONS

Obligations payable after balance date on a non-cancellable operating lease total nil (1998 – $34,000).

14. CONTINGENT LIABILITIES AND CAPITAL EXPENDITURE COMMITMENTS

A bond in favour of the New Zealand Stock Exchange has been granted for $75,000 (1998 -$75,000). The Group is not involved in any litigation, accordingly there are no claims outstanding, and there are no contingent liabilities at year end (1998 -nil).

At 31 July 1999 there were no capital expenditure commitments outstanding (1998 - nil).

15. SUBSEQUENT EVENTS

At a Special Meeting of the Company held on 20 July 1999, shareholders approved an offer by the Company to buyback and cancel 7,500,000 shares in Strathmore in consideration for the distribution of up to all shares the Group owns in Wellington Drive. In August 1999 this offer closed. Strathmore shareholders accepting the offer totalled 6,450,540. These shares have subsequently been cancelled. Shareholders accepting the offer received 19,351,620 Wellington Drive shares.

The remaining Wellington Drive shares (i.e. 3,085,145) were sold in September 1999 for a consideration of $369,109.

On 3 September 1999 shareholder changes resulted in a change in control of the Group. Mr P. Norman, Mr P. Wright and Mr D. Cowie were appointed directors.

On 3 September 1999 the Company acquired a stake of 8.3% and options to increase their shareholding up to 31% in total of CommSoft, a telecommunications and internet software company, together with the personnel of Foresight Partners Limited engaged in the venture capital services. The consideration was $172,059 to be settled by the issue of 955,882 Strathmore shares at 18 cents each.

As a result of these transactions occurring after year end, the Company has at 8 October 1999 16,658,026 shares on issue.

16. FINANCIAL INSTRUMENTS

1. Nature of activities and management policies with respect to financial instruments.

   1. Interest Rate

      The Group has commercial bills and deposits from which it derives interest income. It is the policy of the Group to maintain these funds in short term deposits with registered trading banks, which can be readily converted to cash if required. Interest rate exposures are not hedged. Management closely monitor interest rate movements in an effort to maximise interest returns within the Group policy requirements. Interest rates earned ranged from 0.5% to 6.8% p.a. (1998 –6.8% to 9.7% p.a.).

   2. Credit

      In the normal course of business the Group incurs credit risk from transactions with financial institutions. The Group has a credit policy which is used to manage this exposure to credit risk, which includes investing a significant proportion of liquid funds in registered bank or bank endorsed securities. As part of this policy, limits on exposures have been set and are monitored on a regular basis. The Group does not require any collateral or security to support financial instruments. The Directors consider there are no significant concentrations of credit risk, beyond the Group’s exposure to registered banks.

   3. Currency

      The Group undertakes transactions denominated in foreign currencies from time to time and resulting from these activities, exposures in foreign currency arise. The Group does not use forward foreign exchange contracts to hedge its exposures to foreign currency risks. The Directors carefully monitor these exposures and made (or continue to hold) deposits in foreign currencies when they perceive there is a risk of possible devaluation in the New Zealand dollar.

2. Fair Values
   
   The carrying value of receivables, creditors, cash at bank, bank call deposits, and commercial bills and deposits is their approximate fair value.

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