DenelDenel Annual Annual ReportReport PresentationPresentation toto thethe PortfolioPortfolio CommitteeCommittee onon PublicPublic EnterprisesEnterprises 2424 OctoberOctober 2007 2007 AgendaAgenda

•• BackgroundBackground •• StrategyStrategy UpdateUpdate •• BusinessBusiness UnitUnit StatusStatus •• Year-EndYear-End ResultsResults •• OrderOrder PipelinePipeline andand GeneralGeneral ProgressProgress •• AnnualAnnual ReportReport •• ConclusionConclusion

2 •• BackgroundBackground •• StrategyStrategy UpdateUpdate •• BusinessBusiness UnitUnit StatusStatus •• YearYear EndEnd ResultsResults •• OrderOrder PipelinePipeline andand GeneralGeneral ProgressProgress •• AnnualAnnual ReportReport •• ConclusionConclusion

3 4 5 6 7 8 9 DenelDenel OffersOffers anan ImpressiveImpressive ProductProduct andand ServiceService Portfolio.Portfolio. .. ..

10 OverviewOverview ofof AviationAviation BusinessesBusinesses

DEVELOPMENT AND AIRCRAFT COMPONENT AIRCRAFT LOW VOLUME DESIGN, MANUFACTURE MAINTENANCE AND PRODUCTION AND ASSEMBLY UPGRADES

Unmanned Aerial Vehicles Helicopters

Gripen fighter

Missiles HawkHawk trainertrainer

Fixed-wing transport Agusta A109

Optical and A400M Fighters laser technologies 11 DLSDLS LytteltonLyttelton hashas SeveralSeveral WorldWorld ClassClass ProductsProducts in in ItsIts PortfolioPortfolio

DEVELOPMENT AND DEVELOPMENT AND PRODUCTION OF LARGE PRODUCTION OF MAINTENANCE AND CALIBRE ARTILLERY MEDIUM AND SMALL UPGRADES CALIBRE WEAPONS

12 FixedFixed CostCost ProblemProblem

•• Insufficient Insufficient locallocal salessales •• Export Export businessbusiness takestakes placeplace toto fragmentedfragmented exportexport markets,markets, mostlymostly developingdeveloping countriescountries •• This This exportexport businessbusiness isis start-stopstart-stop typetype businessbusiness •• Generally Generally lessless politicallypolitically stablestable marketsmarkets •• High High salessales costscosts •• These These marketsmarkets buybuy mainlymainly onon priceprice andand nono longlong termterm repeatrepeat orderorder businessbusiness isis achieved.achieved.

13 AA ProcessProcess of of DiscoveryDiscovery

•• Legal Legal agreementsagreements •• Legacy Legacy contractscontracts •• Poor Poor deliverydelivery cultureculture •• Poor Poor managementmanagement skillsskills •• Governance Governance issuesissues •• Labour Labour issues.issues.

14 AA ProcessProcess of of DiscoveryDiscovery

•• Discussions Discussions withwith stakeholdersstakeholders toto improveimprove orderorder covercover •• Discussions Discussions withwith industryindustry toto improveimprove synergiessynergies •• Legal Legal agreementsagreements andand LegacyLegacy contractscontracts –– renegotiaterenegotiate oror terminate terminate •• Sell Sell offoff non-corenon-core assetsassets R1bnR1bn •• New New and/orand/or improvedimproved managementmanagement skillsskills •• Improved Improved governancegovernance issuesissues andand controlscontrols •• Labour Labour issuesissues resolved.resolved.

15 FinancialFinancial IndicatorsIndicators

600600 400400 200200 00 -200-200 -400-400 -600-600 -800-800 -1000-1000

19961996 1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 PROFITPROFIT (LOSS)(LOSS)

16 •• BackgroundBackground •• StrategyStrategy UpdateUpdate •• BusinessBusiness UnitUnit StatusStatus •• Year-EndYear-End ResultsResults •• OrderOrder PipelinePipeline andand GeneralGeneral ProgressProgress •• AnnualAnnual ReportReport •• ConclusionConclusion

17 OurOur ChallengeChallenge

‘Fixing’‘Fixing’ Denel Denel means means ...... •• Becoming Becoming aa profitable,profitable, commerciallycommercially viableviable andand dynamicdynamic entityentity •• Delivering Delivering consistent,consistent, realreal growthgrowth •• Attracting, Attracting, developing,developing, retainingretaining andand appropriatelyappropriately rewardingrewarding world-classworld-class skillsskills •• Achieving Achieving worldworld classclass productivityproductivity •• Focusing Focusing onon thethe areasareas wherewhere wewe cancan competecompete crediblycredibly •• Partnering Partnering withwith statestate agenciesagencies toto meetmeet thethe defencedefence needsneeds ofof thethe countrycountry •• Developing Developing partnerships/alliancepartnerships/alliance venturesventures withwith truetrue valuevalue add.add.

18 KeyKey MessagesMessages

1.1. Much Much ofof thethe globalglobal defencedefence spendspend isis inaccessibleinaccessible toto independentindependent contractors,contractors, makingmaking playersplayers highlyhighly reliantreliant onon theirtheir domesticdomestic markets.markets. Furthermore,Furthermore, changeschanges inin thethe industryindustry areare forcingforcing playersplayers toto consolidate,consolidate, buildbuild alliancesalliances aandnd carefullycarefully focusfocus theirtheir businessesbusinesses

2.2. Denel Denel nono longerlonger hashas aa largelarge domesdomestictic marketmarket toto provideprovide thethe scalescale toto succeedsucceed asas anan independentindependent globalglobal systemssystems integratorintegrator andand exporterexporter ofof aa broadbroad rangerange ofof producproductsts onon thethe internationalinternational marketsmarkets

3.3. To To succeed,succeed, DenelDenel isis pursuingpursuing a a strategystrategy basedbased onon primeprime contractingcontracting inin thethe domesticdomestic marketmarket andand thethe exportexport ofof systemssystems andand componentscomponents throughthrough selective selective equityequity partnershipspartnerships andand alliancesalliances withwith globalglobal primeprime contractors.contractors.

19 20 TheThe GlobalGlobal DefenceDefence IndustryIndustry Has Has UndergoneUndergone SignificantSignificant Change Change Over Over thethe PastPast Decade,Decade, andand thethe PacePace of of ChangeChange WillWill IncreaseIncrease

FORCESFORCES FORFOR CHANGECHANGE IMPLICATIONSIMPLICATIONS

• Lengthening product life cycles and Declining defence reducing demand for new platforms spend • Shift to smaller, more mobile weapons and increasing use of electronics • Increasing consolidation to achieve minimum scale • Smaller players forming global alliances Changing nature of and focusing on: conflicts and shifting – Supply of systems, sub-systems and customer needs components to alliance partners – Fulfilling maintenance and upgrade role for domestic customer

21 DecliningDeclining DefenceDefence SpendSpend andand IncreasingIncreasing R&DR&D Costs Costs HaveHave DrivenDriven ConsolidationConsolidation ofof PrimePrime ContractorsContractors AcrossAcross AllAll SectorsSectors

US AEROSPACE EXAMPLE 1992: Over 30 companies 2005: Five consolidated groups • Lockheed Martin • General Dynamics A/C In 1992, the US Defence • Martin Marietta GE Aerospace • Loral Department encouraged • Computer Affiliated Svc. Inc. manufacturers to merge • Rockwell Aerospace • McDonnell Douglas in order to cope with • Hughes Space drastic budget cuts: • Continental Graphics • Jeppesen • Flight Safety Training “By 1996, American • Raytheon • BAE Corp Jets defence budget • E-Systems expenditure on • Texas Instruments (Def.) • Hughes Defense equipment procurement • General Dynamics • Bath Iron Works and R&D will fall by over • NASSCO Holds. 40%, from $117b to • Gulfstream • Galaxy Aerosp. $68b” • Motorola IISG • GM Defense •Veridian • Northrop Grumman • Grumman • Westinghouse ESD • Logicon • Aerojet EIS • Newport News Ships •TRW •XonTech 22 LookingLooking Ahead,Ahead, SuccessfulSuccessful PlayersPlayers WillWill RequireRequire BothBoth PrivilegedPrivileged AccessAccess andand aa CommercialCommercial OrientationOrientation

PRIVILEGED ACCESS •• LargeLarge domesticdomestic demanddemand andand guaranteedguaranteed accessaccess toto domesticdomestic programmesprogrammes Captive Market •• ReliableReliable multi-yearmulti-year R&DR&D fundingfunding toto retainretain aa techno-techno- logicallogical edgeedge inin anan increasinglyincreasingly globalisedglobalised market market

Political Support •• Consistent,Consistent, activeactive supportsupport fromfrom governmentgovernment forfor exportexport salessales

COMMERCIAL ORIENTATION

Focus •• SpecificSpecific productsproducts oror rolesroles inin thethe valuevalue chainchain withwith defendabledefendable positionspositions Alliances •• IntegrationIntegration intointo aa networknetwork ofof OEMsOEMs andand sub-supplierssub-suppliers toto gaingain marketmarket access,access, skillsskills andand minimumminimum scalescale Excellent Execution •• WorldWorld classclass capabilitiescapabilities andand productivityproductivity 23 DenelDenel hashas LargelyLargely LostLost itsits CaptiveCaptive DomesticDomestic FundingFunding BaseBase ......

Rm, Real 2005

RSA Defence Spend Recovered Since 2000 . . .. . But Denel did not participate in this recovery

14 000 • Recent spend increase 14 000 not in areas where Denel has capabilities 12 000 • Spend levels will decline 12 000 by 2010 10 000 10 000

8 000 Total SA 8 000 defence 6 000 spend 6 000

Total Denel 4 000 4 000 revenue* Denel exports 2 000 2 000 Denel local sales 0 0 1985 1990 1995 2000 2005 1985 1990 1995 2000 2005

*Pre-1992 figures estimated from Armscor and defence industry data ESTIMATES 24 ...... TheThe FiveFive IndustryIndustry SuccessSuccess FactorsFactors ShouldShould FormForm thethe FoundingFounding PrinciplesPrinciples ofof thethe FutureFuture DenelDenel WHATWHAT THISTHIS MEANSMEANS PRIVILEGED ACCESS 1.1. Secure Secure privilegedprivileged accessaccess toto aa guaranteedguaranteed minimumminimum proportionproportion ofof RSARSA defencedefence developmentdevelopment Captive Market andand procurementprocurement spendspend

2.2. Partner Partner withwith thethe statestate agenciesagencies –– joint joint businessbusiness Political Support planningplanning andand exportexport marketingmarketing responsibilitiesresponsibilities

3.3. Focus Focus onon growinggrowing thethe commerciallycommercially viableviable COMMERCIAL businessesbusinesses wherewhere DenelDenel hhasas realreal technologicaltechnological ORIENTATION leadership;leadership; otherother businessesbusinesses ring-fencedring-fenced oror operatedoperated underunder managementmanagement contractscontracts Focus 4.4. Secure Secure scalescale throughthrough equityequity businessbusiness Alliances partnershipspartnerships withwith majormajor globalglobal playersplayers

5.5. Raise Raise capabilitiescapabilities andand productivityproductivity toto worldworld classclass Excellent Execution levels;levels; exitexit businessesbusinesses wherewhere thisthis cannotcannot bebe achievedachieved 25 26 StrategyStrategy ImperativesImperatives SingleSingle VisionVision AnythingAnything ElseElse WillWill NotNot HelpHelp

From: Misalignment Amongst Stakeholders To: Single Vision and Purpose

President Portfolio Ministers – and DPE, DoD, Foreign Cabinet Affairs, Finance

One Team President and Cabinet Denel Denel Portfolio Ministers / DOD Board Executive Denel Board Team Denel Executive Team 27 28 •• BackgroundBackground •• StrategyStrategy UpdateUpdate •• BusinessBusiness UnitUnit StatusStatus •• Year-EndYear-End ResultsResults •• OrderOrder PipelinePipeline andand GeneralGeneral ProgressProgress •• AnnualAnnual ReportReport •• ConclusionConclusion

29 DenelDenel Structure Structure

Minister of Public Enterprises Mr Alec Erwin

Denel (Pty) Ltd

Denel Saab Denel Denel Mechem Aerostructures Land Systems Munitions (Pty) Ltd (Pty) Ltd *80% Turbomeca Denel Denel Carl Zeiss Optronics Africa Dynamics Aviation (Pty) Ltd (Pty) Ltd

*30% *49%

* Denel Shareholding

30 StructuredStructured ApproachApproach StructuredStructured DenelDenel NewCoNewCo ApproachApproach

PHASE 1 (Explore) Structured Risk Management in Place • Identify Potential Partners NewCo Approach Outcomes: • Develop Business Plan • Restructured Businesses: • Ring Fence Business • Exit “bad” Business PHASE 2 (Uncover) • Access Markets - Stable Turnover/Order Books • Full Risk Assessment • Rightsized • Data Room - Full Disclosure • Inject Management Skills - Improve • Due Diligence with Partner Operations • Apply Recap/Guarantees PHASE 3 (Define) • More Defence Spend Access • Recap/Guarantees • Business Arrangements • Performance Based Contracts • Equity Partner & SANDF • NewCo Board - Strengthen Governance • Ring Fenced PTY (Ltd) Risk Containment

31 EquityEquity PartnerPartner ProcessProcess

•• SAAB SAAB // DenelDenel Aerostructures Aerostructures – – completed completed 20072007 •• Zeiss Zeiss / / OptronicsOptronics – – completed completed 20072007 •• Turbomeca Turbomeca Africa Africa –– completed completed 20022002 •• Denel Denel Munitions Munitions –– Equity Equity TransactionTransaction proposalproposal submittedsubmitted andand approvedapproved byby DenelDenel Board Board (P(PFMAFMA applicationapplication submitted)submitted) •• Denel Denel UAVs UAVs – – Equity Equity TransactionTransaction proposalproposal submittedsubmitted andand approvedapproved byby DenelDenel Board Board (PFMA(PFMA applicationapplication submitted).submitted).

32 DenelDenel MunitionsMunitions

•• Core Core CompetenciesCompetencies – – Current Current •• Design Design andand manufacturemanufacture ofof small,small, mediummedium andand largelarge calibrecalibre ammunitionammunition andand ammunitionammunition manufacturingmanufacturing facilitiesfacilities •• Future Future FocusFocus •• International International nicheniche marketsmarkets forfor innovativeinnovative productsproducts •• Insensitive Insensitive munitionsmunitions (IM)(IM) •• Equity Equity partnerpartner shareholding,shareholding, on-goingon-going discussionsdiscussions withwith aa majormajor EuropeanEuropean companycompany •• Potential Potential splitsplit ofof smallsmall andand mediummedium calibrecalibre fromfrom otherother MunitionsMunitions businessbusiness •• Turnover/Staff Turnover/Staff –– R1,100m/3100. R1,100m/3100. 33 DenelDenel MunitionsMunitions

DENELDENEL MUNITIONSMUNITIONS SalesSales RiskRisk AnalysisAnalysis

1,8001,800

1,6001,600

1,4001,400

1,2001,200

1,0001,000 Rm Rm 800800

600600

400400

200200

-- 07/0807/08 08/0908/09 09/1009/10 10/1110/11 11/1211/12

Breakeven LocalLocal OrdersOrders LocalLocal PlannedPlanned SalesSales ExportExport OrdersOrders ExportExport PlannedPlanned SalesSales

34 DenelDenel MunitionsMunitions

DENELDENEL MUNITIONSMUNITIONS (Exports(Exports atat aa 50%50% success)success)

1,8001,800

1,6001,600

1,4001,400

1,2001,200

1,0001,000 Rm Rm 800800

600600

400400

200200

-- 07/0807/08 08/0908/09 09/1009/10 10/1110/11 11/1211/12

Breakeven LocalLocal OrdersOrders LocalLocal PlannedPlanned SalesSales ExportExport OrdersOrders ExportExport PlannedPlanned SalesSales

35 AreasAreas ofof ConcernConcern -- Munitions Munitions

•• Far Far shortshort ofof ordersorders forfor currentcurrent yearyear oror futurefuture yearsyears –– breakeven breakeven RR 1.21.2 billionbillion •• Current Current locallocal ordersorders fromfrom SANDFSANDF circacirca RR 120120 millionmillion •• Uncertainty Uncertainty withwith regardregard toto furtherfurther ordersorders toto bebe placedplaced forfor currentcurrent yearyear byby SANDFSANDF •• No No visibiltyvisibilty on on futurefuture requirementsrequirements forfor SANDFSANDF •• Export Export ordersorders inconsistentinconsistent andand lowlow toto negativenegative marginmargin •• This This businessbusiness isis likelylikely toto becombecomee insolventinsolvent byby thethe endend ofof thethe currentcurrent financialfinancial yearyear ifif thethe alternativesalternatives proposedproposed areare notnot implementedimplemented

36 DenelDenel AviationAviation

•• Core Core competenciescompetencies - - Current Current –– Accredited Accredited maintenancemaintenance andand repairrepair organisationorganisation (MRO)(MRO) forfor militarymilitary andand civiliancivilian fixed-wingfixed-wing andand rotary-wingrotary-wing aircraftaircraft –– Rooivalk Rooivalk now now reportingreporting throughthrough toto AviationAviation •• Focus Focus –– Further Further internationalinternational accreditationaccreditation andand PSSPSS –– Worldwide Worldwide trend trend toto outsourcingoutsourcing maintenancemaintenance –– An An annualannual growthgrowth ofof 10%10% isis projectedprojected inin thisthis marketmarket forfor thethe nextnext 1010 yearsyears

•• Turnover/Staff Turnover/Staff –– R550m/1300. R550m/1300.

37 DenelDenel AviationAviation

DENELDENEL AVIATIONAVIATION SalesSales RiskRisk AnalysisAnalysis (Excl(Excl AMGAMG Order)Order)

1,0001,000

900900

800800

700700

600600

500500 Rm Rm

400400

300300

200200

100100

-- 07/0807/08 08/0908/09 09/1009/10 10/1110/11 11/1211/12

Breakeven LocalLocal OrdersOrders LocalLocal PlannedPlanned SalesSales ExportExport OrdersOrders ExportExport PlannedPlanned SalesSales

38 AreasAreas ofof ConcernConcern -- Aviation Aviation

•• Duplication Duplication betweenbetween SAAFSAAF andand DenelDenel Aviation Aviation inin areasareas ofof manpower,manpower, equipment,equipment, facilitiesfacilities •• Opportunity Opportunity existsexists toto createcreate aa modemodell ofof co-sharingco-sharing ofof allall resourcesresources •• Benefit Benefit willwill leadlead toto overalloverall efefficiencyficiency inin MaintenanceMaintenance andand RepairRepair activitiesactivities inin lineline withwith internationalinternational bestbest practicepractice •• This This willwill leadlead toto costcost optimisationoptimisation •• Due Due toto relativelyrelatively highhigh numbernumber ofof platforms,platforms, eacheach withwith lowlow volumes,volumes, criticalcritical massmass becomesbecomes difficultdifficult •• As As such,such, aa modelmodel ofof “single“single source”source” supply supply willwill bebe requiredrequired forfor newnew generationgeneration platforms.platforms.

39 DenelDenel Aviation Aviation -- Rooivalk Rooivalk

•• Denel Denel lost lost thethe bidbid toto thethe TurkishTurkish GovernmentGovernment inin earlyearly 20072007 •• The The implementationimplementation ofof thethe SAAFSAAF contractcontract forfor 1212 RooivalkRooivalk Attack Attack HelicoptersHelicopters continuescontinues •• Denel Denel Aviation, Aviation, asas thethe designdesign authority,authority, willwill continuecontinue toto provideprovide afterafter salessales supporsupportt onceonce thethe deliverydelivery ofof thethe 1212 helicoptershelicopters isis completedcompleted •• Strategic Strategic decisiondecision fromfrom thethe SAAFSAAF withwith regardregard toto RooivalkRooivalk required required givengiven potentialpotential obsolescenceobsolescence andand redundancyredundancy andand longtermlongterm support support fundingfunding requirementsrequirements

40 DenelDenel DynamicsDynamics

•• Core Core competenciescompetencies - - current current –– Missiles, Missiles, DISSDISS andand UAVsUAVs •• Products Products –– Ingwe, Ingwe, Mokopa,Mokopa, Umkhonto,Umkhonto, A-Darter,A-Darter, R-Darter,R-Darter, SeekerSeeker 2,2, Skua,Skua, UmbaneUmbane andand ArachnidaArachnida (WMS),(WMS), Raptor,Raptor, GBADS.GBADS. •Future•Future -- Unbundle Unbundle Missiles, Missiles, UAVsUAVs and and DISSDISS -- Implement Implement strongstrong outsourceoutsource modelmodel -- Investigate Investigate “home”“home” for for R&DR&D •• Turnover/Staff Turnover/Staff –– R750m/800. R750m/800.

41 DenelDenel DynamicsDynamics

DENEL DYNAMICS Sales risk analysis

1,400

1,200

1,000

800 Rm

600

400

200

- 07/08 08/09 09/10 10/11 11/12

Breakeven Local Orders Local Planned Sales Export Orders Export Planned Sales

42 AreasAreas ofof ConcernConcern -- Missiles Missiles

•• The The businessbusiness cannotcannot achieveachieve sufficsufficientient salessales toto covercover overheadsoverheads inin thethe shortshort toto mediummedium termterm •• A-Darter A-Darter hashas nono productionproduction ordersorders asas yetyet •• Business Business hashas aa numbernumber ofof legacylegacy contractscontracts thatthat mustmust bebe addressedaddressed •• The The businessbusiness willwill becomebecome insolventinsolvent byby thethe endend ofof thethe currentcurrent financialfinancial yearyear unlessunless allall stakeholdersstakeholders findfind aa solutionsolution •• Various Various strategiesstrategies areare beingbeing investigatedinvestigated toto retainretain capabilitycapability andand toto looklook atat optimisingoptimising thethe capabilitycapability

43 DenelDenel Land Land SystemsSystems

•• Hoefyster Hoefyster will will createcreate futurefuture basebase load/load/ CompanyCompany remainsremains effectivelyeffectively aa singlesingle projectproject companycompany •• Very Very dependentdependent onon HoefysterHoefyster production production ordersorders -- Needs Needs alternativealternative revenuerevenue fromfrom internationalinternational marketsmarkets •• Future Future FocusFocus •• Focused Focused providerprovider ofof landwardlandward DefenceDefence systemssystems solutionssolutions •• Equity Equity partner/spartner/s withwith consolidatedconsolidated locallocal andand internationalinternational industryindustry •• Prime Prime contractor,contractor, systemsystem integratorintegrator andand suppliersupplier ofof subsystemssubsystems inin infantryinfantry weapons,weapons, artilleryartillery gungun systems,systems, combat combat turretsturrets (small(small arms?) arms?) •• Turnover Turnover /Staff/Staff –– R430m/440. R430m/440.

44 DenelDenel Land Land SystemsSystems

DLSL (Exports at 50% success)

1,600

1,400

1,200

1,000

800 Rm

600

400

200

- 07/08 08/09 09/10 10/11 11/12

Breakeven Local Orders Local Planned Sales Export Orders Export Planned Sales

45 DenelDenel Land Land SystemsSystems

DLSLDLSL (Exports(Exports atat 50%50% success)success)

1,6001,600

1,4001,400

1,2001,200

1,0001,000

800800 Rm Rm

600600

400400

200200

-- 07/0807/08 08/0908/09 09/1009/10 10/1110/11 11/1211/12 12/1312/13 13/1413/14 15/1615/16 16/1716/17

Breakeven LocalLocal OrdersOrders LocalLocal PlannedPlanned SalesSales ExportExport OrdersOrders ExportExport PlannedPlanned SalesSales

46 DenelDenel SaabSaab AerostructuresAerostructures (Pty)(Pty) LtdLtd

•• 20% 20% EquityEquity shareholdingshareholding byby SaabSaab ABAB •• Focus Focus onon compositescomposites,, aerostructuresaerostructures designdesign andand manufacturing,manufacturing, globalglobal leaderleader inin aerostructuresaerostructures for for AfricaAfrica •• Current Current ProductsProducts –– A400M A400M aerostructures,aerostructures, GripenGripen aerostructures,aerostructures, HawkHawk aerostructures,aerostructures, AgustaAgusta A109A109 assemblyassembly && manufacturing,manufacturing, BoeingBoeing componentscomponents •• Turnover/Staff Turnover/Staff –– R220m/780. R220m/780. 47 CarlCarl ZeissZeiss OptronicsOptronics (Pty)(Pty) LtdLtd

•• Equity Equity PartnershipPartnership –– Denel Denel shareholdingshareholding 30%30% •• Core Core competenciescompetencies –– Design, Design, development,development, manufacturemanufacture andand supportsupport ofof militarymilitary andand civiliancivilian electro-opticalelectro-optical products.products. •• Products Products –– Range Range ofof image-stabilizedimage-stabilized opticaloptical surveillancesurveillance systems,systems, laserlaser range-findersrange-finders andand helmet-mountedhelmet-mounted sightingsighting andand trackingtracking systems.systems. •• Turnover/Staff Turnover/Staff –– R330m/370. R330m/370.

48 MechemMechem (Pty)(Pty) LtdLtd

•• Future Future FocusFocus –– Local Local andand internationalinternational marketsmarkets forfor landminelandmine clearanceclearance andand contrabandcontraband detection.detection. •Prospects•Prospects –– UN UN estimatesestimates therethere areare 110110 millionmillion landmineslandmines acrossacross 1515 countriescountries –– Strategic Strategic decision decision mademade toto diversifydiversify intointo contrabandcontraband detection.detection. •• Turnover/Staff Turnover/Staff –– R110m/50. R110m/50.

49 •• BackgroundBackground •• StrategyStrategy UpdateUpdate •• BusinessBusiness UnitUnit StatusStatus •• Year-EndYear-End ResultsResults •• OrderOrder PipelinePipeline andand GeneralGeneral ProgressProgress •• AnnualAnnual ReportReport •• ConclusionConclusion

50 FinancialFinancial HighlightsHighlights –– 06/07 06/07

Item 2007 R millions 2006 R millions

Turnover 3,268.1 2,773.2 Gross profit 754.0 (131.1) Loss before taxation (500.9) (1,291.4) Net Loss (549.1) (1,363.4)

51 GroupGroup IncomeIncome StatementStatement forfor thethe YearYear EndedEnded 3131 MarchMarch 20072007

Description Year-end 31-Mar-07 31-Mar-07 31-Mar-06 Actual Budget Actual Rm Rm Rm

Turnover 3,268.1 3,598.2 2,773.2 Gross profit/(loss) 754.0 553.5 (131.1) GP as % of revenue 23% 15% -5% Other income 116.6 6.5 209.9 Operating costs (1,257.4) (1,109.2) (1,155.1) Operating profit (loss) (386.8) (549.2) (1,076.3) Interest paid (143.0) (96.1) (187.8) Profit (loss) on ordinary activities before tax (500.9) (677.3) (1,291.4) Tax (6.4) (6.9) (19.3) Income from associates and minority interest 28.9 3.6 Profit (loss) on ordinary activities after tax (549.1) (684.2) (1,363.4)

52 BalanceBalance SheetSheet –31–31stst MarchMarch 20072007

31 March 2007 31 March 2006 Actual Actual Description Rm Rm Non-current assets 1,348 1,601 Current assets 2,615 2,724 • Trade and other receivables 1,147 883 • Inventories 1,067 984 Non-current assets held for sale 540 352 Total assets 4,504 4,677

Total equity 633 614 Non-current liabilities 856 2,096 Current liabilities 2,999 1,938 • Trade and other payables 627 561 • Provisions 801 546 Total equity and liabilities 4,504 4,677 53 CashCash FlowFlow BeforeBefore FinancingFinancing ActivitiesActivities –31–31stst MarchMarch 20072007

Description 31 March 2007 31 March 2006 Actual Actual Rm Rm (restated) Cash utilized in operating activities (1,015.0) (1,146.6)

Cash flow from / (utilized in) investing activities 69.5 85.7 Cash flow before financing activities (945.5) (1,060.9)

Cash flow from financing activities 555.0 1,482.7 Net (decrease) / increase in cash and cash equivalents (390.5) 421.8 Cash and cash equivalents at the beginning of the year 730.2 305.5

Cash movement of entities held for sale (1.3) 2.9

At the end of the year 338.4 730.2

54 •• BackgroundBackground •• StrategyStrategy UpdateUpdate •• BusinessBusiness UnitUnit StatusStatus •• Year-EndYear-End ResultsResults •• OrderOrder PipelinePipeline andand GeneralGeneral ProgressProgress •• AnnualAnnual ReportReport •• ConclusionConclusion

55 ConsolidatedConsolidated OrderOrder PipelinePipeline asas atat 1212 SeptemberSeptember 20072007

6,0006,000 DenelDenel MunitionsMunitions

DynamicsDynamics 5,0005,000 DenelDenel AviationAviation

4,0004,000 DenelDenel LandLand SystemsSystems 89%89% DenelDenel OptronicsOptronics Rm Rm 3,0003,000 CommandCommand andand ControlControl

AerostructuresAerostructures 2,0002,000 RooivalkRooivalk 27%27% 17% 11% 12% MechemMechem 1,0001,000 17% 11% 12% Non-CoreNon-Core

-- BudgetedBudgeted TargetTarget 07/0807/08 08/09 08/09 09/10 09/10 10/11 10/11 11/12 11/12 56 PositivePositive ProgressProgress -- StakeholdersStakeholders

•• SANDF SANDF // DoDDoD / / ArmscorArmscor seem seem toto understandunderstand thethe issuesissues atat DenelDenel and and SADRI,SADRI, andand areare moremore willingwilling toto findfind solutionssolutions althoughalthough longlong termterm ordersorders areare stillstill anan issueissue •• Far Far moremore interactioninteraction takingtaking placeplace atat allall levels,levels, includingincluding progressiveprogressive interactionsinteractions withwith SADRISADRI role-playersrole-players •• DoD DoD community community interactinginteracting wellwell acrossacross DenelDenel and and DenelDenel DivisionsDivisions •• Hoefyster Hoefyster great great contributorcontributor toto overalloverall industryindustry motivation,motivation, aa resultresult ofof collectivecollective drivedrive fromfrom allall stakeholders.stakeholders.

57 PositivePositive ProgressProgress –– Internal Internal toto DenelDenel

•• Unbundling Unbundling intointo separateseparate entitiesentities progressingprogressing •• Focus Focus onon projectproject delivery,delivery, onon scheduleschedule andand atat specifiedspecified qualityquality •• Processes Processes andand systemssystems improvementimprovement •• Cost Cost controls,controls, productivityproductivity andand efficiencyefficiency •• Contracting Contracting capabilitycapability •• Customer Customer focusfocus •• Sales Sales pipelinepipeline •• Transformation, Transformation, businessbusiness cultureculture andand diversity.diversity.

58 PositivePositive ProgressProgress -- GBADS GBADS

•• GBADS GBADS hashas comecome throughthrough thethe woworstrst andand isis wellwell onon itsits wayway toto recoveryrecovery •• Latest Latest PMRPMR reviewreview satisfactorysatisfactory •• Closer Closer projectproject collaborationcollaboration withwith ArmscorArmscor and and SANDFSANDF bearingbearing fruitfruit toto ensureensure timelinestimelines areare metmet •• First First missilemissile firingfiring inin OctoberOctober inin lineline withwith newnew scheduleschedule withwith ChiefChief ofof ArmyArmy •• Software Software acceptanceacceptance hashas beenbeen completedcompleted •• Moving Moving intointo integrationintegration phasephase

59 DenelDenel 20072007 and and BeyondBeyond

•• Denel Denel (Pty)(Pty) LtdLtd –– 100% 100% State-ownedState-owned holdingholding company company •• Eight Eight toto tenten focusedfocused (Pty)(Pty) LtdLtd companiescompanies –– Responsible Responsible forfor theirtheir ownown profit/lossesprofit/losses –– Independent Independent Balance-sheetBalance-sheet –– Ring-fenced Ring-fenced •• Equity Equity partnerspartners bringbring globalglobal expertise,expertise, market market accessaccess and and R&DR&D •• Denel Denel shareholdingsshareholdings rangerange betweenbetween 26%26% andand 100%100% •• Various Various GovernmentGovernment andand ShareholderShareholder agreementsagreements protectprotect IP,IP, securitysecurity ofof supplysupply andand includeinclude relativerelative pre-emptivepre-emptive rightsrights •• Further Further consolidationconsolidation ofof industrindustryy inin RSARSA nownow possiblepossible andand feasiblefeasible •• Within Within 2424 toto 3636 monthsmonths DenelDenel w willill bebe financiallyfinancially viableviable onon aa sustainablesustainable basisbasis ifif allall plans,plans, sosomeme ofof whichwhich areare outsideoutside Denel’sDenel’s control,control, areare implemented.implemented. 60 •• BackgroundBackground •• StrategyStrategy UpdateUpdate •• BusinessBusiness UnitUnit StatusStatus •• Year-EndYear-End ResultsResults •• OrderOrder PipelinePipeline andand GeneralGeneral ProgressProgress •• AnnualAnnual ReportReport •• ConclusionConclusion

61 Chairman’sChairman’s ReportReport

•• Denel Denel isis aa strategicstrategic assetasset –– SA SA needsneeds aa competentcompetent defencedefence iindustryndustry toto supportsupport thethe SANDFSANDF –– A A competentcompetent locallocal industryindustry proviprovidesdes aa largelarge measuremeasure ofof strategicstrategic independenceindependence –– This This facilitatesfacilitates productproduct developmentdevelopment forfor locallocal conditionsconditions •• Cutting-edge Cutting-edge technologytechnology –– Need Need forfor highly-skilledhighly-skilled personnelpersonnel andand trainingtraining –– Denel Denel offersoffers anan opportunityopportunity toto developdevelop thesethese skillsskills –– These These occuroccur throughthrough thethe DeDenelnel CentreCentre forfor LearningLearning && DevelopmentDevelopment (DCLD)(DCLD) andand throughthrough partnershipspartnerships withwith locallocal andand foreignforeign companiescompanies •• The The GovernmentGovernment hashas fundedfunded muchmuch ofof Denel’sDenel’s technologytechnology capabilitycapability forfor manymany yearsyears –– This This investmentinvestment needsneeds toto bebe protectedprotected andand nurturednurtured –– Export Export opportunitiesopportunities areare availableavailable inin thethe areasareas ofof missiles,missiles, unmannedunmanned aerialaerial vehicles,vehicles, artilleryartillery andand munitions.munitions. 62 GroupGroup CEO’sCEO’s Report Report

•• Significant Significant progressprogress mademade inin thethe pastpast year:year: –– Reduced Reduced lossloss fromfrom thethe previousprevious yearyear –– Unbundling Unbundling ofof thethe organisatiorganisationon intointo independentindependent businessesbusinesses –– Focus Focus onon revenuerevenue generatgenerationion byby thethe businessesbusinesses –– Commercial Commercial viabilityviability studystudy completedcompleted onon allall businessesbusinesses andand thethe implementationimplementation ofof individualindividual strategiesstrategies •• Awarded Awarded thethe largestlargest contractcontract inin thethe company’scompany’s history:history: –– Project Project HoefysterHoefyster –– Badger Badger InfantryInfantry FightingFighting VehicleVehicle –– R8-billion R8-billion contractcontract forfor 264264 vehiclesvehicles •• Total Total re-engineeringre-engineering ofof Denel:Denel: –– Climate Climate surveysurvey implementedimplemented toto improveimprove staffstaff perceptionsperceptions –– New New performanceperformance managementmanagement systemsystem implementedimplemented –– Appointment Appointment ofof aa groupgroup executexecutiveive toto specificallyspecifically handlehandle transformationtransformation –– Reporting Reporting structuresstructures improvedimproved acrossacross thethe entireentire group.group.

63 Directors’Directors’ Report Report

•• Directors Directors responsibleresponsible forfor preparation,preparation, integrityintegrity andand fairfair presentationpresentation ofof GroupGroup AnnualAnnual FinancialFinancial StatementsStatements ofof DenelDenel (Pty)(Pty) LtdLtd andand itsits subsidiaries.subsidiaries. –– Statements Statements presentedpresented inin accoraccordancedance withwith InternationalInternational FinancialFinancial ReportingReporting Standards,Standards, SASA CompaniesCompanies ActAct andand PublicPublic FinanceFinance ManagementManagement ActAct –– Appropriate Appropriate toto useuse goinggoing concconcernern basisbasis forfor financialfinancial statementsstatements –– External External auditorsauditors responsibleresponsible forfor independentindependent auditingauditing andand reporting.reporting.

64 Directors’Directors’ Report Report (contd.)(contd.)

•• The The Group:Group: –– Established Established 11 AprilApril 19921992 asas privateprivate companycompany –– Incorporated Incorporated inin termsterms ofof SASA CompaniesCompanies ActAct No.No. 6161 ofof 19731973 –– SA SA GovernmentGovernment solesole shareholdershareholder –– Listed Listed ScheduleSchedule 22 PublicPublic Entity Entity in in termsterms of of the the PFMAPFMA –– Headquartered Headquartered inin Irene,Irene, CenturionCenturion –– The The Group’sGroup’s businessbusiness entitiesentities operateoperate inin SASA andand abroadabroad •• Description Description ofof Business:Business: –– Technology-based Technology-based companycompany –– Core: Core: aerospace,aerospace, landland systemssystems andand defence/securitydefence/security related related industriesindustries –– Key Key capabilities:capabilities: R&D,R&D, engiengineeringneering andand manufacturingmanufacturing ofof proprietaryproprietary andand otherother productsproducts throughoutthroughout theirtheir lifecycles.lifecycles.

65 Directors’Directors’ Report Report (contd.)(contd.)

•• Business Business Strategy:Strategy: –– Five Five yearyear corporatecorporate planplan inin placeplace inin termsterms ofof thethe PFMAPFMA –– Currently Currently inin yearyear twotwo ofof thethe strategystrategy toto returnreturn thethe GroupGroup toto profitabilityprofitability –– Key Key performanceperformance indicatorsindicators areare containedcontained inin thethe ShareholdersShareholders CompactCompact –– Progress Progress isis reportedreported onon aa regularregular basbasisis toto thethe Directors,Directors, Executive,Executive, NationalNational TreasuryTreasury andand DPEDPE

•• Good Good progressprogress onon thethe MacroMacro Strategy: Strategy: –– Secure Secure “privileged“privileged access”access” (to (to SouthSouth Africa’sAfrica’s defencedefence spend)spend) –– Engage Engage statestate agenciesagencies –– Evaluate Evaluate commercialcommercial viabilityviability (fix(fix oror exit)exit) ofof businessbusiness entitiesentities –– Create Create equityequity basedbased relationshipsrelationships // formalformal alliancealliance partnerspartners –– Raise Raise productivityproductivity andand capabilitiescapabilities toto world-classworld-class standards.standards.

66 Directors’Directors’ Report Report (contd.)(contd.)

•• Overview Overview ofof FinancialFinancial Performance:Performance: –– Financial Financial results:results: •• Turnover Turnover increasedincreased byby 17.8%17.8% toto R3.3R3.3 billionbillion •• Net Net loss:loss: R549R549 million, million, improvementimprovement onon previousprevious year year R1,363R1,363 million million •• Net Net equityequity positionposition improvedimproved toto R633R633 millionmillion •• Positive Positive cashcash balancebalance ofof R338R338 million million

–– Financial Financial Performance:Performance: •• Turnover Turnover increasedincreased byby R495R495 millionmillion fromfrom thethe previousprevious yearyear •• Substantial Substantial progressprogress onon Umkhonto,Umkhonto, Airbus,Airbus, Agusta,Agusta, GBADSGBADS andand AerostructuresAerostructures •• Gross Gross marginmargin improvedimproved toto 23%23% fromfrom aa grossgross lossloss ofof –5%–5% fromfrom lastlast yearyear •• Operating Operating costscosts asas aa percentagepercentage ofof salessales reducedreduced fromfrom 42%42% toto 38%38% •• Cost Cost ofof SalesSales reducedreduced fromfrom 105%105% toto 77%77% asas aa %% ofof sales.sales.

67 Directors’Directors’ Report Report (contd.)(contd.)

•• Property, Property, PlantPlant andand EquipmentEquipment –– Carrying Carrying valuevalue ofof assetsassets decreaseddecreased byby R329R329 millionmillion beingbeing transferredtransferred toto thethe “Held“Held forfor Sale”Sale” category category •• Share Share CapitalCapital andand ShareShare PremiumPremium –– Only Only thethe shareholdershareholder isis autauthorisedhorised toto issue issue sharesshares asas aboveabove –– No No changechange inin authorizedauthorized shareshare capitalcapital –– During During thethe yearyear thethe compcompanyany issuedissued 126126 836836 290290 ClassClass AA sharesshares ofof R1.00R1.00 each,each, atat aa premiumpremium ofof R440R440 millionmillion toto thethe GovernmentGovernment asas partpart ofof thethe recapitalisationrecapitalisation ofof thethe companycompany •• Dividends Dividends –– No No dividendsdividends werewere recommendedrecommended forfor thethe 2006/072006/07 year.year.

68 Directors’Directors’ Report Report (contd.)(contd.) •• Non-core Non-core businesses:businesses: –– Six Six businessesbusinesses disposeddisposed ofof realisingrealising R413.3R413.3 millionmillion •• Arivia.kom Arivia.kom 2005/062005/06 •• Irenco Irenco PlasticsPlastics 2005/062005/06 •• Dendustri Dendustri 2005/062005/06 •• Voltco Voltco 2005/062005/06 •• Irenco Irenco ElectronicsElectronics 2005/06 2005/06 •• Bonaero Bonaero ParkPark 2006/072006/07

•• SPP SPP (Pty)(Pty) LtdLtd inin progressprogress •• Cosource Cosource (Pty)(Pty) LtdLtd inin progressprogress –– Five Five moremore areare atat anan advancedadvanced stagestage ofof disposaldisposal –– Sale Sale ofof vacantvacant and and unutilisedunutilised landland carried carried outout –– Borrowings: Borrowings: –– A A corporatecorporate Bond Bond ofof R825R825 millionmillion matured matured onon 16 16 AugustAugust 20072007 at at 12.8%12.8% andand waswas repaidrepaid –– A A DomesticDomestic MediumMedium TermTerm NoteNote (DMTN)(DMTN) hashas beenbeen registeredregistered toto fundfund futurefuture fundingfunding requirements.requirements. 69 Directors’Directors’ Report Report (contd.)(contd.)

•• Going Going Concern:Concern: –– To To date,date, thethe shareholdershareholder hashas providedprovided recapitalisationrecapitalisation ofof R3,500R3,500 millionmillion –– The The shareholdershareholder viewsviews DenelDenel asas aa strategicstrategic assetasset andand hashas agreedagreed toto supportsupport thethe DirectorsDirectors toto mainmaintaintain DenelDenel asas aa goinggoing concernconcern –– Forecast Forecast negativenegative cashcash positionposition atat 3131 MarchMarch 20072007 –– Non-core Non-core assetasset salessales resultedresulted inin proceedsproceeds ofof R606R606 millionmillion –– The The abilityability ofof thethe GroupGroup toto continuecontinue asas aa goinggoing concernconcern isis dependentdependent onon thethe successfulsuccessful implimplementationementation ofof thethe businessbusiness strategystrategy •• Human Human Resources:Resources: –– New New performanceperformance managementmanagement systemsystem implementedimplemented –– Staff Staff complementcomplement reducedreduced fromfrom 8,1208,120 toto 7,6347,634 –– 117 117 internalinternal bursars,bursars, 101101 externalexternal bursarsbursars –– Denel Denel CentreCentre forfor LearningLearning andand DevelopmentDevelopment hashas moremore thanthan 200200 studentsstudents andand thethe ApprenticeApprentice SchoolSchool hashas 253253 apprentices.apprentices. 70 Directors’Directors’ Report Report (contd.)(contd.)

•• Public Public FinanceFinance ManagementManagement ActAct (PFMA):(PFMA): –– Group Group internalinternal auditaudit integratedintegrated inin compliancecompliance withwith PFMAPFMA provisionsprovisions –– Findings Findings are are reported reported toto thethe AuditAudit andand RiskRisk CommitteeCommittee –– PFMA PFMA containscontains certaicertainn onerousonerous requirementsrequirements –– Despite Despite progress,progress, companycompany notnot fullyfully compliantcompliant inin certaincertain sectionssections (e.g.(e.g. RiskRisk management,management, internalinternal controls,controls, irregularirregular expenditure)expenditure) •• Companies Companies Act:Act: –– Directors Directors confirmconfirm companycompany lolodgeddged allall returnsreturns asas required.required. –– Instances Instances ofof non-compliancenon-compliance atat subsidiarysubsidiary level:level: •• Company Company registersregisters notnot upup toto datedate •• Annual Annual returnsreturns notnot submittedsubmitted •• Year-ends Year-ends notnot changedchanged toto thatthat ofof GroupGroup •• No No AnnualAnnual GeneralGeneral MeetingsMeetings heldheld •• No No resolutionsresolutions toto approveapprove financialfinancial statementsstatements –– Most Most ofof thethe aboveabove havehave beenbeen rectif rectifiedied subsequent subsequent toto thethe year-end.year-end. 71 RiskRisk ManagementManagement

•• The The primaryprimary riskrisk managementmanagement objectiveobjective isis toto protectprotect thethe interestsinterests ofof thethe stakeholdersstakeholders andand toto ensureensure sustainabilitysustainability –– On-going On-going processprocess toto identify,identify, manage,manage, monitormonitor risksrisks –– Management Management isis responsibleresponsible for:for: •• Continuous Continuous identification,identification, assessmentassessment andand responseresponse toto riskrisk –– The The BoardBoard isis ultimatelyultimately responsibleresponsible for:for: •• Group Group riskrisk managementmanagement systemsystem •• Review Review ofof effectivenesseffectiveness ofof systemsystem –– Audit Audit && RiskRisk CommitteeCommittee taskedtasked with:with: •• Oversight Oversight andand monitoringmonitoring ofof riskrisk managementmanagement processprocess –– SHEQ SHEQ policypolicy andand practicespractices inin placeplace –– Adopted Adopted OHSASOHSAS 1800118001 forfor occupationaloccupational healthhealth andand safety.safety.

72 OtherOther MattersMatters

•• Corporate Corporate GovernanceGovernance –– Denel Denel isis committedcommitted toto thethe principrinciplesples ofof goodgood corporatecorporate governancegovernance asas recommendedrecommended byby thethe KingKing IIII ReportReport andand thethe ProtocolProtocol onon CorporateCorporate GovernanceGovernance inin thethe PublicPublic SectorSector –– Governance Governance structuresstructures areare inin placeplace toto continuouslycontinuously improveimprove accountability,accountability, integrityintegrity andand thethe ststandardandard ofof reportingreporting toto facilitatefacilitate informedinformed decision-makingdecision-making •• Shareholder’s Shareholder’s CompactCompact –– The The Shareholder’sShareholder’s CompactCompact for for 20072007 was was signedsigned onon 11 DecemberDecember 20062006 –– The The ShareholderShareholder Compact:Compact: •• Confirms Confirms Denel’sDenel’s mandatemandate •• Identifies Identifies thethe strategicstrategic objectivesobjectives toto bebe attainedattained byby DenelDenel •• Identifies Identifies thethe requiredrequired keykey performanceperformance areasareas andand indicatorsindicators basedbased onon thethe 5-year5-year CorporateCorporate PlanPlan andand reporreportedted inin pagespages 50-5150-51 ofof thethe AnnualAnnual ReportReport – – most most ofof whichwhich werewere achieved.achieved. 73 IncomeIncome StatementStatement -- -31-31stst MarchMarch 20072007

31 March 2007 31 March 2006 Description Actual Actual Rm Rm Revenue 3,307 2,801 Turnover 3,268 2,773

Cost of Sales (2,514) (2,904)

Gross (loss) profit 754 (131)

Operating Expenses (1,257) (1,155)

Loss Before Taxation (501) (1,291)

Loss After Taxation From Continuing (507) (1,311) Operations

Loss for the year (549) (1,263)

74 SalesSales PerPer RegionRegion

2006 2007

South Africa Africa (Excl. N Africa) S America Asia Pacific Middle East & N Africa Europe N America

75 SalesSales PerPer RegionRegion

1400

1200

1000

800

600

400

200

0 Asia Africa South Africa Pacific Africa) Europe (Excl. N Middle N Africa East and East S America N America 2006 2007

76 GroupGroup GrossGross RevenueRevenue andand GrossGross ProfitProfit // LossLoss

77 GroupGroup Gross Gross RevenueRevenue CompositionComposition (Percentage)(Percentage)

78 GroupGroup SegmentSegment ReportReport

Corporate and Non- Description Aerospace Land Systems Total cores 2007 2006 2007 2006 2007 2006 2007 2006 Rm Rm Rm Rm Rm Rm Rm Rm

Segment revenue 2,126.9 1,926.0 1,500.4 1,106.4 227.9 311.5 3,268.1 2,773.2

Segment result (264.7) (739.9) (117.2) (342.1) 0.3 (21.5) (386.8) (1,107.2)

Se gme nt a sse ts 1,789.5 1,821.8 1,365.0 1,355.7 6,238.9 7,785.4 4,503.7 4,677.2

Segment liabilities 2,055.5 4,642.5 910.3 1,430.3 3,857.5 3,624.9 3,871.0 4,062.4

Cash flows from: Operating activities (856.7) (528.6) (178.2) (431.6) 3.0 (219.6) (1,025.8) (1,146.6) Investing activities (87.1) (81.7) 140.9 (31.3) (34.5) 200.6 80.3 85.7 Financing activities (725.6) 466.7 70.3 312.3 (1,712.2) 1,157.1 555.0 1,482.7

Capital expenditure (55.5) (88.5) (37.5) (31.9) (27.1) (19.8) (120.1) (140.2)

79 BalanceBalance SheetSheet –31–31stst MarchMarch 20072007

31 March 2007 31 March 2006 Actual Actual Description Rm Rm Non-current assets 1,348 1,601 Current assets 2,615 2,724 • Trade and other receivables 1,147 883 • Inventories 1,067 984 Non-current assets held for sale 540 352 Total assets 4,504 4,677

Total equity 633 614 Non-current liabilities 856 2,096 Current liabilities 2,999 1,938 • Trade and other payables 627 561 • Provisions 801 546 Total equity and liabilities 4,504 4,677 80 CashCash FlowFlow BeforeBefore FinancingFinancing ActivitiesActivities –31–31stst MarchMarch 20072007

Description 31 March 2007 31 March 2006 Actual Actual Rm Rm (restated) Cash utilized in operating activities (1,015.0) (1,146.6)

Cash flow from / (utilized in) investing activities 69.5 85.7 Cash flow before financing activities (945.5) (1,060.9)

Cash flow from financing activities 555.0 1,482.7 Net (decrease) / increase in cash and cash equivalents (390.5) 421.8 Cash and cash equivalents at the beginning of the year 730.2 305.5

Cash movement of entities held for sale (1.3) 2.9

At the end of the year 338.4 730.2

81 TotalTotal NumberNumber ofof EmployeesEmployees

Description 2007 2006

Quantity % Quantity %

TOTAL NUMBER OF EMPLOYEES 7,634 100% 8,120 100%

TOTAL NUMBER OF MANAGERS 493 6% 560 7%

White managers 395 5% 445 5%

Black managers 98 1% 115 1%

RACE

White employees 3,983 52% 4,266 53%

Black employees 3,651 48% 3,854 47%

GENDER

Male employees 5,954 78% 6,291 77%

Female employees 1,680 22% 1,829 23%

82 DeterminationDetermination ofof DenelDenel GCEO,GCEO, EXCOEXCO && EntityEntity CEO’sCEO’s RemunerationRemuneration •• Remuneration Remuneration ofof thethe GCEOGCEO isis agreedagreed uponupon duringduring engagementengagement betweenbetween thethe Shareholder,Shareholder, BoardBoard ofof DirectorsDirectors andand thethe GroupGroup CEOCEO •• Remuneration Remuneration ofof EXCOEXCO andand EntityEntity CEO’sCEO’s is is agreedagreed uponupon duringduring engagementengagement betweenbetween thethe GCEOGCEO representingrepresenting thethe Shareholder,Shareholder, entityentity BoardBoard ofof Directors/andDirectors/and DeDenelnel Board Board ofof DirectorsDirectors andand thethe incumbentincumbent TheThe followingfollowing factorsfactors areare takentaken intointo account:account: •• GCEO--Size GCEO--Size ofof SOESOE linkedlinked toto totaltotal guaranteedguaranteed packagepackage asas setset outout inin remunerationremuneration modelmodel asas suppliedsupplied byby PublicPublic EnterprisesEnterprises •• CEO’s CEO’s and and EXCO--SizeEXCO--Size ofof thethe individualindividual companycompany basedbased onon salarysalary && wagewage billbill asas wellwell asas pre-taxpre-tax profitsprofits inin lineline withwith remunerationremuneration principles.principles. •• Market Market remunerationremuneration informationinformation asas conductedconducted throughthrough variousvarious surveyssurveys isis usedused asas anan input.input. •• Remuneration Remuneration approvedapproved inin termtermss ofof thethe DenelDenel Delegation Delegation ofof AuthorityAuthority byby ShareholderShareholder andand Board/sBoard/s ofof Directors.Directors. 83 IncentiveIncentive BonusBonus SchemeScheme

•• An An incentiveincentive bonusbonus schemescheme hashas beenbeen introducedintroduced forfor allall employeesemployees withwith effecteffect ofof 11 AprilApril 20072007 •• The The schemescheme encompassesencompasses aa variablevariable paypay portionportion basedbased onon thethe achievementachievement ofof agreedagreed uponupon targetstargets •• In In lineline withwith bestbest practice,practice, thethe incentiveincentive schemescheme formsforms partpart ofof employeesemployees totaltotal remunerationremuneration incorporatingincorporating thethe paypay atat riskrisk principle.principle. •• A A performanceperformance managementmanagement systemsystem hashas beenbeen introducedintroduced toto linklink performanceperformance toto pay.pay.

84 TransformationTransformation

•• Significant Significant progressprogress hashas beenbeen mmadeade sincesince thethe lastlast reportreport inin 20062006 •• A A TransformationTransformation portfolio/officeportfolio/office hashas beenbeen institutedinstituted andand anan executiveexecutive appointedappointed •• A A TransformationTransformation frameworkframework hashas beenbeen drawn-updrawn-up andand approvedapproved •• The The TransformationTransformation frameworkframework andand rorolloutllout planplan hashas beenbeen submittedsubmitted to to allall businessbusiness entitiesentities •• A A requestrequest hashas beenbeen mademade forfor businessbusiness entitiesentities toto appointappoint TransformationTransformation ChampionsChampions •• Transformation Transformation CommitteesCommittees havehave beenbeen establishedestablished atat thethe businessbusiness entities.entities. TheseThese committeescommittees inincorporatecorporate CEOs,CEOs, management,management, organisedorganised labour,labour, non-unionisednon-unionised labourlabour andand HRHR facilitatorsfacilitators •• Comprehensive Comprehensive transformatitransformationon plansplans havehave beenbeen drawn-updrawn-up andand approvedapproved byby thethe GroupGroup CEO.CEO. •• Progress Progress evaluationevaluation andand performperformanceance reportingreporting areare scheduledscheduled forfor NovNov 20072007 andand Mar/AprMar/Apr 20082008 respectively.respectively. 85 Socio-EconomicSocio-Economic DevelopmentDevelopment

•• Denel Denel CentreCentre forfor LearningLearning andand DevelopmentDevelopment (DCLD)(DCLD) –– Partnering Partnering strategystrategy adoptedadopted withwith industryindustry andand otherother SOEsSOEs –– Apprentice Apprentice schoolschool expandedexpanded toto includeinclude non-aerospacenon-aerospace tradestrades –– 5-year 5-year contractcontract signedsigned withwith EEskomskom toto traintrain 100100 apprenticesapprentices perper yearyear –– The The DCLDDCLD thusthus contributescontributes meaninmeaningfullygfully toto JIPSAJIPSA andand 70%70% ofof thethe intakeintake areare womenwomen •• Denel Denel YouthYouth FoundationFoundation TrainingTraining ProgrammeProgramme (DYFTP)(DYFTP) –– The The ProgrammeProgramme currentlycurrently hashas 295295 learnerslearners fromfrom allall overover thethe countrycountry –– Learners Learners areare sponsoredsponsored byby thethe DoDoD,D, Transnet,Transnet, Eskom,Eskom, Denel,Denel, andand thethe DPE.DPE. –– Learners Learners mustmust showshow anan interestinterest inin careerscareers inin science,science, engineeringengineering andand technologytechnology –– Extensive Extensive schoolingschooling isis givengiven inin mathematicsmathematics andand science.science.

86 Socio-EconomicSocio-Economic DevelopmentDevelopment

•• Schools Schools OutreachOutreach ProgrammeProgramme (SOP)(SOP) –– Covers Covers gradegrade 1111 andand 1212 learnerslearners inin allall ninenine provincesprovinces –– 93% 93% passpass raterate withwith 65%65% havinghaving universityuniversity entranceentrance –– Nominated Nominated asas thethe bestbest runrun projprojectect inin thethe NorthNorth WestWest byby thethe ProvincialProvincial DeptDept ofof EducationEducation –– Denel’s Denel’s contributioncontribution forfor thethe pastpast yearyear amountedamounted toto R1.2R1.2 millionmillion •• Apprentice Apprentice andand ArtisanArtisan TrainingTraining SchoolSchool –– Part Part ofof thethe company’scompany’s stratstrategyegy toto buildbuild itsits skillsskills basebase –– The The SchoolSchool coverscovers apprenticeapprentice andand arartisantisan trainingtraining asas wellwell asas tradetrade testtest preparationpreparation andand revisionrevision –– There There areare 253253 studentsstudents forfor 2007,2007, inincludingcluding privateprivate andand foreignforeign studentsstudents –– 189 189 males,males, 6464 females.females.

87 BEEBEE PerformancePerformance

88 RiskRisk GovernanceGovernance SummarisedSummarised

Board

Risk & Audit Committees

Executive Management

Internal Auditors

Chief Financial Officer External Auditors

Other Assurance Providers (Including compliance function)

89 PFMAPFMA -- TreasuryTreasury RegulationRegulation 27.2.127.2.1

•• Requires Requires thatthat thethe accountingaccounting authorityauthority carrycarry outout regularregular riskrisk assessmentassessment andand havehave aa riskrisk managementmanagement strategystrategy inin placeplace

–– A A formalformal riskrisk managementmanagement processprocess isis inin place,place, whichwhich includesincludes aa fraudfraud preventionprevention policypolicy butbut thethe policypolicy waswas notnot fully fully implemented.implemented. TheThe policypolicy hashas beenbeen implementedimplemented subsequentsubsequent toto thethe year-endyear-end auditaudit andand aa fraudfraud responseresponse planplan waswas approvedapproved byby thethe BoardBoard AuditAudit andand RiskRisk CommitteeCommittee onon 99 OctoberOctober 20072007 forfor implementation.implementation.

90 PFMAPFMA –– Sec Sec 51(1)(a)(i)51(1)(a)(i)

•• Requires Requires anan entityentity toto maintainmaintain anan effectiveeffective systemsystem ofof internalinternal financialfinancial controlcontrol –– Deficiencies Deficiencies werewere identifiedidentified inin twotwo businessbusiness entitiesentities –– Action Action plansplans havehave beenbeen implementedimplemented toto addressaddress thesethese deficienciesdeficiencies –– Internal Internal auditaudit hashas beenbeen outsourcedoutsourced toto PWC.PWC.

91 PFMAPFMA –– Sec Sec 5151 andand 5555 of of thethe PFMAPFMA

•• Requires Requires thethe prevention,prevention, identificationidentification andand reportingreporting ofof irregularirregular and/orand/or fruitlessfruitless andand wastefulwasteful expenditureexpenditure –– Certain Certain penaltiespenalties werewere incurredincurred whichwhich couldcould bebe deemeddeemed asas wastefulwasteful expenditureexpenditure –– The The BoardBoard examinedexamined thesethese issuesissues andand isis satisfiedsatisfied thatthat theythey werewere notnot incurredincurred inin vainvain –– Internal Internal control control systemsystem hashas beenbeen strengthened.strengthened.

92 CompaniesCompanies ActAct

•• Instances Instances ofof non-compliancenon-compliance atat certaincertain subsidiariessubsidiaries occurredoccurred whichwhich rangedranged from:from: –– Company Company registersregisters notnot beingbeing keptkept upup toto datedate –– Annual Annual returnsreturns notnot beingbeing submittedsubmitted –– No No AGMsAGMs beingbeing heldheld –– No No resolutionsresolutions passedpassed toto approveapprove annualannual financialfinancial statementsstatements •• The The majoritymajority ofof thesethese issuesissues havehave beenbeen rectifiedrectified subsequentsubsequent toto thethe year-end.year-end.

93 •• BackgroundBackground •• StrategyStrategy UpdateUpdate •• BusinessBusiness UnitUnit StatusStatus •• Year-EndYear-End ResultsResults •• OrderOrder PipelinePipeline andand GeneralGeneral ProgressProgress •• AnnualAnnual ReportReport •• ConclusionConclusion

94 ConclusionConclusion

•• Turnaround Turnaround strategystrategy onon tracktrack •• Forward Forward salessales focusfocus startingstarting toto bearbear fruitfruit •• Relationship Relationship betweenbetween stakeholdersstakeholders improvingimproving •• Armscor Armscor unbundling unbundling andand DERIDERI processprocess hashas aa potentialpotential impactimpact onon momentummomentum •• Denel’s Denel’s view view isis thatthat SADRISADRI shouldshould consolidateconsolidate furtherfurther •• Visibility Visibility ofof certaincertain procurprocurementement budgetsbudgets notnot clearclear fromfrom DOD/Armscor,DOD/Armscor, impactingimpacting onon abilityability toto planplan businessbusiness activities.activities.

95 ThankThank youyou