- 4 - Executive review The financial year under review signified the end of another successful year for both ISA and the information security industry. Positive momentum in corporate governance and related legislative frameworks as well as a general upswing in spending in the Information and Communication Technology market, continue to provide stimulus for above-average growth. ISA’s ability to convert these opportunities into tangible and distributable profits, illustrates the value of a sustainable strategy, which has been successfully implemented by a team of focused and experienced specialists. The board is pleased with ISA’s performance and is proud to announce that all of its key performance indicators were achieved. Going into the new financial year with a streamlined service model, underpinned by their recently implemented Customer Relationship Management system, ISA is able to achieve a level of agility and responsiveness, which are fundamental ingredients to the delivery of world-class proactive security solutions. Financial One of the most challenging financial objectives set by the directors for the period was to grow revenue organically by 20%, whilst maintaining gross margin levels above 40%. This objective was attained with revenue of R38 million (2005: R31 million). The quality of revenue further improved during the period with an increase in annuity derived revenue to 58% (2005: 50%), which sets a solid foundation for sustainable revenue into the future. Headline earnings of R7.9 million and earnings of R7.5 million were substantially generated in cash, allowing ISA to close the financial year with cash resources amounting to R11.9 million. ISA has adopted IFRS in the preparation of the audited annual financial results, which includes the restatement for the year ending 28 February 2005. Dividend ISA should be able to sustain its organic growth objectives with little impact to its capital structures. In this light and in support of the directors’ opinion that surplus cash should be distributed to shareholders, the board is to propose an ordinary dividend of 4 cents per share at the Annual General Meeting on 23 June 2006. During the period an ordinary dividend of 1 cent per share, together with a special dividend of 1 cent per share, was declared and paid. Territory coverage To capitalise on the opportunities in the greater sub-Saharan African region, ISA launched a focused business development initiative aimed at achieving 10% of its revenue from outside of South Africa. The success of this initiative has resulted in a revenue contribution of 12% for the period. Going forward, ISA remains cautiously optimistic about their prospects in this region and anticipate increased spending on information security, specifically in Nigeria, Kenya and Botswana. Black economic empowerment ISA’s BEE objective remains a high priority and management are confident that a transaction will be concluded in 2006. The cautionary announcement dated 4 May 2006, relating to an anticipated empowerment deal, will hopefully culminate in the success of this objective. Despite a concerted effort to find a BEE partner during the period under review, management was unsuccessful. The announcement to shareholders relating to a possible empowerment transaction, published in August 2005, was withdrawn in November 2005 due to the difficulties encountered in securing appropriate funding. Corporate governance and financial reporting Corporate governance remains a key focus for ISA and the board strives to adhere to all the fundamental requirements of the King Reports. In the spirit of transparency, ISA strives towards presenting their results in a clear and succinct manner in order for all stakeholders to gain a comprehensive understanding of the Group’s performance. Prospects ISA is well positioned to capitalise on opportunities within the security market and intends to continue achieving above average organic growth, by further developing their coverage and competencies within the information security sector. The fundamental industry drivers, including the recent focus on legislative compliance and corporate governance issues, continue to support ISA’s value proposition. ISA remains focused on building a trusted information security brand thereby creating tangible value for all stakeholders. By embracing a culture of teamwork and learning, ISA is able to nurture strong high-level relationships with their partners. Conclusion On behalf of the board, I thank all of our stakeholders, customers and vendors for their contribution to another successful and exciting year. A special thanks is extended to our management and staff for a year of excellent performance and outstanding results. I look forward to meeting all shareholders at the Annual General Meeting on 23 June 2006. Clifford S Katz Chairman and Chief Executive Officer 29 May 2006
Transcript
- 4 -
Executive review
The financial year under review signified the end of another successful year for both ISA and the information security industry. Positive momentum in
corporate governance and related legislative frameworks as well as a general upswing in spending in the Information and Communication Technology
market, continue to provide stimulus for above-average growth. ISA’s ability to convert these opportunities into tangible and distributable profits, illustrates
the value of a sustainable strategy, which has been successfully implemented by a team of focused and experienced specialists.
The board is pleased with ISA’s performance and is proud to announce that all of its key performance indicators were achieved. Going into the new
financial year with a streamlined service model, underpinned by their recently implemented Customer Relationship Management system, ISA is able to
achieve a level of agility and responsiveness, which are fundamental ingredients to the delivery of world-class proactive security solutions.
Financial One of the most challenging financial objectives set by the directors for the period was to grow revenue organically by 20%, whilst maintaining gross margin
levels above 40%. This objective was attained with revenue of R38 million (2005: R31 million). The quality of revenue further improved during the period
with an increase in annuity derived revenue to 58% (2005: 50%), which sets a solid foundation for sustainable revenue into the future. Headline earnings of
R7.9 million and earnings of R7.5 million were substantially generated in cash, allowing ISA to close the financial year with cash resources amounting to
R11.9 million.
ISA has adopted IFRS in the preparation of the audited annual financial results, which includes the restatement for the year ending 28 February 2005.
Dividend ISA should be able to sustain its organic growth objectives with little impact to its capital structures. In this light and in support of the directors’ opinion that
surplus cash should be distributed to shareholders, the board is to propose an ordinary dividend of 4 cents per share at the Annual General Meeting on 23
June 2006. During the period an ordinary dividend of 1 cent per share, together with a special dividend of 1 cent per share, was declared and paid.
Territory coverage To capitalise on the opportunities in the greater sub-Saharan African region, ISA launched a focused business development initiative aimed at achieving
10% of its revenue from outside of South Africa. The success of this initiative has resulted in a revenue contribution of 12% for the period. Going forward,
ISA remains cautiously optimistic about their prospects in this region and anticipate increased spending on information security, specifically in Nigeria,
Kenya and Botswana.
Black economic empowerment ISA’s BEE objective remains a high priority and management are confident that a transaction will be concluded in 2006. The cautionary announcement
dated 4 May 2006, relating to an anticipated empowerment deal, will hopefully culminate in the success of this objective. Despite a concerted effort to find a
BEE partner during the period under review, management was unsuccessful. The announcement to shareholders relating to a possible empowerment
transaction, published in August 2005, was withdrawn in November 2005 due to the difficulties encountered in securing appropriate funding.
Corporate governance and financial reporting Corporate governance remains a key focus for ISA and the board strives to adhere to all the fundamental requirements of the King Reports. In the spirit of
transparency, ISA strives towards presenting their results in a clear and succinct manner in order for all stakeholders to gain a comprehensive
understanding of the Group’s performance.
Prospects ISA is well positioned to capitalise on opportunities within the security market and intends to continue achieving above average organic growth, by further
developing their coverage and competencies within the information security sector. The fundamental industry drivers, including the recent focus on
legislative compliance and corporate governance issues, continue to support ISA’s value proposition.
ISA remains focused on building a trusted information security brand thereby creating tangible value for all stakeholders. By embracing a culture of
teamwork and learning, ISA is able to nurture strong high-level relationships with their partners.
Conclusion On behalf of the board, I thank all of our stakeholders, customers and vendors for their contribution to another successful and exciting year. A special
thanks is extended to our management and staff for a year of excellent performance and outstanding results. I look forward to meeting all shareholders at
the Annual General Meeting on 23 June 2006.
Clifford S Katz
Chairman and Chief Executive Officer
29 May 2006
Corporate information
Registered office Name ISA Holdings Limited (formerly Y3K Group Limited)
Physical address Unit 12, 152 Hendrik Verwoerd Drive, Randburg, 2194, South Africa
Postal address P O Box 142, Randburg, 2125, South Africa
Transfer secretary Name Ultra Registrars (Proprietary) Limited
Physical address 11 Diagonal Street, Johannesburg, 2001, South Africa
Postal address P O Box 4844, Johannesburg, 2000, South Africa
Telephone +27 (0) 11 832-2652
Auditors Name Levenstein and Partners
Physical address 6th Floor, Twin Towers East, Sandton City, Sandton, 2196, South Africa
Postal address P O Box 782712, Sandton, 2146, South Africa
Bankers Name Absa Private Bank Limited
Physical address 1st Floor, Block A, Parkridge Office Park, 65 Empire Road, Parktown, 2193, South Africa
Postal address P O Box 1133, Auckland Park, 2006, South Africa
Designated advisor Name Exchange Sponsors (Proprietary) Limited
Physical address Hyde Park Manor, 79 Hyde Lane, Hyde Park, 2196, South Africa
Postal address P O Box 411216, Craighall, 2024, South Africa
Declaration by company secretary
To the members of ISA Holdings Limited We have audited the annual financial statements and Group annual financial statements of ISA Holdings Limited set out on pages 7 to 21
for the year ended 28 February 2006. These financial statements are the responsibility of the Company’s directors. Our responsibility is to
express an opinion on these financial statements based on our audit.
Scope We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes:
- examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements;
- assessing the accounting principles used and significant estimates made by management; and
- evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
Audit opinion In our opinion, the annual financial statements present fairly, in all material respects, the financial position of the Company and of the Group
at 28 February 2006 and of the results of its operations and cash flows for the year then ended in accordance with International Financial
Reporting Standards and in the manner required by the South African Companies Act.
Levenstein and Partners
Chartered Accountants (SA)
Registered Accountants and Auditors
Sandton
29 May 2006
Report of the independent auditors
Desmond Seaton (46) BCom, LLB, Dip Tax
Desmond Seaton is a founding member of TWS Consulting, a tax and legal consultancy. He specialises in corporate tax and legal advice
as well as the drafting of agreements relating to corporate transactions. He has been responsible for advising on regulatory matters with
regards to a number of listings over the last eight years, including the listing of Y3K Group Limited during 1998. He was appointed to the
board of ISA Holdings Limited as a non-executive director on 1 September 1998.
Ryan Price (32) CA(SA), CIS
Ryan Price is a chartered accountant and in 1998 he completed his articles at Grant Thornton Kessel Feinstein. After completing his
articles Ryan joined Eureka Industrial Limited ("Eureka") as financial manager and later became the financial director, and chief executive
officer of Y3K Group Limited (“Y3K”), one of Eureka’s investments. During his tenure at Y3K, he successfully turned around the troubled
operations and concluded the mergers with both Information Security Architects and iSecure. He was appointed to the board of ISA
Holdings Limited as an executive director on 1 October 2000.
Denzil Perriera (49) Denzil Perriera is an experienced businessman who has founded and managed several companies over the last 20 years of his career.
Denzil has been a director of numerous organisations, including several in the information technology sector, and is currently also the
Managing Director of Skincare Technologies. He was appointed to the board of ISA Holdings Limited as a non-executive director on 25
February 2003.
Clifford Katz (36) IMM
Clifford Katz has been involved in the information technology sector since the early 1990’s. Pursuing a career in marketing of enterprise
solutions, he joined the Datatec Group to assist with their newly formed Internet Service Provider, UUNet South Africa. Shortly thereafter,
Clifford co-founded DataSecure within the Datatec stable, which was one of the first South African information security solution providers.
During 2001 he joined Information Security Architects as managing director and was instrumental in merging this business with Y3K Group
Limited in March 2004. He was appointed to the board of ISA Holdings Limited as an executive director on 15 April 2004.
Philip Green (41) MSc
Philip Green graduated with an MSc (with distinction) from the Department of Computer Science at the University of Witwatersrand. On
completing his studies, Philip co-founded Internet Solutions, now South Africa’s leading Internet Service Provider. In the 1990’s he joined
Datatec and assisted with the formation of both UUNet South Africa and DataSecure. During 2001 he formed and headed iSecure, a
focused IT security solutions provider, and was instrumental in merging this business with Y3K Group Limited in March 2004. He was
appointed to the board of ISA Holdings Limited as an executive director on 15 April 2004.
Directors’ summary curriculum vitae
Declaration by company secretary
The board of directors have pleasure in presenting its report on the Company and the Group for the year ended 28 February 2006.
Nature of business ISA Holdings Limited (“the Company”) is a South African incorporated limited liability investment holding company listed on the AltX, a
division of the JSE Limited. ISA Holdings Limited, through its main operating subsidiary Information Security Architects (Pty) Ltd, together
referred to as “ISA” or “the Group” is a prominent provider of network, Internet and information security solutions to the sub-Saharan African
market.
Special resolution During the period under review a special resolution was passed by the requisite majority of shareholders, to change the name of the
Company from Y3K Group Limited to ISA Holdings Limited. The change of name was registered effective 24 June 2005.
Post balance sheet events Apart from an announcement to shareholders relating to a possible empowerment transaction which was published on 4 May 2006, there
has been no other post balance sheet events since the financial year end being 28 February 2006 and the date of this report.
Financial results The financial results of the Company and of the Group are set out on pages 9 to 21 of this report. Profit attributable to shareholders
amounted to R7,479,000 (2005: R5,009,000) or 5.8 (2005: 3.9) cents per share. Headline earnings amounted to R7,943,000 (2005:
R5,161,000) or 6.1 (2005: 4.0) cents per share. Net asset value is 16.3 (2005: 12.5) cents per share and a tangible net asset value is 11.4
(2005: 7.3) cents per share. The 2005 figures have been restated as shown in note 2 of the Notes to the annual financial statements in
terms of IFRS 1-First-time Adoption.
Share capital The Company’s authorised and issued share capital remained unchanged during the year under review.
Dividends Ordinary dividend number 1, of 1 cent per share as well as a special dividend number 1, of 1 cent per share was declared and paid during
the period under review. Ordinary dividend number 2, of 4 cents per share is to be proposed and ratified at the Annual General Meeting, to
be held on 23 June 2006, to all shareholders recorded in the shareholders register on 7 July 2006 and payable on 10 July 2006. It is the
policy of the Company to distribute excess cash, which is not required for working capital, to shareholders by way of a dividend.
Going concern, liquidity and capital resources The financial statements have been prepared on a going-concern basis as the directors have no reason to believe that ISA will not be a
going-concern for the year ahead. ISA’s working capital after ordinary dividend number 2 will be adequate for the Group’s cash
requirements. At 28 February 2006, ISA had no borrowings or material commitments for capital expenditure.
Company secretary and assistant company secretary Ryan S Price, Tracey M Truran (assistant)
Investments in subsidiary companies The financial information in respect of the Company’s investments in its subsidiaries is set out on page 21 of the financial statements. The
aggregate net profits after taxation of the subsidiaries, attributable to the Group, for the year ended 28 February 2006 was R7,314,000
(2005: R4,792,000).
Directorate The following were the directors of the Company during the year:
Executive: Clifford S Katz, Philip J G Green, Ryan S Price Non-executive and independent: Denzil R Perreira,
Desmond C Seaton
As at 28 February 2006, the interests of the directors in the shares of the Company were as follows:
Directors’ report
Directors’ shareholding R Price
Qty
C Katz
Qty
P Green
Qty
D Seaton
Qty
D Perreira
Qty
Direct and beneficial: 2006
Indirect and beneficial: 2006
7,283,917
15,225,167
14,000,000
23,766,385
21,898,435
-
150,000
591,812
150,000
-
Total shareholding: 2006 22,509,084 37,766,385 21,8 98,435 741,812 150,000
Direct and beneficial: 2005
Indirect and beneficial: 2005
6,916,100
17,740,437
13,666,666
23,766,385
21,565,102
-
150,000
591,812
150,000
-
Total shareholding: 2005 24,656,537 37,433,051 21,565,102 741,812 150,000
Share options exercised in 2004
(included in the above figures) 1,000,000 1,000,000 1,000,000 150,000 150,000
R Price has indirectly sold 323,000 shares since year end. These shares were owned by Eureka Industrial Limited, in which he has an
indirect beneficial interest. There has been no other change in the shareholding of the directors since the financial year end and the date of
this report.
The directors’ remuneration for the period under review was as follows:
Directors’ emoluments R Price
R
C Katz
R
P Green
R
D Seaton
R
D Perreira
R
Services as directors: 2006 - - - - -
Basic salary: 2006 504,110 603,312 490,698 - -
Allowances*: 2006 89,890 132,175 61,367 - -
Contributions to pension: 2006 - - 43,738 - -
Other services: 2006 594,000 735,487 595,803 - -
Services as directors: 2005 - - - - -
Basic salary: 2005 185,438 490,759 435,155 - -
Allowances*: 2005 115,387 176,950 51,090 - -
Contributions to pension: 2005 - - 58,318 - -
Other services: 2005 300,825 667,709 544,563 - -
* Allowances include medical aid, travel, petrol and cell phone.
Effects of International Financial Reporting Standa rds (IFRS) ISA has adopted IFRS for the year ending 28 February 2006 and includes the restatement for the year ending 28 February 2005,
amounting to an increase of earnings for that period of R1.8 million. This increase in earnings is as a result of the revaluation of tangible
and intangible assets to their realisable values. There has been no adjustment to share based payments as the shares in the share
incentive trust were exercised at market related prices.
Employee share incentive scheme
The employee share incentive scheme provides the opportunity for employees to participate in ISA’s growth and success. Shares have
been exercised by employees and directors in respect of 6,547,190 shares in the Company, this amount includes 3,300,000 shares which
have been allocated directly to directors on the same terms and conditions as those offered to employees. The shares offered were
exercised with effect from 31 March 2004 at a price of 13.396 cents per share. 340,000 shares held by the trust were unallocated as at 28
February 2006 and will be sold into the market during the 2007 financial year.
All share options exercised are held in the share incentive trust as a pledge against the outstanding loans to the respective employees.
These loans bear interest at a rate equivalent to the rate prescribed from time to time by the Commissioner for Inland Revenue for the
purposes of Schedule 7 to the Income Tax Act. The shares in the share incentive trust are entitled to all dividends declared by the
Company and these dividends will be used to reduce the loan account of the respective employee.
Declaration by company secretary
The directors of the Company are responsible for the maintenance of adequate accounting records and the preparation, integrity and fair
presentation of the annual financial statements and related information. The annual financial statements have been prepared in accordance
with International Financial Reporting Standards and in a manner required by the Companies Act. The directors believe that the Company
and the Group have adequate resources to continue in operation in the foreseeable future and the annual financial statements have
therefore been prepared on a going-concern basis.
The Group’s independent auditors, Levenstein and Partners, have audited the annual financial statements and their unqualified audit report
appears on page 6. The directors believe that all representations made to the independent auditors during the audit were valid and
appropriate.
The directors are also responsible for the systems of internal control. These are designed to provide reasonable assurance as to the
reliability of the annual financial statements, and to adequately safeguard, verify and maintain accountability of assets, and to prevent and
detect material misstatement and loss. The systems are implemented and monitored by suitably trained personnel with an appropriate
segregation of authority and duties. Nothing has come to the attention of the directors to indicate that any material breakdown in the
functioning of these controls, procedures and systems has occurred during the year under review.
The annual financial statements were approved by the board of directors on 29 May 2006 and signed on their behalf by:
Ryan S Price Clifford S Katz
Financial Director Chairman and Chief Executive Officer
Directors’ approval
Declaration by company secretary
At each Annual General Meeting of ISA Holdings Limited, one third of the directors shall retire from office. The directors so to retire at each
Annual General Meeting, shall be the directors whom have been longest in office. The length of time a director has been in office shall be
computed from the date of his last election or appointment. The retiring director shall hold office until the conclusion of the meeting in which
he retires. Retiring directors shall be eligible for re-election at any Annual General Meeting provided he, or some member intending to
propose him, has at least 7 calendar days before the meeting left at the registered office of ISA Holdings Limited, a notice in writing, duly
signed, signifying his candidature for office or the intention of such member to propose him.
If at any General Meeting at which an election of directors ought to take place, the place of any retiring director is not replaced, he shall
continue in office until the dissolution of the Annual General Meeting in the next year, and so on from year to year until his place is
replaced, unless it shall be determined at a General Meeting to reduce the number of directors.
Profit attributable to shareholders 7,479 5,009 8,452 217
Earnings and headline earnings per share
attributable to equity holders for the year
Earnings per share (cents) 7 5.8 3.9 Headline earnings per share (cents) 7 6.1 4.0
Declaration by company secretary
For the year ending 28 February
Group Company
2006 2005 2006 2005
Note
R 000’s R 000’s R 000’s R 000’s
Cash flows from operating activities 6,452 4,562 (187) 342
Cash receipts from customers 36,785 24,173 350 464
Cash paid to suppliers and employees (29,860) (19,606) (212) (122)
Cash generated from operations 25 6,925 4,567 138 342
Interest paid (148) (9) - -
Income tax (paid)/refunded (325) 4 (325) -
Cash flows from investing activities 570 (973) 395 (7,988)
Purchase of tangible assets (231) (126) - -
Proceeds from sale of tangible assets 89 - - -
Decrease/(increase) in investment in associate 122 (122) - -
Loans granted to share incentive trust (30) (868) (30) (868)
Dividends received - - 2,600 -
Interest received 620 143 188 -
Loans granted to subsidiaries - - (2,363) (7,120)
Cash flows from financing activities (55) 656 (55) 7,646
Repayments of short-term borrowings - (19) - - Loans granted - (2,545) - (2,545) Loan repayments 2,545 - 2,545 - Proceeds from issuance of ordinary shares - 3,244 - 10,191 Dividends paid to ordinary shareholders (2,600) - (2,600) - Repayments of long-term borrowings - (24) - -
Net increase in cash and cash equivalents 6,967 4,245 153 - Cash and cash equivalents at beginning of the year 4,932 687 - -
Cash and cash equivalents at end of the
year
11,899
4,932
153
-
For the year ending 28 February
Group Company
2006 2005 2006 2005
Note
R 000’s R 000’s R 000’s R 000’s
SHARE CAPITAL
Ordinary shares
Balance at beginning of the year 1,300 523 1,300 523
Proceeds from shares issued - 777 - 777
Balance at end of the year 1,300 1,300 1,300 1,300
Share premium Balance at beginning of the year 14,387 4,973 14,387 4,973 New shares issued during the year - 9,637 - 9,637
Cash Flow Statements
Write off of share issue expenses - (223) - (223)
Balance at end of the year 14,387 14,387 14,387 14,387
RESERVES
Non-distributable reserve Balance at beginning of the year 3,021 3,021 3,021 3,021 Movement during the year - - - -
Balance at end of the year 3,021 3,021 3,021 3,021
Retained earnings Balance at beginning of the year (2,429) (7,438) (8,115) (8,332) Attributable profit for the year 7,479 5,009 8,452 217 Dividends paid during the year 6 (2,600) - (2,600) -
Balance at end of the year 2,450 (2,429) (2,263) (8,115)
Total capital and reserves attributable to
equity holders 21,158 16,279 16,445 10,593
Declaration by company secretary
For the year ending 28 February
Group Company
2006 2005 2006 2005
Note
R 000’s R 000’s R 000’s R 000’s
SHARE CAPITAL
Ordinary shares
Balance at beginning of the year 1,300 523 1,300 523
Proceeds from shares issued - 777 - 777
Balance at end of the year 1,300 1,300 1,300 1,300
Share premium Balance at beginning of the year 14,387 4,973 14,387 4,973 New shares issued during the year - 9,637 - 9,637 Write off of share issue expenses - (223) - (223)
Balance at end of the year 14,387 14,387 14,387 14,387
RESERVES
Non-distributable reserve Balance at beginning of the year 3,021 3,021 3,021 3,021 Movement during the year - - - -
Balance at end of the year 3,021 3,021 3,021 3,021
Retained earnings Balance at beginning of the year (2,429) (7,438) (8,115) (8,332) Attributable profit for the year 7,479 5,009 8,452 217 Dividends paid during the year 6 (2,600) - (2,600) -
Balance at end of the year 2,450 (2,429) (2,263) (8,115)
Total capital and reserves attributable to
equity holders 21,158 16,279 16,445 10,593
Statement of changes in Equity
Operating results
Revenue R 37,935,000 ���� 21%
EBITDA (earnings before interest, tax, depreciation and amortisation) R 7,626,000 ���� 24%
Headline earnings R 7,943,000 ���� 54%
Earnings R 7,479,000 ���� 49%
Cash and cash equivalents R 11,899,000 ���� 141%
Balance sheet
Total shareholders' equity R 21,158,000 ���� 30%
Ordinary share performance
Earnings per share (cents) 5.8 ���� 49%
Headline earnings per share (cents) 6.1 ���� 53%
Net asset value per share (cents) 16.3 ���� 30%
Net tangible asset value per share (cents) 11.4 ���� 56%
Financial highlights
Declaration by company secretary
1. Accounting policies The principal accounting policies applied in the preparation of the financial statements are set out below. These policies have been
consistently applied to all the years presented, unless otherwise stated.
1.1 Basis of preparation The financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS)
with the date of transition to IFRS being 1 March 2005. The financial statements for the year ended 28 February 2006 are the Group’s
first IFRS compliant financial statements and hence IFRS 1 – First-time Adoption of IFRS has been applied. An explanation of how
the transition to IFRS from SA GAAP, has affected the previously reported financial position and performance of the Group is
provided in note 2, there were no material changes to the cash flow statements. The financial statements have been prepared under
the historical cost convention, as modified by the revaluation of tangible and intangible assets to fair value.
The financial statements have been prepared on a going-concern basis and are presented in thousands of South African Rand
(R'000s).
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also
requires management to exercise its judgement in the process of applying the accounting policies.
1.2 Basis of consolidation The consolidated financial statements comprise of the financial statements of the Company, its subsidiaries and associates.
Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally
accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which
control is transferred to the Group. The purchase method of accounting is used to account for the acquisition of subsidiaries by the
Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred
or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business
combination are measured initially at their values at the acquisition date, irrespective of the extent of any minority interest. The
excess of the cost of acquisition over the fair value of the Group’s share of identifiable net assets acquired is recorded as goodwill. If
the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in
the income statement. Investments in subsidiaries are stated at cost. Investments are reviewed annually and are written down when
the investment is considered to be impaired.
Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of
between 20% and 50% of the voting rights. Investments in associates are accounted for by the equity method of accounting and are
initially recognised at cost. The Group’s investment in associates includes goodwill identified on acquisition. The Group’s share of
post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is
recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment.
Associated companies are included from their effective dates of acquisition to their effective dates of disposal. Differences between
the consideration paid for businesses acquired and the fair value of their identifiable net assets, at the date of acquisition, are
expressed as goodwill. Investments are reviewed annually and are written down when the investment is considered to be impaired.
Inter-company transactions, balances and unrealised gains or transactions between Group companies are eliminated while inter-
company transactions with associates are eliminated to the extent of the Group’s interest in the associate. Unrealised losses are also
eliminated unless the transaction provides evidence of an impairment of the assets transferred. Accounting policies of subsidiaries
and associates have been changed where necessary to ensure consistency with the policies adopted by the Group.
1.3 Revenue recognition Revenue comprises the fair value of the sale of goods and services, net of value-added tax, rebates and after the eliminated sales
within the Group. Revenue is only recognised once it is probable that the economic benefits associated with a transaction will flow to
the Group and the amount of revenue can be measured reliably. Revenue from services is recognised in the accounting period in
which the services are rendered, by reference to the stage of completion of the specific transaction assessed, on the basis of actual
Notes to the annual financial statements
service provided as a proportion of the total services to be provided. The services sold, but which are to be provided in a subsequent
accounting period are classified as revenue received in advance.
1.4 Foreign currency translation Foreign currency transactions are translated into Rand using the exchange rates prevailing at the date of the transaction. At each
balance sheet date, foreign currency monetary items are reported using the closing rate. Exchange differences arising on the
settlement of monetary items or on reporting of monetary items at rates different from those at which they were initially recorded
during the year, are recognised in the results of the year in which they arise.
1.5 Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating
leases. Payments under ongoing leases are charged to the income statement on a straight-line basis over the period of the lease.
1.6 Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity shareholders of the Group by the weighted average
number of ordinary shares in issue during the year.
1.7 Headline earnings per share Headline earnings per share is calculated by dividing the headline earnings attributable to equity shareholders of the Group by the
weighted average number of ordinary shares in issue during the year.
1.8 Dividend distribution Dividend distribution and all STC costs in relation to these dividends are recognised in the income statement in the financial year in
which the related dividend was approved by the Company’s shareholders and paid to the Company’s shareholders.
1.9 Tangible assets Tangible assets are valued to their fair value annually. An asset’s carrying amount is written down to its recoverable amount if the
asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by
comparing proceeds with carrying amount. These are included in the income statement.
Depreciation is calculated using the straight-line method to allocate their costs or revalued amounts to their residual values, over their
estimated useful lives, as follows:
– Motor vehicles 3 years
– Computer equipment and software 5 years
– Office furniture and equipment 6 years
1.10 Intangible assets Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of net identifiable assets of the
acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is
tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity
include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash generating units for the purpose of
impairment testing.
Trademarks
Trademarks are shown at historical cost and are tested annually for impairment.
1.11 Share incentive trust The Group operates a share incentive trust. The fair value of the employee services received in exchange for the grant of the share
options less amount paid by the participant is recognised as an expense through the income statement. Shares have been allocated
by the trust to ISA’s employees and directors and all of these shares are governed by the Share Incentive Trust Deed. All shares
exercised have a direct loan with the respective participant and these loans bear interest at the official rate of interest prescribed in
terms of the Schedule 7 to the Income Tax Act.
1.12 Deferred tax Deferred tax is provided in full, using the liability method, on temporary differences arising between tax bases of assets and liabilities
and their carrying amounts in the financial statements. Deferred tax is determined using rates that have been enacted at the balance
sheet date. Deferred tax assets, as a result of assessed losses, are only realised once the tax assessment approves the assessed
loss and only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be
utilised.
1.13 Cash and cash equivalents Cash and cash equivalents consist of cash in hand, deposits held with banks and other financial institutions as well as other short-
term highly liquid investments with original maturities of three months or less.
1.14 Inventories Inventories consist of trading stock and are stated at the lower of cost and net realisable value. Cost is determined using the first-in,
first-out (FIFO) method.
1.15 Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest
method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective
evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the
provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at
the effective interest rate. The amount of the provision is recognised in the income statement.
1.16 Share capital and share premium Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares are shown in
equity as a deduction from the proceeds and are taken off the share premium account.
1.17 Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised
cost, any difference between the proceeds and the redemption value is recognised in the income statement over the period of the
borrowings using the effective interest method. In terms of the Company’s articles of association, the borrowing powers of the
Company are unlimited.
1.18 Post retirement benefits At year end the Group has no obligations to fund post-retirement, pension or medical benefits.
1.19 Financial risk management
Financial risk factors
The Group’s activities expose it to a variety of financial risks: liquidity risk, credit risk, market risk (specifically foreign currency risk)
and cash flow interest rate risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets
and seeks to minimise potential adverse efforts on the Group’s financial performance.
Liquidity risk management
The Group manages liquidity risk by monitoring forecast cash flows and ensuring that adequate cash levels are maintained. In terms
of its articles of association, the Company's borrowing powers are unlimited.
Credit risk management
The Group's credit risk is primarily attributable to its trade and other receivables balances. Provision is made for doubtful debts and
management does not consider there to be any material credit risk exposure that has not already been covered by the doubtful debt
provision.
Foreign currency management
Certain subsidiaries undertake transactions in foreign currencies and are therefore exposed to exchange rate fluctuations. At year
end foreign currency exposure was €56,267 (2005: €97,266) and $5,854 (2005: $50,485). The foreign exchange rates at year end
were R7.31 = €1.00 and R6.17 = $1.00 (2005: R7.84 = €1.00 and R5.90 = $1.00). This risk is managed by building margin into selling
prices and maintaining a dollar based foreign currency account with the Group's bankers. At year end the foreign currency on hand
was $424,000 (2005: $298,000).
Cash flow interest rate management
Cash and cash equivalents earn interest at variable interest rates, negotiated at arm's length with financial institutions, and generally
vary in response to the prime overdraft rate.
1.20 Related party transactions Arms length trading transactions occur between subsidiaries and the divisions of the Group. These transactions are reversed on
consolidation of the financial statements. Related party transactions between associated companies were done at arms length.
Group Company
2006 2005 2006 2005
R 000’s R 000’s R 000’s R 000’s
2. Reconciliation of previous SA GAAP
to IFRS
Balance sheet Equity Ordinary shareholders’ equity as previously
reported – SA GAAP
-
14,459
-
10,438
Restatement of IFRS - 1,820 - 155
Revaluation of tangible assets - 127 - 119 Revaluation of intangible assets - 1,273 - - Deferred tax on the above - 420 - 36
Restated equity – IFRS - 16,279 - 10,593
Income statement Net income as previously reported – SA
GAAP - 3,189 - 62
Restatement of IFRS - 1,820 - 155
Reversal of depreciation for tangible assets - 127 - 119 Reversal of amortisation for intangible assets - 1,273 - - Deferred tax on the above - 420 - 36
Restated net income - IFRS - 5,009 - 217
3. Other income Other income includes the following: Dividends received - - 2,600 - Profit on disposal of tangible assets 47 - - - Profit on foreign exchange 25 36 - - Reversal of impairment of loan to subsidiary - - 5,687 - Revaluation of tangible assets - 127 13 119
4. Administrative expenses Administration expenses includes the
Clifford S Katz 735 668 - - Philip J G Green 596 544 - - Ryan S Price 594 301 - 55
Impairment of intangible assets - goodwill 464 1,356 - 36 Loss on sale of associate 59 - 37 - Loss on foreign exchange - 22 - - Operating lease charges - premises (see note 24) 406 456 - -
Group Company
2006 2005 2006 2005
R 000’s R 000’s R 000’s R 000’s
5. Income tax Current tax – overprovision prior year - 4 - - Deferred tax (note 13) 355 420 2 36 Secondary Tax on Companies (STC) (325) - (325) -
30 424 (323) 36
Tax reconciliation Tax calculated at domestic tax rates applicable to profits 2,160 1,376 2,545 55 Utilisation of previously unrecognised tax losses (366) (379) - - Tax losses for which no deferred tax assets was recognised (1,434) (571) (140) (30) Expenses not deductible for tax purposes 1 12 - 11 Deemed income for tax purposes 5 - - - Income not subject to tax (11) (18) (2,403) - Overprovision in prior years - 4 - - Secondary Tax on Companies (STC) (325) - (325) -
6. Dividends paid Dividend number 1, of one cent per ordinary share and one
cent special dividend per ordinary share, was declared on 29
July 2005 and paid on 1 August 2005. Secondary tax on
companies of R325,000 has been accounted for and paid in
respect of dividend 1. 2,600
-
2,600
-
Dividend number 2, of four cents per ordinary share is to be
proposed and ratified at the Annual General Meeting on 23
June 2006. These financial statements do not reflect this
dividend payable.
7. Earnings and headline earnings per share Reconciliation of earnings and headline earnings: Earnings as per income statement 7,479 5,009 Impairment of goodwill 464 152
Headline earnings 7,943 5,161
Weighted average number of shares in issue (000's) 130,000 130,000
Earnings per share (cents) 5.8 3.9
Headline earnings per share (cents) 6.1 4.0
2006 2005 2006 2005
R 000’s R 000’s R 000’s R 000’s
8. Tangible assets Cost Motor vehicles 62 62 - - Computer equipment and software 969 830 129 129 Office furniture and equipment 676 686 510 510
1,707 1,578 639 639
Accumulated depreciation and impairment Motor vehicles 3 - - - Computer equipment and software 726 589 119 108 Office furniture and equipment 484 499 388 388
1,213 1,088 507 496
Net book value at end of year Motor vehicles 59 62 - - Computer equipment and software 243 241 10 21 Office furniture and equipment 192 187 122 122
494 490 132 143
Movement for the year Net book value at beginning of year 490 460 143 110 Additions 231 126 - - Depreciation (185) (223) (24) (86) Revaluation of tangible assets - 127 13 119 Disposals – cost (102) - - - Disposals – accumulated impairment 60 - - -
Net carrying value Goodwill - 464 - - Trademarks 6,367 6,367 - -
6,367 6,831 - -
Movement for the year Balance at beginning of year 6,831 1,240 - 36 Goodwill arising on acquisition of businesses - 580 - - Acquisition of trademarks - 6,367 - -
Less: impairment (464) (1,356) - (36)
Balance at end of year 6,367 6,831 - -
Trademarks relate to the registered ISA trademark,
which is a well known and respected brand name in
the IT security sector. Based on an external
independent valuer, the asset is expected to generate
net cash inflows for the Group. The trademark was
valued at the effective dates 28 February 2005 and 28
February 2006, by the external independent valuer.
2006 2005 2006 2005
R 000’s R 000’s R 000’s R 000’s
10. Investments in subsidiaries - - 15,199 7,149
Shares at cost - - 2 2 Amounts owed by subsidiaries - - 15,197 7,147
The subsidiaries' loans are unsecured and bear interest at
market related rates. No fixed terms for the repayment of the
loans have been arranged.
Directors’ valuation of investments - - 15,199 7,149
11. Investments in associates ISA’s shareholding in Tsebo Internet and Informatio n
Security Architects (Pty) Ltd, which was sold durin g the
year under review.
The Group’s proportional share of revenue and expenses are
The Group’s proportional share of assets and liabilities are as
follows:
Assets - 364 - -
Tangible assets - 5 - - Current assets - 359 - -
Liabilities - (342) - -
Current liabilities - (342) - -
Share of net assets - 22 - -
Loan to associate - 100 - - Share of profit for the current year - 22 - -
- 122 - -
12. Share incentive trust Opening balance 923 55 923 55 Shares sold by the trust during the year - (55) - (55) New shares allocated to the trust during the year - 923 - 923 Interest received by the trust 188 - 188 - Payments received from beneficiaries of the trust (158) - (158) -
Closing balance 953 923 953 923
6,547,190 shares have been exercised.
13. Deferred tax asset Balance at beginning of the year 420 - 36 - Movement for the year as a result of timing differences between the
value of tangible and intangible assets for tax and accounting
purposes 369
420
3
36
Tax rate change (14) - (1) - Balance at the end of the year 775 420 38 36
14. Cash and cash equivalents Cash at bank and in hand 11,899 4,932 153 -
The effective interest rate on short-term bank deposits
17. Trade and other receivables Trade debtors 8,495 7,345 - - Other receivables 79 - - -
8,574 7,345 - -
18. Share capital Authorised 500,000,000 ordinary shares with a par value of one cent each 5,000 5,000 5,000 5,000
Issued 130,000,000 ordinary shares with a par value of one cent each 1,300 1,300 1,300 1,300
The unissued ordinary shares are under the control of the
directors in terms of a resolution of members passed at the
Annual General Meeting of shareholders in July 2005. The
authority is valid until the next Annual General Meeting.
19. Share premium Balance at beginning of year 14,387 4,973 14,387 4,973 Movement in the current year - 9,637 - 9,637 Write off of new share issue expenses - (223) - (223)
Balance at end of year 14,387 14,387 14,387 14,387
20. Non-distributable reserve Reduction in purchase price of a business acquired 3,021 3,021 3,021 3,021
21. Retained earnings Balance at beginning of the year (2,429) (7,438) (8,115) (8,332) Attributable profit for the year 7,479 5,009 8,452 217 Dividends paid during the year (2,600) - (2,600) -
Balance at end of the year 2,450 (2,429) (2,263) (8,115)
22. Trade and other payables Trade payables 5,707 5,586 - - Revenue received in advance 484 479 - - Other payables 1,458 1,095 15 203
7,649 7,160 15 203
23. Provision for other liabilities and charges Provision for audit fees 60 70 - - Provision for leave pay 241 135 15 -
301 205 15 -
24. Commitments
Operating lease which is payable within one year 112 84 - -
25. Notes to cash flow statements Conventions applying to figures other than adjustme nts Outflows of cash are represented by figures in brackets Inflows of cash are represented by figures without brackets
Reconciliation of profit before taxation to cash ge nerated
from operations
Profit from ordinary activities before taxation 7,449 4,585 8,775 181 Adjustment for: 226 1,318 (8,449) 3
Interest paid 148 9 - - Interest received (620) (143) (188) - Dividends received - - (2,600) - Profit on disposal of tangible assets (47) - - - Impairment of intangible assets 464 1,356 - 36 Increase in provisions 96 - 15 - Reversal of impairment of loan to subsidiary - - (5,687) - Depreciation of tangible assets 185 223 24 86 Revaluation of tangible assets - (127) (13) (119)
7,675 5,903 326 184 Working capital changes (750) (1,336) ( 188) 158
Increase in inventories (10) (13) - - Increase in trade and other receivables (1,229) (4,728) - - Increase/(decrease) in trade and other payables 489 3,405 (188) 158
Cash generated from operations 6,925 4,567 138 342
Dec
As at 28 February 2006
Size of shareholding # of shares % of shares # of shareholders % of shar eholders
1 to 100,000 7,570,145 5.8% 519 95.0%
100,001 to 1,000,000 3,716,413 2.9% 19 3.5%
1,000,001 and over 118,713,442 91.3% 8 1.5%
Total 130,000,000 100.0% 546 100.0%
Category of shareholding
Companies or trusts 69,586,249 53.5% 29 5.3%
Nominee companies or banks 12,863,645 9.9% 16 2.9%
Private individuals 46,985,156 36.2% 484 88.7%
Other corporate bodies 564,950 0.4% 17 3.1%
Total 130,000,000 100.0% 546 100.0%
Type of shareholder
Total non-public shareholders 106,705,354 82.1% 9 1.6%
