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CS COMPUTER SERVICES HOLDINGS LIMITED - Audited results
CS COMPUTER SERVICES HOLDINGS LIMITED
Registration number 1996/015131/06
Incorporated in the Republic of South Africa
Share code: CSH ISIN: ZAE000022034
Audited results
June 2003
GROUP INCOME STATEMENT
Audited Audited
12 months 12 months
ended ended
30 June 30 June
2003 2002
R"000 R"000
Revenue 430 485 403 161
Cost of sales 290 504 223 395
Gross profit 139 981 179 766
Operating costs 136 568 127 469
Operating profit before depreciation 3 413 52 297
Depreciation - change in accounting policy 3 634 2 663
Depreciation and amortisation 13 234 10 533
(Loss)/Profit before interest (13 455) 39 101
Net finance costs (9 709) (1 621)
Share of results of associate 415 68
(Loss)/Profit before goodwill amortisation and
discontinued operation (22 749) 37 548
Goodwill amortisation and impairment 12 524 13 724
Loss on sale of investment in associate 115 -
Loss on discontinued operation - 6 956
(Loss)/Profit before tax (35 388) 16 868
Income tax (9 747) (3 921)
Net (loss)/profit for year (25 641) 20 789
Minority interest 10 -
Attributable (loss)/profit for year (25 651) 20 789
Reconciliation of headline (loss)/earnings
Attributable (loss)/profit for year (25 651) 20 789
Adjusted for:
Goodwill amortisation/impairment 12 524 13 724
Loss on sales of investment in associate 115 -
Loss on discontinued operation - 4 869
Headline (loss)/earnings (13 012) 39 382
Weighted average number of shares in
issue (thousand) 233 668 189 753
Fully diluted number of shares
(thousand) 240 457 207 902
(Loss)/Earnings per share (cents)
Basic (10,98) 10,96
Fully diluted (10,67) 10,00
Headline (loss)/earnings per share (cents)
Basic (5,57) 20,75
Fully diluted (5,41) 18,94
STATEMENT OF CHANGES IN EQUITY
Audited Audited
12 months 12 months
ended ended
30 June 30 June
2003 2002
R"000 R"000
Share capital 2 454 2 082
Balance at beginning of year 2 082 1 527
New shares issued during year 372 555
Share premium 114 873 79 861
Balance at beginning of year 79 861 27 326
Premium of new shares issued during year 33 294 52 740
Treasury shares realised 1 833 -
Share issue expenses written-off (115) (205)
Shares to be issued for acquisitions 472 19 730
Balance at beginning of year 19 730 7 790
New shares to be issued 17 000 69 570
New shares issued during year (33 666) (53 295)
Treasury shares available to vendor (2 210) (3 292)
Transfers (382) (1 043)
Distributable reserves 36 065 61 716
Balance at beginning of year 61 716 40 927
- As previously reported - 41 971
- Adjusted for change in accounting policy - (1 044)
Net (loss)/profit for year (25 651) 20 789
Total equity 153 864 163 389
GROUP BALANCE SHEET
Audited Audited
30 June 30 June
2003 2002
R"000 R"000
Assets
Non-current assets 159 044 153 677
Fixed assets 41 271 41 058
Deferred tax asset 31 867 21 106
Intangible assets 80 887 82 837
Other investments 1 350 1 350
Investment in associate - 3 786
Long-term contracts 1 923 1 942
Loans 770 192
Loan to share incentive trust 976 1 406
Current assets 159 959 146 508
Trade receivables 96 192 92 932
Other receivables and pre-payments 6 519 5 776
South African Revenue Services 768 -
Inventory 10 241 4 191
Work in progress 19 614 12 400
Cash and cash equivalents 26 625 31 209
Total assets 319 003 300 185
EQUITY AND LIABILITIES
Share capital and premium 117 327 81 943
Shares to be issued 472 19 730
Accumulated profits 36 065 61 716
Ordinary shareholders" interest 153 864 163 389
Non-current liabilities 5 511 14 984
Interest bearing borrowings 3 878 11 030
Amounts due to vendors 1 628 3 954
Minority interest 5 -
Current liabilities 159 628 121 812
Trade and other liabilities 90 141 79 736
South African Revenue Services 4 028 2 290
Short-term portion of long-term liabilities 3 062 1 997
Short-term loans 13 460 -
Deferred revenue 6 743 8 454
Short-term portion of amounts due to vendors 10 484 9 363
Bank overdraft 31 710 19 972
Total equity and liabilities 319 003 300 185
Number of shares in issue (thousand) 245 444 208 245
Net tangible asset value per share (cents) 29,73 38,68
Net asset value per share (cents) 62,69 78,46
ABBREVIATED GROUP CASH FLOW STATEMENT
Audited Audited
12 months 12 months
ended ended
30 June 30 June
2003 2002
R"000 R"000
Cash flow from operating activities (15 761) 59 523
Cash outflow from investing activities (24 819) (62 284)
Cash inflow from financing activities 24 258 538
Net decrease in cash and cash equivalents (16 322) (2 223)
Cash and cash equivalents at beginning of year 11 237 13 460
Cash and cash equivalents at end of year (5 085) 11 237
Cash flow from operating activities per share (cents)
Basic (6,75) 31,37
Fully diluted (6,55) 28,63
INTRODUCTION
The directors of CS Holdings herewith announce the Group"s audited results
for the year ended 30 June 2003. The past financial year has been a difficult
one for the IT industry and proved to be challenging for CS Holdings.The past
year has also been one in which the company went through some growing pains as
it matured into a bigger company, positioning itself to compete head-on with
some of the leading ICT competitors in the market. We believe that CS Holdings
has successfully repositioned itself as a strong contender for business and
gaining market share in the high end of the market.
Highlights
* BEE Transformation and positioning:
- The completion of the share transaction between CS Holdings and Worldwide
African Investment Holdings (WAIH), resulting in WAIH owning a 25,8% stake in CS
Holdings.
- The appointment of Thuli Zuma (CEO of WAIH) as non-executive Chairman, Litha
Nyhonyha (CEO of NBC) as a non-executive director and Makhuperetja Nyama as an
executive director of CS Holdings.
- The validation of the transformation efforts of the Group in the form of the
BMI-T African Achievers Award for the Most Progressive ICT Company for 2002/2003
and ranking third overall in the Empowerdex survey of JSE listed companies
2002/2003.
* Becoming an accredited Proudly South African company.
* The formation of a strategic alliance with Telkom T-BIS, jointly gaining new
business to the value of R14,4 million in the current financial year and
expecting to achieve sales in excess of R50 million in the 2004 financial year.
* A number of significant projects were secured in the second half of the
financial year. These include the South African Revenue Services (SARS) FIMS
project for CS Holdings and Partners to provide financial transformation
solutions to SARS, valued at approximately R100 million over a two-year period;
a R15 million SAP HR implementation with the Government of Zambia; a R8,2
million Telkom SAP Treasury implementation; a R14,4 million joint contract with
Telkom Business for the Legal Aid Board; a R11,4 million JD Edwards
implementation with Rand Refinery; approximately R7 million Kronos workforce
scheduling contract with the Edcon Group; renewal of the outsource contract with
MultiChoice Africa for desktop and network support for a further three-year
period valued at R34 million; and the renewal of the ABSA training outsource
contract, valued at R7 million per annum. These wins represent the validation by
the industry that CS Holdings is well-positioned and is capable of providing and
delivering strong solutions, off the back of presenting strong BEE credentials
and active leadership initiatives in support of the transformation drive in the
South Africa ICT environment.
* The incorporation of First National Bank"s IT Customer Services business
(ITCS) into CS Holdings" Managed Services division of IT Solutions, effective
post-financial year-end on 1 August 2003, a deal, that it is anticipated will
deliver first year revenue of more than R60 million and open up services
opportunities for CS Holdings in the lucrative banking sector.
Strategic Review
The past year has been one of consolidation and investing into our strategy
of migrating our sales focus from a product/specialist sales approach, to
selling an integrated solution to a defined list of strategic targeted clients.
This meant that the business development structure had to be unified in one
focused team, skilled in selling specialised and integrated solutions, across
the spectrum of IT services provided by the three core operations of CS
Holdings, being Processes, People and Technology.
This included, inter alia:
* the completion of a restructure of the Group to create a unified, integrated
go-to-market strategy, which is geared to consolidate business development
across the Group and bring relevant solutions to the specific chosen industry
sectors;
* the appointment of key industry leaders to co-ordinate business initiatives
across the Group and focus on strategic accounts within the selected vertical
industries. They have developed unique insights into the customer and its
industry in order to create an integrated, customised solution that will deliver
measurable value to customers;
* the introduction of structured account teams around a customer relationship
owner, supported by the industry experts and technical experts, targeting small
pools of customers with similar business needs; and
* the regional re-alignment of KwaZulu-Natal and Western Cape regions from
operationally to strategically driven regions, supported by the appointment of
Regional directors in each region. Their focus being to build market share and
presence in the regions appropriate to their target markets.
Strategic Review
Shared Support Services
CS Holdings has centralised its corporate support functions in terms of a shared
services model. The integration of operating and information systems is still
underway and will continue into the new financial year. The rationalisation
exercise will continue to take place during the first half of the 2004 financial
year and will result in better operational efficiencies leading to overall cost.
People Division
During the 2003 financial year the People Solutions division experienced a
downturn in turnover. This was attributable to the slow-down experienced in the
technology training market, as well as a predicted shift from traditional
instructor-led training towards technology-based training. As a result of this
change in delivery method of IT training solutions, a process was started to
consolidate the national infrastructure in order to reduce the exposure to
capital infrastructure costs. This process is ongoing and will result in lower
overhead costs for the division.
The division has introduced a new CRM model for its strategic clients, which
should result in an increase in service delivery and annuity revenue streams.
Furthermore, the People Consulting and People Education business units of the
Group were merged and incorporated into the People Solutions division. This was
done in order to provide customers with a comprehensive set of People
Effectiveness consulting, combined with business training solutions focused at
the high end of the corporate market.
The expected benefits of the strategic changes made to the People Solutions
division will have a positive bearing on the division"s performance in the 2004
financial year with better growth anticipated as a result of improved quality
and annuity earnings.
Processes Division
As previously reported in the two trading updates, the Systems Integration
division experienced a very slow second half that was a direct consequence of
the delays experienced in contract inception dates; primarily in the mining,
manufacturing and public sectors.
Furthermore, the shift from targeting medium-sized contracts in the mid-market,
to large contracts in the high end of the market, has had the impact of longer
sales cycles and high exposure to delays in the commencement of contracts.
As reported above, a series of long-term implementation projects have
recently commenced and, with a strong pipeline in place, we believe that the
risk of high volatility and unpredictable revenue streams have largely been
mitigated. We believe that this division will show strong revenue growth and
bottom-line performance in the 2004 financial year.
Technology Division
Although the IT Solutions division increased its revenue by 20% for the year,
overhead costs also increased by a similar percentage. Subsequent to the
acquisition of Getronics in October 2001, the division started with a
consolidation exercise to rationalise duplicate infrastructure, support
structures and resources. This process has not been completed and has not yet
given the expected and desired benefits of rationalising costs. The process is
ongoing and it is expected that this will be completed within the first six
months of the 2004 financial year. The upgrading and integration of all support
systems is receiving highest priority and is expected to bring about increased
efficiencies and service delivery.
The incorporation of First National Bank"s IT Customer Services business
(ITCS) occurred effective post-financial year-end, on 1 August 2003, a deal that
it is anticipated will deliver additional annuity-based revenue of more than
R60million in the 2004 financial year. This deal will also benefit CS Holdings
by creating economies of scale and bringing new opportunities and markets for
the Group in supplying and maintaining a credible service delivery in the
banking sector.
PROSPECTS
Selling solutions instead of products/time to the customer creates huge
opportunities for value-based rather than cost plus pricing or hourly time
charges. Business solutions create added value for our customers and can
therefore be sold at a premium. Furthermore, due to the integrated and
customised nature of the solution, and alignment to the specific business needs
of the customer, CS Holdings services are differentiated from those provided by
our competitors.
During the 2003 financial year, the management of CS Holdings embarked on an
extensive company reorganisation in order to convert and migrate the business to
a solutions business. This had its initial investment impact, sales teams had to
be more skilled, deals took longer to complete and successful accounts required
extra service before, during and after transactions. The initial costs invested
in assessing the market and pulling together the solutions set of CS Holdings
has been considerable. The re-organisation has been completed and the foundation
has been laid. The large contracts that have been awarded at the end of the 2003
financial year are validation of this strategy.
CS Holdings will begin the 2004 financial year with a signed order book of
R350 million and new contract wins for July 2003 and August 2003 amounting to
R30 million; with a pipeline in excess of R200 million that reflects a list of
very strong prospects in the vertical industries.
The board of directors is confident that the Group"s strategy is focused and
managed in terms of an appropriate integrated business model. CS Holdings is
budgeting for profitable operations in the next financial year.
Traditionally, the Group"s financial results are lower in the first half of the
financial year. The directors expect this trend to continue.
FINANCIAL PERFORMANCE
The company issued two trading updates, the first one at the end of May 2003
and the second one in August 2003, in which shareholders were informed that the
Group"s performance for the third and fourth quarters of the financial year was
substantially lower than projected and anticipated.
This effectively resulted in CS Holdings posting a headline loss of R13,0
million (2002: headline earnings of R39,4 million) and a headline loss per share
of 5,6 cents (2002: headline earnings per share of 20,7 cents) for the year
under review. This can mainly be attributable to:
* slower sales in the third and fourth quarters, due to contracts being delayed
or awarded later than anticipated;
* the company taking a conscious decision to preserve its intellectual assets
and skills;
* the cancellation of the sale of the rights to a software product entered into
during the first six months of the year. The cancellation resulted in a negative
impact on headline earnings of approximately R10,5 million after tax;
* various other matters, including the write-off of assets and debtors and
higher finance costs;
* negative impact of the change in accounting policy with regard to back-up
equipment and maintenance stock, and the adoption of AC 133 (see note on change
in accounting policies).
Margins
The slower sales and the conscious decision to preserve intellectual assets
and skills as indicated above resulted in negative gross profit growth and
therefore erosion of margins.
Margins are expected to return to above the 7% level during the next financial
year, but as per the normal trend, these will be lower in the first half of the
financial year.
New shares issued for cash during the year
In terms of the agreement with WAIH, whereby WAIH had to increase its
shareholding in CS Holdings to a minimum of 25%, CS Holdings issued 20 000 000
new shares at 85 cents per share for cash. Full details of the transaction were
published on SENS on 24 December 2002, thereafter in the press.
Balance sheet
Although the Group has always maintained a healthy balance sheet, the
financial results have weakened the balance sheet and ratios to some extent.
The balance sheet ratios shall strengthen as profitability converts to cash and
as net investment in working capital is managed at acceptable levels.
Cash utilised in operating activities
The net investment in working capital was funded from cash resources
generated from operations and cash resources at the beginning of the year.
It is expected that as growth and profitability convert into cash flow, cash
generated from operations will return to normal levels. In addition, a concerted
effort is being made to reduce inventory levels, minimise debtor collection days
and accelerate work in progress turnaround, while maintaining normal creditors"
payment terms.
Investment activities
Investment activities during the year relate to: 2003 2002
Investment in capital base and infrastructure R14,4m R5,3m
Acquisitions of subsidiaries R3,6m R32,9m
Activities to maintain operations R5,5m R8,2m
Payments to vendors for past acquisitions R5,6m R6,7m
These activities were planned and budgeted for. The investment activities
were funded from shares issued for cash (see note on new shares issued for cash)
and from cash resources at the beginning of the year.
Further investment activities budgeted for during the next financial year
include payments to vendors of R10,5 million for past acquisitions (as disclosed
under current assets) and normal investment activities to maintain operations.
No further capital expansions or acquisitions are anticipated in the short and
medium term.
Segment Reporting
The segment information for the year ended 30 June 2003 is:
CS Systems CS IT CS Education
Integration Solutions Solutions Total
R"000 R"000 R"000 R"000
Revenue 116 370 253 607 60 508 430 485
Operating (loss)/profit (20 089) 6 989 (355) (13 455)
Dividends
The current policy is not to pay dividends and all retained earnings are used
to fund growth. The directors will periodically review this policy.
Accounting policies
The financial statements are prepared on an historical cost basis in
accordance with South African Statements of Generally Accepted Accounting
Practice, and incorporate the accounting policies of the Group, which are
consistent in all material respect with those adopted in the previous financial
year, except as indicated below.
Change in accounting policies
Reclassification of back-up equipment and maintenance stock
The Group changed its accounting policy during the year with respect to the
accounting and disclosure treatment of back-up equipment and maintenance stock.
This was decided due to the long-term nature thereof being better described as
fixed assets and therefore to achieve more appropriate presentation in the
financial statements. Back-up equipment and maintenance stock were reclassified
as fixed assets and are written-off over the expected life span of the
equipment. Comparative figures have been appropriately restated. Inventory
specifically purchased for resale is still disclosed as inventory. The
application of the change in accounting policy had the following effect on the
financial statements:
Debit depreciation charge - Income Statement 2003: R3,6 million.
Debit depreciation charge - Income Statement 2002: R2,7 million.
Debit retained earnings opening balance 2002: R1,0 million.
Fixed asset adjustment - Balance Sheet 2003: R18,4 million.
Fixed asset adjustment - Balance Sheet 2002: R18,1 million.
Adoption of AC 133: Financial instruments - Recognition and Measurement
This recently published accounting statement became applicable to the Group
during the financial year. The statement requires retrospective application in
so far as the retained earnings at the beginning of the financial year. The
directors decided not to adjust the opening balance of retained earnings at the
beginning of the financial year as the effect is not material. The application
of the statement had the following effect on the financial results at 30 June
2003:
Debit fair value adjustment - Income Statement : R0,59 million.
Audited results
PricewaterhouseCoopers has provided an unqualified audit opinion on the 30
June 2003 annual financial statements, which have been abridged, for the purpose
of this announcement. The unqualified audit opinion is available for inspection
at the company"s registered office.
On behalf of the board of directors:
Annette van der Laan Johan Goosen
Chief Executive Officer Company Secretary
4 September 2003
Midrand
Registered Office: Transfer Secretaries:
241 Third Road Computershare Limited
Halfway Gardens 70 Marshall Street
Midrand Johannesburg
Board of Directors:
T Zuma* (Chairman), A van der Laan (CEO), T R T Bohlmann*, A D Botha*,
A R Ruckert*, J G Goosen, S H Muller*, N V Qangule (Alt)*, D L Vink,
M P Nyama, L M Nyhonyha*, P N Reeves
*Non-executive
Company Secretary:
J G Goosen
Date: 04/09/2003 05:50:24 PM
Produced by the JSE SENS Department
