7-1 dat 2004 annual report - datacom · • trading profit before tax was $23 million, up 31% •...

3 Directors’ Report

6 Datacom - Company Report

10 Statement of Financial Performance

11 Statement of Movements in Equity

12 Statement of Financial Position

14 Statement of Cash Flows

16 Notes to and Forming Part of the Financial Statements

37 Auditor’s Report

Contents

“ Investment in best

practices & smart tools

sustains the company’s

value proposition...”

Datacom Annual Report / www.datacom.co.nz

Directors

J. W. Holdsworth (Chairman)

J. R. Allen

C. D. Boyce

J. C. Hagen

P. M. Hargreaves

S. L. Matheson

F. N. Stephenson

P. M. Schuyt

Management

F. N. Stephenson

Executive Chairman, Datacom NZ

M. C. Browne

Managing Director, Australia/SE Asia

Secretary

R.A. Keall

Auditor

Ernst & Young

Solicitors

Kensington Swan

Duncan Cotterill

Simpson Grierson

Bankers

The National Bank of New Zealand

ASB Bank

Citibank

National Australia Bank

Registered Office

Level 9, South Tower

68 - 86 Jervois Quay

PO Box 2063

Wellington

Ph: (04) 460 1500

Fax: (04) 460 1511

Website: www.datacom.co.nz

Datacom Group Limited

2

The year ended 31 March 2004 proved to be

a very successful year for Datacom Group with

excellent results both in New Zealand and

Australia. Datacom continues to be the leading

New Zealand-owned Information Technology

services company in terms of both revenues

and staff numbers.

Now, in its 39th year of operation, Datacom

has continued in 2004 with its long term trend

of steady growth in revenues, profit and strong

balance sheet, and is well positioned to continue

this trend into its 40th year.

New Zealand again recorded a record year in

terms of profit, with increased business in both

outsourcing services and systems development.

Australia/Asia also had its best year in its 10

year trading history, with strong growth in the

systems management activities and continuing

growth in the technical call centre business

Total revenue for the Group was $261 million, up

8% on the previous year’s $242 million, continuing

the long term trend that has seen revenues increase

every year for the past 10 years. Of this total,

New Zealand contributed $190 million and

Australia/Asia $72 million. The Australian

revenue was 27% of total revenue, compared

with 20% in 2003 (detailed reports on New

Zealand and Australia/Asia are contained later).

The net surplus before tax and abnormal items

was $23 million, compared with $17.5 million in

2003, up 31%. In addition to this operating profit,

the Company released $1.7 million of prior year

provisions which were no longer required, giving

a total net surplus before tax of $24.7 million. After

tax profit for the year was $16.6 million, an increase

of 43%.

Directors’ Report

3

Reflecting the growth in revenues, staff numbers

increased by 7% during the year to a total of

1,666. Of the total, 1,071 are New Zealand based,

with 520 based in Australia and 75 in Asia.

The Company continued to strengthen its

balance sheet, with shareholders funds at year

end totalling $50.3 million, compared with $41

million in 2003, an increase of 23%. The after tax

return on average shareholders’ funds was 36%,

compared with 30% in

the previous year.

The cash balance, net

of overdraft, stood at

$30 million at year end,

up $8 million for the year.

The Board continues

to look at investment

opportunities for cash

surplus to requirements

and have evaluated a

number of acquisition opportunities.

Dividends paid during the year totalled $1.12

per share, up from $0.95 in 2003, an increase

payout of 18%.

In summary the highlights of the year’s

performance were:

• Total operating revenue was $261 million,

up 8%

• Trading profit before tax was $23 million,

up 31%

• After tax profit was $16.6 million, up 43%

• Shareholders’ funds increased to $50.3 million,

up 23%.



4

Dividends

Dividends of 112 cents per share were provided

for during the year. Interim dividends of 30 cents

each were paid on 5 September 2003 and 15

December 2003. A final dividend of 52 cents

was paid on 3 May 2004.

Directors

Mr P.M. Schuyt was appointed to the board

on 9 September 2003. Messrs F.N. Stephenson,

P.M. Schuyt and C. D. Boyce retire by rotation

and, being eligible, offer themselves for re-election.

Auditor

It is proposed the auditor, Ernst & Young,

continue in office in accordance with Section

200(1) of the Companies Act 1993.

Disclosures

The shareholders of the company have exercised

their right under Section 211 (3) of the 1993

Companies Act and unanimously agreed that

this Annual Report need not comply with

paragraphs a) and e) to g) of Section 211 (1)

of the Act for the year ended 31 March 2004.

Appreciation

The Chairman’s report would not be complete

without a word of thanks to all our staff. We

value their ongoing commitment to serving the

Group and its customers. Without their efforts

we would not have achieved the success that

we have enjoyed over the past year.

For and on behalf of the Board.

J. W. Holdsworth

Chairman


Directors’ Report

5

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2004 2003

$000 $000

Revenue 261,148 241,638

Net Surplus Before Tax 24,686 17,531

Tax 8,092 5,932

Net Surplus After Tax 16,594 11,599

Total Assets 98,606 85,504

Shareholders’ Funds 50,251 40,728

Return on Average Shareholders’ Funds 36% 30%

Earnings Per Share $2.44 $1.80

Net Asset Backing Per Share $7.62 $6.32

For the year ended 31 March 2004


Company Report

6

Datacom New Zealand

Datacom continues to build and run systems

(and entire sites) for major NZ organisations

—the loyalty and professionalism of customers

and staff being the key to the company’s strength.

A decline in ‘commoditised’ product and technical

support revenues during 2003/04 was offset by

increases in high-value systems development,

systems integration, and systems management

revenues. This has been the pattern for some

years, and the trend is not expected to change

soon. Profit was up 7% and staff numbers

increased by 30 to 1,071.

There has not been much change in the

range of services offered (as listed in the box),

though more customers than previously are

now contracting for managed bundles of

services—in what is effectively a form of

‘outsourcing’. Managed services, as well as

DNZ’s value proposition and the power of

systems to improve a customer’s bottom-line,

are addressed in what follows:

Outsourcing the Management of IT...

• Functions • Processes • Sites • Systems • Infrastructure

A feature of the year—with customers electing

to do what they do best, and sub-contracting

the rest—has been the increase in the number

of outsourcing engagements. This encompasses

the overall management of a business function,

process or site, as well as the usual management

of IT systems and infrastructure.

In DNZ terms, the business process management

includes operating the systems as well as running

them, while business function management adds

responsibility for improving work-flow and

systems as well. Business process management

is output based, and function management is

outcome based.

Outsourcing is no more than the sub-contracting

of a bundle of tasks (drawn from the list in the

box) with clear accountability for outcomes. DNZ

simply calls this a managed service. It does not

normally have anything to do with staff movement,

though in some instances customer staff-members

may transfer to DNZ (and usually like the extra

opportunity), and it does not involve loss of

control. DNZ’s open contract looks after that

—and the inevitable changes in scope, priorities

and costs—with:

• An open exit clause.

• An agreed planning regime and horizon.

• Full (on-line) disclosure of costs and KPIs.

• Third-party products and services at net cost.

• Shared incentive arrangements, as appropriate.

• A quick and realistic engagement with full

flexibility.

Not unexpectedly the managed service business

continues to grow, since customers save as much

as 25% on their flexible bundles. Resource sharing

and scale/scope aside, that is because high product-

ivity involves strategy, organisation, practices and

architecture, which are not always variables in

simple service engagements. There is also

“ Greater agility lets

customers address new

business opportunities

—with the prospect of

bigger returns...”

7

greater agility, speed to handle new projects,

and better new business models and systems

—with the prospect of bigger returns than with

normal build/run/operate activities.

DNZ’s Value Proposition

DNZ has always aimed to be the supplier of

choice for the best customers, and the place to

work for the best IT people. This fuels a virtuous

spiral, reinforced by substantial economies of

scale and scope. It is a formula, kept fresh

through investment in best practice and smart

tools, which sustains the company’s value

proposition as the low-cost provider of high

performance systems and services.

Building, running and operating high-performance

systems is not economical or even practical these

days without a wide range of skills and resources

on tap. It has become an activity for professional

systems houses with shared resources, substantial

infrastructure, and economies of scale and

Product Supply and Support

The provision of hardware and software,

together with options for financing (with

product at net cost), life-cycle asset manage-

ment, desktop/network support, and move/

change/fix technical services.

Secure Hosting and Arming/Alerting

The housing of servers and switches, with access

to equipment supply and/or hire arrangements,

help-desk facilities, business continuity and

disaster recovery provisions, and utility services

(for web, mail, security, network storage, on-

demand servers, systems administration, telephony,

call routing and VoIP).

Systems Management & Desktop/Network Support

The running and maintaining of customer app-

lications and software and sites (with ITIL

systems and database administration), which

may or may not include product supply,

desktop support, hosting/alerting, and

handling voice/data networks.

Custom Systems Development and Integration

The engineering and programming of systems

—and also doing the application design and

software architecture—usually, these days,

for self-service front-ends (with web and

wireless and PDA extras), integrated with

existing systems and databases, backed by

intranet delivery and work-flow management.

Business Process and Function Management

The conduct of business services, ranging

from operating call-centres and logistics

processes (such as fulfillment or ticketing or

payroll and accounting applications) to complete

accountability for delivering a business function

—and maybe improving or replacing processes

and systems as well as running them.

Consulting and Project Management

The offer of advice and assistance, drawing

on DNZ’s experience of building and running

systems, especially to do with IT strategy,

economics, policy, organisation, engagement,

architecture, best practice and benchmarking.

DNZ’s One-Stop-Shop for IT Services

Our customers select as much or as little as they want, for whatever term suits best,

from this range of services:


Company Report

8

scope. Building and assembling secure and

reliable systems, and maintaining and running

them efficiently, calls for scarce talent, entrenched

know-how, expensive tools, and disciplined

organisation—not readily available to other

than a big IT firm.

During FY 2003/04, DNZ completed new

Microsoft .Net Programming Frameworks,

expanded its Web Design Studio, invested in

Mobile and PDA templates, and streamlined its

Java development methods. Another 500m2 of

machine room was added, and utility storage,

server and disaster recovery capabilities extended.

As well, the call centres’ self-service helpdesks

and functionality were expanded, as was the use

of the Rockwell skills-based routing switches.

And the arming and alerting capabilities of the

management tools were further developed, and

best practice aligned with ITIL standards.

Systems Design & Development

Ultimately it is a customer’s business model

that matters, and the systems which support

it. A 25% saving on IT costs—which may be

1% to 10% of total costs—is more important for

the agility and reliability it produces than for the

one or two percent it may add to the bottom line.

But dramatic changes in model (which, admittedly,

are not easily found) make the real difference.

And they usually involve new systems to carry

revised practices, to inform and empower users,

and to project the company style. This is why

DNZ’s 250 developers (plus consultants and

architects, system integrators and project managers)

are a key part of the company’s skill-set.

This year, DNZ has handled around twenty

such re-engineering development projects

(including systems for travel/reservation,

banking/insurance, telco/energy, wholesale/

retail and government) and over one hundred

smaller ones. Even when dramatic change is not

possible, a stream of small mix-and match projects

—with payback measured in months—can come

together over a couple of years to provide a

seamless enterprise asset. This mix-and-match

accumulation of integrated systems is possible

because of the ease of deploying individual

internet and intranet applications—and the ability

to subsequently bring together their transactions

with customers and vendors. It is in these linkages,

and in supporting internal cooperation across

an organisation, that real money is saved, and

benefits realised.

DNZ's custom system development involves

mainly .Net, Java and Oracle (but also Cobol,

PowerBuilder and Open Source tools). These

days most systems use self-service web front-ends

with fulfillment handled via intranet back-ends

—one transaction generating many activities.

Integrating with existing systems and databases

is a big part of the job. As an example, a system

installed a few years ago has so far processed

20 million transactions involving approximately

300 million individual delivery activities.

Foodstuffs Exchange is another such high-

volume system—built and run by DNZ—used

by Foodstuff’s suppliers for purchasing and

payment logistics. Foodstuffs collected the

Computerworld eBusiness of the Year Award

for this system which, financial benefits aside,

is notable for the fact that it largely eliminated

transaction errors and reconciliation work.

Another winning website from the DNZ Design

Studio (this one with integrated kiosk options)

was for Puke Ariki (New Plymouth District

Council’s new concept Museum and Library)

which received the Computerworld Excellence

Award for Education & Training Systems.

9

“ Ultimately it is a customer’s

business model that matters...”

In Summary…

DNZ and its customers understand that IT can

make a difference. For business and government,

alike, it is one of the few ways to increase revenues,

cut costs and conserve cash. DNZ’s people look

on information systems engineering as a profession

—a vocation, based on recognised disciplines,

and informed by a sense of service (to customers,

community, colleagues and the profession

itself). This commitment to the profession/craft

—shared by equally dedicated customers—is what

produces results. Each new project is a fresh

start, and a challenge to draw on past experience

to make it the best ever.

F. N. Stephenson

Executive Chairman

Datacom NZ

Datacom International

2004 was a productive year for the Australian

and Asian businesses culminating in revenue

growth of 42% at $72 million generated by

595 staff, increasing from 520 at the end of the

previous financial year. Trading profit enjoyed

substantial growth lifting from $1.55 million to

$4.78 million, with a further $1.67 million being

realised through the release of surplus provisions.

A notable achievement for the period was the

completion of the Datacom Connect merger,

symbolised through the consolidation of

Sydney office premises into a single new

facility in North Ryde. Investments totalling

$1.8 million underpinned the exercise and

provided the real estate and infrastructural

basis to support the companies’ further growth

over the medium term.

Datacom Connect enjoyed a number of significant

competitive wins retaining accounts considered

to be cornerstone to the business. Increasingly

this business looks to the Malaysian operation

as a point of differentiation enabling the ability

to offer an alternative low cost delivery location

in response to off-shore competitive pressure.

Datacom Financial Services took a number of

steps forward though the diversification of its

client base including TXU and AOL and is well

positioned for the year ahead.

Datacom Systems further established itself as

a credible provider of high quality, cost effective

IT project and infrastructure management skills,

securing new clients and effectively building

on existing client relationships. An acquisition

type exercise concluded towards the end of the

calendar year resulted in a number of new skills

and clients being bought into the business,

including, JP Morgan, Sydney University, Simms

Metal and Hermis Presisa. Datacom Systems

has grown rapidly since inception in 1999 and

now contributes over 50% of the Australian

consolidated profit.

M. C. Browne

Managing Director

Australia/SE Asia


Consolidated Parent Company

2004 2003 2004 2003

Notes $000 $000 $000 $000

Operating revenue 2 261,148 241,638 7,921 5,975

Operating surplus before release of provisions 21 23,011 17,531 6,825 4,590

Operating surplus before taxation 3 24,686 17,531 6,825 4,590

Income tax expense 4 8,092 5,932 190 88

Operating surplus after tax 16,594 11,599 6,635 4,502

Net surplus attributable to minority interest 867 120 - -

Net surplus attributable to the shareholders

of the company 15,727 11,479 6,635 4,502

Statement of Financial Performance


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10

The accompanying notes form part of and are to be

read in conjunction with these financial statements.*

Datacom Group LimitedStatement of Movements in Equity



2004 2003 2004 2003

Notes $000 $000 $000 $000

Net Surplus Attributable to:

Company 15,727 11,479 6,635 4,502

Minority interest 867 120 - -

Net surplus for the year 16,594 11,599 6,635 4,502

Other Recognised Revenue and Expenses

Foreign currency translation reserve:

Attributable to parent company shareholder 7 287 (191) - -

Attributable to minority shareholder (15) - - -

Total recognised revenues and expenses

for the year 16,866 11,408 6,635 4,502

Distribution to Owners

Dividends on ordinary/employee shares 11 (7,219) (6,116) (7,219) (6,116)

Distributions to minority shareholders (63) (53) - -

Other Movements

Increase/(decrease) in minority interest (61) 16 - -

Total movements in equity 9,523 5,255 (584) (1,614)

Equity at the beginning of the year 40,728 35,473 20,630 22,244

Equity at the end of the year 50,251 40,728 20,046 20,630

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11





2004 2003 2004 2003

Notes $000 $000 $000 $000

Equity

Attributable to parent company shareholders 12 49,090 40,295 20,046 20,630

Attributable to minority interest in negative equity (563) (162) - -

Attributable to minority interest in positive equity 1,724 595 - -

Total equity 50,251 40,728 20,046 20,630

Represented by:

Non Current Assets

Property, plant & equipment 14 16,487 14,783 5,500 5,609

Investment in subsidiaries - - 981 920

Employee share scheme advance 15 1,996 2,206 1,277 1,446

Deferred taxation 5 2,485 2,332 3 (1)

Finance lease receivables 17 648 1,440 - -

Total non-current assets 21,616 20,761 7,761 7,974

Current Assets

Cash 30,697 24,818 6,917 5,988

Receivables & prepayments 16 40,977 34,647 9,483 29,312

Inventories 2,157 1,772 - -

Work in progress 1,845 1,971 - -

Finance lease receivables 17 1,314 1,535 - -

Total current assets 76,990 64,743 16,400 35,300

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Statement of Financial Position

As at 31 March 2004

12





2004 2003 2004 2003

Notes $000 $000 $000 $000

Current Liabilities

Bank overdraft 18 453 3,014 - -

Payables 19 33,289 28,152 761 20,384

Employee entitlements 7,899 7,924 2 5

Dividends payable 3,352 2,255 3,352 2,255

Current portion of term liabilities 20 1,577 1,544 - -

Total current liabilities 46,570 42,889 4,115 22,644

Net Working Capital 30,420 21,854 12,285 12,656

Non Current Liabilities

Term liabilities 20 1,785 1,887 - -

Total non-current liabilities 1,785 1,887 - -

Net Assets 50,251 40,728 20,046 20,630

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13

On behalf of the Board

J. W. Holdsworth Dated: 30th June 2004

Chairman

J. C. Hagen Dated: 30th June 2004

Director




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Statement of Cash Flows


14


2004 2003 2004 2003

Notes $000 $000 $000 $000

Cash Flows from Operating Activities

Cash was Provided from:

Receipts from customers 251,740 236,220 2,289 1,936

Rent 2,013 759 693 693

Interest received 1,203 1,450 275 348

Dividends received - - 5,395 2,959

Other - - 7 323

Total cash provided 254,956 238,429 8,659 6,259

Cash was Disbursed to:

Payments to suppliers & employees 219,039 210,730 2,313 2,570

Interest paid 250 541 2 142

Rent/operating leases paid 8,050 6,615 - -

Taxation paid 7,429 5,936 1,039 -

Total cash disbursed 234,768 223,822 3,354 2,712

Net Cash Flows from Operating Activities 26 20,188 14,607 5,305 3,547

Cash Flows from Investing Activities


Sale of property, plant & equipment 331 123 - -

Repayment of share scheme loan 273 751 169 1,081

Total cash provided 604 874 169 1,081


Purchase of property, plant & equipment 6,597 6,889 36 43

Total cash disbursed 6,597 6,889 36 43

Net Cash Flows from Investing Activities (5,993) (6,015) 133 1,038



2004 2003 2004 2003

$000 $000 $000 $000

Cash Flows from Financing Activities


Repayment of loan to subsidiaries - - 1,422 3,659

Loan from minority shareholder 298 435 - -

Finance leases 1,016 2,975 - -

Total cash provided 1,314 3,410 1,422 3,659


Repayments of borrowings - 2,340 - 2,127

Finance leases 1,075 2,975 - -

Dividends paid on ordinary/employee shares 6,123 5,021 6,123 5,021

Dividends paid to minority interests 63 53 - -

Total cash disbursed 7,261 10,389 6,123 7,148

Net Cash Flows from Financing Activities (5,947) (6,979) (4,701) (3,489)

Net increase (decrease) in cash held 8,248 1,613 737 1,096

Cash at the beginning of the year 21,804 20,742 5,988 4,978

Effect of exchange rate change on foreign currency balances 192 (551) 192 (86)

Cash at the end of the year 30,244 21,804 6,917 5,988

Comprising:

Cash at Bank 30,697 24,818 6,917 5,988

Bank Overdraft (453) (3,014) - -

30,244 21,804 6,917 5,988

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15

The accompanying notes form part of and are tobe read in conjunction with these financialstatements.

*


Notes to and forming part of the financial statements

1. Statement of Accounting Policies

Reporting Entity

Datacom Group Limited is a company registered under the Companies Act 1993. The financial

statements of the Company and the Group have been prepared in accordance with the Companies

Act 1993 and the Financial Reporting Act 1993.

The Company and its subsidiaries comprise the Datacom Group.

Differential Reporting

The Group is a qualifying entity for Differential Reporting by virtue of the fact that is has no

public accountability and all shareholders or their nominees are on the Board of the Group.

Differential reporting exemptions have been applied to SSAP-22 Related Parties Disclosures,

SSAP-23 Financial Reporting for Segments and FRS-30 Reporting Share Ownership

Arrangements including Employee Share Ownership Plans.

Measurement Base

The accounting principles recognised as appropriate for the measurement and reporting of

financial performance and financial position on a historical cost basis are followed by the

Group.

Specific Accounting Policies

The following specific accounting policies which materially affect the measurement of financial

performance and the financial position have been applied.

a) Basis of Consolidation

Subsidiaries are entities in which the Company has the capacity to determine the financing

and operating policies and from which it has an entitlement to significant ownership benefits.

The consolidated financial statements, which include the parent company and its subsidiaries,

have been prepared using the purchase method. All significant intercompany transactions

have been eliminated in preparing the consolidated statements. In the company's financial

statement, investments in subsidiaries are stated at their cost less provision for impairment.


16


17

b) Property, Plant and Equipment

All items of property, plant and equipment are stated at cost, including costs directly

attributable to bringing the asset to its working condition.

Any expenditure that increases the economic benefits derived from an asset is

capitalised. Expenditure on repairs and maintenance that does not increase the economic

benefits is expensed in the period it occurs.

All items are depreciated on a straight line basis. Expected useful lives are:

Furniture and fittings ................................ 3 - 10 years

Leased furniture & fittings .............. Term of the lease

Leasehold improvements ............................ 2-10 years

Computers ................................................... 2-5 years

Leased computers ........................... Term of the lease

Plant & equipment ...................................... 3-10 years

Motor vehicles ............................................ 3-5 years

Leased motor vehicles ..................... Term of the lease

Buildings ....................................................... 40 years

Land ................................................. Not depreciated

When an item of property, plant or equipment is disposed of, the difference between net

disposal proceeds and the carrying amount is recognised as a gain or loss in the statement

of financial performance.

c) Receivables

Receivables are valued at net realisable value, after due allowance has been made for

doubtful debts.

d) Taxation

The income tax expense charged to the statement of financial performance includes both

the current year's provision and the income tax effect of timing differences calculated using

the liability method.

Tax effect accounting is applied on a partial basis to all timing differences. The tax effect

of timing differences is only recognised to the extent they are expected to crystallise in

the foreseeable future. A debit balance in the deferred tax account, arising from timing

differences or income tax benefits from income tax losses, is only recognised if there is

virtual certainty of realisation.

e) Inventories

Trading inventories are stated at the lower of cost and net realisable value, determined

on a specific identification basis.



f) Leases

Datacom Group entities lease certain plant & equipment and land and buildings.

Finance leases, which effectively transfer to the Company substantially all of the risks

and benefits incident to ownership of the leased item, are capitalised at the present

value of the minimum lease payments. The leased assets and corresponding liabilities

are recognised and the leased assets are depreciated over the period the Company is

expected to benefit from their use.

Operating lease payments, where the lessors effectively retain substantially all the risks

and benefits of ownership of the lease items, are included in the determination of the net

surplus in equal instalments over the period of the lease.

g) Foreign Currencies

Transactions in foreign currencies are converted at the New Zealand rate of exchange

ruling at the date of the transaction. Short-term transactions covered by foreign currency

forward exchange contracts are measured and reported at the forward rates specified in

those contracts.

At balance date, foreign monetary assets and liabilities including those of integrated

foreign operations are translated at the closing rate, and exchange variations arising

from these translations are recognised in the statement of financial performance. The

statement of financial performance is translated at a rate approximating the rate as at

transaction date.

The assets and liabilities of independent foreign operations are translated at the closing

rate. Foreign currency exchange differences are recognised in the foreign currency

translation reserve.

h) Financial Instruments

Financial Instruments recognised in the statement of financial position include cash

balances, bank overdrafts, receivables, payables, investments and loans to others,

and term borrowings. In addition, members of the Datacom Group are party to financial

instruments with off-balance sheet risk to meet financing needs and to reduce exposure

to fluctuations in foreign currency exchange rates. These financial instruments include

guarantees of other's bank account overdraft facilities and foreign currency forward

exchange contracts.

The Group enters into foreign currency forward exchange contracts to hedge trading

transactions. Gains and losses on contracts which hedge specific short-term foreign currency

denominated transactions are recognised as a component of the related transaction in the

period in which the transaction is completed. Any financial instruments that do not qualify

as hedges are stated at market value and any gain or loss is recognised in the statement

of financial performance.

18


19

The Group is exposed to changes in overdraft and deposit interest rates. Due to the low

level of such risk no cover is taken. The Group further minimises its credit exposure by

limiting the amount of funds placed with any one financial institution at any one time.

i) Cash Flows

For the purpose of the statement of cash flows, cash includes cash on hand, deposits

held at call with banks and investments in money market instruments, net of bank

overdrafts, which are used as part of day-to-day cash management.

j) Employee Entitlements

A liability for annual leave and long service leave is accrued and recognised in the

statement of financial position. The liability is equal to the present value of the estimated

future cash outflows as a result of employee services provided at balance date.

k) Changes in Accounting Policies

There have been no changes in accounting policies during the year. All policies have

been applied on bases consistent with those in previous years. Certain figures for the

2003 year have been reclassified to conform to the current year's presentation.


2004 2003 2004 2003

$000 $000 $000 $000

2. Operating Revenue

Sales 257,784 239,096 478 499

Dividend revenue - - 6,239 4,087

Interest revenue 1,104 1,439 303 353

Rent revenue 2,013 759 693 693

Other revenue 247 344 208 343

Total operating revenue 261,148 241,638 7,921 5,975

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2004 2003 2004 2003

$000 $000 $000 $000

3. Operating Expenses

Operating Surplus Before Taxation Includes

Audit fees 185 192 22 20

Bad debts written off 78 49 - -

Change in provision for doubtful debts (122) (133) - -

Depreciation:

- Furniture & fittings 406 326 10 10

- Leased furniture & fittings 1 - - -

- Leasehold improvements 650 710 - -

- Computers 2,786 2,591 5 4

- Leased computers 134 - - -

- Plant & equipment 1,181 942 3 4

- Motor vehicles 2 2 2 2

- Leased motor vehicles 9 7 - -

- Buildings 122 118 122 118

Directors' fees 143 150 69 80

Donations 59 33 22 10

Foreign currency exchange losses 213 494 - 63

Interest:

- Mortgages & other borrowings 33 225 2 148

- Finance charges on finance leases 217 317 - -

Loss on sale of property, plant & equipment 16 35 3 9

Rental & operating lease costs 8,050 6,616 - -

Amounts Paid and Payable to the Auditors for:

Auditing the Financial Statements

Company auditor 178 175 22 20

Other auditors 7 17 - -

Other Services

Company auditor 128 284 48 89

20

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21


2004 2003 2004 2003

$000 $000 $000 $000

4. Income Tax Expense

Operating surplus before taxation 24,686 17,531 6,825 4,590

Prima facie income tax 8,146 5,785 2,252 1,515

Add (Subtract) Taxation Effect of Permanent Differences:

Non-deductible legal expenses 1 12 - 2

Other non-deductible expenses 144 318 11 47

Non-taxable dividends - - (2,059) (1,349)

Other non-taxable income (341) (113) (3) (113)

Deferred tax asset/(liability) not recognised 46 (7) (11) (14)

Future income tax benefit not recognised 157 141 - -

Prior period adjustment 14 (153) - -

Tax rate difference (75) (51) - -

Taxation on surplus 8,092 5,932 190 88

The Income Tax Expense is Represented by:

Current tax 8,245 6,512 194 68

Deferred tax (153) (580) (4) 20

8,092 5,932 190 88

There are tax losses available to be carried forward against profits in overseas subsidiaries

of $952,302 (2003: $296,393). The benefit of these has not been recognised in these financial

statements due to the uncertainty of their recoverability in the immediate future. Tax losses

arising in each jurisdiction can only be utilised against future profits arising in the same

jurisdiction.

The Group has not recognised deferred taxation assets on cumulative timing differences of

$1,210,287 (2003: $1,801,765) as these are not expected to reverse in the foreseeable future.

The tax effect of timing differences not recognised is $399,395 (2003: $594,582).

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2004 2003 2004 2003

$000 $000 $000 $000

5. Deferred Tax Asset (Liability)

Balance at the beginning of the year 2,332 1,752 (1) 19

Transfer to (from) statement of financial performance 153 580 4 (20)

Balance at the end of the year 2,485 2,332 3 (1)

6. Imputation Credit Account

Balance at the beginning of the year 7,619 3,771

Imputation credits attached to dividends paid during the year (3,016) (2,476)

Income tax payments (refunds) & transfers during the year 5,490 6,324

Balance at the end of the year 10,093 7,619

Since all New Zealand companies in the Group have been part of a tax consolidated group from

1 April 2002, the parent company's imputation credit account reflects all of these subsidiaries

from that day on.

At Balance Date the Imputation Credits Available to the Shareholders Were:

Through direct shareholding in the company 10,093 7,619

Through indirect interests in subsidiaries 5,879 5,879

15,972 13,498

7. Reserves

Foreign Currency Translation Reserve

Balance at the beginning of the year (125) 66 - -

Movement during the year 287 (191) - -

Balance at the end of the year 162 (125) - -

22

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23

Group & Company Group & Company

2004 2004 2003 2003

Number Value Number Value

000 $000 000 $000

8. Share Capital

Ordinary shares 6,070 8,084 6,070 8,084

Employee shares 375 2,153 375 2,153

Total share capital 6,445 10,237 6,445 10,237

Each ordinary share in the Company confers on the holder:

a) The right to vote on any resolution, including any resolution to:

(i) Appoint or remove a Director or auditor;

(ii) Alter the constitution;

(iii) Approve a major transaction;

(iv) Approve an amalgamation of the Company under Section 221;

(v) Put the Company into liquidation;

b) The right to an equal share in dividends authorised by the Board; and

c) The right to an equal share in the distribution of the surplus assets of the Company

on winding up.

Employee Shares

These shares are non-voting except as between the holders of Employee Class Shares in a vote

pursuant to section 117 of the Companies Act 1993 where the holders of Employee Class Shares

are entitled to vote as an “Interest Group”. In those circumstances each share carries a vote of

1/375,000.

Each employee share in the Company confers on the holder:

a) The right to an equal share in the dividends authorised by the Board; and

b) The right to an equal share in the distribution of the surplus assets of the Company

on winding up.

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Percent Held Country of

2004 2003 Incorporation

9. Investments in Subsidiaries

Significant Subsidiaries:

Datacom Systems Limited 100% 100% New Zealand

Datacom Systems (Wellington) Limited 100% 100% New Zealand

Datacom Engineering Services Limited 100% 100% New Zealand

New Technologies Limited 100% 100% New Zealand

Datacom Employer Services Limited 100% 100% New Zealand

Datacom Services Limited 100% 100% New Zealand

Interconnect Limited 100% 100% New Zealand

DTL Finance Limited 100% 100% New Zealand

Datacom Australia Holdings Pty Limited 89% 88% Australia

Subsidiaries:

Datacom Investments Pty Ltd 100% 100% Australia

Subsidiaries:

Datacom Systems Pty Ltd 100% 100% Australia

Datacom Customer Contact Pty Ltd 100% 100% Australia

Datacom Financial Services Pty Ltd 51% 51% Australia

Datacom Connect Pty Ltd 70% 70% Australia

Datacom South East Asia (Hong Kong) Limited (de-registered) 0% 100% Hong Kong

Datacom South East Asia (Malaysia) Sdn Bhd 100% 100% Malaysia

Subsidiaries:

Datacom IT Services South East Asia Pte Limited 100% 100% Singapore

Datacom South East Asia Philippines Inc 100% 100% Philippines

Datacom South East Asia (Thailand) Limited 100% 100% Thailand

All subsidiaries have a balance date of 31 March and are involved in various aspects

in the provision of computer services.

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24


25

10. Acquisition and Disposal of Subsidiaries

a) Acquisition of Subsidiaries

The Group did not acquire any subsidiaries in the 2004 financial year.

In July 2002 Datacom Investments Pty Ltd, a subsidiary of the Group, acquired 51% of the

100 shares of Datacom Financial Services Pty Ltd. Datacom Financial Services was a new

company which did not hold any assets at that time. It now provides call centres services.

In January 2003 Datacom Investment Pty Ltd also acquired 70% of the 1,272,209 shares of

Datacom Connect Pty Ltd. Datacom Connect is also a new company which took over assets

and liabilities from Datacom Customer Contact Pty Ltd in return for the shares issued.

Datacom Customer Contact Pty Ltd is no longer trading. Datacom Connect Pty Ltd has

a large contract to provide a range of services to Microsoft in Australia.

For the reasons described, Datacom Financial Services Pty Ltd and Datacom Connect

Pty Ltd became subsidiaries of Datacom Investments Pty Ltd, and therefore the Group,

as from the date of acquisition.

b) Disposal of Subsidiaries

The Group wound down its operations in Hong Kong over the last year and the subsidiary

was de-registered on 6 February 2004. The Group did not dispose of or close down any

subsidiaries in the 2003 financial year.


2004 2003 2004 2003

$000 $000 $000 $000

11. Distribution to Owners

Interim Distributions:

Dividend on ordinary shares 3,642 3,636 3,642 3,636

Dividend on employee shares 225 225 225 225

Final Distribution:

Dividend on ordinary shares 3,157 2,124 3,157 2,124

Dividend on employee shares 195 131 195 131

Total distributions to owners 7,219 6,116 7,219 6,116

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2004 2003 2004 2003

$000 $000 $000 $000

12. Total Equity

Share capital 10,237 10,237 10,237 10,237

Foreign currency translation reserve 162 (125) - -

Accumulated surplus 38,691 30,183 9,809 10,393

49,090 40,295 20,046 20,630

Equity attributable to minority shareholders

of the group 1,161 433 - -

Total equity 50,251 40,728 20,046 20,630

13. Accumulated Surplus

Balance at the beginning of the year 30,183 24,820 10,393 12,007

Net surplus attributable to the shareholders

of the company 15,727 11,479 6,635 4,502

Distribution to owners (7,219) (6,116) (7,219) (6,116)

Balance at end of the year 38,691 30,183 9,809 10,393

14. Property, Plant and Equipment

Furniture & fittings at cost 4,722 4,180 60 59

Accumulated depreciation (3,516) (3,090) (35) (26)

1,206 1,090 25 33

Leased furniture & fittings at cost 17 - - -

Accumulated depreciation (1) - - -

16 - - -

26

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27


2004 2003 2004 2003

$000 $000 $000 $000

14. Property, Plant and Equipment contd

Leasehold improvements at cost 6,345 6,085 - -

Accumulated depreciation (4,167) (4,902) - -

2,178 1,183 - -

Computers at cost 24,924 23,627 48 42


3,917 4,110 10 7

Leased computers at cost 690 381 - -

Accumulated depreciation (134) (286) - -

556 95 - -

Plant & equipment at cost 6,842 6,190 26 27


3,142 2,721 5 4

Motor vehicles at cost 25 22 22 22

Accumulated depreciation (11) (7) (9) (7)

14 15 13 15

Leased motor vehicles at cost 26 26 - -

Accumulated depreciation (15) (7) - -

11 19 - -

Buildings at cost 4,597 4,578 4,597 4,578

Accumulated depreciation (886) (764) (886) (764)

3,711 3,814 3,711 3,814

Land at cost 1,736 1,736 1,736 1,736

Total net book value 16,487 14,783 5,500 5,609

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15. Employee Share Schemes

Datacom Group Limited Share Scheme

The Group has advanced funds to enable the purchase of shares in Datacom Group Limited

through transfer of shares from other shareholders or by issue of new shares. The beneficial

owners in the shares are nominated employees. Each advance is repayable over a maximum of

ten years with all dividends on applicable shares being appropriated as a reduction of the advance.

No interest is charged to the Scheme.

The share price at which shares are allocated is determined by the Group Directors having regard

to any recent independent valuation, any recent share transactions or any events or information

that has a material effect on the value of the Shares. The Group Directors have full control over

the appointment and removal of Trustees of the Scheme.

As at 31 March 2004 the Scheme held 598,050 (9.85%) Ordinary shares (2003: 641,800-10.57%)

of which 60,050 (2003: 15,625) were not allocated. It held 375,000 (100%) Employee shares

(2003: 375,000-100%) of which all were allocated (2003: all allocated).

Advances to directors under this Scheme totalled $80,469 (2003: $175,996).

Datacom Holdings Pty Ltd Share Scheme

In Australia the Group has advanced funds to enable the purchase of shares in Datacom

Australia Holdings Pty Limited. The owners of the shares are nominated employees. Each

advance is repayable over a maximum of five years with all dividends on applicable shares

being appropriated as a reduction of the advance. No interest is charged to the Scheme.

The share price at which shares are allocated is determined by the Group Directors having

regard to any recent independent valuation, any recent share transactions or any events or

information that has a material effect on the value of the Shares. The Group Directors have

full control over the rules and terms of the Scheme.

At 31 March 2004 the Scheme held 1,169,473 (11.11%) Ordinary shares (2003: 1,219,473-11.58%),

all of which have been allocated.

Advances to directors under this Scheme totalled $376,183 (2003: $423,219).

28


29


2004 2003 2004 2003

$000 $000 $000 $000

16. Receivables and Prepayments

Trade receivables 38,432 31,994 - 1

Sundry receivables 743 592 1 54

Dividends receivable - - 1,973 1,129

Taxation refundable - - 576 6

Inter-company receivables - - 6,876 28,045

Prepayments 1,802 2,061 57 77

Total receivables & prepayments 40,977 34,647 9,483 29,312

17. Finance Lease Receivables

Current 1,475 1,771 - -

Term 696 1,554 - -

Gross finance leases 2,171 3,325 - -

Less unearned income 209 350 - -

Net finance lease receivables 1,962 2,975 - -

Reconciled to:

Current receivables 1,314 1,535 - -

Term portion 648 1,440 - -

1,962 2,975 - -

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2004 2003 2004 2003

$000 $000 $000 $000

18. Bank Balances

Bank overdraft 453 3,014 - -

The $452,833 ($3,014,077) overdraft relates to Australian operations and is secured through

a Group guarantee for up to AUD 4,450,000. The interest rate charge was 7.75% (2003: 7.75%).

Interest for credit balances was 1.5% (2003: 1.4%).

In New Zealand any overdraft balance during the year incurred an interest rate of between 9.75-10.45%

(2003: 10.45%). Interest on credit balances was between 3.56-5.81% (2003: 4.01-6.0%) for NZD

investments. During 2004 & 2003 the parent had AUD term deposits which earned interest @ 3.5%.

19. Payables

Trade payables 22,838 17,025 45 97

Sundry payable & accruals 8,204 9,902 124 18

Taxation payable 1,580 778 - -

Intercompany payables - - 526 20,195

Related parties 667 447 66 74

Total payables 33,289 28,152 761 20,384

Sundry payables and accruals include provisions as reflected in note 21.

30

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31


2004 2003 2004 2003

$000 $000 $000 $000

20. Term Liabilities

Loan from minority shareholder 745 435 - -

Lease liability 2,617 2,996 - -

3,362 3,431 - -

Less: Current Portion

Lease liability 1,577 1,544 - -

Total term liabilities 1,785 1,887 - -

The finance leases are secured over the assets to which they relate and attract an interest rate

of between 7.65-9.23% (2003 : 7.65-9.04%). The loan from the minority shareholder incurs

interest of 4% and has no date of repayment.

Repayable as Follows: Lease Liabilities

2004 2003

$000 $000

Less than 1 year 1,577 1,544

Between 1-2 years 760 1,232

Between 2-5 years 280 220

Total 2,617 2,996

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Unused Amount

Opening Amount Reversed During New Closing

$000 Balance Paid the Current Period Provision Balance

21. Provisions

Group 2004

Restructuring 1,022 - 1,022 - -

Contract losses 70 - 70 - -

Vacant space - New Zealand 245 - 29 - 216

Vacant space - Australia 903 349 554 - -

Total 2,240 349 1,675 - 216

Group 2003

Restructuring 176 - 176 1,022 1,022

Accounting systems replacement 90 - 90 - -

Contract losses 121 - 51 - 70

Foreign exchange cover 85 - 85 - -

Vacant space - New Zealand - - - 245 245

Vacant space - Australia - - - 903 903

Total 472 - 402 2,170 2,240

Parent 2004

The Parent did not have any provisions (2003: Nil).

The conditions relating to the provision for restructuring no longer exist as the contract in

question was re-negotiated and the provision was released accordingly.

A provision has been recognised to cover vacant office space in Auckland. The provision has

been estimated based on the unoccupied floor space over the period during which the area is

expected to be vacant. This floor space is expected to be fully occupied by the end of the next

financial year as the business expands.

32

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Parent Company

2004 2003

$000 $000

22. Contingent Liabilities

Guarantee of bank overdraft facilities for subsidiaries

to a limit of: AUD 4,450 4,100

MYR 500 500

SGD - 300

NZD 4,347 4,347

Total net facility in NZD 9,647 9,362

At balance date the amount of the bank overdraft so

guaranteed was: AUD 395 2,772

Total in NZD 453 3,014

These guarantees have been secured by short term deposits with Citibank New Zealand and

Australia to the value of $5,528,000 and by the two properties owned by the Group.

23. Commitments

Capital Commitments

The company has capital commitments of $15,000 as at 31 March 2004 (2003: $1,159,646).


2004 2003 2004 2003

$000 $000 $000 $000

Operating Lease Commitments

Lease Commitments Under

Non-cancellable Operating Leases:

Less than 1year 6,620 4,606 - -

Between 1-2 years 5,503 4,909 - -

Between 2-5 years 9,224 7,144 - -

Greater than 5 years - 566 - -

Total operating lease commitments 21,347 17,225 - -

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33



24. Transactions with Related Parties

The Company paid consultancy fees to Evander Management Ltd, a company in which

Mr J.W. Holdsworth, a director, has an interest. The fees were charged on normal terms

and conditions.

The Group has several transactions with New Zealand Post Limited, a shareholder of

Datacom Group Limited, including the lease of premises, and other transactions in the

normal course of business.


2004 2003 2004 2003

$000 $000 $000 $000

25. Financial Instruments

Credit Risk

Maximum exposures to credit risk at balance date are:

Bank balances 30,697 24,818 6,917 5,988

Receivables 40,977 34,647 634 138

71,674 59,465 7,551 6,126

The above maximum exposures are net of any recognised provisions for losses on these

financial instruments. No collateral is held on the above amounts.

General Exposure to Credit Risk

To the extent Datacom Group has a receivable from another party there is a credit risk in the

event of non-performance by that counterparty. Financial instruments which potentially subject

Datacom Group to credit risk principally consist of bank balances, receivables, foreign currency

forward exchange contracts and financial guarantees.

Datacom Group continuously monitors the credit quality of the major financial institutions that

are the primary counterparties to its financial instruments and does not anticipate non-performance

by any of these counterparties.

Concentrations of Credit Risk

Datacom Group's largest customer accounts for 10.9% (2003: 11.3%) of total sales and 8.7%

(2003: 13.6%) of trade receivables at balance date. The Datacom Group does not have any

other significant concentrations of credit risk.

34

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35

Currency Risk

Datacom Group has exposure to foreign exchange risk as a result of transactions denominated

in foreign currencies, arising from normal trading activities. The currencies in which Datacom

Group primarily transacts are Australian and US dollars. Where exposures are certain it is

Datacom Group's policy to hedge these risks as they arise.

Outstanding foreign exchange contracts at balance date totalled $72,385 (2003: $306,769).

Fair Values

The estimated fair value of foreign exchange contracts in 2004 is $3,066 (2003: -$246). The

carrying value for 2004 is nil (2003: nil). The fair values of all other financial instruments are

equal to their carrying values.

At balance date the Group had the following outstanding balances in foreign currencies that

were not hedged:


2004 2003 2004 2003

$000 $000 $000 $000

Malaysian Ringgit Current assets 1,208 1,667 - -

Current liabilities (662) (378) - -

Singapore Dollar Current assets 22 185 - -


Hong Kong Dollar Current assets - 2 - -

Current liabilities - (324) - -

Philippine Peso Current assets 101 92 - -


Thai Baht Current assets 162 227 - -


Australian Dollar Current assets 21,118 16,362 - -

Current liabilities (16,744) (15,357) - -

Term liabilities (745) (486) - -

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2004 2003 2004 2003

$000 $000 $000 $000

26. Cash Flow Reconciliation

Reported surplus after taxation 16,594 11,599 6,635 4,502

Add (Less) Non-cash Items and Non-operating Items:

Depreciation 5,291 4,696 142 138

Movement in deferred taxation (153) (580) (4) 20

Bad debts written off 78 49 - -

Change in provision for doubtful debts (122) (133) - -

(Gain) loss on sale of investments/assets 16 35 (6) 9

Other (39) 82 (2,138) (3,903)

Movement in Working Capital:

Increase (decrease) in trade creditors 5,813 (3,909) (52) 49

Increase (decrease) in sundry payables and

employee entitlements (1,503) 2,432 95 (78)

Increase (decrease) taxation payable 802 175 - -

(Increase) decrease inventory (385) 666 - -

(Increase) decrease work in progress 126 (586) - -

(Increase) decrease receivables & prepayments (6,330) 81 (770) (873)

(Increase) decrease taxation receivable - - (570) 391

Increase (decrease) in inter-company payables - - 1,973 3,292

Net Cash Flows from Operating Activities 20,188 14,607 5,305 3,547

36

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37

Auditor’s Report

Auditor’s Report

To the Shareholders of Datacom Group Limited

We have audited the financial statements on pages 10 to 36. The financial statements provide

information about the past financial performance of the company and group and their financial

position as at 31 March 2004. This information is stated in accordance with the accounting policies

set out on pages 16 and 19.

Directors’ Responsibilities

The directors are responsible for the preparation of financial statements which comply with generally

accepted accounting practice in New Zealand and give a true and fair view of the financial position

of the company and group as at 31 March 2004 and of their financial performance and cash flows

for the year ended on that date.

Auditor’s Responsibilities

It is our responsibility to express an independent opinion on the financial statements presented by

the directors and report our opinion to you.

Basis of Opinion

An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in

the financial statements. It also includes assessing:

• the significant estimates and judgements made by the directors in the preparation of the

financial statements; and

• whether the accounting policies are appropriate to the circumstances of the company

and group, consistently applied and adequately disclosed.

We conducted our audit in accordance with generally accepted auditing standards in New Zealand.

We planned and performed our audit so as to obtain all the information and explanations which we

considered necessary in order to provide us with sufficient evidence to give reasonable assurance

that the financial statements are free from material misstatements, whether caused by fraud or error.

In forming our opinion we also evaluated the overall adequacy of the presentation of information

in the financial statements.

Ernst & Young undertakes consulting projects and provides taxation advice to the company and group.

Chartered Accountants

Datacom Annual Report / www.datacom.co.nz38

Auditor’s Report

Unqualified Opinion

We have obtained all the information and explanations we have required.

In our opinion:

• proper accounting records have been kept by the company as far as appears from our

examination of those records; and

• the financial statements on pages 10 to 36:

- comply with generally accepted accounting practice in New Zealand; and

- give a true and fair view of the financial position of the company and group as at 31

March 2004 and their financial performance and cash flows for the year ended on that date.

Our audit was completed on 30 June 2004 and our unqualified opinion is expressed as at that date.

Wellington

7-1 dat 2004 annual report - datacom · • trading profit before tax was $23 million, up 31% •...

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