Finance report

GROUP ACCOUNTING POLICIES 

The annual financial statements have been prepared in accordance with the Group's published accounting policies, which comply with International Financial Reporting Standards ("IFRS"). During the year under review the Group changed its manner of accounting for the sale of vendor maintenance contracts under which a maintenance service is provided by the supplier of the equipment directly to Datatec's customers. In previous financial statements the Group has included the total revenue from these contracts on a gross basis in its income statement. 

In line with industry peers and as these types of arrangements become an increasingly significant feature of the Group's operating model, the Board has decided to change the Group's accounting for vendor maintenance contracts to a net revenue basis. The gross profit element only from these contracts will now be included in the Group's revenue. This change does not affect the Group's gross profit, EBITDA, net income, balance sheet or cash flow statement. Accordingly, this change has no effect on any of the earnings per share figures. The change has been implemented with effect from the year ended 28 February 2007 and comparative figures have been restated accordingly. 

The effect of the change is as follows: 

REVENUE 

The Group's financial results for the year ended 28 February 2007 reflected revenue of $3,2 billion compared with revenue in the previous period (restated) of $2,7 billion, an increase of 17%. Westcon achieved revenue of $2,3 billion in 2007 compared to revenue (restated) of $2,1 billion in 2006, an increase of 10%.

Logicalis achieved revenue of $693 million in 2007 compared to revenue (restated) of $505 million in 2006, an increase of 37% which includes $43 million arising from the acquisitions made during the year. Excluding the impact of acquisitions, revenue increased by 11% over the prior year on a like-for-like basis. 

Analysys Mason achieved revenue of $61 million in 2007 compared to $60 million in 2006.  

Revenue per division is as follows:

                                               Restated

	2007	2006
	US$'m	US$'m
Revenue
Westcon	2272	2063
Logicalis	693	505
Analysys Mason	61	60
Other Holdings	142	87
Total	3168	2715

OPERATING PROFIT BEFORE FINANCE COSTS, DEPRECIATION AND AMORTISATION ("EBITDA")

EBITDA amounted to $119 million compared with the prior period of $85 million. This increase resulted from improved performances in Europe, Asia-Pacific and the Emerging markets across all three major divisions.

EBITDA per division is as follows:

	2007	2006
EBITDA (million)	US$'m	US$'m
Westcon	83	67
Logicalis	27	17
Analysys Mason	6	6
Other Holdings	(6)	(6)
EBITDA before foreign exchange gain	110	84
Foreign exchange gain	9	1
EBITDA after foreign exchange gain	119	85
EBITDA margin	3,8%	3,1%

PROFIT/(LOSS) ON DISPOSAL AND CLOSURE OF DISCONTINUED OPERATIONS

The following items were recorded during the year under review:

TAXATION 

The tax charge has increased to $27 million from $25 million in 2006. The effective tax rate decreased from 38,6% to 30,5%. This is higher than the statutory South African tax rate, primarily due to the fact that the Group's profits in the year have been earned mainly in the US where tax rates are higher. The reduction in the rate is largely due to the recognition of deferred tax assets resulting from previously unrecognised US tax losses and the lowering of the Group's weighted standard rate of tax based on mix of profits by jurisdiction. 

MINORITY INTERESTS 

Minority interests relate to the 2,6% in Westcon, 20,4% in Logicalis South America, 13,5% in Analysys Mason, 45% in Westcon SA and 45% in African Legend Indigo not owned by the Group. 

HEADLINE EARNINGS PER SHARE 

Headline earnings per share increased from 26,9 cents in 2006 to 40,8 cents in 2007. Basic earnings per share increased from 26,5 cents in 2006 to 40,0 cents in 2007. Diluted headline earnings per share of 40,0 cents in 2007 was higher than the 26,3 cents in 2006 and diluted earnings per share of 39,2 cents compared to 25,9 cents in 2006. The weighted average number of shares in issue for the year was 149,8 million which increased from last year's 142,3 million due to 7,2 million shares being issued in connection with the London listing, 0,9 million issued for share options exercised under the Datatec Share Option Scheme and 0,7 million for acquisitions. 

DIVIDEND POLICY 

The Company has decided to make a cash distribution to shareholders out of share premium, which represents a cover of 3,7 times headline earnings. The Company has instituted a policy of making an annual distribution to shareholders subject to annual review and this may be adjusted for business growth, acquisition activity, or changes in reported earnings resulting from applying fair value accounting principles. 

BALANCE SHEET 

Ordinary shareholders' funds at the reporting date were $538 million, representing an $89 million increase from the $449 million in 2006. Net tangible asset value per share was $2,20 (2006: $2,07). 

BORROWINGS 

The Group is reliant on its bank overdrafts, working capital line of credit and trade finance facilities to operate. These facilities generally consist of either a fixed term or fi xed period advances but repayable on demand, are secured against the assets of the company to which the facility is made available and contain certain covenants which include financial covenants such as minimum liquidity, maximum leverage and pretax earnings coverage. There were no breaches of covenants during the year. Refer to note 21 of the annual financial statements. Datatec has no restrictions on its borrowing powers in terms of its memorandum and articles of association. 

CAPITALISED DEVELOPMENT EXPENDITURE 

Westcon has implemented an enterprise resource planning system known as Compass. The system is based on a JD Edwards application running on an Oracle platform and has been customised by the company to meet its specific requirements. Compass has been installed in substantially all of the Westcon companies and has helped improve both accounting and operational efficiencies across the Westcon Group. Development costs are amortised over a maximum of seven years with $3 million amortised in the year under review. 

AMOUNTS OWING TO VENDORS 

Amounts owing to vendors represent purchase considerations owing in respect of recent acquisitions. These purchase considerations are to be settled with the vendors in cash or shares on fulfilment of the relevant profit warranties. The amounts owing are interest free and will be settled within the next year. Any additional amounts payable to vendors will be allocated to intangibles or goodwill arising on acquisition and will have no effect on the income statement. Amounts owing to vendors increased during the year from $2 million in 2006 to $4 million. CASH FLOW Cash generated from operations was $20 million, and $25 million was received from additional financing. At financial year-end the Group's balance sheet reflected a net cash position after short and long-term borrowings of $99 million (2006: $129 million).   

OPERATING LEASE COMMITMENTS

Operating lease commitments have increased from $97 million in 2006 to $108 million in 2007, the increase arising mainly in Logicalis.

Operating lease commitments by division is as follows:

More detail on operating lease commitments can be found in Note 22.2 of the Group annual financial statements. The operating lease commitments in Westcon relate mainly to future property rentals of warehouses and office properties. The balance relates to future rentals in respect of office equipment and computer equipment. 

The majority of the operating lease commitments in Logicalis relate to property rentals. Included in these rentals is an amount of $32 million which relates to the Logicalis Group and Logicalis UK premises in Slough, where a twenty-five year lease was entered into in April 2000. 

Approximately 28% of the building has been sublet for a period of five years (with annual break clauses) from January 2005. The balance of the operating lease commitments relate to future rentals on computer equipment and vehicles. The operating lease commitments for Analysys Mason relate predominantly to future property rentals of warehouses and office properties. 

FOREIGN CURRENCY

The Group earns over 48% of its revenue in US Dollars and approximately 96% of its revenue is denominated in US Dollars as Westcon, Logicalis and OnLine report their consolidated results in US Dollars. As a result a similar amount of the Group's balance sheet, including net debt and cash deposits, is denominated in US Dollars. The foreign exchange gain recorded by the Group on intercompany loans, was $9 million (2006: $1 million). 

The Group conducts business in many foreign currencies and, as a result, it is subject to currency risks owing to exchange rate movements. These movements will affect its costs and translation of the profits of subsidiaries whose functional currency is not the South African Rand or the US Dollar. The most significant other currencies in which the Group trades are Pound Sterling, the Euro and the Australian Dollar.  

The following table reflects the average and year-end exchange rates against the US Dollar:

	Year ended		Year ended
	28 February 2007		28 February 2006
	Average	Closing	Average	Closing
South African Rand	70,076	72,402	64,003	61,702
Pound Sterling	18,874	19,609	17,897	17,517
Euro	12,821	13,208	12,208	11,925
Australian Dollar	0,7626	0,7886	0,7558	0,7429

POST-RETIREMENT BENEFITS 

The Group's retirement benefit funds comprise a number of defined contribution funds throughout the world. The Group has no liability to these funds other than the monthly payment of contributions. The Group has no liability in terms of post-retirement medical aid contributions for staff. 

KEY RISK AREAS 

The Group's risk management policies and procedures are summarised in the Corporate Governance report. The risk management process has identified certain key risks faced by the Group, some of which are summarised below. The risks identified below do not necessarily comprise all risks affecting the Group and the risks listed are not set out in any particular order of priority. Additional risks and uncertainties not presently known to the Group or the directors or that the Group or the directors currently deem immaterial may also adversely affect the Group's business or operations. 

Dependence on key vendors
The Group is particularly dependent on certain vendors, particularly Cisco, whose product sales accounted for approximately 49% of the Group's revenue in 2007. If any one of the Group's principal vendors, especially Cisco, terminates, fails to renew or materially adversely changes its agreement or arrangements with the Group, it could materially reduce the Group's revenue and operating profit and thereby seriously harm the Group's business, financial condition and results of operations. 

Working capital 
As a speciality distributor of networking and communications equipment for leading technology vendors, the Group's business is working capital intensive; this is particularly relevant for Westcon. Westcon's working capital needs are utilised to finance accounts receivable and inventories. Westcon largely relies on revolving credit and vendor inventory purchase financing for its working capital needs. Typically, Westcon carries inventory quantities which are sufficient to enable it to promptly meet anticipated customer demand. Westcon maintains inventory levels based on its projections of future demand and market conditions. Any sudden decline in demand or technological change could cause it to have excess or obsolete inventories. If actual market conditions are more favourable than forecasts, additional inventory may be required. Whilst Westcon takes steps to mitigate this risk by including protective provisions in its purchase agreements with vendors, there can be no assurance that such risks will be obviated. 

Management of future growth and acquisition risk 
The Group's plans to continue its growth, which will place additional demand on the Group's management, customer support, administrative and technological resources. If the Group is unable to manage its growth effectively, its business operations or financial conditions may deteriorate. To date, the business of the Group has grown through acquisitions and through organic growth. The Group will continue to consider further acquisition opportunities. If the Group is unable to successfully integrate an acquired company or business, such acquisition could lead to disruptions to the business. If the operations or assimilation of an acquired business do not accord with the Group's expectations, the Group may have to impair the value attributed to the acquired business or realign the Group's structure. 

Payment discounts, product rebates and allowances
The Group receives signifi cant benefits from purchase and prompt payment discounts, product rebates, allowances and other programmes from vendors based on various factors. A decrease in purchases and/or sales of a particular vendor's products could negatively affect the amount of volume rebates the Group receives from such vendor. Because some purchase discounts, product rebates and allowances from vendors are based on percentage increases in purchases and/or sales of products, it may become more difficult for the Group to achieve the percentage growth in volume required for larger discounts due to the current size of its revenue base. In addition, vendors may exclude the Group from time to time from participation in some of their programmes. 

Dependence on key personnel 
The Group's future success depends largely upon the continued employment of its executive directors, senior management and key sales, technical and marketing personnel. Certain of its key employees have personal relationships with principal vendors and customers which are particularly important to the business of the Group. The executive directors, senior management team and key technical personnel would be very difficult to replace in the short term and the loss of any of these key employees could harm the business and prospects of the Group. 

Currency exchange risk 
Changes in currency rates may harm the financial condition of the Group through both transaction and translation risks. US dollars are the functional currency in which the Company prepares its financial statements. Whilst the Group does implement hedging transactions where appropriate, the Directors cannot predict the effect of exchange rate fluctuations upon future operating results and there can be no assurance that exchange rate fluctuations will not have a material adverse effect on its business, operating results or financial condition. 
Other risks faced by the Group include:

• Restrictive covenants
• Intellectual property protection
• Intense competition
• Dependence on relations with third parties
• Future profitability
• Overseas activities
• Access to capital in the future
• Reduction in demand
• Pressure on gross margins
• Adequate supply arrangements
• Dependence on key information systems
• Significant credit exposure.