REPORT OF THE INDEPENDENT AUDITORS

Transcription

1 REPORT OF THE INDEPENDENT AUDITORS We have audited the annual financial statements of the group for the period ended 30 April 2005 as set out on pages 22 to 28 and 30 to 47. These annual financial statements are the responsibility of the group s directors. Our responsibility is to express an opinion on these annual financial statements based on our audit. SCOPE We conducted our audit in accordance with statements of South African Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement. An audit includes: examining, on a test basis, evidence supporting the amounts and disclosures in the annual financial statements; assessing the accounting principles used and significant estimates made by management; and evaluating the overall annual financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. AUDIT OPINION In our opinion, the annual financial statements fairly present, in all material respects, the financial position of the group at 30 April 2005, and the results of its operations and cash flows for the 10 months then ended in accordance with South African Statements of Generally Accepted Accounting Practice and in the manner required by the Companies Act in South Africa. Deloitte & Touche Registered Accountants and Auditors Chartered Accountants (SA) Johannesburg 5 October

2 DIRECTORS RESPONSIBILITY STATEMENT The directors of the group are responsible for the maintenance of adequate accounting records and the preparation and integrity of the annual financial statements and related information. The annual financial statements have been prepared in accordance with South African statements of Generally Accepted Accounting Practice. The group s independent auditors, Deloitte & Touche, have audited the annual financial statements and their unqualified report appears on page 20 of the annual report. The directors are responsible for the systems of internal control. These are designed to provide reasonable, but not absolute, assurance as to the reliability of the annual financial statements, to adequately safeguard, verify, and maintain accountability of assets, to record liabilities, and to prevent and detect material misstatement and loss. The systems are implemented and monitored by suitably trained personnel with an appropriate segregation of authority and duties. Nothing has come to the attention of the directors to indicate that any material breakdown in the functioning of these controls, procedures and systems has occurred during the year under review. The annual financial statements were approved by the board of directors and are signed on its behalf by: Michael McCloskey Chief executive officer Dana Buys Non-executive chairman Johannesburg 5 October

3 DIRECTORS REPORT The directors present their report on the activities of the group for the period ended 30 April INCORPORATION FrontRange Limited, the JSE Limited ( JSE )-listed holding company owning 100% of US-based FrontRange Solutions, Inc., is a leading independent provider of service management, CRM and communication applications designed specifically for the SME and distributed enterprise markets. It employs 417 people in 14 countries, with a base of more than customers worldwide. The group s core and integrated product sets include GoldMine for business relationship management, teambased contact management and sales forces automation solutions; IT Service Management with HEAT and ITIL standards-based modules for complete service management; Communication Management including IP Contact Center for reduced telephony costs and increased agent productivity, streamlined customer service and communications; and Infrastructure Management, which provides the ability to optimise the full lifecycle of a company s assets. FrontRange products are designed specifically for small to mid-sized enterprises and distributed enterprises. Customers represent over 50% of the Fortune 500 and over 75% of the FTSE 100. NATURE OF BUSINESS FOR THE 10 MONTHS ENDED 30 APRIL 2005 FrontRange focuses on developing business relationship management solutions for the small to mid-range market, which typically ranges from 10 to 250 seats per installation. FrontRange specialises in the research, development, marketing, sales, and support of these software solutions, which have been successfully implemented across a wide range of industries. Brand names associated with FrontRange for the 10 months ended 30 April 2005 included GoldMine Business Contact Manager (Sales and Marketing Automation and Business Contact Management Solutions); HEAT (HelpDesk Expert Automation Tools), including various add-on modules such as HEAT Asset Tracker and HEAT Plus Knowledge; FrontRange IP Contact Center; and IT Service Management. TRADING RESULTS* Compared with the 10 months ended April 2004, FrontRange generated: licence revenue of $27.6-million, 25% up on $22.1-million; total revenue of $66.7-million, 12% up on $59.4-million; trading profit (profit before amortisation of intangibles, exchange gains, finance income and exceptional loss) of $4.3-million, 77% up on $2.4-million; headline earnings of $6.7-million, 104% up on $3.3-million. *The prior period results for the 10 months ended 30 April 2004 and the quarterly splits disclosed are unaudited. Revenue: Total revenue for the period was $66.7-million, representing a 12% increase from the comparable period ended April Continued solid sales of FrontRange s GoldMine and HEAT products combined with some significant wins in its new IT Service Management and IP Contact Center products resulted in strong licence revenue growth of 25% to $27.6-million. FrontRange s recurring maintenance revenue streams grew by 7% to $32.6-million. Whilst services revenue declined by 7% to $6.4-million, it accelerated in the final quarter as the new products rolled out, with the April 2005 quarter showing growth of 17% when compared to the comparable quarter in the prior year. Sequential quarterly revenue growth achieved: Revenue in the software industry tends to increase in the last month of each quarter. FrontRange changed its year end away from a calendar quarter end in an attempt to mitigate this trend. In order to show a basis of comparison with the trend shown in fiscal 2004, the results for the seven fiscal quarters to end April 2005 are presented below. These exclude the month of July 2004 due to the change in year end. FrontRange has generated six consecutive fiscal quarters of improvement in licences and total revenue as follows: 22

4 Licence Total Trading revenue revenue profit/(loss) Quarter ended: $ million $ million $ million September (0.5) December March June October January April * *Pro-forma number after adding back $0.4-million relating to a one-off non-cash charge for amortisation of leasehold improvements and a level rent adjustment. Significant increase in research and development investment: Consistent with FrontRange s strategy to develop the leading mid-market service management, CRM and communication management software solutions, FrontRange significantly increased its investment in research and development in the period to $12.5-million, a 41% increase over the prior year comparable period. Trading profit: For the 10 months ended April 2005, the group made a trading profit of $4.3-million, compared with $2.4-million in the prior year comparable period. FrontRange Limited trading results: At average rand/dollar exchange rates, FrontRange Limited, whose function is largely to act as an investment holding company for the group, generated a net loss in the 10 months to April 2005 of $ (year ended 30 June 2004: net profit of $ ). At closing exchange rates, FrontRange Limited s accumulated loss at 30 April 2005 was $18.1-million. The balance of the group s earnings arose in subsidiary companies. DIVIDENDS The group s present policy is to retain earnings for reinvestment and not to declare dividends. SHARE CAPITAL The company issued the following shares during the period under review: Total number of shares in issue: 30 June Shares issued under the option scheme Shares issued to settle amount owed to vendors of Cayo Communications Shares bought back ( ) Total number of shares in issue: 30 April GROUP S FINANCIAL POSITION The financial position of the group is set out in the balance sheet on page 27. GOING CONCERN The board is pleased with the financial performance of the group over the 10 month period, which continued and accelerated the improvement shown over the previous two years. Based on the six consecutive quarters of growth in licences and total revenue; the significant early successes achieved with the IT Service Management product; the improvement in operating margin and operating profit; the positive cash flows generated; the liquid balance sheet; the $24.5-million cash on hand at April 2005 and the $7.5-million unsecured revolving line of credit raised from Silicon Valley Bank to support its growth and overall business strategy, the board is satisfied that FrontRange will continue as a going concern for the foreseeable future. ACQUISITIONS No acquisitions were completed during the period under review. DISPOSALS No disposals were completed during the period under review. 23

5 DIRECTORS REPORT (CONTINUED) INVESTMENTS Information regarding the company s interests in material subsidiary companies held at year end is given in note 26 of the financial statements. DIRECTORATE The following directors served throughout the period: Daniel Buys (non-executive chairman) Michael McCloskey (chief-executive) Derek Kreunen (non-executive) Edward Ekstrom (independent non-executive) Gary Heil (independent non-executive) John Hillyard (executive director) Julian Pienaar (executive director) John Hillyard and Julian Pienaar both resigned from the board on 12 July 2005, although both will in all other respects continue in their current roles in the group. DIRECTORS INTEREST IN SHARE CAPITAL OF THE COMPANY At 30 April 2005, directors held (2004: ) shares in the company. Full details showing the breakdown of the directors interest in share capital are included on page 18. DIRECTORS INTERESTS IN CONTRACTS The directors have certified that they were not materially interested in any transaction of any significance with the company or any of its subsidiaries. Accordingly, no conflicts of interest exist with regard to directors interest in contracts. NUMBER OF SHARES AUTHORISED FOR ISSUE In terms of an ordinary resolution passed, the directors are authorised to issue and allot shares in the authorised but un-issued share capital of the company. As at 30 April 2005, there were ordinary shares authorised. Provisions for the resolution stipulate that in aggregate shares issued during the year cannot exceed 10% of the shares in issue at the beginning of the year. At 30 June 2004 there were ordinary shares in issue, therefore until the date of the annual general meeting, directors are authorised to issue a further shares. FRONTRANGE LIMITED STAFF SHARE OPTION SCHEME FrontRange Limited has a share option scheme giving staff the opportunity to participate in the creation of shareholder wealth in the group. At 30 April 2005, options had been granted but not exercised at an average price of R2.46 (30 June 2004: options at an average price of R1.96). Options must be exercised within seven years of award. Option holders who leave the employment of FrontRange are entitled to exercise their options for three months after their leaving date. The following table reconciles the total movements in the staff share option scheme over the period: Options outstanding at 30 June Issued during the period Exercised during the period ( ) Lapsed or forfeited ( ) Options outstanding at 30 April Options granted before 1 April 2004 vest in eight equal tranches over 54 months, with the first tranche vesting after 12 months and the following seven tranches vesting six-monthly thereafter. Options granted from 1 April 2004 vest over 48 months, with 25% of the options vesting after 12 months and the balance in 36 equal monthly tranches. Under the terms of the current scheme, which was approved by shareholders on 31 July 2000, a maximum of 20% of FrontRange s issued share capital is reserved for the staff share options. FRONTRANGE LIMITED SPECIFIC SHARE OPTION GRANT Outside of the FrontRange staff share option scheme, on 16 April 2004, FrontRange Limited shareholders approved a specific share option grant of shares at a strike price of cents each to Michael McCloskey. A third of the options vested on the date of approval by FrontRange shareholders. A sixth vested on the anniversary date of Michael McCloskey s appointment as acting chief executive of FrontRange Solutions, Inc., being 20 August 2004, with the remaining three-sixths of the 24

6 grant vesting equally at the end of every month over the 36-month period following the first anniversary of the effective date of his appointment as effective chief executive. In the event of the securities of FrontRange Limited or FrontRange Solutions, Inc. being successfully listed for public trading on any national securities exchange other than the JSE (such as Nasdaq), all the options granted under this specific issue shall vest. Options not exercised seven years after the initial offer date shall expire. ACCOUNTING FOR SHARE OPTIONS Accounting Standard AC 136 for Share-based Payments was released during the year of assessment and will be effective for FrontRange from its financial year beginning 1 May While the group has not early-adopted AC 136, in order to enhance its financial disclosures it has opted to disclose assumptions made and the resultant expenses that would have resulted had the Accounting Standard been effective for the 10 months ended 30 April The group s share options issued are classified under the Standard as equity-settled share-based payments. Equity-settled share-based payments are measured at fair value at the date of the grant and expensed on a straightline basis over the vesting period based on the group s estimate of shares that will eventually vest. Fair value is measured using an actuarial binomial pricing model. The inputs into the model for all options outstanding in the periods ending 30 April 2005 and 30 June 2004 are as follows: Assumptions Weighted average share price R2.16 R2.26 Weighted average strike price R1.97 R2.12 Expected volatility 88.0% 92.0% Expected option life 5 years 5 years Risk-free interest rate 9.82% 10.0% Expected dividend yield 0.0% 0.0% The expected volatility was determined based on the historical volatility of the group s share price over the previous five years respectively. The expected life used in the model has been adjusted based on management s best estimate of the effects of non-transferability, exercise restrictions and exercise behaviour considerations. The risk-free interest rate used is the yield on the zerocoupon South African government bonds of a term consistent with the expected option life. In calculating the expense value of the options, allowance for non-market conditions, such as forfeitures and leavers during the vesting period, has been included. These adjustments have been allowed for by adjusting for forfeitures in the vesting period at the rate of 15% compound per annum. Under AC 136, based on the average rand/dollar exchange rates in the relevant financial periods, the actuarial binomial pricing model s financial charge for all of FrontRange s share options over the last two fiscal years would have been as follows: 10 months ended 30 April 2005 $ Year ended 30 June 2004 $ FRONTRANGE LIMITED SHARE ISSUES FOR CASH Apart from options exercised under the staff share option scheme, detailed above, and the shares issued to settle the obligation to the vendors of Cayo Communications, Inc., FrontRange Limited did not issue any shares for cash during the year. SPECIAL RESOLUTION PASSED DURING THE YEAR On 8 December 2004, the following special resolution was passed by FrontRange Limited resolving that in terms of sections 85 (2) and 85 (3) of the Companies Act of South Africa 1973, and subject to the articles of association of the Company, the provisions of the Companies Act and the JSE Listings Requirements, where applicable, the directors be authorised to acquire issued shares in the capital of the company from shareholders, subject to a maximum repurchase of shares in the financial year of 20%. DIRECTORS RESPONSIBILITY STATEMENT The directors, whose names are given on pages 4 and 5 of the annual report, collectively and individually accept full responsibility for the accuracy of the information pertaining to this annual report and certify that to the best of their knowledge and belief there are no facts that have been omitted which would make any statement false or 25

7 DIRECTORS REPORT (CONTINUED) misleading, and that all reasonable enquiries to ascertain such facts have been made and that this annual report contains all information necessary. MATERIAL CHANGE Other than the facts and developments reported on in the annual report, there have been no material changes in the affairs or financial position of FrontRange Limited and its subsidiaries since the date of signature of the audit report and the date of this notice. LITIGATION In terms of section of the Listings Requirements of the JSE, the directors, whose names are given on pages 4 and 5 of the annual report, are not aware of any legal or arbitration proceedings, including proceedings that are pending or threatened, that may have or have had in the recent past, being at least the previous 10 months, a material effect on the group s financial position. COMPANY FINANCIAL STATEMENTS The financial statements of FrontRange Limited are available for inspection at the annual general meeting or at the company s registered office. CERTIFICATION BY COMPANY SECRETARY In terms of S268(G)d of the Companies Act, 1973, as amended, I, the company secretary, certify that the company has lodged with the Registrar all returns as are required of a public company by the Companies Act. Julian Pienaar Company secretary 5 October

8 CONSOLIDATED BALANCE SHEET AT 30 APRIL April 30 June Notes $ 000 $ 000 $ 000 $ 000 ASSETS Non-current assets Goodwill and intangible assets Deferred taxation asset Property and equipment Other receivables Current assets Inventories merchandise for resale Trade and other receivables Cash and cash equivalents Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Share premium Non-distributable reserve (7 382) (6 415) Accumulated profit/(loss) (4 750) Current liabilities Trade and other payables Taxation owing Vendors for acquisition Provisions Deferred revenue Total equity and liabilities Net asset value per share (US cents) Net tangible asset value per share (US cents)

9 CONSOLIDATED INCOME STATEMENT FOR THE 10 MONTHS ENDED 30 APRIL months to Year to 30 April June 2004 $ 000 $ 000 Notes Audited Audited Revenue Licences Services Maintenance Cost of sales (14 550) (16 976) Gross margin Operating costs Research and development (12 451) (11 325) Sales and marketing (28 135) (32 884) General and administrative (7 205) (8 385) Trading profit Amortisation of intangibles 1 (424) (2 755) Operating profit before foreign exchange gains, interest and exceptional loss Foreign exchange gains Interest income Interest expense 12 (42) Profit after exchange gains and interest Exceptional loss 13 (753) (4 072) Profit/(loss) before taxation (172) Deferred taxation credit Taxation charge 14 (29) (98) Net profit for the period Weighted average earnings per share (US cents) Weighted average headline earnings per share (US cents) Weighted average diluted earnings per share (US cents) Weighted average diluted headline earnings per share (US cents)

10 CONSOLIDATED PRO-FORMA INCOME STATEMENT FOR THE 10 MONTHS ENDED 30 APRIL months to 10 months to 30 April April 2004 $ 000 $ 000 Audited Unaudited* Revenue Licences Services Maintenance Cost of sales (14 550) (14 149) Gross margin Operating costs Research and development (12 451) (8 857) Sales and marketing (28 135) (27 115) General and administrative (7 205) (6 816) Trading profit Amortisation of intangibles (424) (2 259) Operating profit before foreign exchange gains, interest and exceptional loss Foreign exchange gains Interest income Interest expense (42) Profit after exchange gains and interest Exceptional loss (753) (3 587) Profit/(loss) before taxation (1 793) Deferred taxation credit Taxation charge (29) Net profit for the period Weighted average earnings per share (US cents) Weighted average headline earnings per share (US cents) Weighted average diluted earnings per share (US cents) Weighted average diluted headline earnings per share (US cents) *This unaudited income statement stems from the change of year end and has been drawn up for readers to perform a direct comparison of performance against the same period in the prior year. 29

11 CONSOLIDATED CASH FLOW STATEMENT FOR THE 10 MONTHS ENDED 30 APRIL months to Year to 30 April 30 June Notes $ 000 $ 000 Cash flows from operating activities Cash flows from operations Interest income Interest expense (42) Foreign exchange gains Taxation paid 19 (125) Cash generated by operations Cash flows from investing activities Funds utilised to acquire subsidiary 20 (377) Net additions to property and equipment to maintain operations 21 (1 150) (762) Capitalised research and development (697) Increase in long-term receivables (51) (357) Cash utilised for investing activities (1 898) (1 496) Cash flows from financing activities Increase/(decrease) in share capital and share premium (555) Cash generated/(utilised) by financing activities 410 (555) Net increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Foreign exchange effect on cash and cash equivalents Cash and cash equivalents at end of the period

12 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE 10 MONTHS ENDED 30 APRIL 2005 Non- Accumu- Share Share distributable lated $ 000 capital premium reserve* profit/(loss) Total Balance at 30 June (940) (8 027) Issue of shares during the year (net of issue expenses) Treasury shares held in FrontRange Share Trust (3) (1 106) (1 109) Foreign currency translation reserve (5 475) (5 475) Share premium arising on consolidation of FrontRange Share Trust Foreign exchange effect on share capital and share premium Net profit for the year Balance at 30 June (6 415) (4 750) Issue of shares during the period (net of issue expenses) Treasury shares held in FrontRange Share Trust (1) (297) (298) Foreign currency translation reserve (967) (967) Foreign exchange effect on share capital and share premium Net profit for the period Balance at 30 April (7 382) *Closing balances at 30 April 2005 and 30 June 2004 consisted entirely of foreign currency translation reserves. 31

13 STATEMENT OF ACCOUNTING POLICIES FOR THE 10 MONTHS ENDED 30 APRIL 2005 The accounting policies used in the preparation of the group results, with the exception of the amortisation of goodwill (due to the adoption of AC140: Business Combinations), are consistent with South African Statements of Generally Accepted Accounting Practice applied in the annual financial statements or the year ended 30 June The Business Combination Standard is applied prospectively and therefore has no impact on opening balances or prior year comparatives. The financial results and position comply with South African statements of Generally Accepted Accounting Practice. The annual financial statements are presented in the currency unit United States dollars, the currency of FrontRange Solutions, Inc., the main operating subsidiary of the group. BASIS OF CONSOLIDATION The group annual financial statements incorporate the annual financial statements of the company and of its local and foreign subsidiaries. The operating results of the subsidiaries are included from the effective date of acquisition and until the effective date of disposal. All significant intercompany transactions and balances are eliminated. TAXATION The charge for taxation is based on the results for the year as adjusted for items which are non-assessable or disallowed. It is calculated using the tax rates that have been enacted or substantially enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of the assessable tax profit. In principle, deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which deductable temporary differences will be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition of other assets and liabilities which affect neither the tax profit not the accounting profit at the time of the transaction. Deferred tax balances are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. FINANCIAL INSTRUMENTS Financial assets and liabilities are recognised on the group s balance sheet when the group has become party to contractual provisions of the instrument. Trade and other receivables Trade and other receivables are stated at their nominal value as reduced by the appropriate allowances for estimated irrecoverable amounts and uncollected deferred revenue. Borrowings Interest-bearing bank loans are recorded at the proceeds received, net of direct issue costs. Finance charges are accounted for on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. If borrowings are made at rates that are discounted or preferential, the borrowings are revalued to fair value. Trade and other payables Trade and other payables are stated at their nominal value. FOREIGN CURRENCY TRANSACTIONS Transactions in foreign currencies are accounted for at the rate of exchange ruling on the date of transaction. Foreign assets and liabilities are translated at the rates ruling at the balance sheet date. Gains and losses on foreign currency transactions and balances are included in the income statement during the year in which they arise. FOREIGN INVESTMENTS The balance sheets of foreign subsidiaries are translated at the rate of exchange ruling on balance sheet date. The related income statements are translated at the average rate of exchange for the year. Gains or losses on the translation of foreign subsidiaries are taken directly to the foreign currency translation reserve in the year they arise. GOODWILL Goodwill, representing the excess of payments for subsidiaries over the net asset value attributable to the subsidiaries, fairly valued at the date of acquisition, is brought into account in the year in which the subsidiaries are acquired. IMPAIRMENT At each balance sheet date, the group reviews the carrying amount of its goodwill, tangible and intangible assets to determine whether there is any indication that those assets may be impaired. If any such indication exists, the recoverable amount of the assets is estimated in order to determine the impairment loss, if any. Where it is not possible to estimate the recoverable amount for an individual asset, the recoverable amount is determined for the cash-generating unit to which the asset belongs. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount and expensed. 32

14 STATEMENT OF ACCOUNTING POLICIES (CONTINUED) FOR THE 10 MONTHS ENDED 30 APRIL 2005 Where an impairment loss (other than goodwill) subsequently reverses, the amount is recognised to income. INTANGIBLE ASSETS Intangible assets, representing the amounts paid on acquisition of subsidiaries attributed to technology and trademarks, are brought into account in the year in which the subsidiaries are acquired. Intangible assets are capitalised and amortised on a straight line basis in line with future expected earnings, to a maximum of three years. INVENTORIES Inventories, comprising merchandise, are stated at the lower of cost and net realisable value. Cost is determined on the first-in-first-out (FIFO) basis. OPERATING LEASES Rentals on operating leases are charged to income on a straight-line basis over the term of the lease. PROPERTY AND EQUIPMENT Equipment is stated at historical cost to the group, less accumulated depreciation. Depreciation is calculated on historical cost using the straight line method over the estimated useful lives of the assets as follows: Amortisation/write-off period Motor vehicles 5 years Furniture and fittings 6 years Office equipment 5 years Leasehold improvements Period of lease Computer equipment 3 years Land is stated at historical cost. Profit or loss on disposal of property and equipment is recorded when ownership is transferred. PROVISIONS Provisions are recognised when the group has a present obligation as a result of a past event and it is probable that this will result in an outflow of economic benefits that can be reliably measured. Provisions for restructuring costs are recognised when the group has a detailed formal plan for the restructuring and the group has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. Restructuring provisions only include those direct expenditures which are necessarily entailed by the restructuring and not associated with the ongoing activities of the enterprise. EQUITY COMPENSATION The issuance of stock options is accounted for at par value and is not expensed through the income statement. RESEARCH AND DEVELOPMENT COSTS Research and development costs incurred internally in developing computer software products are charged as incurred to expenses until the technological feasibility of a product has been established. Thereafter, all direct costs and an appropriate portion of overhead costs incurred in bringing the product to a marketable state are capitalised. Capitalised software development costs are amortised on a straight line basis over the estimated useful life of the asset commencing when the product is available for general release to customers. RETIREMENT BENEFIT COSTS The group provides retirement benefits for its employees and directors by way of subsidiary-specific defined contribution retirement funds. The contributions paid to fund obligations for the payment of retirement benefits are charged against income in the year of payment. The funds are managed funds and are not subject to actuarial valuations. The liabilities of the funds are limited to the assets of the funds and the group has no commitment to meet any unfunded benefits. REVENUE RECOGNITION Revenue represents the net value of software sales and services but excludes Value Added Tax (VAT). Intercompany and inter-divisional sales transactions are eliminated on consolidation. Interest received is recognised on an accrual basis. Software and service revenue Revenue from the sale of computer software or services is recognised when the sale or service takes place. Maintenance and licence fee revenue Maintenance and licence fee revenue is brought to account over the relevant contract periods. Deferred revenue Amounts received in advance for future maintenance and services are raised as a deferred revenue liability on the balance sheet. SEGMENTS All segment revenue and expenses (as set out on page 12) are directly attributable to the segments. Segment assets include all operating assets used by a segment, and consist principally of current assets as well as property and equipment. Segment liabilities include all operating liabilities and consist principally of trade and other payables. These assets and liabilities are all directly attributable to the segments. 33

15 NOTES TO THE ANNUAL FINANCIAL STATEMENTS FOR THE 10 MONTHS ENDED 30 APRIL months to Year to 30 April 30 June $ 000 $ GOODWILL AND INTANGIBLE ASSETS Goodwill Capitalised research and development 697 Technology Trademarks Made up as follows: Goodwill Opening goodwill carrying amount Goodwill arising on acquisition of Cayo Communications, Inc. 130 Exchange gain Goodwill amortised during the period (2 755) Closing carrying amount Made up of: Gross carrying amount Accumulated amortisation (18 448) (17 942) Goodwill arose primarily from the acquisition of shares from FrontRange Solutions, Inc. minority shareholders in prior years. The recoverable amount of goodwill is determined by value in use calculated with reference to the projected discounted cash flows of FrontRange Solutions, Inc Capitalised research and development Opening capitalised research and development Research and development capitalised during the period 697 Closing carrying amount Technology Opening technology carrying amount Technology arising on acquisition of Cayo Communications, Inc Technology amortised during the period (414) Exchange gain 38 Closing carrying amount

16 10 months to Year to 30 April 30 June $ 000 $ Trademarks Opening trademarks carrying amount 33 Trademarks arising on acquisition of Cayo Communications, Inc. 33 Trademarks amortised during the period (10) Exchange gain 1 Closing carrying amount DEFERRED TAXATION ASSET Deferred taxation asset at the beginning of the year Temporary differences recognised Assessed tax losses Exchange gain Closing deferred taxation asset During the period, FrontRange Limited recognised further deferred taxation assets to the extent that, on a conservative projection, the directors consider it probable that taxable profit will be available against which deductible assessed tax loss temporary differences will be utilised in the future. If all of the group s deferred tax assets had been raised without being impaired, they would have totalled $31.9-million (2004: $34.9-million). 3. PROPERTY AND EQUIPMENT Furniture fittings Leasehold and office Computer Land improvements equipment equipment Total 2005 $ 000 $ 000 $ 000 $ 000 $ 000 Cost Beginning of the year Additions Disposals (384) (577) (830) (1 791) Foreign exchange effect End of the period Accumulated depreciation Beginning of the year Depreciation Transfers (49) Disposals (378) (490) (828) (1 696) Foreign exchange effect End of the period Carrying value end of the period

17 NOTES TO THE ANNUAL FINANCIAL STATEMENTS (continued) FOR THE 10 MONTHS ENDED 30 APRIL 2005 Furniture fittings Leasehold and office Computer Land improvements equipment equipment Total 2004 $ 000 $ 000 $ 000 $ 000 $ 000 Cost Beginning of the year , Additions Transfers (139) 139 Impairments (301) (301) Disposals (274) (2 217) (2 491) Foreign exchange effect End of the year Accumulated depreciation Beginning of the year Depreciation Transfers (10) 10 Disposals (241) (2 003) (2 244) Foreign exchange effect End of the year Carrying value end of the year Land comprises property at 1150 Kelly Johnson Boulevard, in the city of Colorado Springs, El Paso County, Colorado Springs, U.S.A $ 000 $ OTHER RECEIVABLES Security deposits Deposits for capital assets Other Directors consider the carrying amounts of other receivables to approximate their fair values

18 30 April 30 June $ 000 $ TRADE AND OTHER RECEIVABLES Gross trade debtors Provision for doubtful debts (1 230) (1 619) Uncollected deferred revenue (7 325) (8 637) Net trade debtors Other receivables The directors consider the carrying value of trade and other receivables to approximate their fair values. Included in net trade debtors are uncovered foreign currency denominated amounts owing: South African operations: US dollar equivalents (in 000) R6 472 $1 051 R4 790 $683 Foreign operations: US dollar equivalents (in 000) $4 549 $ $ 000 $ CASH AND CASH EQUIVALENTS Amounts denominated in South African rands Amounts denominated in US dollars and other foreign currencies On 12 June 2003, FrontRange Solutions, Inc. ( FRS ) and Silicon Valley Bank ( Bank ) entered into a loan and security agreement that provided $6 million in revolving advances and $ as a term loan. The revolving advances provided for under the loan and security agreement are secured by FRS s US subsidiary s accounts receivable. The term loan was secured by FRS s UK subsidiary's accounts receivable. At 30 April 2005, $1.7-million of letters of credit were issued against the revolving advances. This loan and security agreement expired on 11 September On 9 September 2004, FRS and the Bank renewed and modified the existing loan and security agreement. This modified agreement provides $7.5-million in revolving advances. These revolving advances are secured by FRS s US subsidiary s accounts receivable. There is also an unlimited, corporate unsecured guarantee from FRS s UK subsidiary. This loan and security agreement expired on 8 September 2005 and is being renegotiated. The revolving advances under the revised agreement bore interest at a per annum rate equal to the greater of (1) 4.25% per annum and (2) the United States prime rate in effect minus twenty-five basis points. An unused line fee of 0.14% per quarter is payable on the first day following the end of each quarter. In addition, FRS shall pay fees to the Bank of 1.25% per annum of the face amount of any and all letters of credit. A $ facility fee was also paid upon execution of this agreement. 37

19 NOTES TO THE ANNUAL FINANCIAL STATEMENTS (continued) FOR THE 10 MONTHS ENDED 30 APRIL months to Year to 30 April 30 June $ 000 $ 000 The loan and security agreement requires FRS to comply with certain covenants such as an adjusted quick ratio, liquidity and minimum tangible net worth. If FRS is in default of any of these covenants, asset based terms under the loan and security agreement come into effect. Asset based terms require FRS to comply with an alternate tangible net worth covenant and to provide more frequent periodic reporting. The directors believe that FRS was in compliance with all the above Bank covenants during the period ended 30 April ORDINARY SHARE CAPITAL Authorised ordinary shares of $ each (2004: ordinary shares of $ each) Issued ordinary shares of $ each (2004: ordinary shares of $ each) Refer to page 24 on the Directors Report for details of control over the unissued shares. 8. TRADE AND OTHER PAYABLES Trade payables Accruals and other payables The directors consider the carrying values of trade and other payables to approximate their fair values VENDORS FOR ACQUISITION Amounts owing to vendors of Cayo Communications, Inc The $ was settled in full by the transfer, in October 2004, of FrontRange Limited shares that were held by the FrontRange Share Trust at 30 June

20 10 months to Year to 30 April 30 June $ 000 $ PROVISIONS Provisions for audit fees Provisions for leave pay Provisions for restructuring expenses and onerous contracts Made up as follows: Audit fees Balance at the beginning of the year Current year charge to the income statement Foreign exchange effects 6 Amount paid out during the period (842) (847) Balance at the end of the period Leave pay Balance at the beginning of the year Current year charge to the income statement Foreign exchange effects (9) 5 Amount paid out during the period (2 725) (575) Balance at the end of the period Restructuring expenses and onerous contracts Balance at the beginning of the year Current year charge to the income statement Foreign exchange effects 10 Amount paid out during the period (910) (3 131) Balance at the end of the period

21 NOTES TO THE ANNUAL FINANCIAL STATEMENTS (continued) FOR THE 10 MONTHS ENDED 30 APRIL months to Year to 30 April 30 June $ 000 $ TRADING PROFIT Trading profit is arrived at after taking into account the following items: Expenses: Auditors remuneration Audit fees Fees for other services Depreciation Profit on disposal of property and equipment (65) (166) Operating lease charges: Premises Equipment Vehicles Other professional services Payments to executive directors Services to the company Services to foreign subsidiaries Payments to non-executive directors services to the group Refer to page 17 for further details of directors emoluments Employers contributions to staff retirement benefit funds Other staff-related costs The following inter-company transaction occurred during the period and has been eliminated on consolidation: Inter-company royalty charge Number of employees NET FINANCE INCOME Net investment income on unlisted investments Interest received Interest paid (42)

22 10 months to Year to 30 April 30 June $ 000 $ EXCEPTIONAL LOSS Included in headine earnings: Provisions for onerous contracts (1 782) Costs associated with closing the French office (725) Severance charges (587) (600) Other (166) 20 Taxation effect (753) (3 087) Excluded from headline earnings: Provisions for onerous contracts on discontinued operations (564) Impairment of property and equipment (301) Release of excess restructuring provision for fixed assets 83 Other (203) Taxation effect (985) Total net exceptional loss (753) (4 072) 14. TAXATION CHARGE Normal income tax foreign subsidiaries (29) (98) The taxation charge is disproportionate to the profit/(loss) before tax because of the utilisation of tax losses carried forward. The estimated tax losses available for set-off against carried forward future taxable income amounts to approximately $86.9-million. Reconciliation of taxation charge: Profit/(loss) before taxation (172) Normal average corporate taxation rate 36.60% 36.70% Normal taxation (charged)/credited (1 304) 63 Adjustments: Allowances and utilisation of assessed loss (161) Deferred taxation assets raised Net taxation credit for the period

23 NOTES TO THE ANNUAL FINANCIAL STATEMENTS (continued) FOR THE 10 MONTHS ENDED 30 APRIL months to Year to 30 April 30 June $ 000 $ EARNINGS PER SHARE Reconciliation of basic earnings to headline earnings: Basic earnings Adjustments Profit on disposal of fixed assets (65) (166) Goodwill amortisation Exceptional items Number of shares used to calculate earnings per share: Number of shares in issue at the beginning of the year Weighted average number of shares issued during the period Weighted average number of treasury shares used for option exercises Weighted average number of shares used to settle amount owed to Cayo Communications vendors Weighted average number of shares bought back during the period ( ) ( ) Number of shares used to calculate weighted average earnings and headline earnings per share Weighted dilutive effect of share options outstanding at period end Number of shares used to calculate diluted earnings per share OPERATING LEASE COMMITMENTS Office premises, vehicles and computer equipment Within one year Between one and five years

24 10 months to Year to 30 April 30 June $ 000 $ EMPLOYEE RETIREMENT BENEFIT PLANS Proportion of employees covered by retirement benefit plans 67% 67% The group operates various subsidiary-specific retirement benefit plans in the various countries in which it operates. FrontRange Solutions USA, Inc. has established a 401 (k) tax-deferred savings plan, to which employees meeting the eligibility requirements may contribute specified percentages of their salaries. The company matches 100% of the employees contributions up to a maximum of 3% of each contributing employee's total earnings. The company s subsidiaries in Australia and Singapore offer personal pension plans that belong to the individual employees. The pensions are fully portable and are retained by the employee if he or she terminates employment (and accessible under certain defined circumstances). All employees receive contributions from the subsidiaries equal to 8% to 9% and 13% to 16% of the employees salaries for Australia and Singapore respectively. The company s subsidiary in the United Kingdom offers a group personal pension plan that belongs to the individual employees. The pension is fully portable and is retained by the employee if he or she terminates employment. Employees meeting the eligibility requirements, as defined by the plan, receive contribution from the subsidiary equal to 5% of the employees base salaries. The company s subsidiary in South Africa offers a company definedcontribution provident plan to which all permanent employees belong. The employees receive contribution into this plan of between 7.5% and 15% of the employees respective salaries. This fund is governed by the Pensions Fund Act, The company has no obligation to meet unfunded benefits. 18. CASH FLOWS FROM OPERATIONS Trading profit Adjustments for: Exceptional loss (753) (4 072) Depreciation and other non-cash items 610 (8) Decrease in provisions (1 115) (123) Trading profit before exchange gains, finance income and working capital changes Adjustments for working capital changes: Decrease in inventories merchandise for resale (Increase)/decrease in trade and other receivables (2 479) Increase in trade and other payables Increase in deferred revenue

25 NOTES TO THE ANNUAL FINANCIAL STATEMENTS (continued) FOR THE 10 MONTHS ENDED 30 APRIL months to Year to 30 April 30 June $ 000 $ TAXATION PAID Net amounts owing at beginning of the year (219) Amounts charged to the income statement (excluding deferred taxation) (29) 98 Reclassification from prior year trade and other payables 113 Foreign exchange effect 8 Net amount owing at end of period 123 (219) (125) 20. FUNDS UTILISED TO ACQUIRE SUBSIDIARY Trade and other receivables (74) Trade and other payables 97 Deferred revenue 15 Goodwill and intangibles on acquisition (1 625) (1 587) Add: Foreign exchange differences (16) Less: Cash acquired 28 Less: Amount owing to vendors at 30 June (377) 21. NET ADDITIONS TO PROPERTY AND EQUIPMENT Leasehold improvements (26) (28) Furniture, fittings and office equipment (100) (146) Computer equipment (1 024) (588) (1 150) (762) 22. INCREASE/(DECREASE) IN SHARE CAPITAL AND SHARE PREMIUM Ordinary shares issued including share premium Share premium arising on consolidation of FrontRange Share Trust 204 Share issue expenses (3) (8) Shares repurchased (298) (1 109) 410 (556) 44