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IQG - IQuad Group Limited - Preliminary condensed unaudited financial statements

Release Date: 20/10/2011 10:35
Code(s): IQG
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IQG - IQuad Group Limited - Preliminary condensed unaudited financial statements for the six months ended 31 August 2011 IQuad Group Limited (Incorporated in the Republic of South Africa) Registration number 2004/025177/06 Share code: IQG ISIN: ZAE000101622 ("IQuad", the "Company" or "the Group") Preliminary condensed unaudited financial statements for the six months ended 31 August 2011 Commentary on interim results for the period ended 31 August 2011 General comments and prospects Overall headline earnings for the six months ended 31 August 2011 declined by 11% from R3.93m to R3.49m. Whilst these results were below expectation, significant progress has been made in cementing our business strategy over the last six months and the Group is well positioned to focus on growth in the core revenue producing areas of the business. Strategic update We have maintained our mission to "be the preferred supplier of high impact strategic outsource and compliance services to business". Whilst our broad strategy remained unaltered, we identified five medium term strategic priorities to position the business for improved performance. These initiatives have been the key focus over the last six months: 1. Ensure the right team is in place to achieve the growth plan The management structure of the Group has been simplified, with a streamlined management team who meet regularly to review the performance of the Group. The six member management committee (MANCO) is made of a dedicated and committed group of senior management representing all of the business activities of the Group. 2. Win in the Gauteng market Strengthening our presence in the Gauteng market continues to be our primary organic growth focus area and is yielding positive results across all business units. MANCO members have been assigned targets specifically aligned to our Gauteng growth plan and we have also made good headway in expanding our strategic alliance network in the Gauteng area. We have taken the decision to delay the appointment of a strategic sales resource in the Gauteng market and believe that recent developments in our business outlined further below, may result in this position not being required. 3. Fix or exit underperforming businesses This area has received the most attention over the last six months, with the decision taken to disinvest from non-core areas in order to focus on growing the traditionally strong business units. It was felt that the profit contribution, risk and future prospects in these business units did not correlate with the amount of management time that was being given to certain of these smaller investments. The following table summarises the restructuring activities taken by the Group: Business unit Rationale IQuad Verification Services Disposed of our 90% share in Iquad Verification (Pty) Ltd ("IQuad due to non-core fit and historical poor Verification") financial performance. IQuad Finance Solutions Disposed of our 35% shareholding and loan (Pty) Ltd ("IQuad Finance") accounts in IQuad Finance due to non-core fit and lack of future profit prospects. IQuad Technologies(Pty) Ltd Post the interim period, effective 1 September ("IQuad Technologies") 2011, we disposed of our 37.5% share in IQuad Technologies. Negotiations are also underway to
dispose of our remaining 37.5% share in National Money Transfer (Pty) Ltd. Both of these businesses are involved in
specialised IT development and services, an area where the broader group has limited competencies.
4. Grow inorganically through significant acquisitions or new business opportunities We merged our KwaZulu-Natal BEE operation with that of Integra Scores (Pty) Ltd ("Integra") effective 1 March 2011 and acquired further shares, with the result that our overall investment in the merged entity totalled 51%. The rationale behind this transaction was to extract value from the outstanding loan stemming from our disinvestment from Entrepreneurial Survival Solutions ("ESS") in 2010, with Integra being a wholly owned subsidiary of ESS. We were further attracted by the variable cost BEE verification model employed by Integra and encouraging historical profit margins achieved by this business. As a result, IQuad has retained an interest in the BEE verification and consulting industry with a KZN-based focus. We entered into negotiations with Sasfin Holdings Ltd ("Sasfin") during July 2011 regarding the acquisition of a possible stake in IQuad. The transaction was successfully concluded, with the announcement in mid- September that Paladin Capital Ltd has sold its 42.9% stake in IQuad to Sasfin with an option to also purchase the Thembeka Capital Ltd stake of 8%, at the same time triggering a mandatory offer to all minority shareholders. Sasfin is focused on providing banking and related services to the SME market and there is a strong synergistic fit between the services offered by IQuad and Sasfin. This will enable both parties to offer a broader range of services to our respective clients and in so doing enhance value to clients and grow revenues. There are also prospects within the current Sasfin business, specifically in the healthcare, short-term insurance and freight businesses to house these investments within IQuad to further entrench a commercial service offering to both IQuad and Sasfin clients. 5. Identify cost savings Our final strategic priority relates to the streamlining of operations in order to generate targeted cost savings of 5% in the current financial year as measured against budgeted expenditure. We have implemented a number of significant cost reduction measures which will benefit the second half of the year. Segment report Investment incentives The transition to the Enterprise Investment Programme ("EIP") has had an impact on the performance of our Incentives business caused by delays on the part of the Department of Trade and Industry ("dti") in getting their online claims processing module up and running. Capacity within the dti has been further hampered by the fact that system testing and training has taken the focus off claims processing. We do expect to see an improvement in processing turnaround time and payments over the second six months of this financial year once the dti`s online claims system has been implemented. Historically, the performance by the dti has always been better in the second half of the year. As at 31 August 2011, work in progress being the IQuad fee income on claims submitted to the dti, amounted to R7.7 million. The total value of claims submitted is expected to increase significantly during September/October as a result of the deadline for the submission of claims being extended by two months. The number of new incentive applications submitted has exceeded our six month target and has increased overall by close on 15% compared to the previous year to date. It is gratifying to see that our focus on growing the Gauteng market is paying off with a 30% increase in the incentives applications submitted by our Gauteng region. Global trade Our global trade business activities incorporating specialised support for importers and exporters, together with our foreign exchange risk management and treasury execution activities, have performed well. From a trade support perspective, our marketing efforts are well co-ordinated and in the six months under review, we have signed up ten new clients, with a large pipeline which we are working through. Within our treasury operation, the current economic downturn has had a direct impact on sectors of our client base, specifically those clients who are in the motor industry. Rand strength over the preceding six months has meant that our commission income stream has been under pressure. Fortunately around 40% of income consists of fixed fees which have cushioned the blow. The recent global uncertainty and resultant rand weakness have, however, been positive for the performance income stream of our business. Since its acquisition late last year, Kagiso Treasury Solutions has been successfully integrated into the IQuad treasury operation. We anticipate that other players in the treasury outsourcing sphere of business are likely to go through a consolidation phase in the short to medium term, and we will be actively pursuing opportunities in this market to acquire competitors. Our main objective for the year ahead is to continue to grow our client base within our existing infrastructure in order to maximise returns. We will also be focusing on increasing and improving our conversion rate in respect of our marketing efforts while being mindful that our existing clients continue to receive excellent service. Business development This segment remains a relatively small contributor to our overall business, especially following our exit from IQuad Technologies and IQuad Finance. Our remaining activities are centred on the provision of ISO management systems implementation and consulting, which has experienced increased activity and profitability over the last six months. Audit and verification Our exit from IQuad Verification and investment in Integra has seen this segment return to profitability. We are pleased with the profitability and progress achieved by Integra over the last six months, and believe that there is scope for further improvement by leveraging off the IQuad client network. Cash flow The Group generated R5.53m cash from its operating activities during the period under review, including a R302k increase in working capital. Despite the positive cash flow and improvement in the Group`s gearing levels, the board has taken the prudent decision not to pay an interim dividend. Statements of financial position as at 31 August 2011 Unaudited Unaudited Audited
31-Aug-11 31-Aug-10 28-Feb-11 R`000 R`000 R`000 Assets Non-current assets 108 264 98 930 111 428 Investment property 14 434 14 255 14 434 Property, plant and equipment 14 121 12 843 14 163 Goodwill 66 327 62 058 65 524 Intangible assets 4 959 3 238 4 430 Investment in associate 1 541 - - Loan receivable 2 373 - 3 278 Deferred tax assets 4 509 6 536 9 599 Current assets 38 055 36 058 33 660 Work in progress 1 830 2 002 1 927 Current tax assets 1 770 1 448 676 Trade and other receivables 27 159 28 657 26 408 Amounts owing by associates and joint 1 516 317 787 venture Cash and cash equivalents 5 780 3 634 3 862 Non-current asset held for sale - 14 268 - Total assets 146 319 149 256 145 088 Equity and liabilities Equity and reserves 110 907 104 423 108 792 Share capital 101 200 101 200 101 200 Other reserves - (369) (369) Accumulated profits 8 899 2 942 9 776 Non-controlling interest 808 650 (1 815) Non-current liabilities 14 805 22 000 15 279 Deferred tax liabilities 870 684 560 Operating lease liabilities 356 577 421 Borrowings 13 579 20 739 14 298 Current liabilities 20 607 22 833 21 017 Current tax liabilities 1 195 517 304 Trade and other payables 11 570 18 417 12 064 Provisions - - 25 Dividend payable 135 - 750 Current portion of borrowings 7 707 3 899 7 874 Total liabilities 35 412 44 833 36 296 Total equity and liabilities 146 319 149 256 145 088 Statements of comprehensive income for the period ended 31 August 2011 Unaudited Unaudited Audited 31-Aug 11 31-Aug-10 28-Feb-11 R`000 R`000 R`000
Revenue 40 833 38 692 85 628 Cost of services rendered 18 375 (19 899) (38 625) Gross profit 40 833 18 793 47 003 Other operating income 121 622 601 Operating expenses (21 432) (41 911) (62 365) Operating profit / (loss) 1 147 (22 496) (14 761) Investment income 2 223 1 590 3 553 Share of profits/(losses) of 70 (32) - associate companies Finance costs (1 744) (1 107) (2 099) Profit/(loss) before taxation 1 696 (22 045) (13 307) Taxation (2 454) (2 558) (4 062) Loss and total comprehensive loss for the period (758) (24 603) (17 369) Loss and total comprehensive loss for the period attributable to: (758) (24 603) (17 369) Non-controlling interest 119 156 (1 800) Owners of the parent (877) (24 759) (15 569) Basic and diluted loss per (3.2) (90.1) (56.9) share (cents) Condensed statements of changes in equity for the period ended 31 August 2011 Attributable Non- Total to equity controlling equity holders of interest Company
R`000 R`000 R`000 Balance at 1 March 2010 - audited 135 954 2 013 137 967 Total comprehensive (loss) / (24 759) 156 (24 603) income for the period Acquisition of non-controlling (1 993) (331) (2 324) interest in existing subsidiary Dividends (5 429) (706) (6 135) Other movements in non-controlling - (482) (482) interests Balance at 31 August 2010 - 103 773 650 104 423 unaudited Total comprehensive income/(loss) 9 190 (1 956) 7 234 for the period Dividends (2 356) (750) (3 106) Other movements in non-controlling - 241 241 interests Balance at 28 February 2011 - 110 607 (1 815) 108 792 audited Total comprehensive (loss) /income (877) 119 (758) for the period Business combinations - 1 244 1 244 Share reserve converted to loan 369 - 369 receivable Disposals of shares in - 1 438 1 438 subsidiaries Dividends - (178) (178) Balance at 31 August 2011 - 110 099 808 110 907 unaudited Condensed statements of cash flows for the period ended 31 August 2011
31-Aug-11 31-Aug-10 28-Feb-11 R`000 R`000 R`000 Cash generated from operations 7 122 6 659 12 525 Investment income 2 207 1 590 3 303 Finance costs (1 744) (1 107) (2 066) Tax paid (2 053) (4 511) (8 144) Cash flows from operating 5 532 2 631 5 618 activities Additions to investment property - - (1 343) Acquisition of property, plant and (738) (1 575) (1 987) equipment Proceeds on disposal of property, - - 51 plant and equipment Investment in subsidiaries (562) - (3 583) Deconsolidation of subsidiary (63) - Disposals of investments in (699) - (194) subsidiaries Acquisition of intangible assets (557) (1 200) (1 334) Additions to non-current asset - - (1 100) held for sale Proceeds on disposal of non- - - 11 800 current asset held for sale Cash flow on consolidation of non- - - 98 current asset held for sale Contingent consideration paid - - (265) Cash flows from investing (2 619) (2 775) 2 143 activities Amounts advanced to associates and (729) (200) (265) joint venture Non-controlling interests` loans - (103) (238) repaid Loans receivable advanced 921 - Borrowings (repaid)/advanced (394) (862) 241 Acquisition of additional shares - - (2 324) in subsidiary from non-controlling interest Dividends paid (793) (6 135) (8 492) Cash flows from financing (995) (7 300) (11 078) activities Net increase/(decrease) in cash 1 918 (7 444) (3 317) and cash equivalents Cash and cash equivalents at 3 862 7 179 7 179 beginning of period Cash and cash equivalents at end 5 780 (265) 3 862 of period Selected explanatory notes Basis of preparation and accounting policies This condensed interim financial report has been compiled in accordance with IAS 34: Interim Financial Reporting, as well as AC 500 standards and the JSE Limited Listings Requirements. The accounting policies and critical accounting estimates and judgements applied to this financial report are consistent with those applied for the year ended 28 February 2011. This report was prepared under the supervision of the financial director, Frans Botha. Financial results This condensed interim report has not been reviewed or audited by the Group`s auditors. Business combinations 51% of Integra was acquired on 1 March 2011 for a total consideration of R3 104 828. The purchase consideration was partially settled by converting an existing loan of R1 095 000 to shares and Integra issued ordinary shares to the value of R1 291 444 to the Company, which were paid for by transferring intangible assets to the same value to Integra. The balance of the purchase consideration of 718 384 was settled in cash. Goodwill of R1 809 593 arose on the transaction and is attributable to the company`s business methodology and operating model. The respective book and fair values acquired in the business combinations are as follows: Book values Fair Values R`000 R`000 Property, plant and equipment 24 24 Deferred tax asset 465 465 Trade and other receivables net of impairment (331) (331) Cash and cash equivalents 159 159 Trade and other payables (727) (727) Intangible assets 1 308 2 616 Net assets acquired 898 2 206 Non-controlling interest (1 244) Goodwill 2 143 Purchase price 3 105 Cash and cash equivalents (159) Part-payment in shares (1 291) Loan converted to equity in transaction (1 095) Cash outflow on business combination 560 A reconciliation of the Group`s 31-Aug-11 31-Aug-10 28-Feb-11 goodwill is as follows: R`000 R`000 R`000
Opening balance 65 524 87 006 87 006 Additions through business combinations 2 143 - 3 472 Addition through consolidation of - 1 848 - subsidiary previously held for sale Adjustments to purchase price - 265 259 considerations Impairment losses (333) (27 061) (25 213) Deconsolidation of subsidiaries (1 003) - - Disposal of shares in subsidiaries (4) - - Closing balance 66 327 62 058 65 524 Changes in investments On 1 March the Group disposed of 12.6% of the interest in IQuad Technologies for a consideration of R1 cash. Consequently the Group lost control and the investment has been equity-accounted for since disposal date. The investment and related loans were measured at fair value and a Group loss of R3 067 288 arose on the transaction. On 1 August the Group disposed of its entire interest in IQuad Verification for a consideration of R1 500 000 and at a Group loss of R778 942. The proceeds are still outstanding and are included in current assets in the statement of financial position. On 1 March the Group ceased accounting for IDEC Consulting Service (Pty) Ltd "IDEC" as a subsidiary and has equity accounted the investment from that date. No profit or loss arose as a result of the deconsolidation. The book values of the entities disposed of during the year are as follows: R`000 Non-current loans payable (492) Goodwill 5 Property, plant and equipment 280 Intangible assets 497 Trade and other receivables 2 380 Cash and cash equivalents 699 Trade and other payables (1 747) Deferred tax 5 613 Net assets disposed of 6 895 Non-controlling interests 1 912 Investment in associate retained (6) Profit/loss on disposal (3 846) Proceeds on disposal 5 045 Amount included trade and other receivables (5 045) Cash and cash equivalents (699) Net cash outflow on disposals of subsidiaries (699) Earnings, dividend and net asset value per share Unaudited Unaudited Audited 31-Aug-11 31-Aug-10 28-Feb-11 R`000 R`000 R`000
Headline earnings per share 12.7 14.3 37.3 Proposed dividend per share - Interim - 8.0 8.0 - Final - - - Weighted average number of ordinary 27 382 27 467 shares in issue (`000s) Headline earnings are reconciled to earnings per the statement of comprehensive income as follows: R`000 R`000 R`000 Earnings attributable to equity (877) (24 759) (15 569) shareholders of the Company Impairment of goodwill 333 27 061 25 213 Impairment of intangible assets - - 977 Other impairments - 1 584 - Loss/(profit) on disposal of property, 30 (1) (1) plant and equipment Fair value adjustment on re- - 48 - measurement of disposal group held for sale Fair value adjustment on loss of 3 135 - - controlling interest in subsidiary Loss/(profits) on disposal of 857 - (232) investments Profit on disposal of non-current - - (164) asset held for sale Headline earnings for the period 3 478 3 933 10 224 Unaudited Unaudited Unaudited
31-Aug-11 31-Aug-10 28-Feb-11 Net asset value per ordinary share Cents Cents Cents Net assets 402.1 377.8 403.9 Net tangible assets 141.8 140.1 148.5 Other significant matters An amount of R369 231 previously included in other reserves has been converted to a loan and the outstanding amount is included in trade and other receivables. The loan bears interest at a market-related rate. The loan is carried at its fair value and is considered recoverable. The amount arose in 2011 as a result of a probable buyback of treasury shares utilised in a business combination in 2009. Contingent asset Future revenue approximating R9.8 million, to be earned from incentive applications submitted to regulatory authorities but still waiting approval for payment as at the statement of financial position date, has not been recognised as income in these financial statements in accordance with the Group`s accounting policy on revenue recognition (31 August 2010: R13 million; 28 February 2011: R10 million). Subsequent events No material events have been identified subsequent to the statement of financial position date of the Group up to the date of this report, other than those disclosed in these condensed financial statements and the commentary thereon. Segment report The Group has four reportable segments within which the Group`s operating units ("SBUs")are categorised. The SBUs offer different services and are managed separately as they require different technology and marketing strategies, and are reported separately to the board of directors. Certain information within the Global trade services and Investment incentives segments has been restated in order to conform with the structure reported to the board of directors. All comparatives presented have been restated to incorporate these changes. Investment incentives Render consulting services aimed at enabling clients to obtain the maximum benefits and refunds from Government and the dti incentive programmes. Global trade services Offer import and export business solutions, including customs consulting, rebate administration and interest rate and forex risk management. Business development Provide consulting services and management tools to optimise business systems and processes and technological solutions for third-party payment transactions. Verification services Conduct quality assurance, VAT and customs audits and verify BEE compliance. Operating Investment Global Business Verification Total segments incentives trade development services services R`000 R`000 R`000 R`000 R`000
31 August 2011 - unaudited Revenue - 172 - 86 - 258 internal Revenue - 8 937 23 365 1 603 6 206 40 111 external Profit before 1 216 6 638 491 899 9 244 tax 31 August 2010 - unaudited Revenue - - - 771 - 771 internal Revenue - 14 032 15 471 3 504 4 683 37 690 external Profit/(loss) 4 151 6 447 696 (841) 10 453 before tax 28 February 2011 - audited Revenue - 192 - 1 113 - 1 305 internal Revenue - 28 357 41 270 5 320 8 926 83 873 external Profit/(loss) 8 851 14 569 (3 620) (2 604) 17 196 before tax Unaudited Unaudited Audited
31-Aug-11 31-Aug-10 28-Feb-11 Segmental profit reconciliation R`000 R`000 R`000 Profit before tax for reportable 9 244 10 453 17 196 segments Impairment losses (333) (28 645) (28 030) Profits from unallocated segments 1 780 2 865 5 574 Elimination of intersegment and (8 995) (6 718) (8 047) corporate profits Group profit/(loss) before tax as per 1 696 (22 045) (13 307) statement of comprehensive income Transactions with individual clients did not amount to 10% or more of the Group`s total revenue. 20 October 2011 Port Elizabeth Corporate Adviser PSG Capital (Pty) Limited Designated Adviser Questco Sponsors (Pty) Limited Date: 20/10/2011 10:35:01 Supplied by www.sharenet.co.za Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited (`JSE`). The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct, indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on, information disseminated through SENS.

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