| Thu 21 May 2009, 16:35 | | HUG - Huge - Trading Statement And Renewal Of Cautionary Announcements |
|
HUG
HUG
HUG - Huge - Trading Statement And Renewal Of Cautionary Announcements
HUGE GROUP LIMITED
(Registration number 2006/023587/06)
Share code: HUG ISIN: ZAE000102042
("Huge" or "the Group" or "the company")
TRADING STATEMENT AND RENEWAL OF CAUTIONARY ANNOUNCEMENTS
In terms of paragraph 3.4(b) of the JSE Limited Listings Requirements, a
listed company is required to publish a trading statement as soon as it is
satisfied that a reasonable degree of certainty exists that the financial
results for the period to be reported upon next will differ, by at least 20%,
from the financial results for the corresponding period in the prior year.
Huge is currently finalising its financial results for the year ended 28
February 2009, expected to be announced on 29 May 2009.
Shareholders are advised of the following summary of certain financial
events, many of them once-off, that occurred during the 2009 financial year.
The company sought to acquire iTalk Cellular (Proprietary) Limited ("iTalk")
in the current year. Had the company been successful in acquiring iTalk,
costs of R3.4 million would have been capitalised as part of the acquisition
cost of iTalk. Instead, this cost has been assigned to the income statement.
The effect of this is the reduction of EPS and HEPS by 2.2 cents per share.
Human capital is a vital component of the competitive advantage of a company
in the managed telecommunications industry. Human capital contributes 67% of
total overhead in Huge Telecom (Proprietary) Limited ("Huge Telecom"), the
principal subsidiary of Huge. The cost of recruiting and training new staff
if employees are lost to outside parties and competitors is high. The loss
of intellectual capital and competitive advantage is even greater when these
staff members are poached by competitors of the company, making it imperative
to achieve the medium and long term benefits of a stable workforce.
In the current financial year the company is please to report that it has
successfully achieved this stability, through the payment of staff retention
incentives in the form of restraint of trade agreements to key staff members
(however specifically excluding all Huge Group directors). These restraint
agreements were in the amount of R4.3 million. The effect of these payments
is the reduction of EPS and HEPS by 2.9 cents per share.
The company also incurred certain extraordinary and once-off integration and
relocation costs in the current financial year, which will not recur in the
next financial year. These integration costs related to the integration of
Huge Telecom and CentraCell (Proprietary) Limited, while relocation costs
resulted from the move of the head offices of Huge Telecom from Cape Town to
Johannesburg. The estimated effect of these costs is the reduction of EPS
and HEPS by 1.0 cents per share.
The company also purchased SSF and CFD contracts against 12 309 279 of its
own shares during the current financial year. In terms of IAS32 (Accounting
for Financial Instruments) a company is required to account for transactions
in derivatives over its own ordinary shares through the income statement in
instances where the company has a choice on the method of disposal of the
derivatives. In instances where the company has no choice but is legally
obliged to take physical delivery of the underlying shares in question, the
transactions are to be treated as a repurchase of the ordinary shares in the
company and accounted through the statement of changes in equity. In terms
of the legal agreements governing these contracts the auditors, and attorneys
advising the company, have advised that the company has the choice of:
- Rolling the short dated SSF contracts into longer dated SSF contracts;
- Selling the SSF contracts in the open market;
- Closing out the contracts and taking physical delivery of the underlying
shares.
Due to the fall in the company`s share price from November 2008, catalysed by
the global financial crisis, the fall in the underlying share value of these
contracts has resulted in a reduction in EPS and HEPS of 16.9 cents per
share. This reduction in EPS and HEPS would not have occurred had these
contracts not had options regarding their disposal, as they would then have
been accounted for through the statement of changes in equity.
These contracts remain in force and shareholders are advised that due to this
accounting treatment, should the company`s share price rise in the next
financial period, the effects of this rise will translate into a direct
profit to the company`s income statement resulting from the increased market
value of the SSF and CFD contracts held.
The SSF and CFD contracts, having the nature of synthetic debt instruments,
have an interest component that needs to be paid. The effect of the interest
paid on the SSF and CFD contracts held by the company in the current
financial year is estimated to equate to a reduction in EPS and HEPS of 2.9
cents per share.
Overall trading conditions in the second six months of the financial year
have been tougher with a commensurate rise in the level of bad debts. The
write off of bad debts at the revenue level has a geared effect on operating
profitability. The company has taken the necessary precautions to limit the
effect of the tougher trading conditions. However, the impact of this on EPS
and HEPS is still estimated to equate to 2.0 cents per share.
In summary, for the current financial period, the combined effects of the
costs of the iTalk acquisition bid, the relocation and integration costs, the
SSF and CFD transaction costs, and the tougher trading environment, will lead
to an estimated combined reduction in operating profit of approximately 27.9
cents per share, the majority of which are once-off and exceptional items
experienced in the current financial year as described above.
Shareholders are accordingly advised that a reasonable degree of certainty
exists that the company`s earnings per share ("EPS") and headline earnings
per share ("HEPS") will be 80% to 90% lower than the 44,17 (EPS) and 44,15
(HEPS) cents reported for the year ended 29 February 2008.
If the SSF and CFD contracts had been treated as a buy back of shares then
the weighted average number of shares in issue would have been 103 973 042 or
4.7% less than the current weighted average number of shares in issue. This
would have resulted in an increase of 4.9% in the reported EPS and HEPS, and
the earlier mentioned reduction of 16.9c in EPS and HEPS due to the current
accounting treatment would also not have occurred.
On a more positive note, post year end the company is experiencing the
beginnings of an upturn in commercial activity, as evidenced by an upswing in
new business deals signed. Three major deals have been signed in the last
month which will represent an increase in annual revenue to Huge Telecom of
approximately R15-million. Additional details of these transactions, which
will be accounted for in the next financial period, will be provided with the
2009 results. The directors are cautiously optimistic that this trend will
continue.
This trading statement has not been reviewed or reported on by the Company`s
external auditors.
RENEWAL OF CAUTIONARY ANNOUNCEMENTS
Shareholders are referred to the previous announcement dated 03 April 2009,
in which shareholders of Huge were advised that the board was in preliminary
discussions regarding the structure, funding and outcome of a transaction
("proposed transaction") that, if proposed, would result in the same offer
being made to all shareholders for them to sell, on a voluntary basis, all or
some of their shares in the company for a cash price.
The company remains in discussions regarding the proposed transaction.
As regards the proposed transaction and offer:
1. Holders of a significant number of the issued shares of the company
(excluding 5 647 297 treasury shares) although only being irrevocably
bound until 29 May 2009, remain committed to supporting the proposed
transaction and to accepting an offer to purchase all their shares in
the company for a cash price of not less than 160 cents per share ("the
offer"), provided that the offer is made and, should the offer trigger a
change in control of the company, the Securities Regulation Panel is
provided with the cash confirmations required under the SRP Code;
2. The cash confirmations that were therefore required to be lodged by no
later than 29 May 2009 will no longer be lodged by that date but will be
lodged on a later date agreed by the parties;
3. Various financial investors have expressed interest in investing in the
business of the company such that this investment would provide a source
of the funding for acceptances of the offer.
4. Implementation of the proposed transaction is subject to conditions,
including the outcome of a due diligence investigation into the company
and the requisite shareholder and regulatory approvals.
Once a formal transaction is tabled to the board, the company will approach
the Securities Regulation Panel for any necessary approvals.
Shareholders are also referred to the cautionary announcement published on 30
March 2009 relating to the pro forma financial effects of the SSF and CFD
contracts and are advised that pro forma financial effects will be included
in the results announcement to be published on or about 29 May 2009.
Shareholders are accordingly advised to continue to exercise caution until
both the pro forma financial effects referred to above are announced and
until a formal proposal is made to the company and a detailed announcement is
made.
Johannesburg
21 May 2009
Designated Advisor
Arcay Moela Sponsors (Proprietary) Limited
Date: 21/05/2009 16:35:02 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.
