| Tue 1 Jun 2010, 7:42 | | HUG - Huge Group Limited - Summarised Audited Results of Huge for the Year |
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HUG
HUG
HUG - Huge Group Limited - Summarised Audited Results of Huge for the Year
Ended 28 February 2010
HUGE GROUP LIMITED
(Registration number 2006/023587/06)
Share code: HUG & ISIN: ZAE000102042
("Huge" or "the Group" or "the company")
SUMMARISED AUDITED RESULTS OF HUGE FOR THE YEAR ENDED 28 FEBRUARY 2010
HIGHLIGHTS FOR THE FINANCIAL YEAR
- Basic earnings per share up 25.8%
- Headline earnings per share up 28.3%
- Huge Telecom improved gross margin while gearing up for growth
- Eyeballs Mobile Advertising now majority owned by Huge
- Further diversification with launch of Huge Media in January 2010
- Value creation through active share repurchase programme
- Net asset value per share up 7.1% to 251.64c per share
- Strategic positioning of Huge Telecom to benefit from changing
regulatory environment
- KPMG Inc. appointed as auditors
SUMMARISED AUDITED RESULTS FOR THE YEAR ENDED 28 FEBRUARY 2010
Summarised Consolidated Statement of Financial Performance
Audited Unaudited Audited
28 February 31 August 29 February
2010 2009 2009
(12 months) (6 months) (12 months)
R R R
Revenue 573 516 182 282 009 503 608 539 826
Gross profit 119 495 995 51 076 777 113 072 808
Other income 830 975 2 038 892 1 600 600
Operating expenses (117 045 158) (49 986 018) (91 343 741)
Operating profit
from operations 3 281 812 3 129 651 23 329 667
Investment income 4 485 384 - 7 522 773
Net change in fair
value of financial
instruments 8 360 236 (9 434 325) (21 305 364)
Income from equity
accounted investments 166 284 329 780 1 324 279
Finance costs (8 038 923) (4 977 125) (6 527 694)
Profit (loss)
before taxation 8 254 793 (10 952 019) 4 343 659
Income tax expense (187 087) 5 198 665 3 093 559
Net profit (loss)
for the period 8 067 706 (5 753 354) 7 437 218
Non controlling interest 961 153 (101 263) -
Net profit (loss) 9 028 859 (5 854 617) 7 437 218
attributable to owners
of the company
Earnings before
interest, taxation,
depreciation and
amortisation 36 865 712 27 297 667 24 154 989
Basic earnings per share (cents) 8.58 (5.43) 6.82
Headline earnings per share (cents) 8.79 (5.46) 6.85
Diluted earnings per share (cents) 8.58 (5.43) 6.82
Diluted headline 8.79 (5.46) 6.85
earnings per share(cents)
Dividends 12.00
Total number of
shares in issue (`000) 102 113 106 167 106 167
Weighted number of
shares in issue (`000) 105 199 107 858 109 089
Earnings/(loss) 9 028 859 (5 854 617) 7 437 218
attributable to ordinary
shareholders
Adjusted for:
(Profit)/Loss on
disposal of property,
plant and equipment (59 957) (37 168) 40 125
Net loss on further 366 773 - -
acquisition of
Eyeballs Mobile
Advertising
Tax effect (86 346) - -
Headline earnings/(loss) 9 250 892 (5 891 785) 7 477 343
Summarised Consolidated Statement of Financial Position
Audited Unaudited Audited
28 February 31 August 29 February
2010 2009 2009
R R R
Assets
Property, plant and equipment 43 573 867 50 143 113 59 627 060
Goodwill 215 153 482 223 475 925 215 153 482
Intangible assets 22 106 583 6 612 873 1 284 009
Investments in joint venture 540 291 563 885 822 941
Investment in associates 2 390 672 2 062 025 7 941 638
Investments 389 409 336 840 263 347
Loans to associate companies - - 5 000 000
Deferred tax 9 497 797 14 955 720 9 652 736
Current assets
Inventories 14 825 421 23 648 593 28 720 935
Trade and other receivables 108 069 904 101 409 112 93 494 129
Loans to associate companies 1 637 478 1 096 064 1 096 064
Loans receivable - - 28 300
Current tax receivable 2 488 386 1 797 816 188 505
Cash and cash equivalents 11 430 271 - 13 785 142
Total assets 432 103 561 426 101 966 437 058 288
Equity and liabilities
Share capital 10 211 10 617 10 617
Share premium 226 429 430 228 822 360 228 822 358
Reserves 1 215 038 296 467 296 467
Retained earnings 29 306 900 14 423 429 20 278 041
Equity attributable to equity
holders of parent 256 961 579 - 249 407 483
Non controlling interest 721 499 (888 476) -
Non current liabilities
Loans from shareholders - 18 416 104 17 035 070
Finance lease obligations 4 171 704 7 025 385 9 484 917
Other financial liabilities - - 1 516 202
Deferred tax 3 885 162 - -
Current liabilities
Loans from associate companies 2 208 308 - -
Loans from shareholders 8 973 884 - -
Other financial liabilities 2 606 254 24 659 930 25 702 334
Finance lease obligations 5 199 529 4 833 657 4 534 184
Trade and other payables 147 046 550 107 820 791 125 969 836
Shareholders for dividends 14 952 14 952 14 952
Bank overdraft - 20 666 750 -
Current tax payable 314 140 - 3 393 310
Total equity and liabilities 432 103 561 426 101 966 437 058 288
Number of shares in issue (`000) 102 113 106 167 106 167
Net asset value per share (cents) 251.64 228.57 234.92
Net tangible asset value per
share (cents) 19.29 11.85 31.05
Summarised Consolidated Statement of Comprehensive Income
Audited Unaudited Audited
28 February 31 August 29 February
2010 2009 2009
R R R
Net profit (loss) for the
period attributable to owners
of the company 9 028 859 (5 854 617) 7 437 218
Other comprehensive income
Gains on property revaluation 797 044 - -
Taxation related to components
of other comprehensive income (537 865) - 72 424
Other comprehensive income for
the year net of taxation 259 179 - 72 424
Total comprehensive
income/(loss) for the period
attributable to owners of the
company 9 288 038 (5 854 617) 7 509 642
Summarised Consolidated Statement of Changes in Equity
Audited Unaudited Audited
28 February 31 August 29 February
2010 2009 2009
R R R
Balance at 28 February 249 407 483 249 407 484 248 064 478
Total comprehensive income/
(loss) for the period 8 326 885 (5 854 617) 7 509 642
Issue of shares - - 15 000 000
Purchase of own shares (2 393 334) - (7 755 437)
Share option reserve 659 392 - -
Dividends - - (13 411 200)
Non controlling interest 1 682 652 (888 476) -
Balance at 28 February/
31 August 257 683 078 242 664 397 249 407 483
Summarised Consolidated Statement of Cash Flows
Audited Unaudited Audited
28 February 31 August 29 February
2010 2009 2009
(12 months) (6 months) (12 months)
R R R
Cash flows from
operating activities 27 177 889 (25 393 896) 26 226 928
Cash flows from
investing activities (6 203 956) (3 813 781) (34 311 121)
Cash flows from financing
activities (23 370 152) (5 244 217) 1 990 688
Net cash movement for
the period (2 354 871) (34 451 894) (6 093 505)
Cash at the beginning
of the period 13 785 142 13 785 142 19 878 646
Cash and cash equivalents
acquired 41 348 - -
Total cash at the end
of the period 11 430 271 (20 666 750) 13 785 141
Segmental reporting
The directors have considered the implications of IFRS 8 Operating segments
and are of the opinion that the current operations of the Group are
substantially similar to one another and the risk and returns of these
operations are likewise similar. Resource allocation and management of the
current operations are performed on an aggregate basis and as such the Group
is considered to be a single aggregated business. The lines of revenue are
disclosed separately to the chief operating decision maker, the Group`s CEO,
and are therefore reported as such in terms of IFRS 8.
Eyeballs Mobile Advertising (Proprietary) Limited ("Eyeballs") and Huge Media
(Proprietary) Limited ("Huge Media") are still in the start up phases of
their respective businesses and as such no revenue is reported.
The revenue lines are indicative of the products and services the Group
provides. These product and services are distributed countrywide to all
clients with no geographical differentiation.
Revenue by operating segment
Audited Unaudited Audited
28 February 31 August 29 February
2010 2009 2009
(12 months) (6 months) (12 months)
R R R
Airtime 496 657 976 243 307 822 537 611 683
Connection incentive bonus 57 555 950 29 110 100 54 537 113
Marketing incentive 7 216 320 3 605 730 4 376 914
Telephone managed services 3 469 679 1 844 998 2 189 503
SMS services 5 082 880 2 453 606 5 988 865
International airtime 2 492 624 1 179 062 2 670 150
Hardware rental and sales 1 040 753 508 186 1 165 598
Total revenue 573 516 182 282 009 503 608 539 826
COMMENTARY
The board of directors of Huge is pleased to present the financial statements
for the year ended 28 February 2010.
ACCOUNTING POLICIES
The summarised audited consolidated financial statements for the year ended
28 February 2010 are extracted from the audited financial statements of the
Group for the year ended 28 February 2010. These have been prepared in
accordance with the recognition and measurement criteria of International
Financial Reporting Standards (IFRS) and the presentation and disclosure
requirements of International Accounting Standard 34 (IAS 34), the AC 500
series and the Companies Act, Act 61 of 1973, as amended. These are
consistent with those of the prior year except for IFRS 2 - Share based
payments and IFRS 8 - Operating segments, and IAS 27 Consolidated and
separate financial statements, which has been early adopted.
COMPANY PROFILE
Huge is an investment holding company listed on the Alternative Exchange
(AltX) of the Johannesburg Stock Exchange Limited ("JSE"). The Group is
focused on building shareholder value. Its treasury operations are mandated
to maximise the financial position of the company in the debt and equity
markets using cash and derivative based instruments.
Huge Telecom (Proprietary) Limited ("Huge Telecom"), a wholly owned
subsidiary of Huge and the principal trading operation of the Group, is South
Africa`s leading "Communication Expense Management" and "Managed
Telecommunications" company.
Eyeballs (77% owned by Huge) is a technology provider whose "Eyeballs"
technology consists of a software application that recipient users download
and install on their mobile phones. It displays advertising and content
images on the phone screen when calls are made or messages are received.
Huge Media`s (100% owned by Huge) strategy is to be a media owner focused on
the advertising industry. It commenced commercial operation on 20 January
2010.
Further investor and shareholder information is available at
www.hugegroup.com.
FINANCIAL OVERVIEW
GROUP`S FINANCIAL PERFORMANCE
The internal restructuring at Huge, in which the operations of TelePassport
and Centracell (Proprietary) Limited ("CentraCell") were merged, together
with the focus on operational efficiencies, treasury management and cost
containment, resulted in a marked improvement in Group financial performance
in the second half of the year. The turnaround has eliminated the loss
recorded in the first six months and the Group is pleased to report increases
in net profits and headline earnings per share compared to the previous
financial year.
Huge`s financial objectives for the past six months included increasing
operational efficiencies and generating higher gross profit margins within
Huge Telecom. Huge Telecom has achieved considerable success in each of
these areas and continues to strive for further improvement.
The focus of the Group for the coming financial year will be to translate the
improved operational efficiencies and higher gross profit margins achieved by
Huge Telecom, into increased operating profit margins at Group level. This
will be achieved through further cost optimisation in Huge Telecom as well as
revenue generation by Eyeballs and Huge Media.
INVESTMENT HOLDING ACTIVITIES
The company listed on the AltX of the JSE stock exchange on 8 August 2007. In
terms of its prospectus dated 1 August 2007 the company privately placed 50
000 000 ordinary shares of 0.01 cents each at an issue price of 250 cents per
share increasing the number of ordinary shares in issue to 99 646 601.
During the period between the date of listing of the company and 28 February
2010, Huge Telecom, being a subsidiary of the company, acquired exposure to
contracts for difference (over 3 904 579 ordinary shares at a weighted
average price 356.9 cents per share totalling R13.9 million), single stock
futures (over 359 200 ordinary shares at a weighted average price of 314.6
cents per share totalling R1.1 million), and ordinary shares (totalling 9 646
926 at a weighted average price of 102.3 cents per share totalling R9.9
million) to be held as treasury shares. During the same period the company
issued 12 113 399 ordinary shares at a weighted average price of 309.7 cents
per share totalling R37.5 million, acquired exposure to single stock futures
(over 8 045 500 ordinary shares at a weighted average price of 362.0 cents
per share totalling R29.1 million), and bought and sold 3 311 546 ordinary
shares at a loss of R149 442. On a net basis the Group has repurchased
exposure over 9 842 806 ordinary shares at a weighted average price of 169.6
cents per share totalling R16.7 million giving the company the future
prospect of reducing the number of ordinary shares in issue to 89 803 795.
The implied aggregate gain (excluding implied interest gains) achieved from
these investment holding activities, being the differential between the
original issue price of 250.0 cents per share and the net acquisition price
of 169.6 cents per share is approximately R7.9 million.
On a debt equivalent basis, treating the issue of shares as an advance of
debt and the repurchase of shares as a repayment of debt, and using a time
weighted approach at the prime rate of interest, the cumulative total benefit
to shareholders from these investment holding activities is approximately
R16.4 million.
The details of the SSF contracts, CFDs and share repurchases are detailed
below.
SSF contracts acquired by Huge Telecom
Transaction Number Number Spot Value
date of of price of
SSF under- per nominal
contracts lying under- exposure
acquired/ reference lying acquired/
(disposed) instruments reference (reduced)
instrument (Rands)
(cents)
Acquisitions
27 Jun 2008 1 061.00 106 100 330.58 350 745.38
30 Jun 2008 500.00 50 000 330.00 165 000.00
01 Jul 2008 933.00 93 300 344.00 320 952.00
02 Jul 2008 250.00 25 000 370.00 92 500.00
Disposals
09 Sep 2008 (2 035.00) (203 500) 400.90 (815 831.50)
Acquisitions
16 Sep 2008 613.00 61 300 362.00 221 906.00
26 Sep 2008 800.00 80 000 362.00 289 600.00
07 Oct 2008 1 200.00 120 000 343.00 411 600.00
10 Oct 2008 250.00 25 000 344.00 86 000.00
13 Oct 2008 20.00 2 000 370.00 7 400.00
Total 3 592.00 359 200 1 129 871.88
CFDs acquired by Huge Telecom
Transaction Number Number Spot Value of
date of CFDs of price nominal
acquired/ under- per exposure
(disposed) lying under- acquired/
reference lying (reduced)
instruments reference (Rands)
instrument
Acquisitions
10 Jul 2008 50.00 5 000 360.00 18 000.00
14 Jul 2008 60.00 6 000 360.00 21 600.00
16 Jul 2008 4.00 400 360.00 1 440.00
17 Jul 2008 8.00 800 364.00 2 912.00
23 Jul 2008 2 303.25 230 325 362.50 834 929.75
24 Jul 2008 6 205.00 620 500 362.75 2 250
705.20
30 Jul 2008 639.00 63 900 360.00 230 018.40
31 Jul 2008 7 500.00 750 000 360.00 2 700
000.00
01 Aug 2008 600.00 60 000 360.00 216 000.00
06 Aug 2008 69.82 6 982 330.00 23 040.60
11 Aug 2008 183.18 18 318 330.00 60 449.40
20 Aug 2008 500.00 50 000 320.00 160 000.00
29 Aug 2008 1 250.00 125 000 343.00 428 750.00
30 Sep 2008 93.00 9 300 350.00 32 550.00
02 Oct 2008 3 560.00 356 000 360.00 1 281
600.00
03 Oct 2008 300.00 30 000 356.00 106 800.00
06 Oct 2008 15 721.00 1 572 100 354.00 5 565
234.00
Total 39 045.79 3 904 579 13 934
029.35
SSF contracts acquired by Huge
Transaction Number of Number Spot Value of
date SSF of price nominal
contracts underlying per exposure
acquired/ reference underlying acquired/
(disposed) instruments reference (reduced)
instrument (Rands)
(cents)
Acquisitions
16 Oct 2008 80 455.00 8 045 500 362.00 29 124 710.00
Ordinary shares of Huge acquired by Huge
The company has also been acquiring its own shares under the general
authority granted to the directors at the last three annual general meetings.
The most recent of these AGM`s was held on Friday, 27 November 2009.
The dates of the issues and acquisitions of the shares are set out below:
Transaction Issuer Number of Price Value of
date ordinary per transaction
shares share
issued
08 Aug 2007 Huge (353 399) 250.00 (883 497.50)
05 Mar 2008 Huge (6 760 000) 320.00 (21 632 000.00)
25 Aug 2008 Huge (5 000 000) 300.00 (15 000 000.00)
Total (12 113 399) (37 515 497.50)
Transaction Purchaser Number Price Value
date of per of
ordinary share transaction
shares
acquired/
(disposed)
28 Oct 2008 Huge 9 400 250.00 23 500.00
28 Oct 2008 Huge 100 275.00 275.00
28 Oct 2008 Huge 100 290.00 290.00
28 Oct 2008 Huge 100 300.00 300.00
30 Oct 2008 Huge 4 900 275.00 13 475.00
30 Oct 2008 Huge 100 300.00 300.00
05 Nov 2008 Huge 600 275.00 1 650.00
05 Nov 2008 Huge 100 300.00 300.00
11 Nov 2008 Huge 5 000 280.00 14 000.00
11 Nov 2008 Huge 5 000 274.00 13 700.00
11 Nov 2008 Huge 5 000 272.00 13 600.00
04 Dec 2008 Huge 2 656 131 120.75 3 207 278.18
05 Dec 2008 Huge 600 000 122.38 734 280.00
08 Dec 2008 Huge 5 000 129.00 6 450.00
11 Dec 2008 Huge 1 000 150.00 1 500.00
11 Dec 2008 Huge 9 115 150.00 13 672.50
12 Dec 2008 Huge 5 000 125.00 6 250.00
12 Dec 2008 Huge 4 900 130.00 6 370.00
29 May 2009 Huge (3 311 546) 118.00 (3 907 624.00)
Total - 149 441.68
02 Jan 2009 Huge 1 028 500 140.00 1 437 843.00
Telecom
06 Jan 2009 Huge 893 000 145.00 1 294 850.00
Telecom
06 Jan 2009 Huge (500 000) 140.00 (700 000.00)
Telecom
07 Jan 2009 Huge 28 000 150.00 42 000.00
Telecom
07 Jan 2009 Huge 8 500 154.00 13 090.00
Telecom
07 Jan 2009 Huge 13 500 155.00 20 925.00
Telecom
07 Jan 2009 Huge 16 800 160.00 26 880.00
Telecom
08 Jan 2009 Huge 30 000 160.00 48 000.00
Telecom
08 Jan 2009 Huge 5 000 170.00 8 500.00
Telecom
09 Jan 2009 Huge (5 000) 169.00 (8 450.00)
Telecom
09 Jan 2009 Huge (15 000) 170.00 (25 500.00)
Telecom
09 Jan 2009 Huge 38 500 170.00 65 450.00
Telecom
09 Jan 2009 Huge 30 000 175.00 52 500.00
Telecom
09 Jan 2009 Huge 29 400 179.00 52 626.00
Telecom
09 Jan 2009 Huge 30 000 180.00 54 000.00
Telecom
12 Jan 2009 Huge 5 990 185.00 11 081.50
Telecom
12 Jan 2009 Huge 10 010 189.00 18 918.90
Telecom
13 Jan 2009 Huge 32 600 190.00 61 940.00
Telecom
13 Jan 2009 Huge 3 500 195.00 6 825.00
Telecom
21 Jan 2009 Huge 1 150 165.00 1 897.50
Telecom
21 Jan 2009 Huge 3 700 175.00 6 475.00
Telecom
28 Jan 2009 Huge 5 000 160.00 8 000.00
Telecom
30 Jan 2009 Huge 10 000 155.00 15 500.00
Telecom
30 Jan 2009 Huge 215 791 138.00 297 791.58
Telecom
13 Feb 2009 Huge 2 000 160.00 3 200.00
Telecom
13 Feb 2009 Huge 283 793 158.00 449 528.11
Telecom
16 Feb 2009 Huge 2 000 160.00 3 200.00
Telecom
17 Feb 2009 Huge 42 137 139.00 58 570.43
Telecom
24 Feb 2009 Huge 14 820 140.00 20 748.00
Telecom
26 Feb 2009 Huge 10 000 140.00 14 000.00
Telecom
26 Feb 2009 Huge 4 694 155.00 7 275.70
Telecom
26 Feb 2009 Huge 3 306 160.00 5 289.60
Telecom
03 Mar 2009 Huge 2 000 154.00 3 080.00
Telecom
03 Mar 2009 Huge 8 000 154.00 12 320.00
Telecom
03 Mar 2009 Huge 42 060 149.00 62 669.40
Telecom
06 Mar 2009 Huge 2 000 150.00 3 000.00
Telecom
16 Mar 2009 Huge 43 154 120.00 51 784.80
Telecom
16 Mar 2009 Huge 35 000 120.00 42 000.00
Telecom
16 Mar 2009 Huge 17 500 120.00 21 000.00
Telecom
16 Mar 2009 Huge 4 346 120.00 5 215.20
Telecom
19 Mar 2009 Huge 150 890 133.00 200 683.70
Telecom
29 May 2009 Huge 3 311 546 118.00 3 907 624.28
Telecom
09 Jul 2009 Huge 4 234 95.00 4 022.30
Telecom
04 Dec 2009 Huge 166 666 49.94 83 233.00
Telecom
07 Dec 2009 Huge 88 070 55.94 49 266.36
Telecom
08 Dec 2009 Huge 10 000 56.00 5 600.00
Telecom
09 Dec 2009 Huge 1 924 689 50.00 962 344.50
Telecom
11 Dec 2009 Huge 127 384 60.00 76 430.40
Telecom
14 Dec 2009 Huge 85 000 60.00 55 250.00
Telecom
15 Dec 2009 Huge 171 300 64.30 110 145.90
Telecom
20 Jan 2010 Huge 120 000 65.00 78 000.00
Telecom
21 Jan 2010 Huge 430 000 65.00 279 500.00
Telecom
01 Feb 2010 Huge 55 000 72.00 39 600.00
Telecom
01 Feb 2010 Huge 1 250 74.00 925.00
Telecom
01 Feb 2010 Huge 75 000 75.00 56 250.00
Telecom
02 Feb 2010 Huge 130 000 75.00 97 500.00
Telecom
03 Feb 2010 Huge 16 792 79.00 13 265.68
Telecom
03 Feb 2010 Huge 343 354 80.00 274 683.20
Telecom
Total 9 646 926 9 869 349.00
TELECOMMUNICATIONS ACTIVITIES
Huge Telecom is the Group`s principal revenue generator. Total turnover
generated for the second six months of the year, which is traditionally the
slower period of the financial year, amounted to R291.5 million, up 3.4% from
R282.0 million in the first half of the financial year. The directors of Huge
Telecom believe that the significant investment which it made in new
executive and senior management will support a continuation of this positive
trend.
Huge Telecom reported an 11.8% increase in gross profit margins, improving
from 18.6% to 20.8%. This was achieved primarily through significant
improvements in the management of Huge Telecom`s input costs. A revenue
assurance department was established to enhance the management of airtime
available for sale. As a result, airtime lost through expiry was dramatically
reduced. The full effect of these benefits, which positively impacted the
business and gross profit margins of Huge Telecom in the second half of 2010,
will be realised in the 2011 financial year.
Gross profit for the traditionally slower second six months of the year
amounted to R68.4 million, an increase of 34% from the R51.0 million recorded
in the first half of the 2010 financial year. The improvements were a result
of the improved management of airtime noted above as well as timing
differences on the receipt of connection incentive bonuses.
MEDIA ACTIVITIES
In March 2009 Huge increased its holding in its Eyeballs subsidiary from 25%
to 77%. Eyeballs furthered the development of its proprietary in-application
mobile phone advertising technology during the year, in support of its
technology provider strategy. Eyeballs` technology has matured significantly
during the past two years, and has started generating revenue from sales post
year end, having introduced this unique advertising mechanism to South
Africa. It is currently available for all Symbian Smartphones (which includes
most Nokia phones and several LG, Samsung and Sony Ericsson models), and
BlackBerry support is planned for release in June 2010. Other operating
systems will be addressed in due course. This technology was valued at R16
million on acquisition of Eyeballs as a subsidiary and is included in
intangible assets of the group.
During the year Huge Media, a wholly owned subsidiary of Huge, was
established with the intention of taking Eyeballs` technology to market under
the consumer brand name "Goodyz". Since it commenced commercial operations in
January 2010, Huge Media has acquired more than 24 000 installed users. Huge
Media served 2.29 million user impressions through Goodyz in April 2010, of
which 1.53 million were available for advertising impressions and will serve
approximately 4 million impressions in May 2010, of which 2.67 million will
be available for advertising.
GROUP OPERATING EXPENSES
Group operating expenses incurred during the current financial year increased
by R25.7 million from R91.3 million to R117.0 million. This increase is
attributable to:
1. The audit fees for both the 2009 and 2010 financial years, which were
expensed in the current financial year. This equates to twice the normal
audit fee of approximately R1.25 million.
2. The non-cash depreciation charge for the replacement of fixed assets
(other than network related assets and routing equipment, where the
depreciation is expensed as part of cost of sales), increased by R2.7
million. This related primarily to the depreciation of the intangible
assets owned by Eyeballs (Eyeballs` technology amounting to R1.6
million) and the intangible assets (computer software) owned by Huge
Telecom (amounting to R1.1 million).
3. Employment costs increased by R12.2 million, from R53.2 million to R65.4
million. Huge Telecom`s fixed overhead platform has the capacity to
support a twofold increase in volumes. Accordingly, revenue growth now
has the potential to further improve operating profit margins. The
increased employment costs were the result of a decision to build a
strong foundation capable of supporting significant growth in
throughput. This is regarded by the Huge directors as an investment in
delivering sustainable profit growth.
4. The level of bad debts increased to R20.7 million as the Group focused
on the management, analysis and categorisation of the debtors books of
Huge Telecom and CentraCell. A significant proportion of the debtors
written off in 2010 relate to sales or revenue generated in prior
financial years for which a provision of R12.7 million was raised. As
such, the level of bad debts in the current financial year is not
indicative of a higher bad debt incidence in Huge Telecom in the current
period. Management estimates that a normalised bad debt to revenue ratio
of 1% is representative of the inherent risks in a business such as Huge
Telecom. Huge Telecom`s current policy in providing for possible bad
debts is as follows:
a. 100% of all debtors older than 120 days with an active, credit
pending, credit approved, installation on hold, or installation
pending status; and
b. 100% of all debtors with a hand over pending, liquidated,
suspended, handed over, or disconnected status; and
c. 50% of all debtors on a payment plan.
5. The Group successfully streamlined its remaining operating expenses
which decreased by R3.4 million from R25.0 million to R21.6 million.
GROUP PROFIT
The substantial improvement in Group profit before tax of R19,2 million which
was achieved in the six months to February 2010 offset the loss of R11,0
million reported after the first six months of the financial year. As a
result, the Group reported net profit before taxation of R8,3 million for the
full year ended 28 February 2010, reflecting an increase of 90% from the
previous year`s profit of R4,3 million.
Profit after tax showed the corresponding effect with net profit after tax
for the second half of the year amounting to R13,8 million, reversing the
loss which was reported at the interim stage of R5,8 million. The Group
achieved net profit after tax for the full year of R8,1 million, up 8.5% from
the 2009 financial year.
GROUP NET CHANGE IN FAIR VALUE OF FINANCIAL INSTRUMENTS
The net change in fair value of financial instruments has improved by R29.7
million from a loss of R21.3 million in the prior year to a gain of R8.4
million. The change is mainly as a result of the release of the vendor loan
of R18.2 million to profit after a cession agreement with J Morelis was
successfully concluded by the group. The loss on SSF and CFD transactions
reduced by R15.6 million from R25.6 million in the prior year to R10 million
in the current year.
BALANCE SHEET CONSIDERATIONS
Cash generated from operations during the current financial year amounted to
R46.2 million while earnings before interest, taxation, depreciation and
amortisation (EBITDA) for the current financial year amounted to R36.8
million.
Capital expenditure during the current financial year was reduced by R 18.4
million compared to the previous financial year, while long-term debt was
reduced by R20.9 million during the current financial year.
FUTURE PROSPECTS
In the next period, the Group anticipates increasing returns from its
investment in Huge Telecom. In addition, the Group expects the growth of Huge
Media and Eyeballs to contribute to Group returns.
Investor interest in Eyeballs is growing and is indicative of the underlying
value of this investment.
Investment Holding Activities
An independent valuation of Huge Group`s shares in May 2010 established a
value per share of between 182 cents and 236 cents per share using the
discounted cash flow method of valuation.
The Group will continue to purchase shares that trade at a discount to its
fair value under its general authority to repurchase. This general authority
is limited to a maximum of 20% of the issued ordinary share capital and will
be utilised by Huge in order to unlock long term value for shareholders.
Telecommunication Activities
Huge Telecom will remain focused on providing a complete spectrum of managed
telecommunication services to South African businesses. Having enhanced the
profitability of its recently integrated business, Huge Telecom is well
positioned to benefit directly from increased managed services sales once the
South African economic recovery gains momentum. In 2010, the division
increased its resource pool and strengthened its information systems to
reduce effective input costs per call and create a solid base for operating
margin growth. Huge Telecom has evolved from its roots of least cost routing
into a telecommunications service provider delivering efficient
Communications Expense Management.
Huge Telecom continues to monitor developments in the telecommunications
industry to ensure that its business model is both optimal and sustainable.
Its highly motivated new executive team is focused on managing the business
for profitable growth and superior service delivery.
Huge Telecom stands to benefit from the regulatory reduction in termination
rates (interconnect tariffs). ICASA, the telecommunication industry
regulator, is exerting pressure on mobile operators to reduce their
termination rates. This led to a reduction from R1.25 per minute to R0.89 on
1 March 2010, with further decreases anticipated in July 2010. ICASA also
recently announced its new proposed categorisation rules for network
operators. These will put voice over IP (VoIP) services providers in the same
category as fixed line network operators. A significant recent development is
that ICASA has called for a further reduction in fixed line termination rates
to R0.15 per minute in July 2010 while mobile termination rates are only
expected to reduce to R0.65 per minute.
The significant reduction in termination rates for fixed line networks could
pose an imminent threat to those Least Cost Routing ("LCR") companies in
Huge`s peer group that invested heavily in recent years to build VoIP
infrastructure.
While these players may have briefly enjoyed additional revenue streams on
incoming voice traffic, their investments are at risk of being rendered
unprofitable long before their expected break-even point if the proposed
lower fixed line termination rates come into effect in July 2010.
Huge Telecom`s strategic decision not to adopt a VoIP-dominated business
model has meant that its economic viability will not be affected by these
possible changes.
Huge Telecom welcomes lower termination rates on the basis that lower
communication costs will drive down input costs, increase demand and deliver
growth in the voice traffic generated by Huge Telecom clients.
In the year ahead, Huge Telecom will focus on introducing alternative revenue
streams that complement its business. It will also pursue opportunities to
increase its client base to enhance capacity utilisation and further improve
gross and operating profit margins.
Media Activities
Having established the commercial viability of its product set, Eyeballs is
exploring partnerships to deploy its offerings in the international market.
This start-up business is well placed to achieve breakeven profitability in
the year ahead.
Huge Media is on track to achieve critical mass of its growing recipient base
in the South African mobile advertising market, which will confirm its
commercial viability in the year ahead.
GENERAL REPURCHASE OF SHARES FOR CASH
From 1 March 2009 to the end of the 2010 financial year Huge Telecom, being a
wholly owned subsidiary of the company, repurchased 4 053 689 shares in
accordance with Section 85 of the Companies Act. The cost of shares acquired
was R2 393 334.
LEGAL AND REGULATORY REQUIREMENTS
The auditor`s opinion referred to below has been modified because they have
identified what they believe to be a reportable irregularity.
However, the company`s directors believe that, having regard to the
information currently available, no reportable irregularity has, or is,
taking place for the reasons set out below.
The auditors have advised that, in terms of section 44(2) and 44(3) of the
Auditing Profession Act, 26 of 2005 (the "Auditing Profession Act"), the
auditors have a duty to report to the shareholders of the company where they
have identified unlawful acts or omissions committed by persons responsible
for the management of the company, which constitute reportable irregularities
in terms of the Auditing Profession Act.
The auditors have submitted a report in terms of section 45 of the Auditing
Profession Act to the Independent Regulatory Board of Auditors ("IRBA")
stating that they have reason to believe that a reportable irregularity has
taken place in relation to the acquisition by the company of 80 455 single
stock futures contracts ("SSF contracts") over ordinary shares of the company
on 16 October 2008 (the "Relevant Transaction").
The auditors have advised the directors that a reportable irregularity is
defined by the Auditing Profession Act as any unlawful act or omission by any
person responsible for management of an entity which:
a. has caused, or is likely to cause, material financial loss to the
entity, its creditors, shareholders or investors; or
b. is fraudulent or amounts to theft; or
c. represents a material breach of fiduciary duty owed by such person to
the entity or any partner, member, shareholder, creditor or investor of
the entity under any law applying to the entity or the management
thereof.
The directors of the company are required in terms of the provisions of the
Auditing Profession Act to report back to the auditors as to whether:
a. no reportable irregularity has/is taking place; or
b. the suspected reportable irregularity is no longer taking place and
adequate steps have been taken for the prevention or recovery of any
loss as a result thereof; or
c. the reportable irregularity is still occurring.
Having regard to the information currently available to the directors of the
company, no reportable irregularity has, or is, taking place for the reasons
set out below.
It is apparent from the content of the auditors letter to IRBA that the
foundation for their contention that a reportable irregularity has taken
place is the decisions of the JSE Limited (the "JSE") in relation to the
Relevant Transaction as reflected in the letters from the JSE to two
directors of the company (the "Relevant Directors") dated 9 April 2009 (the
"9 April 2009 Letter") and 9 October 2009 (the "9 October 2009 Letter")
respectively.
In the 9 April 2009 Letter the JSE recorded its decision as follows:
"
6. The JSE has decided that the actions of the Directors amount to a
material breach of their fiduciary duties towards the Company and its
shareholders. Section 3.62 of the JSE Listings Requirements stipulates that
directors are bound by and must comply with the JSE`s Listings Requirements
in their capacities as directors, and in their personal capacities.
7. The Directors` actions in respect of the Company`s acquisition of the
SSF positions resulted in the breach of the JSE`s Listings Requirements by
Huge as communicated in our letter of 12 February 2009 in that:
(i) the Company`s acquisition of the Directors` SSF positions constitutes a
specific repurchase of the Company`s securities as defined in section 5.69 of
the JSE`s Listings Requirements and
(ii) the Company`s acquisition of the SSF positions is a transaction with a
related party.
(iii) In these circumstances, the JSE decided that the Company`s
acquisition of the SSF positions amounts to a contravention of section 5.69
of the JSE Listings Requirements and of section 85 of the Companies Act.
"
In the 9 October 2009 Letter the JSE recorded its decisions as follows:
"
6. The JSE has considered all the facts and information at its disposal and
has decided to impose a public censure on the Directors as well as a fine of
R5 million on each of the Directors as a result of the Directors` actions in
respect of Huge`s purchase of the SSF positions that have resulted in the
breach of section 5.69 of the Listings Requirements by Huge and the Directors
in that:
(i) the Company`s acquisition of the Directors` SSF positions constitutes a
specific repurchase of the Company`s securities as defined in section 5.69 of
the JSE`s Listings Requirements;
(ii) the Company`s acquisition of the SSF positions was a transaction with a
related party; and
(iii) the Directors` actions caused the Company to be in breach of the
peremptory provisions of the Listings Requirements in respect of a specific
repurchase of the Company`s securities from related parties.
"
It is apparent ex facie the 9 April 2009 Letter and the 9 October 2009 Letter
that the JSE did not make any express finding of an unlawful act or omission
by the Relevant Directors (as persons responsible for the management of the
company) which:
a. has caused, or is likely to cause, material financial loss to the
company or its creditors, shareholders or investors; or
b. is fraudulent or amounts to theft.
Having regard to the decisions set out in the 9 April 2009 Letter and the 9
October 2009 Letter (the "Relevant Decisions") there is consequently no basis
to suggest that a reportable irregularity has occurred within the definition
of that term described above.
It is correct that in the 9 April 2009 Letter the JSE made a finding of a
breach by the Relevant Directors of their fiduciary duties towards the
company and its shareholders.
The company has been advised by its legal representatives that the finding
that the Relevant Directors have breached fiduciary duties to the
shareholders of the company has no legal foundation, since the company`s
legal representatives have confirmed that at common law the directors of the
company owe fiduciary duties to the company only and not to its shareholders.
It will be noted that no reference was made by the JSE to a finding of a
breach of fiduciary duties when imposing sanctions on the Relevant Directors
in the 9 October 2009 Letter and in the ambit of the findings of the JSE is
therefore a matter of debate.
Even if it is correct that the JSE has made a decision that the Relevant
Directors have acted in breach of their fiduciary duties to the company
(which is not admitted) then the company is advised by its legal
representatives that such decision is not final. This is apparent from
section 1.3 of the Listings Requirements of the JSE (the "Listings
Requirements") which states inter alia as follows:
"Where the JSE exercises its discretion in terms of these Listings
Requirements, it shall use its sole discretion and, subject to the provisions
of paragraphs 1.4 and 1.5 below, judicial review and the appeal provisions in
SSA, its ruling shall be final." (emphasis added)
The reference in section 1.3 of the Listings Requirements to "SSA" is to the
Securities Services Act, No. 36 of 2004 (the "Securities Services Act").
The directors of the company confirm that the Relevant Directors have lodged
an appeal (the "Appeal") against the Relevant Decisions (including the
finding of a breach by the Relevant Directors of their fiduciary duties to
the company) in terms of section 111 of the Securities Services Act as read
with regulation 2 of the Regulations published in terms of section 26B(19) of
the Financial Services Board Act, 97 of 1990. The Appeal is predicated inter
alia on the grounds that:
1. the JSE has no jurisdiction to make a finding that the Relevant
Directors breached their fiduciary duties to the company;
2. the finding that the Relevant Directors breached their fiduciary duties
to the company is based on factual conclusions that have no proper
evidentiary foundation and are incorrect; and
3. the JSE was incorrect in finding that the Relevant Directors have
breached their fiduciary duties to the company.
In their Notice of Appeal the Relevant Directors seek inter alia an order
that the Relevant Decisions (including the finding of a breach by the
Relevant Directors of their fiduciary duties to the company) be set aside.
The company has been advised by its legal representatives that the Appeal
will be adjudicated upon by an Appeal Panel constituted by the Financial
Services Board on a future date to be determined by the Financial Services
Board. At present therefore the status of the matter is that the 9 April
2009 Decision and the 9 October 2009 Decision are provisional decisions of
the JSE which are sub judice in that they are the subject of pending
litigation, which may be set aside by the Appeal Panel. In the result the
JSE has not to date made any final decision of a breach by the Relevant
Directors of any of their fiduciary duties to the company and there is
consequently currently no proper basis to conclude that a reportable
irregularity has taken place within the definition of that term contemplated
above. In the result the directors confirm that, having regard to the
information currently available to the directors of the company, no
reportable irregularity has, or is, taking place. The directors undertake
however to furnish a further report to the shareholders of the company once
the Appeal process has been finalised.
SUBSEQUENT EVENTS
There are no subsequent events that require adjustment or disclosure.
CHANGES TO THE BOARD OF DIRECTORS AND COMPANY SECRETARY
With effect from 1 March 2009, Mrs Michelle Allison Meth was appointed to the
board of directors.
With effect from 12 August 2009, Mr Steve Tredoux became a non executive
director of Huge.
With effect from 9 December 2009, Mr Michael Ronald Beamish was appointed a
non executive to the board of directors.
DIVIDENDS
No dividends were paid or declared during the financial year ended 28
February 2010.
GOVERNANCE
The Group recognises the need to conduct its business with integrity,
transparency and equal opportunity and subscribes to the spirit of good
corporate governance as set out in the King II Report on Corporate
Governance.
AUDIT OPINION
KPMG Inc. has audited the consolidated financial statement from which the
financial information set out in this report has been derived. Their
unqualified audit report on the financial statements is available for
inspection at the group`s registered office. The auditors have in accordance
with their responsibilities in terms of section 44(2) and 44(3) of the
Auditing Profession Act, reported a reportable irregularity to the
Independent Regulatory Board for Auditors. The matter pertaining to the
reportable irregularity is described above.
Johannesburg
31 May 2010
Designated Advisor
Arcay Moela Sponsors (Proprietary) Limited
Number 3, Anerley Road, Parktown, 2193
Auditors
KPMG Inc.
KPMG Crescent
85 Empire Road, Parktown, 2193
Registered office:
Block 2, Woodlands Drive Office Park, 5 Woodlands Drive, Woodmead,
Johannesburg, 2191 (PO Box 16376, Dowerglen, 1610)
Transfer secretaries
Computershare Investor Services (Proprietary) Limited, Ground Floor, 70
Marshall Street, Johannesburg
Directors:
AD Potgieter (Executive Chairman), BA McQueen*, SP Tredoux*, D Tredoux*, KD
Jarvis*, MR Beamish*, JC Herbst (CEO), MA Meth (Financial Director), VM
Mokholo, M Pillay
*Non-executive
Date: 01/06/2010 07:42:01 Produced by the JSE SENS Department.
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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,
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