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MGX - Reviewed Group Results for the year ended 30 June 2002
MGX Holdings Limited
Reviewed Group Results for the year ended 30 June 2002
Delivering The Information Advantage
Financial summary
* Revenue up 70% to R1,5 billion
* Operating income up 55%
* Headline earnings up 17%
* Headline EPS before discontinued operations up 8,6%
* Headline EPS after discontinued operations down 5,5%
Introduction
During the year under review most of the MGX operating companies performed well
despite extremely difficult trading conditions. The group showed strong growth
in both revenue and operating profits. The results, however, were adversely
affected by a longer than expected integration process of the Computer
Configurations Holdings Limited (CCH) operations which had a negative effect on
the profit, cash flow and gearing levels. This is discussed in more detail
below. As a result, headline earnings per share, before discontinued items, was
8,6% above the restated headline earnings per share of last year and 5,5% below
that of last year after discontinued operations.
Trading results
The year under review includes the operations of CCH, EC-Hold Limited ("EC-
Hold") and enTechnologies ("enTech") as subsidiaries for the full year. The
comparative figures include the operations of CCH for four months only.
Operating income increased 55,0% from R119,6 million to R185,4 million on a
69,5% increase in revenue from R885,1 million to R1 500,4 million. The increase
in operating income is a commendable performance in the current trading climate
and a credit to the teams involved. Operating margins were at 12,4% compared to
13,5% last year. Headline earnings rose by 16,6% from R74,9 million to R87,3
million.
Headline earnings per share, before discontinued operations, rose by 8,6% to
150,9 cents and after discontinued operations fell by 5,5% to 131,2 cents.
As discussed in the next section, headline earnings per share for 2001 was 157,3
cents before restatement. The comparable figure for 2002, before restatement and
discontinued operations, is 167,5 cents per share.
MGX Business Continuity Solutions, Software Futures, MGX Enterprise Solutions,
Drive Control Corporation and the Metrofile Content Management group largely met
or exceeded their targets for the year. MGX Storage Solutions had its toughest
year on record and performed well below expectations. Didata UK, EC-Hold and
enTech all fell short of their targets for the year.
In addition to the above, MGX had to carry the costs of tendering for several
large government projects which have not yet borne fruit but should make a
contribution next year. The integration and rationalisation of the CCH
operations took longer than expected resulting in higher costs than anticipated.
Interest paid was much higher than expected as MGX has had to take on to its
balance sheet a significant amount of debt relating to CCH lease commitments. In
addition, total liabilities of CCH have proved to be higher than were originally
disclosed. Due to the nature of these undisclosed liabilities, and supported by
the findings of the recent audit, MGX is to undertake a forensic audit to
investigate these liabilities.
Change in accounting treatment for enTechnologies and restatement of earnings
for 2001
MGX holds convertible preference shares in enTech, a USA company, which have the
right to convert into 50% of the ordinary shares. enTech is a service provider
in the IBM Websphere space. As enTech was a start-up business it was anticipated
in its business plan that it would take at least two years before the company
broke even and therefore MGX intended to reflect its interest in enTech as an
investment, which would not affect headline earnings. However, MGX has the right
to control the board. On a strictly technical basis this qualifies enTech as a
subsidiary of MGX and, as a consequence, immediately prior to finalising the
results for the year, the auditors required that enTech`s results be
consolidated. As enTech commenced business in late 2000, this change in
accounting treatment has required a restatement of the 2001 earnings.
The effect can be quantified as follows:
2002 2001 % change
Headline
earnings per
share
excluding
effect of
enTech and 167,5 157,3 +6,5
excluding
discontinued
operations
Restated 150,9 138,9 +8,6
headline
earnings per
share
including
enTech and
excluding
discontinued
operations
Discontinued operations
Discontinued operations are separately disclosed as these are non-recurring
closure costs relating to certain CCH businesses.
2002 2001 % change
Restated
headline
earnings per
share
including
enTech and 150,9 138,9 + 8,6
excluding
discontinued
operations
Headline
earnings per
share
including
enTech
and 131,2 138,9 -5,5
discontinued
operations
Discontinued operations and enTech were not accounted for in the interim results
to December 2001. To make comparison meaningful these will be accounted for in
the comparative figures when the interim results to December 2002 are published.
Cash flow and funding
The group generated positive cash flow from operations of R222 million before
net investment in working capital of R50,1 million. Cash outflow in respect of
fair value adjustments arising from the CCH acquisition amounted to R42,8
million.
The investing activities of R176,9 million comprises predominantly additions to
fixed assets of R168,8 million, of which R47,1 million was in Didata UK.
The cash inflow from financing activities of R164,2 million arose from funds
invested by the minority shareholders of Didata UK of R28,4 million and R139,8
million of borrowings raised.
The agreement to settle the Peregrine loan mentioned below had the effect of
reducing long-term debt by R140 million and increasing short-term debt by R69
million. An exercise is being conducted with our major stakeholders to embark on
a capital restructuring programme to implement a more appropriate capital
structure for MGX. This programme is likely to be implemented in the near
future.
Peregrine
As advised to shareholders on 20 February 2002, MGX reached an agreement with
Peregrine whereby Peregrine invested R140 million in the form of a Convertible
Promissory Note (the "Peregrine loan"). As a result of recent senior management
changes at Peregrine, MGX was approached by Peregrine to renegotiate the terms
of the Peregrine loan and an agreement was concluded whereby MGX settled the
Peregrine loan and achieved a capital profit of R12,0 million in addition to a
benefit of R29,3 million gained by returning inventory that was carried at no
value to the group. The net amount due to Peregrine which amounted to R69
million, is reflected in short-term interest-bearing borrowings and was repaid
after year-end. MGX remains a distributor of Peregrine software products into
Africa.
Black economic empowerment
During the year under review, good progress was made in implementing an
empowerment profile throughout the organisation. Our goal is to achieve
transformation through a properly conceived and executed black economic
empowerment strategy appropriate to all stakeholder groups. We are currently in
negotiations with various empowerment groups regarding an investment by them in
MGX or its operating companies.
EC-Hold Limited
The reasons for the ruling given by the Securities Regulation Panel (SRP) on 18
March 2002 regarding the EC-Hold matter were received on 9 August 2002. The
board of directors of MGX will consider these reasons and take legal opinion in
order to decide upon an appropriate course of action. Based on a worst-case
scenario, the implications of the current SRP ruling would be to increase the
cost of MGX`s investment in EC-Hold by a maximum of R30 million.
Subsequent to the year-end, MGX has purchased all the EC-Hold shares held by the
Mandy Rebecca Price Trust, totalling 16,7 million shares, at a price of R1,00
per share. MGX now owns 89% of EC-Hold.
Software Futures
Shareholders were advised on 2 July 2002 that MGX had signed a memorandum of
understanding relating to the potential acquisition by Paracon Holdings Limited
of a 100% shareholding in MGX Software Futures (Pty) Limited, a subsidiary of
MGX.
On 20 August 2002 Paracon announced that it has satisfactorily completed its due
diligence of Software Futures and Paracon and MGX are in the process of
concluding a formal agreement regulating the acquisition.
Changes to the board of directors of MGX
Shareholders were advised on 12 August 2002 that, as a consequence of the
recommendations of the Second King Report on Corporate Governance ("King II"),
including the recommendation of an independent non-executive chairperson, Ronnie
Price decided to step down as non-executive chairperson with immediate effect.
He and his wife, Linda Wengrowe, simultaneously resigned as directors of MGX.
The board is considering the appointment of additional non-executive directors
to comply with the recommendations of King II and to strengthen the empowerment
characteristics of the board.
In the interim, independent non-executive deputy chairperson, Patrick Landey,
has been appointed acting chairperson of MGX.
The board expresses its thanks to Ronnie and Linda for their valuable
contribution over many years.
Prospects
Whilst the past year has without doubt been the most challenging in MGX`s seven
years as a listed company there are some encouraging signs for the future.
Following a recent strategic review the group structure has been further refined
into three main business units namely Metrofile (formerly Content Management),
MGX Solutions (incorporating Enterprise Solutions, Storage Solutions and
Business Continuity Solutions) and Software Futures. An aggressive cost
reduction programme has been implemented to ensure that all central costs are
borne by the operating units and MGX`s head office has been reduced to the bare
minimum. The business units are autonomous, focused and well placed to achieve
their targets.
In addition, we are confident that the legacy costs of the CCH acquisition are
now under control and should not adversely affect our future trading
performance, other than a higher interest expense as a result of the higher
levels of gearing. The CCH acquisition has proved to be expensive and has placed
a financial burden on MGX. However, the strategic reasons for acquiring CCH
remain valid and the CCH staff who joined us have performed well.
The tough trading environment is expected to continue in the coming year. MGX
will continue to focus on the financial fundamentals of achieving solid annuity
income and strong operating cash flows.
Accounting policies
The accounting policies used in the preparation of the financial statements for
the year ended 30 June 2002 comply with Generally Accepted Accounting Practice
and are consistent with those applied in the prior year, other than the effects
of AC135, which has been accounted for as a prior-year adjustment.
Review by independent auditors
The financial information set out in this announcement has been reviewed, but
not audited by Deloitte & Touche, whose review reports are available for
inspection at the company`s registered office.
Dividends
The policy of the group remains that, at the present time, the interests of
shareholders are best served if MGX does not pay a dividend, as cash generated
will be used to reduce debt.
Staff
The board of directors of MGX would like to extend its sincere thanks and
appreciation to all the loyal employees of MGX who have made such a valuable
contribution during an extremely difficult year.
21 August 2002
Directors: P A Landey* (Chairman), C S Hills (Chief Executive), D E Baloyi*, R T
Dalais* (Alternate: E Gutierrez-Garcia*),
A E Ling, D J J McMahon, R D Shirley, N J Webster * (*Non-executive)
Company secretary: R D Shirley
Transfer secretaries: Computershare Investor Services Limited, 8th Floor, 11
Diagonal Street, Johannesburg, 2001
MGX Holdings Limited Reg No: 1983/012697/06 Share Code: MGX ISIN Code:
ZAE000009262
Registered office: 126, 14th Road, Erand Gardens, Midrand. PO Box 1697, Bramley,
2018.
www.mgxgroup.com
Summarised consolidated income statement
Reviewed Audited
12 Months 12 Months
ended ended
30 June `02 30 June `01
R`000 R`000
Revenue 1 500 438 885 066
Operating income
before depreciation
and
goodwill 227 628 150 255
amortisation
Depreciation 42 235 30 670
Operating income 185 393 119 585
before goodwill
amortisation
Goodwill 82 895 18 854
amortisation
Net operating 102 498 100 731
income
Exceptional items 22 701 37 583
Ordinary profit 79 797 63 148
before finance
costs
Net finance costs 45 842 14 262
Ordinary profit 33 955 48 886
before taxation
Taxation 33 804 33 067
Ordinary profit 151 15 819
before associate
income
Associate income 2 020 15 069
Ordinary profit 2 171 30 888
before minorities
Minority (6 184) 684
shareholders`
interest
Attributable 8 355 30 204
earnings
Weighted average
number of ordinary
shares in issue 66 563 53 924
(thousands)
Headline earnings
per ordinary share
(cents)
including 131,2 138,9
discontinued
operations
Headline earnings
per ordinary share
(cents)
excluding 150,9 138,9
discontinued
operations
Headline earnings
per ordinary share
(cents)
excluding 167,5 157,3
enTechnologies and
discontinued
operations
Earnings per 12,6 56,0
ordinary share
(cents)
Headline earnings
reconciliation
Attributable 8 355 30 204
earnings
Profit on (10 929)
restructure of long-
term debt
Capital profit on (1 907)
investments
Amortisation of 82 895 18 854
goodwill
Exceptional items 3 908 37 583
of a capital nature
Capital profit from (12 096)
associate
Loss on sales of 4 997 371
assets
Headline earnings 87 319 74 916
Summarised consolidated balance sheet
Reviewed Audited
as at as at
30 June `02 30 June `01
R`000 R`000
Equity and
liabilities
Ordinary 473 766 456 288
shareholders`
interest
Outside 8 358 851
shareholders`
interest
Deferred taxation 2 484 1 941
liability
Non-current
liabilities
Non-interest- 56 107 1 200
bearing
Interest-bearing 136 631 117 621
Current liabilities 701 733 625 284
Trade payables 147 925 118 149
Other payables and 150 666 185 458
accruals
Deferred revenue 58 250 31 954
Bank overdrafts 97 435 169 313
Taxation 12 751 14 034
Short-term portion
of long-term debt
Non-interest- 5 140 51 462
bearing
Interest-bearing 229 566 54 914
1 379 079 1 203 185
Assets
Property, plant and 319 537 235 368
equipment
Intangibles 413 488 358 883
Deferred taxation 74 843 61 949
asset
Financial assets 49 517 51 748
Non-current assets 10 516 3 206
Current assets 511 178 492 031
Inventory 68 450 37 692
Trade receivables 308 328 298 305
Other receivables 74 322 42 369
Short-term 18 000
financial assets
Cash resources 60 078 95 665
1 379 079 1 203 185
Number of ordinary
shares in issue
(excluding treasury 66 626 66 113
shares)
Summarised consolidated cash flow statement
Reviewed Audited
12 Months 12 Months
ended ended
30 June `02 30 June `01
R`000 R`000
Cash generated from
operations before
working capital 221 993 139 988
changes
Cash effects of (42 824)
fair value
adjustments
Increase in net (50 142) (28 766)
working capital
Cash generated from 129 027 111 222
operations
Net finance costs (45 842) (14 262)
Taxation paid (34 112) (25 836)
Cash flow from 49 073 71 124
operating
activities
Cash flow from (176 922) (242 820)
investing
activities
Cash flow from 164 183 (24 834)
financing
activities
Net 36 334 (196 530)
increase/(decrease)
in cash and cash
equivalents
Cash and cash (73 648) 122 803
equivalents at
beginning of year
Translation (43) 79
difference on
opening cash
position
Cash and cash (37 357) (73 648)
equivalents at end
of year
Statement of changes in equity
for the year ended 30 June 2002
Non- Distri-
distri-
Share Share butable butable
capital premium reserve reserve Total
Balance at 30
June 2001 as
previously 410 200 988 (679) 266 783 467 502
stated
Prior-year 1 415 (12 629) (11 214)
adjustment
Restated
balance at
30 June 2001 410 200 988 736 254 154 456 288
Attributable 8 355 8 355
earnings -
2002
Impairment of
share
incentive (6) (3 656) (3 662)
shares
Treasury 3 4 463 4 466
shares
Revaluation
of associate
in subsidiary 6 833 6 833
Share issuing -
expenses
Vendor loan 7 600 7 600
released in
subsidiary
FCTR (6 114) (6 114)
movements
Balance at 30 407 201 795 9 055 262 509 473 766
June 2002
Date: 22/08/2002 10:52:03 AM Produced by the JSE SENS Department
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