Provisional condensed reviewed results of Huge for the year ended 28 February 2011
28 June 2011 - Huge Group
Huge Group Limited - Provisional condensed reviewed results of Huge for
the year ended 28 February 2011
HUGE GROUP LIMITED
(Registration number 2006/023587/06)
Share code: HUG ISIN: ZAE000102042
("Huge" or "the Group" or "the company")
PROVISIONAL CONDENSED REVIEWED RESULTS OF HUGE FOR THE YEAR ENDED 28 FEBRUARY
2011
HIGHLIGHTS FOR THE FINANCIAL YEAR
- Basic loss per share of 15.33c
- Headline loss per share of 15.41c
- Significant beneficial changes in Huge Telecom and CentraCell`s
regulatory environment
- Significant changes to Huge Telecom and CentraCell`s market structure
- Maintenance of sales volumes at Huge Telecom and CentraCell
- Cessation of connection incentive bonuses received by Huge Telecom and
CentraCell from the mobile network operators
- Strategic positioning of Huge Telecom and CentraCell to benefit from
changing regulatory environment
- Decision to sell loss making subsidiary Huge Media
- Continued shareholder value creation through active share repurchase
programme
- Net asset value per share of 245.54c
The board of directors ("the Board") of Huge is pleased to present the
condensed reviewed financial results for the year ended 28 February 2011.
PROVISIONAL CONDENSED REVIEWED RESULTS FOR THE YEAR ENDED 28 FEBRUARY 2011
Provisional Condensed Consolidated Income Statement
Reviewed Unaudited Audited
28 February 31 August 28 February
2011 2010 2010
(12 months) (6 months) (12 Months)
Total revenue 523 771 553 275 371 023 573 516 182
Gross profit 89 667 748 52 590 049 119 495 995
Other income 1 200 715 614 916 830 975
Operating expenses (114 763 516) (57 440 528) (117 045 158)
Operating (loss) profit from (23 895 053) (4 235 563) 3 281 812
operations
Investment income 3 733 895 3 202 968 4 485 384
Net change in fair value of 5 126 817 13 705 772 8 360 236
financial instruments
(Loss) income from equity (952 298) (483 934) 166 284
accounted investments
Finance costs (2 999 875) (1 419 221) (8 038 923)
(Loss) profit before taxation (18 986 514) 10 770 022 8 254 793
Income tax expense 2 111 745 (1 676 910) (187 087)
Net (loss) profit for the period (16 874 769) 9 093 112 8 067 706
Non-controlling interest (1 897 957) 464 005 961 153
Net (loss) profit attributable to (14 976 812) 9 557 117 9 028 859
owners of the company
(Loss) earnings before interest, (1 080 604) 21 388 735 36 865 712
taxation, depreciation and
amortisation
Basic (loss)earnings per share (15.33) 9.49 8.58
(cents)
Headline (loss)earnings per share (15.41) 9.42 8.79
(cents)
The Diluted earnings per share
and diluted headline earnings per
share are the same as there are
no instruments which result in a
dilution.
Total number of shares in issue 95 901 95 901 102 112
(`000)
Weighted average number of shares 97 663 100 752 105 199
in issue (`000)
(Loss) earnings attributable to (14 976 812) 9 557 117 9 028 859
owners of the company
Adjusted for:
Profit on disposal of property, (104 556) (66 600) (59 957)
plant and equipment
Profit on disposal of investments (3 396) - -
Loss on acquisition of Eyeballs - - 366 773
Mobile Advertising
Tax effect 30 226 - (86 346)
Headline (loss) earnings (15 054 538) 9 490 517 9 250 892
Provisional Condensed Consolidated Statement of Financial Position
Reviewed Unaudited Audited
28 February 31 August 28 February
2011 2010 2010
(12 months) (6 months) (12 Months)
Assets
Non-current assets
Property, plant and equipment 38 901 193 36 856 468 43 573 867
Goodwill 215 153 473 215 153 482 215 153 482
Intangible assets 17 716 060 22 196 773 22 106 583
Investments in joint venture 387 558 383 042 540 291
Investments in associates 1 591 107 2 063 986 2 390 672
Investments 305 587 389 409 389 409
Loans to associate companies - 234 972 -
Deferred tax 10 511 199 3 996 975 9 497 797
284 566 177 281 275 107 293 652 101
Current assets
Inventories 43 749 852 28 200 363 14 825 421
Trade and other receivables 69 486 872 124 677 772 101 809 367
Derivative asset 8 554 970 11 092 946 6 260 537
Loans to associate companies 1 779 083 1 710 925 1 637 478
Current tax receivable 1 429 577 1 797 816 2 488 386
Cash and cash equivalents 11 933 887 13 540 511 11 430 271
136 934 241 181 020 333 138 451 460
Total assets 421 500 418 462 295 440 432 103 561
Equity and liabilities
Equity
Share capital 9 590 9 590 10 211
Share premium 221 108 366 221 073 428 226 429 430
Reserves 28 888 1 215 038 1 215 038
Retained earnings 14 330 091 38 864 016 29 306 900
Equity attributable to owners of 235 476 935 261 162 072 256 961 579
the company
Non-controlling interests (1 272 805) 257 495 721 499
234 204 130 261 419 567 257 683 078
Non-current liabilities
Finance lease obligations 439 094 1 293 153 4 171 704
Deferred tax 2 385 861 - 3 885 162
2 824 955 1 293 153 8 056 866
Current liabilities
Loans from associate companies 1 212 057 809 006 2 208 308
Loans from shareholders 654 951 4 425 603 8 973 884
Other financial liabilities 1 630 832 850 649 2 606 254
Finance lease obligations 3 674 139 5 547 100 5 199 529
Trade and other payables 155 001 410 187 229 288 147 046 548
Shareholders for dividends 14 952 14 952 14 952
Bank overdraft 21 955 871 - -
Current tax payable 327 121 706 122 314 140
184 471 335 199 582 720 166 363 615
Total liabilities 187 296 288 200 875 873 174 420 481
Total equity and liabilities 421 500 418 462 295 440 432 103 561
Net asset value per share (cents) 245.54 272.32 251.64
Net tangible asset value per 2.72 24.83 19.29
share (cents)
Provisional Condensed Consolidated Statement of Comprehensive Income
Reviewed Unaudited Audited
28 February 31 August 28 February
2011 2010 2010
(12 months) (6 months) (12 Months)
Net (loss) profit for the period (16 874 769) 9 093 112 8 067 706
Other comprehensive income
(Decline) gain on property (624 998) - 797 044
revaluation
Taxation related to components of 140 602 - (537 865)
other comprehensive income
Other comprehensive (loss) income (484 396) - 259 179
for the year net of taxation
Total comprehensive (loss) income (17 359 165) 9 093 112 8 326 885
for the period
Total comprehensive (loss) income (15 461 208) 9 557 117 9 288 038
for the period attributable to
the owners of the company
Total comprehensive (loss) income (1 897 957) (464 005) (961 153)
for the period attributable to
the non-controlling interest
Provisional Condensed Consolidated Statement of Changes in Equity
Share Share Reval- Share option
capital premium uation reserve
reserve
Balance at 29 February 10 617 228 822 358 296 467 -
2009
Profit for the year - - - -
Total other comprehensive - - 259 179 -
income (loss)
Purchase of own shares (406) (2 392 928) - -
Share option - - - 659 392
Non controlling interest - - - -
in business combination
Balance at 28 February 10 211 226 429 430 555 646 659 392
2010
Profit for the period - - - -
Total other comprehensive - - - -
income (loss)
Purchase of own shares (621) (5 321 064) - -
Balance at 31 August 2010 9 590 221 108 366 555 646 659 392
Loss for the period - - - -
Total other comprehensive - - (484 396) -
income (loss)
Rights to share options - - - (701 754)
Non controlling interest - - - -
in business combination
Balance at 28 February 9 590 221 108 366 71 250 (42 362)
2011
Provisional Condensed Consolidated Statement of Changes in Equity (continued)
Retained Equity Non
earnings attributable controlling
(accumulated to equity interest
loss) holders of
the Group
Balance at 29 February 20 278 044 249 407 486 -
2009
Profit for the year 9 028 859 9 028 859 (961 153)
Total other comprehensive - 259 179 -
income (loss)
Purchase of own shares - (2 393 334) -
Share option - 659 392 -
Non controlling interest - - 1 682 652
in business combination
Balance at 28 February 29 306 903 256 961 582 721 499
2010
Profit for the period 9 557 117 9 557 117 464 005
Total other comprehensive - - -
income (loss)
Purchase of own shares - (5 321 685) -
Balance at 31 August 2010 38 400 015 260 733 009 1 185 504
Loss for the period (24 533 929) (24 069 924) (2 361 962)
Total other comprehensive - (484 396) -
income (loss)
Rights to share options - (701 754) -
Non controlling interest - - (96 347)
in business combination
Balance at 28 February 14 330 091 235 476 935 (1 272 805)
2011
Provisional Condensed Consolidated Statement of Cash Flows
Reviewed Unaudited Audited
28 February 31 August 28 February
2011 2010 2010
(12 months) (6 months) (12 Months)
Cash flows from operating 7 967 919 22 043 101 27 177 889
activities
Cash flows from investing (7 349 055) (9 698 693) (6 203 956)
activities
Cash flows from financing (22 079 219) (10 234 168) (23 370 152)
activities
Net cash movement for the (21 452 255) 2 110 240 (2 354 871)
period
Cash at the beginning of 11 430 271 11 430 271 13 785 142
the period
Cash and cash equivalents - - 41 348
acquired
Total cash at the end of (10 021 984) 13 540 511 11 430 271
the period
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 can be split
into two main operating segments, namely Telecoms (including Huge Telecoms
and Centracell) and Media (including Eyeballs and Huge Media). The operations
within each of these main segments 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 within each of the two main segments.
Eyeballs Mobile Advertising Proprietary Limited ("Eyeballs") and Huge Media
are still in the start-up phase of their business and as such minimal revenue
is reported.
The lines of revenue were disclosed separately in the prior year`s annual
financial statements relating only to the Telecoms operating segment.
Additional focus has been placed on operating expenses in the year and as
such the information provided to the chief operating decision maker, the
Group`s CEO, has been more extensive in the current year. The summarised
information is included below in line with the requirements of IAS 34. The
revenue lines are distributed countrywide to all clients with no geographical
differentiation.
Telecom Media Huge Group Total
Grouping - Grouping - - 2011 - 2011
2011 2011
Revenue 523 548 980 222 573 - 523 771 553
Cost of sales (433 907 467) (196 338) - (434 103 805)
Gross profit 89 641 513 26 235 - 89 667 748
Other income 1 197 320 - 3 395 1 200 715
Operating expenses (95 853 010) (8 562 292) (10 348 (114 763 516)
214)
Operating loss (5 014 177) (8 536 057) (10 344 (23 895 053)
819)
Investment income 3 061 164 11 817 660 914 3 733 895
Net change in fair 2 013 208 - 3 113 609 5 126 817
value of financial
instruments
Loss from equity (952 298) - - (952 298)
accounted
investments
Finance costs (2 114 966) (155 832) (729 077) (2 999 875)
Profit (loss) (3 007 069) (8 680 072) (7 299 373) (18 986 514)
before income tax
Income tax expense 715 212 - 1 396 533 2 111 745
Loss for the year (2 291 857) (8 680 072) (5 902 840) (16 874 769)
Telecom Grouping Media Huge Group - Total
- 2010 Grouping - 2010 - 2010
2010
Revenue 573 516 182 - - 573 516 182
Cost of (454 009 689) (10 498) - (454 020 187)
sales
Gross profit 119 506 493 (10 498) - 119 495 995
Other income 829 413 - 1 562 830 975
Operating (107 189 557) (4 239 327) (5 616 274) (117 045 158)
expenses
Operating 13 146 349 (4 249 825) (5 614 712) 3 281 816
profit
Investment 3 562 707 2 018 920 659 4 485 384
income
Net change (3 230 162) - 11 590 398 8 360 236
in fair
value of
financial
instruments
Income from 166 284 - - 166 284
equity
accounted
investments
Finance (5 508 085) 79 434 (2 610 272) (8 038 923)
costs
Profit 8 137 093 (4 168 373) 4 286 073 8 254 793
(loss)
before
income tax
Income tax 2 131 711 - (2 318 798) (187 087)
expense
(Loss) 10 268 804 (4 168 373) 1 967 275 8 067 706
profit for
the year
Other income, expenses, investment income and finance costs in the group
company and the segments are adjusted by intersegment management fees, costs
and interest and deducted.
COMMENTARY
ACCOUNTING POLICIES
The condensed group annual financial results are prepared in accordance with
the recognition and measurement principles of International Financial
Reporting Standards and presented in accordance with the minimum content,
including disclosures, prescribed by IAS 34 Interim Financial Reporting
applied to year end reporting, and South African Statements and
Interpretations of Statements of Generally Accepted Accounting Practice (AC
500 Series) and the Companies Act of South Africa.
COMPANY PROFILE
Huge is an investment holding company listed on the Alternative Exchange
(AltX) of the JSE Limited`s Stock Exchange ("the 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") and CentraCell Proprietary
Limited ("CentraCell"), wholly owned subsidiaries of Huge and the principal
trading operations of the Group, are two of South Africa`s leading
"Communication Expense Management" and "Managed Telecommunications"
companies. Ambient Mobile Proprietary Limited (50.2% owned by Huge Telecom)
("Ambient") provides SMS services and Legacy Telecom Proprietary Limited
(50.3% owned by Huge Telecom) ("Legacy") is trading as a "Managed
Telecommunications" company. The shareholding in Ambient was acquired during
the year. Legacy Telecom was started during the year.
Eyeballs (77% owned by Huge) is a technology provider whose technology
consists of a software application that recipient users download and install,
at no cost, on their mobile phones. It displays advertising and content
images on the phone screen when calls are made or messages are received.
Eyeballs intends generating revenue from the successful deployment of the
server-end of its technology on the servers of various customers,
particularly mobile network operators operating throughout the world.
A decision to sell the business of Huge Media (100% owned by Huge) was made
prior to the end of the financial year. The conditions precedent to the sale
of the business will be fulfilled after 28 February 2011.
Huge Media`s strategy was to be a media owner focused on the advertising
industry. It commenced commercial operation on 20 January 2010 and it was
successful in acquiring a substantial base of recipient users. However, the
Board was of the view that the potential revenue or sales life cycle of a
business such as Huge Media is too extended, and the funding commitments too
substantial given the significant industry shocks experienced by Huge Telecom
and CentraCell in the period under review, for Huge to continue funding start-
up costs.
FINANCIAL OVERVIEW
GROUP`S FINANCIAL PERFORMANCE
Significant changes took place in the South African telecommunications
industry during the period under consideration. Termination rates were
regulated for the first time, a glide path for the lowering of termination
rates implemented, different classes of operators identified, and different
termination rates stipulated for each class of operator. A clear distinction
was made between fixed line operators and mobile operators and the rates each
may charge for termination. This has had a marked effect on many of Huge
Telecom and CentraCell`s competitors in the industry, in particular the VoIP
(Voice over Internet Protocol) operators who have been classified as fixed
line operators. Huge Telecom and CentraCell are not VoIP operators and stand
to benefit from the regulatory changes in the future. No benefits from the
regulatory changes were realised in the 2010/2011 financial year.
This effect is pertinent when considering falling retail client rates
("competitive quotes") and their impact on potential client losses at Huge
Telecom and CentraCell. The competitive quote is a competing retail rate in
the market quoted by a competitor to Huge Telecom and CentraCell that is used
by clients and prospective clients in making their decision to select a
particular supplier in place of Huge Telecom or CentraCell. The directors of
Huge Telecom and CentraCell considered the VoIP operators a major competitive
threat and the principal drivers of the falling competitive quote. With
bilateral termination rates a thing of the past, local loop unbundling of
Telkom Limited`s fixed line last mile a distant dream, and origination and
termination of telephone calls dominated by Telkom and the mobile network
operators, the VoIP over fixed line business model has been marginalized,
greatly reducing the likelihood of a falling competitive quote in the near
future.
The Board of Huge has always considered falling competitive quotes a greater
risk to Huge Telecom and CentraCell than falling termination rates. The
directors have considered falling termination rates and their impact on the
business model and goodwill of Huge Telecom and CentraCell and are of the
opinion that the long term benefits of falling termination rates are positive
for Huge Telecom and CentraCell. For this reason, no impairment to the
goodwill of Huge Telecom and CentraCell was considered necessary.
During the financial year the major mobile network operators decided to cease
paying connection incentive bonuses to businesses employing fixed cellular
methods of origination having a more marked impact on the revenue and profit
generated by Huge Telecom and CentraCell. In the 2009 and 2010 financial
years the revenues and profits enjoyed by Huge Telecom and CentraCell
relating to connection incentive bonuses was R55 million and R58 million
respectively. Huge Telecom and CentraCell earned R13.7 million in connection
incentive bonuses during 2010/2011. The negative impact to the current
year`s revenue and profit was therefore in the region of R44 million. Absent
the foregoing impact, and all other things being equal, Huge Telecom and
CentraCell would have delivered a considerably different set of financial
results.
As a result of the foregoing change in market practice Huge Telecom and
CentraCell were faced with a further restructuring of their businesses. Cost
reductions have taken place and these will more than compensate for the
cessation of connection incentive bonuses in the 2011/2012 financial year.
The directors of Huge considered the cessation of connection incentive
bonuses and the possibility that the cessation thereof was, and is, an
indicator of a possible impairment of the goodwill of Huge Telecom and
CentraCell. A number of factors were identified in mitigation of a possible
impairment of goodwill: firstly, the cessation removed the desire to maximise
connection incentive bonuses through over-subscription of SIM cards - a
process otherwise known as multiplexing; secondly, the cessation removed the
breakage cost (i.e. unnecessary airtime package costs incurred through
failure to utilize the complete benefits of a retail airtime subscription
package as a result of inefficient management of multiplexing) normally
associated with multiplexing; thirdly, the cessation raised the input cost
prices of all the fixed cellular operators to the same level thereby removing
the competitive advantage of more effective multiplexing (traditionally
enjoyed by Huge Telecom and CentraCell`s VoIP competitors); and lastly, the
drop in the retail prices of the mobile network operators more than
compensated for the cessation of connection incentive commissions.
Accordingly, although the impact of the cessation of connection incentive
bonuses on Huge Telecom and CentraCell was severe, its impact was more short
term in nature.
The directors have therefore determined that no impairment to the goodwill
generated by Huge on the acquisition of Huge Telecom and CentraCell is
required. The directors will continue to assess the industry and the
possible changes that could impact the goodwill of the company.
The focus of the directors for the coming financial year will be to
strengthen the financial position of the respective group companies.
The company continues to be well managed and revenues remain substantial,
although slightly down on the previous financial year, operating expenses
have been reduced and debtor management has improved. A potentially healthy
financial performance and position was reversed by the significant, but once-
off, impact of the cessation of connection incentive bonuses.
INVESTMENT HOLDING ACTIVITIES
The company continues to repurchase its own shares in accordance with the
mandate of its shareholders.
The dates of the acquisitions of the shares are set out below:
Transaction Number of Price Value of
Date ordinary Per transaction
shares Share (R)
issued (cents)
1 June 2010 3 200 000 75.00 2 400 000
10 June 2010 74 500 70.00 55 875
11 June 2010 58 000 79.00 45 820
11 June 2010 262 330 80.00 209 864
15 June 2010 100 000 75.00 75 000
15 June 2010 50 000 79.00 39 500
15 June 2010 686 910 80.00 549 528
18 June 2010 8 015 80.00 6 412
21 June 2010 50 000 83.00 41 500
21 June 2010 28 000 84.00 23 520
21 June 2010 28 000 85.00 23 800
23 June 2010 12 000 85.00 10 200
28 June 2010 78 000 88.00 68 460
28 June 2010 166 600 90.00 149 940
29 June 2010 72 000 98.00 70 560
30 June 2010 8 000 99.00 7 920
30 June 2010 162 000 100.00 162 000
30 June 2010 80 000 104.00 83 200
30 June 2010 25 945 105.00 27 242
30 June 2010 5 000 110.00 5 500
30 June 2010 50 000 115.00 57 500
30 June 2010 1 006 805 120.00 1 208 166
Total 6 212 105 5 321 687
TELECOMMUNICATIONS ACTIVITIES
Huge Telecom (considered with CentraCell) is the Group`s principal revenue
generator. Total turnover for the financial year, excluding connection
incentive bonuses and marketing incentives, amounted to R502.9 million - down
1.1% from the R508.7 million generated in the previous financial year. In
comparing total turnover generated for the second six months of the year, of
R248.7 million, turnover was lower than the R275 million generated in the
first six months of the year. The second six months of every financial year
is traditionally the slower period of each year.
Huge Telecom and CentraCell reported an increase in gross profit margins,
measured before connection incentive bonuses and marketing incentives
improved. This was achieved primarily through continued improvements in the
management of Huge Telecom and CentraCell`s input costs. This is estimated to
more than offset the negative impact to gross margins resulting from the
cessation in connection incentive bonuses.
MEDIA ACTIVITIES
Huge has a 77% shareholding in Eyeballs. Eyeballs continued to develop its
proprietary in-application mobile phone advertising technology during the
financial year in support of its technology provider strategy. Eyeballs`
technology continues to mature. Various unsolicited interests in the
technology, including the signing of a significant commercial software
distributor agreement with a company already deploying its own software at 25
mobile network operators throughout the world underpins the potential and
inherent value of this technology.
Eyeballs is currently available for Symbian Smartphones (version 3 and above,
which includes most Nokia phones and several LG, Samsung and Sony Ericsson
models), and all BlackBerry Smartphones running Blackberry OS version 4.5 or
later. Other operating systems continue to be considered. The directors have
considered the possible impairment of the Eyeballs technology based on a
value in use or fair value to sell as required by International Financial
Reporting Standards (IFRS). Based on the higher of the two values, reflected
in current unsolicited offers and expressions of interest in acquiring the
technology, the directors have decided that no impairment is necessary.
Although the technology is unique the directors understand the impact of
possible competitive technologies and have decided to accelerate the
amortisation of the technology by reducing the estimate useful life from 10
years to 5 years. The technology is carried at a value of R14 million.
On 6 February 2011 the Board of Huge decided to cease funding the start-up
costs of Huge Media. Huge Media had incurred life to date start-up costs of
R6.2 million before the decision was made to cease funding, of which R5
million of these costs were funded during 2010/2011. The long sales cycle
relating to pioneering advertising mediums (such as Eyeballs), particularly
in South Africa, was the principal rationale for ceasing the funding lines to
Huge Media, and the consequent decision to sell the operations thereof. The
business of Huge Media will be sold to Anton Potgieter, a related party to
the company, at the nominal value of R1. The directors are of the view that
the business of Huge Media is either suited to a large technology or media
conglomerate with a sizeable financial position or to the nimbleness of a
smaller entrepreneurial establishment. The directors believe that as part of
the right organisation the business model of Huge Media will flourish.
GROUP OPERATING EXPENSES
Group operating expenses incurred during the current financial year decreased
by R2.2 million from R117.0 million to R114.8 million. Those expenses
requiring specific mention include:
1. The non-cash depreciation provision for the replacement of property,
plant and equipment (other than network related assets and routing
equipment, where the depreciation is expensed as part of cost of sales),
as well as the amortisation of intangible assets almost doubled from
R6.5 million to R11,5 million. The amortisation of intangible assets
relates primarily to the amortisation of the intangible assets owned by
Eyeballs (Eyeballs` technology amounting to R7.5 million) and the
intangible assets (computer software) owned by Huge Telecom and
CentraCell (amounting to R1.7 million). Depreciation of other assets
amount to R2.2 million.
2. Employment costs were higher by R7 million when compared to the prior
year.
3. Bad debts written off decreased by R11.2 million from R21.1 million in
the previous year to R9.9 million in the current year. Management has
focused considerably on its analysis and categorisation of the debtors
books of Huge Telecom and CentraCell. A significant proportion of the
debtors written off in 2010 related to sales or revenue generated in
prior financial years. The same situation applies to bad debts written
off in the current year. As evidence of the improvement in their
management of debtors, Huge Telecom and CentraCell reduced their
allowance for doubtful debtors by R7.1 million.
GROUP PROFIT
Group operating profit was significantly impacted by the loss of connection
incentive bonuses.
GROUP NET CHANGE IN FAIR VALUE OF FINANCIAL INSTRUMENTS
The net change in fair value of financial instruments, in particular the mark-
to-market profits on the single stock futures contracts and contracts for
difference held by the Group, amounted to a profit of R5.1 million.
STATEMENT OF FINANCIAL POSITION CONSIDERATIONS
Cash generated from operations during the current financial year amounted to
R1.1 million.
Capital expenditure during the current financial year amounted to R2.7
million, while long-term debt was further reduced by R14.9 million in the
current year. Long term debt was reduced by R20.9 million during 2010.
The Group invested R5.3 million in repurchasing its own shares, and spent
R701 754 on acquiring call options against 1.8 million ordinary shares held
by various past and present directors of Huge Telecom.
FUTURE PROSPECTS
The performance of Huge remains reliant on the performance of its primary
investments in Huge Telecom and CentraCell.
Huge Telecom and CentraCell have been restructured, a new business model has
been defined and made operational, and additional significant revenue streams
are expected to be generated in the immediate future. The restructuring of
the company, including significant reductions in overheads, coupled with
falling input costs will have a material and positive effect on profitability
and cash flow generated by this subsidiary company during the forthcoming
financial year - the benefits of this being experienced from the start of the
2012 financial year. This will assist the Group in strengthening its balance
sheet.
The business of Huge Media has been sold post year-end. The annual cost
saving from the decision to sell the operations of Huge Media amounts to R5
million.
The business of Eyeballs is gaining momentum and recent commercial agreements
signed by the company are lucrative. Investor interest in Eyeballs is also
growing and is indicative of the underlying value of this investment.
Investment Holding Activities
An independent valuation of Huge`s goodwill in May 2011 established a
goodwill value that equates to approximately R3 per share and supports the
Board`s view that no impairment of goodwill is required. The goodwill
valuation was performed by BDO Corporate Finance Proprietary Limited 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.
Further repurchases of share capital is however a secondary objective to the
Board`s new primary objective of strengthening its statement of financial
position.
Telecommunication Activities
Huge Telecom and CentraCell will remain focused on providing a complete
spectrum of managed telecommunication services to South African businesses.
The South African telecommunications industry has seen radical changes to its
regulatory framework in the last eighteen months. Most of these changes bode
extremely well for the businesses of Huge Telecom and CentraCell. Huge
Telecom and CentraCell are well positioned to benefit directly from increased
managed services sales of telephony once the South African telecommunications
industry, including its customers and clients, has settled into, and become
familiar with, the current regulatory and industry framework.
Huge Telecom and CentraCell have evolved from its early roots into a
telecommunications service provider delivering efficient Communications
Expense Management. Unlike other operators who have chosen to adopt a fixed-
line dependent VoIP business model in response to the changing regulatory
landscape, Huge Telecom and CentraCell continue to make use of fixed cellular
technology to make (otherwise known as originate), and now receive (otherwise
known as terminate), telephone calls on behalf of their clients.
Huge Telecom and CentraCell will continue to monitor developments in the
telecommunications industry to ensure that their business models are both
optimal and sustainable. Their highly motivated executive teams are focused
on managing the businesses for profitable growth and superior service
delivery.
Huge Telecom and CentraCell are therefore ideally positioned to emerge as a
net beneficiaries of the regulatory reduction in termination rates
(interconnect tariffs).
In the year ahead, Huge Telecom and CentraCell will focus on supplying
international, national, and local outbound telephony as well as
international, national, mobile and local inbound telephony (collectively the
"telephony revenue opportunity") to their existing bases of clients.
Media Activities
Eyeballs continues to explore partnerships to deploy its offerings in the
international market. This start-up business continues to be well placed to
achieve breakeven profitability in the near future. The mobile advertising
market continues to enjoy enormous growth projections from leading experts
worldwide.
GENERAL REPURCHASE OF SHARES FOR CASH
From 1 March 2010 to the end of the 2011 financial year Huge repurchased 6
212 105 ordinary shares in accordance with Section 85 of the Companies Act,
1973. The cost of the shares acquired was R5 321 687 at an average price of
85.7 cents per share. The Group currently holds 15 859 031 ordinary shares,
of which 9 646 926 ordinary shares are held by Huge Telecom. Further
repurchases of ordinary shares will have to be made in compliance with
Section 48 of the Companies Act, 2008 which was promulgated on 1 May 2011.
LEGAL AND REGULATORY REQUIREMENTS
The company has nothing further to report to shareholders in relation to its
dealings with the JSE in connection with the single stock futures contracts
and contracts for difference acquired by the company in the 2008/2009
financial year, which was dealt with extensively in the last annual report.
The directors who were fined by the JSE in November 2009 for purported non-
compliance with the JSE`s Listings Requirements are persisting in their
appeal of the decisions made. An appeal date for the hearing of the matter
has not yet been set.
Huge Telecom is currently party to the following litigation:
MTN Service Provider Proprietary Limited (MTN)
MTN instituted a notice of motion in the South Gauteng High Court,
Johannesburg on 18 January 2011 whereby it makes application for either an
order 1) liquidating Huge Telecom Proprietary Limited; 2) that the costs of
the application be costs in the liquidation; 3) further and/or alternative
relief, or alternatively a judgement against Huge Telecom Proprietary Limited
for 1) payment of the amount of R30 million; 2) interest; 3) costs of the
suit; 4) further or alternative relief.
Huge Telecom has opposed the notice of motion and filed its answering
affidavit on 1 March 2011. MTN Service Provider has not abandoned the legal
process. The group has recognised the assets and the liabilities relating to
the MTN dispute in accordance with the settlement agreement MTN claims was
reached. As such the carrying amounts of these assets and liabilities may be
materially adjusted within the next financial year, depending on the outcome
of the legal dispute.
Mr JP Kimber
On 22 November 2010, Jonathan Peter Kimber, a past director of Huge Telecom,
instituted a claim against Huge Telecom for payment of R6.8 million in terms
of an option agreement signed by Huge Telecom and Mr JP Kimber on 2 September
2008, as varied by the option agreement amendment agreement signed by Huge
Telecom and Kimber on 27 February 2009.
No legal proceedings have been instituted by Mr Kimber but the parties have
agreed to a formal arbitration hearing.
SUBSEQUENT EVENTS
Shareholders were advised on 25 May 2011 that Huge Telecom has made a
decision post year end to dispose of its shareholding in TelePassport
Communications Proprietary Limited ("TelePassport"), a Namibian company, to
Luigi`s Trust, a trust formed for the benefit of Anton Daniel Potgieter, a
related party to Huge ("the sale transaction"), for a purchase consideration
of R4 900 000 (four million nine hundred thousand Rand). The shareholding
represents 49% of the entire issued share capital of TelePassport and the
effective date of the sale transaction is the date on which all of the
suspensive conditions to the sale agreement are fulfilled or waived.
The purchase consideration of R4 900 000 due to Huge Telecom in terms of the
sale agreement will be settled by Mr Potgieter transferring 3 500 000 Huge
ordinary shares to Huge Telecom on the closing date of the sale agreement.
TelePassport is based in Windhoek, Namibia. TelePassport was formed in 2004
by Huge Telecom and local high profile residents of Namibia with a view to
growing Huge Telecom`s market share outside the borders of South Africa.
Namibia is a small market for the provision of managed telecommunications
services and is roughly equal in size to half of Huge Telecom`s Kwa-Zulu
Natal office.
Namibia also has a different regulatory environment as far as
telecommunications services are concerned making the management thereof
different to the Group`s South African operation.
Huge is in addition committed to continue repurchasing its own shares and the
sale transaction accordingly affords Huge the opportunity of doing so without
the outflow of cash resources.
GOING CONCERN
The Board has made a detailed assessment of the going concern capability of
the company and all subsidiaries of the company that form the group of
companies comprising Huge with reference to certain assumptions and plans
underlying various cash flow forecasts made by management.
The Board has not identified any events or conditions that individually or
collectively cast significant doubt on the ability of the company and the
Group to continue as a going concern.
The Board confirms that it regarded the following factors in arriving at its
conclusion that the company and the Group will continue to operate as a going
concern for an eighteen month period post year end:
1. The expected improvements in the profitability, recorded in the budget
approved by the Board, of Huge Telecom and CentraCell for the year that
will end on 28 February 2012;
2. The cessation of connection incentive bonuses;
3. The reduction in salaries and wage costs;
4. The benefits from the change in practice related to the management of
low and zero usage;
5. The impact of the MTN Service Provider dispute and the possible
settlement thereof;
6. The terms of trade of the major suppliers to Huge Telecom and
CentraCell, including Vodacom Service Provider Company Proprietary
Limited;
7. Funding undertakings provided by four key shareholders, who are also
executive directors, of the company.
The loans between Huge Media, Eyeballs and the company or any other Group
company have been subordinated so that these entities are able to settle
their debts as they fall due.
The impact of 1) lower interconnection fees; and 2) the cessation of
connection incentive commissions on the businesses of Huge Telecom and
CentraCell has been carefully considered by the Board and it is the opinion
of the Board that the strategies identified by Huge Telecom and CentraCell
are sufficient to mitigate the full extent of the impact.
Huge Telecom is party to certain loan agreements with FirstRand Bank Limited.
FirstRand has not notified Huge Telecom of any breach of any of the loan
covenants relating to the loan agreements.
The current credit facilities of the company and its subsidiary companies are
sufficient to meet the ongoing needs of the company and its subsidiary
companies.
CHANGES TO THE BOARD OF DIRECTORS AND COMPANY SECRETARY
Mrs Michelle Allison Meth resigned as a director of the company on 22 October
2011.
Mr Manogaran (Rajen) Pillay resigned as a director of the company on 4 August
2010, but remains a director of Huge Telecom.
Mr Anton Daniel Potgieter resigned from his office as executive chairperson
on 6 October 2010.
The role of Mr Potgieter changed from that of executive director to non-
executive director with effect from 1 April 2011.
Mr Stephen Peter Tredoux was appointed to the office of non-executive
chairman of the company on 6 October 2010.
Mr Donovan Tredoux resigned as a director of the company on 8 December 2010.
Miss Yvette Neveling was appointed to the Board of the company on 6 December
2010 as its acting Financial Director and resigned on 31 May 2011.
DIVIDENDS
No dividends were paid or declared during the financial year ended 28
February 2011.
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 III Report on Corporate
Governance.
UNMODIFIED REVIEW OPINION
The condensed provisional group financial results of Huge for the year ended
28 February 2011 have been reviewed by the company`s auditor, KPMG Inc. Their
unmodified review report dated 28 June 2011, is available for inspection at
the company`s registered office.
Johannesburg
28 June 2011
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:
SP Tredoux* (Non-executive Chairman), KD Jarvis (Lead Independent non-
executive director)*, BA McQueen*, AD Potgieter*, MR Beamish*, JC Herbst (CEO
and Acting Group Financial Director), VM Mokholo
*Non-executive
Date: 28/06/2011 13:57:00 Produced by the JSE SENS Department.
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