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HUG - Huge - Trading Statement And Renewal Of Cautionary Announcements

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

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