Wrap Text
Unaudited interim results for the six months ended 28 February 2014
CONVERGENET HOLDINGS LIMITED AND ITS SUBSIDIARIES
Incorporated in the Republic of South Africa
(Registration number 1998/015580/06)
Share code: CVN ISIN: ZAE000182440
("ConvergeNet" or the "Group" or the "Company")
UNAUDITED INTERIM RESULTS FOR THE SIX MONTHS ENDED 28 FEBRUARY 2014,
CHANGE TO THE BOARD OF DIRECTORS AND CAUTIONARY ANNOUNCEMENT
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED 28 FEBRUARY 2014
R’000 Unaudited Unaudited Audited
six months restated year ended
ended six months 31 Aug 2013
28 Feb 2014 ended
28 Feb 2013
Continuing operations
Revenue 119,058 132,173 283,007
Cost of Sales (89,177) (109,733) (218,650)
Gross Profit 29,881 22,440 64,357
Other income 282 280 12,495
Operating expenses (78,371) (44,971) (158,200)
Impairment of goodwill and other
financial assets (note 6) (34,822) - (58,667)
Fair value adjustments - 5,646 5,646
Other operating expenses (43,549) (50,617) (105,179)
Operating loss (48,208) (22,251) (81,348)
Finance income 2,368 552 520
Finance costs (2,281) (97) (815)
Loss before taxation (48,121) (21,796) (81,643)
Taxation 1,430 1,096 (5,980)
Loss for the period from
continuing operations (46,691) (20,700) (87,623)
Discontinued operations
Net loss for the period from
discontinued operations (48,685) (4,125) (138,644)
Other comprehensive (loss)/income:
Exchange (loss)/gain on translation
of foreign operations (recyclable) - (1,146) 388
Gains on revaluation of land and buildings - - 99
Other comprehensive (loss)/income for
the period net of taxation - (1,146) 487
Total comprehensive loss for the period (95,376) (25,971) (225,780)
(Loss)/income attributable to:
Equity holders of the parent (97,588) (18,222) (209,204)
Non-controlling interests 2,212 (6,603) (17,063)
(Loss)/Profit for the period from continuing
operations attributable to:
Equity holders of the parent (46,753) (20,841) (83,974)
Non-controlling interests 62 141 (3,649)
(Loss)/Profit for the period from
discontinued operations attributable to:
Equity holders of the parent (50,835) 2,619 (125,230)
Non-controlling interests 2,150 (6,744) (13,414)
Total comprehensive (loss)/income
for the period attributable to:
Equity holders of the parent (97,588) (18,807) (208,949)
Non-controlling interests 2,212 (7,164) (16,831)
(Loss)/Earnings per share
Basic and diluted (loss)/earnings
per share (cents)
From continuing operations (47.42) (2.47) (9.43)
From discontinued operations (51.56) 0.31 (14.08)
Basic loss for the period (98.98) (2.16) (23.51)
Headline and diluted headline
(loss)/earnings per share (cents)
From continuing operations (12.11) (2.27)* (3.01)*
From discontinued operations (11.79) 0.39* (5.94)*
Headline loss for the period (23.90) (1.89)* (8.95)*
Weighted average number of shares 98,592,416 842,829,240 889,726,462
Fully diluted weighted
average number of shares 98,592,416 842,829,240 889,726,462
Total number of shares in issue 100,946,502 921,285,941 970,935,125
* Comparative period earnings per share
and headline earnings per share shown
before taking into account the effect of
the share consolidation on a 10-for-1 basis.
Reconciliation between (loss) earnings
and headline (loss)/earnings
Continuing operations
Basic loss attributable to
equity holders of parent (46,753) (20,841) (83,974)
(Profit)/loss on disposal of assets (6) (24) 117
loss on disposal of subsidiaries - - 2,550
(Profit) on sale of other financial asset - (2,409) -
Impairment of goodwill (note 6) 34,822 4,959 55,334
Tax effect of adjustments 1 (820) (826)
Portion of adjustments attributable
to non-controlling interests - (12) -
Headline loss (11,936) (19,147) (26,799)
Discontinued operations
Basic (loss)/profit attributable
to equity holders of parent (50,835) 2,619 (125,230)
(Profit)/loss on disposal of assets - (16) 600
Loss on disposal of associates - - 3,255
Loss/(Profit) on disposal of subsidiaries 39,207 312 (15,020)
Loss recognised on the remeasurement of
asset disposal groups to its
fair value less cost to sell - - 786
Impairment of goodwill - - 72,160
Tax effect of adjustments - 245 (1,348)
Portion of adjustments attributable
to non-controlling interests - 91 12,037
Headline (loss)/profit (11,628) 3,251 (52,760)
Net asset value per share (cents) 187.06 41.76* 22.57*
Net tangible asset value per share (cents) 185.86 22.19* 18.68*
* Comparative period net asset value per share and net tangible assets per share
shown before taking into account the effect of the share consolidation
on a 10-for-1 basis (note 7)
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 2014
R’000 Unaudited Unaudited Unaudited Audited
as at restated restated as at
28 Feb 2014 as at as at 31 Aug 2013
28 Feb 2013 29 Feb 2012
ASSETS
NON-CURRENT ASSETS
Property, plant and equipment 4,420 49,204 41,352 4,342
Goodwill - 169,620 184,816 34,822
Intangible assets 1,208 10,616 15,849 2,910
Investments in associates - 5,956 5,590 -
Other financial assets (note 7) 111,300 500 58,610 -
Deferred taxation 12,448 38,236 29,296 9,777
CURRENT ASSETS
Inventories 46,985 85,155 94,824 58,688
Loans to related parties - 589 332 -
Other financial assets (note 7) 900 17,973 8,263 2,331
Current tax receivable 1,090 482 1,187 883
Trade and other receivables 36,178 262,260 275,545 62,644
Cash and cash equivalents 22,881 31,548 36,758 14,689
Non-current assets held for sale - - - 262,058
TOTAL ASSETS 237,410 672,139 752,422 453,144
EQUITY AND LIABILITIES
TOTAL EQUITY
Shareholders’ equity 188,831 384,700 464,141 219,113
Non-controlling interest (19,400) 50,353 59,155 (8,605)
NON-CURRENT LIABILITIES
Other financial liabilities - 11,299 20,878 -
Finance lease obligation 47 8,099 10,617 -
Operating lease liability 3 1,529 1,733 1,251
Deferred taxation 1,332 6,717 4,773 106
CURRENT LIABILITIES
Other financial liabilities 41,379 21,111 1,639 29,241
Current tax payable 490 12,252 9,666 490
Finance lease obligation - 7,911 776 126
Provisions - 976 10,219 1,046
Deferred income - 1,352 -
Trade and other payables 24,721 164,794 157,381 56,062
Bank overdraft 7 1,046 11,444 15,066
Non-current liabilities held for sale - - - 139,248
TOTAL LIABILITIES 67,979 237,086 229,126 242,636
TOTAL EQUITY AND LIABILITIES 237,410 672,139 752,422 453,144
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHS ENDED 28 FEBRUARY 2014
R’000 Unaudited Unaudited Audited
as at restated as at
28 Feb 2014 as at 31 Aug 2013
28 Feb 2013
Balance at the beginning
of the period as reported 210,508 488,013 483,188
Prior period errors - (4,825) -
Balance at the beginning of
the period as restated 210,508 483,188 483,188
Total comprehensive loss for the period (95,376) (25,971) (226,267)
Exchange gain on translation
of foreign operation - - 388
Revaluation - - 99
Shares issued in terms of transactions
with non-controlling shareholders - - 15,888
Equity settled share based payments (note 7) 3,420 397 476
Shares vested in terms of forfeitable
share plan (note 8) 1,017 - -
Issue of treasury shares in
terms of forfeitable share plan - - -
Own shares acquired by subsidiaries,
held as treasury shares (note 8) (79) (20,415) (21,211)
Own shares acquired by subsidiaries,
held as treasury shares re-issued - - 23,139
Transactions with non-controlling shareholders 49,941 (2,146) (65,192)
Balance at the end of the period 169,431 435,053 210,508
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED 28 FEBRUARY 2014
R’000 Unaudited Unaudited Audited
six months restated year ended
ended six months 31 Aug 2013
28 Feb 2014 ended
28 Feb 2013
Net cash flow from operating activities 5,382 (40,903) (40,558)
Net cash flow from investing activities (847) 5,392 (979)
Net cash flow from financing activities 18,716 (483) (11,233)
Total cash movement for the period 23,251 (35,994) (52,770)
Cash at the beginning of the period (377) 66,496 66,496
Cash balances transferred to held for sale - - (14,103)
Total cash at the end of the period 22,874 30,502 (377)
CONDENSED SEGMENTAL INFORMATION FOR THE SIX MONTHS ENDED 28 FEBRUARY 2014
The segment results for the six months ended 28 February 2014 are as follows:
R’000 IT Telecom Africa Site Corporate Consolidation Total
Infrastructure Infrastructure Maintenance and other
Technology Technology Solutions
solutions solutions
From continuing operations
Total revenue 25,118 93,940 - 1,543 - 120,601
Inter-segment sales - - - (1,543) - (1,543)
Reported revenue 25,118 93,940 - - - 119,058
Segmental result
Core operating loss for the year 994 (4,044) (8,425) (2,487) 576 (13,386)
Impairment of goodwill and
loans and receivables (34,822)
Investment income 2,368
Share of profits of associates -
Finance costs (2,281)
Taxation 1430
Net loss for the year after taxation (46,691)
The segment results for the six months ended 28 February 2013 are as follows:
R’000 IT Telecom Africa Site Corporate Consolidation Total
Infrastructure Infrastructure Maintenance and other
Technology Technology Solutions
solutions solutions
From continuing operations
Total revenue 23,619 127,910 669 7,992 - 160,190
Inter-segment sales (4,731) (15,294) - (7,992) - (28,017)
Reported revenue 18,888 112,616 669 - - 132,173
Segmental result
Core operating loss for the year (3,884) 4,272 (4,079) (14,440) (4,120) (22,251)
Impairment of goodwill and
loans and receivables - - - - - -
Investment income - - - - - 552
Share of profits of associates - - - - - -
Finance costs - - - - - (97)
Taxation - - - - - 1,096
Net loss for the year after taxation - - - - - (20,700)
Notes to the Financial Statements
1. Accounting Policies
The unaudited condensed interim financial statements have been prepared in accordance with the framework concepts, the measurement and recognition requirements of International Financial Reporting Standards (IFRS), the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council, the listings requirements of the JSE Limited (JSE), the information as required by IAS 34: Interim Financial Reporting and the requirements of the South African Companies Act 71 of 2008 as amended (Companies Act). The accounting policies are consistent with those applied during the comparative period.
2. Financial preparation and review
These results have been prepared by Gert Le Roux (Group Financial Manager) which preparation was supervised by Peter van Zyl, the Group Chief Financial Officer. These results have not been reviewed or reported on by the Group’s auditors. The results were approved by the board of directors on 12 June 2014.
3. Prior period errors
The prior period errors reported to shareholders in the integrated annual report issued on 31 March 2014, which also impact the interim condensed financial statements for the six months ended 28 February 2013 and six months ended 29 February 2012 are detailed below. The amounts presented have been restated for the following errors:
3.1. Revenue recognition errors noted
The majority of the Sizwe Africa IT Group Proprietary Limited ("Sizwe")’s subsidiaries are party to a major maintenance and support contract as sub-contractors to the main contractor. The sub-contractor agreement provides that, these entities are required to invoice the main contractor a fixed amount on a monthly basis. In the middle of the prior year, the main contractor revised the invoicing terms to "invoicing in arrears". In changing these terms, the entities erroneously invoiced the main contractor twice in one month. This error was identified and corrected in the current financial year. The earliest affected prior period is 2012.
A revenue recognition error was also identified in X-DSL Networking Solutions Proprietary Limited ("X-DSL") whereby revenue was recognised upon the issue of invoices to customers and not on the stage-of-completion basis as required by IFRS and in terms of the Group’s accounting policy on revenue recognition. The earliest affected prior period is 2012.
The correction of these errors resulted in adjustments to the following financial statement line items related to the prior year:
R’000 Effect on prior period Effect on prior year
ended 28 February 2013 ended 29 February 2012
Statement of financial position
Increase in inventories 3,932 -
Decrease in trade accounts receivable (8,932) -
Increase in deferred income 444 908
Increase in deferred taxation 1,524 -
Decrease in Non-controlling interest (2,112) (309)
Decrease in retained earnings (1,808) (599)
Statement of other comprehensive income
Decrease in revenue (11,569) (908)
Decrease in cost of sales# 6,125 -
Decrease in taxation# 1,524 -
Increase in net loss for the year from
discontinued operations# (3,920) (908)
# Restated amounts shown as they would have appeared in the comparative period before taking into account discontinued operations.
3.2. Earnings and Headline Earnings per share error noted
Due to losses reported in the prior year, basic loss per share and headline loss per share were anti-dilutive. This fact was not taken into account in calculating the diluted basic loss and diluted headline loss per share in the prior year. The earliest affected prior period is 2013.
The effect hereof was as follows:
R’000 Restated six months Reported six months
ended 28 February 2013 ended 29 February 2012
Diluted basic loss per share (cents) (1.97) (1.97)
Diluted headline loss per share (cents) (1.70) (1.60)
3.3. Intangible assets incorrectly classified as property and equipment
In the prior year, computer software acquired by a subsidiary of Sizwe was incorrectly classified as property and equipment and not as intangible assets as required by IFRS. The earliest affected prior period is 2012.
The correction of this error resulted in adjustments to the following financial statement line items related to the prior year:
R’000 Restated six Reported six Restated six Reported six
months ended months ended months ended months ended
28 February 28 February 29 February 29 February
2013 2013 2012 2012
Statement of Financial Position
Property and equipment 49,204 54,378 41,352 46,317
Intangible assets 10,616 5,442 15,849 10,884
Statement of Comprehensive Income
Depreciation of property and equipment 565 1,782 210 824
Amortisation of intangible assets 1,217 - 614 -
3.4. Incorrect classification of trade and other payables as provisions
Restated trade and other payables include amounts reclassified from provisions to trade and other payables in the amount of R2.125 million to enhance the comparability of the annual financial statements. The amounts relate to product related accruals previously disclosed as provisions for product warranties which should have been disclosed as trade and other payables due to the obligation of the Group in relation to these items already having existed at year-end.
The impact of the above is as follows:
R’000 Restated six months Reported six months
ended 28 February 2013 ended 29 February 2012
Trade and other payables 2,125 -
Provisions - 2,125
3.5. Derecognition of goodwill on disposal of Interface Network Technology Proprietary Limited
Goodwill related to Interface Network Technology Proprietary Limited was not derecognised on disposal of the subsidiary on 1 September 2012.
The effect of the dereognition of goodwill is as follows:
R’000 Restated six months
ended 28 February 2013
Statement of Financial Position
Decrease in goodwill (1,579)
Decrease in retained earnings (1,243)
Decrease in non-controlling interest (336)
Statement of Comprehensive Income
Increase in loss from discontinued operations (1,579)
4. Change in Board of Directors
Mr. DF Bisschoff resigned as Chief Financial Officer on 31 October 2013 and was subsequently appointed as interim Chief Financial Officer and CEO on a contract basis. This interim agreement terminated on 31 December 2013. Mr. P van Zyl was appointed as a director on 21 November 2013 and replaced Mr. Bisschoff as Chief Financial Officer from 1 January 2014.
5. Corporate Governance
Mr. Warwick van Breda was appointed as company secretary to ConvergeNet and its subsidiaries with effect from 1 December 2013, prior to which date the role was fulfilled by Juba Statutory Services Proprietary Limited.
6. Operating results and impairments
The six months ended 28 February 2014 were characterised by difficult trading conditions, especially within the DC Power and System Integration divisions of CK Solutions, which resulted in reduced revenue from continuing operations to R119 million from R132.2 million during the comparative period.
An impairment charge of R34.8 million was recognized in respect of goodwill attributable to CK Solutions. The loss of a key battery supply tender and the cessation of the mobile build program of a major client resulted in a significant earnings gap versus budget, which is expected to persist during the medium term.
As a result of the impairment charge raised and declining financial performance, the operating loss from continuing operations increased to R48.2 from R22.2 million and loss for the period increased from R20.7 million to R46.7 million in the comparative period. Unless trading conditions improve further impairment of the investment in CK Solutions is likely in the medium term.
7. Corporate Activities and Share Capital
The Group issued 38,529,866 shares at 9 cents per share during November 2013 under the general authority to issue shares for cash. The shares were issued to settle operating expenses of the Group.
The Group completed the repurchase of 34,447 shares at 12 cents per share on 9 December 2013 under the Specific and Odd-lot Offers announced previously. The consolidation of the shares in issue on a 10-for-1 basis was completed on 23 December 2013 ("Share Consolidation").
On 11 December 2013, the sale of Sizwe Africa IT Group Proprietary Limited ("Sizwe") became unconditional. Payment of R10 million was effected prior to 28 February 2014 and a further R30 million was received subsequent to the reporting period. The acquirer has honoured all purchase consideration and vendor finance interest repayments under the agreement to date. Other financial assets disclosed in the Statement of Financial Position include the remaining R110 million receivable from the Sizwe purchaser as at 28 February 2014. In the event that the outstanding purchase consideration in respect of Sizwe is settled prior to 12 December 2014, the acquirer will be eligible for a R20 million reduction in the face value of the R110 million receivable as an early settlement discount.
The sale of Telesto Communication Solutions Proprietary Limited ("Telesto") became unconditional on 29 October 2013 and payment of R6 million was effected by the acquirer in accordance with the agreement terms described in the integrated annual reported issued on 31 March 2014. Other financial assets disclosed in the Statement of Financial Position include the remaining R1.3 million receivable from the Telesto purchaser at 28 February 2014. Subsequent to the reporting period, an early settlement discount of R50,000 was negotiated with the purchaser and an amount of R1.25 million was settled on 30 May 2014.
The current portion of other financial assets includes R0.9 million receivable from the purchasers of X-DSL on 28 February 2014.
8. Forfeitable share plan
During the period under review, 4,420,000 shares (pre-consolidation) vested at 10 cents per share under the Group’s forfeitable share plan. An expense of R0.4 million was recognised directly in equity. A further 145,000 shares (post consolidation on a 10-for-1 basis) are expected to vest on or before 1 September 2014 in respect of SCS.
9. Dividend
No dividend has been proposed for the period under review.
10. Appointment of Chief Executive Officer
In terms of rule 3.59(a) of the Listings Requirements of the JSE Limited, ConvergeNet is pleased to announce that Mr Peter van Zyl will, in addition to his role as Chief Financial Officer, assume the role of interim Chief Executive Officer of ConvergeNet with immediate effect.
11. Group Outlook and Cautionary Announcement
The board of directors ("Board") is carefully considering the options that are available to address the continued underperformance of the Group. The high cost-base and the difficult trading conditions experienced by its remaining subsidiaries during the period under review are expected to continue into the next financial year. In light thereof, shareholders are advised that the Board is considering various strategic options, all of which, if successful, will have a material effect on the price of the Company’s securities.
Accordingly, shareholders are advised to exercise caution when dealing in the Company’s securities until a further announcement is made.
12. Events after the Reporting Period
The directors are not aware of any subsequent events, not already disclosed above, that require further disclosure in this announcement.
13. Appreciation
ConvergeNet thanks its stakeholders, customers and suppliers for their continued support during this period of change.
For and on behalf of the board
D Tabata PJ van Zyl
Chairman Chief Financial Officer
13 June 2014
CORPORATE INFORMATION:
Directors
D Tabata*^ (Chairman), P van Zyl, L Mangope*^, NG Nika*^, C Pettit*
(* Non-Executive, ^ Independent)
Company secretary
Warwick van Breda,
7 Killara Road, Bedfordview, 2007
Registered office
Level P3, Oxford Corner, c/o Jellicoe and Oxford, Rosebank, Johannesburg, 2196
Business Address
Monza Close No 3, Kyalami Business Park, Kyalami, 1685
Postal Address
P.O. Box 10709, Centurion, 0046
Transfer Secretaries
Computershare Investor Services (Pty) Ltd, 70 Marshall Street, Johannesburg, 2001
Sponsor
Deloitte & Touche Sponsor Services (Pty) Ltd, Deloitte & Touche Place, The Woodlands, 20 Woodlands Drive, Woodmead, 2196
Corporate Adviser
AfrAsia Corporate Finance (Pty) Ltd
Office 202, Cape Quarter, The Square, 27 Somerset Road, Green Point, Cape Town, 8005
Web
www.convergenet.co.za
Date: 13/06/2014 03:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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