directors’ report

The directors have pleasure in presenting the annual financial statements of Blue Label Telecoms Limited (Blue Label Telecoms) and its subsidiary and associate companies (the group) for the year ended 31 May 2008.

Nature of business

Blue Label Telecoms is a leading distributor of prepaid secure electronic tokens of value and transactional services within emerging and developing economies. Its core business is the virtual distribution of secure electronic tokens of value (predominantly prepaid airtime at present) and transactional services across its global footprint of touch points.

Listing

Blue Label Telecoms listed in the Mobile Telecommunications sector of the JSE Limited on 14 November 2007 under the abbreviated name of Bluetel. The listing was done by way of a private placing. The main purpose of the private placing was to raise capital in order to fund current and future operations including the expansion of the group.

The company registration number is 2006/022679/06.
The registered office is 75 Grayston Drive, Morningside Ext 5, Sandton, South Africa.

Share capital

Authorised capital

The authorised capital of the company comprises 1 000 000 000 ordinary shares of R0,000001 each.

Issued capital

As at 31 May 2008 the issued share capital of the company was R766 divided into 766 360 894 ordinary shares of R0,000001 each. Other than the shares issued in terms of the private placing, no shares were issued during the period under review.

Refer note 13 to the group annual financial statements for full details of the share capital of the company.

Financial results

Full details of the financial position and results of the company, the group and its segments are set out in the annual financial statements, and group annual financial statements.

Dividends

Blue Label Telecoms expects to initiate a competitive dividend policy from the financial year commencing 1 June 2010. It is anticipated that interim dividends will be paid in February and final dividends will be paid in August of each financial year, in the approximate proportion of one-third and two-thirds of the annual dividend, respectively.

Subsidiaries, associates and other investments

Particulars of the principal subsidiaries, joint ventures and associates of the Blue Label Telecoms group are provided in note 29 to the annual financial statements.

Strategic initiatives and acquisitions

Microsoft Corporation (“Microsoft”)

As previously disclosed to shareholders, Blue Label Telecoms and Microsoft signed a strategic collaboration agreement in November 2007 to provide each other with mutual assistance in exploring new business opportunities and preferred partnership initiatives across the world’s emerging and developing economies. To date, the group has made significant progress with respect to integrating its core technology and services infrastructure into Microsoft’s service platforms, allowing for the imminent delivery of co-packaged services to support key group requirements, including those of the group’s mobile services business.

Content Connect Africa (Proprietary) Limited

In January 2008, Blue Label Telecoms concluded an agreement to acquire the entire issued share capital of Content Connect Africa (Proprietary) Limited (“CCA”) for a consideration of R30 million.

CCA is an aggregator and provider of on-portal and off-portal localised content to mobile operators and third-party clients throughout Africa. CCA’s core business includes the distribution and marketing of mobile music, games and entertainment; interactive television; television and in‑store music as well as the exclusive local rights to Prefueled, a full scale kiosk and web-based digital entertainment provider of music, video, games and lifestyle products.

Little River Trading 181 (Proprietary) Limited trading as Crown Cellular

On 29 February 2008, the Competition Tribunal unconditionally approved the acquisition of the assets of the business conducted by Close Trade 393 CC trading as Crown Cellular (“Crown Cellular”) by The Prepaid Company (Proprietary) Limited, a major subsidiary of Blue Label Telecoms. The purchase consideration for the acquisition amounted to R90 million.

Crown Cellular is a wholesaler of prepaid airtime to the informal market. The business has successfully penetrated this market, due to its ability to make product available through otherwise difficult distribution channels. The business operates through exclusive supply agreements entered into with owner-managed cash and carry stores.

For further details of acquisitions during the year, refer to note 24 to the annual financial statements.

Post balance sheet events

Subsequent to the financial year-end, Blue Label Telecoms, or its subsidiaries have entered into the following transactions:

• Blue Label Telecoms purchased a 50% shareholding in a procurement company called Demtrade 11 (Proprietary) Limited for R3,03 million. The objective of the purchase is to centralise group procurement in order to realise greater efficiencies from the restructured group and to ensure the co-ordination of Blue Label Telecom’s BEE procurement initiatives. The company shall operate as a profit centre and shall seek also to offer similar services to external operations. The operational minorities in the company have extensive experience in the procurement field, gained both in businesses that they established themselves and in listed procurement and logistics companies.
• Gold Label Investments (Proprietary) Limited (“Gold Label”) (a wholly owned subsidiary of Blue Label Telecoms) increased its stake, via sale and subscription, in Oxigen Services India Private Limited (“Oxigen”) (following a slight dilution occasioned by a share issuance to employees) to 38,85% for a consideration of US$9,15 million. This was pursuant to an agreement entered into with Microsoft Corporation who also took up 38,85% of the shares in Oxigen. Following receipt of approval from the Reserve Bank, the additional shares were transferred to Gold Label in June 2008.
• Gold Label has acquired a 17,25% interest in a United Kingdom based company called Smart Voucher Limited (trading under the name of Ukash) for an amount of US$6 million. That permission has not yet been obtained. Gold Label also has an option to purchase an additional 32,75% in the company in the next three years. This company has developed valuable proprietary technology which enables the purchase of a prepaid voucher that may be redeemed for online products and services, and will be integral to Blue Label Telecom’s mobile strategy in the future. The company has a footprint in Western Europe and intends to expand into developing markets, such as India, which have populations that are technologically sophisticated but are often unbanked.
• Blue Label Telecoms has jointly established Blue Label Mexico, with Nadhari S.A. de C.V., a Mexican company that has expertise in the strategic and operational development of products and services within emerging markets. Blue Label Mexico has been created to pursue opportunities which are complementary to Blue Label Telecom’s current areas of business. The establishment of a business presence in Mexico is an important step in the group’s goal of creating a transaction-based distribution network in the emerging markets of Latin America. Blue Label Telecoms has subscribed for 50% plus one share of the company for US$3,5 million.
• Content Connect Australia (Proprietary) Limited was established by Blue Label Telecoms (holding 50,25% for a subscription price of AUS$500 000), Shark Reef Enterprises Limited and Daniel Segal, in Australia. The company owns or has access to significant music and other content which it makes available to Australian consumers online and through their mobile devices, utilising the model successfully developed by Content Connect South Africa (Proprietary) Limited.
• Answers Direct (Proprietary) Limited is a company established by Blue Label Call Centre (Proprietary) Limited (80% held following a subscription for R150 000) and the balance held by the founding member of the close corporation out of which the business assets were acquired. The company operates an inbound and outbound call centre business. Its acquisition is consistent with the strategy of the call centre segment of the Blue Label Telecoms group to acquire additional call centre seats through which it can sell its suite of products.
• Africa Prepaid Services RDC SPRL (a subsidiary of Africa Prepaid Services (Pty) Ltd) purchased a 51% stake in a business called E-Talk Box DRC for a purchase consideration of US$400 000. The company has successfully implemented a community based call box solution in the Democratic Republic of Congo.
• The company is in the process of finalising a share incentive scheme for staff members. The arrangement shall be in the form of a forfeitable share plan and shall be presented to shareholders for approval at the upcoming annual general meeting.

Directorate

The following were directors of the company for the period under review:

In accordance with the company’s articles of association all directors will retire by rotation at the company’s first annual general meeting to be held on 12 November 2008. The directors have offered themselves for re-election by shareholders.

Directors’ interests

The individual interests declared by directors and officers in the company’s share capital as at 31 May 2008, held directly or indirectly were as follows:

The aggregate interest of the current directors in the capital of the company was as follows:

The beneficial interest held by directors and officers of the company constitutes 31,65% of the issued share capital of the company and the non-beneficial interest represents 0,32% of the issued share capital.

Subsequent to the disclosure of directors interests contained in paragraph 18 of the pre-listing statement (“PLS”), but prior to listing, the following changes occurred in the direct and indirect beneficial interests that directors have in the shares of Blue Label Telecoms:

• Paragraph 18 of the PLS described the beneficial interests of the directors in Blue Label Telecoms prior to the private placement, as well as their interests after the private placement. A portion of the private placement consisted of the offer for sale which represented shares disposed of by the original Blue Label Investment shareholders to settle funding obligations. The calculations in paragraph 18 of the PLS reflecting the movement between the “Before the Private Placing and after the Restructuring” and “After the Private Placing” tables was based on the mid price of R6,25 of the private placing range of between R5,75 – R6,75. The actual private placing price was R6,75 resulting in the actual number of shares sold being less than that assumed in the PLS. In this regard, the actual number of shares after the private placement, held by the affected directors, was:
  Mark Steven Levy – 79 170 638;
  Brett Marlon Levy – 78 375 183;
  Mark Vivian Pamensky – 6 657 081;
  Larry Michael Nestadt – 7 695 013;
  Gary David Harlow – 3 078 005;
  Herbert Cedrik Theledi – 34 683 312;
  Neil Norman Lazarus – 7 695 013.
• Paragraph 18 further detailed the acquisition of R50 million of Blue Label Telecoms shares, which equated to 7 407 407 shares, which was intended to be funded by Brett Marlon Levy on behalf of certain employees. This initiative has not been proceeded with as Blue Label Telecoms has decided to implement a group wide share incentive scheme, the details of which are provided above, and which will be voted on by shareholders at the Blue Label Telecoms annual general meeting. The shares have therefore been retained by Brett Marlon Levy.
• In accordance with paragraph 61 of the PLS, the directors listed below disposed of shares in terms of the further allotment option awarded to the bookrunner at the bookrunner’s discretion:
  Mark Steven Levy – 9 335 018;
  Brett Marlon Levy – 9 335 018;
  Mark Vivian Pamensky – 501 070;
  Herbert Cedrik Theledi – 4 801 898.
• Mark Steven Levy and Brett Marlon Levy’s shares were disposed of as part of Microsoft Corporation’s 12% acquisition of Blue Label Telecoms. Shotput Investments (Proprietary) Limited also disposed of 15 918 545 shares to Microsoft Corporation (thereby reducing the indirect interest that Sidney Ellerine has in Blue Label Telecoms). Mark Vivian Pamensky’s and Herbert Cedrik Theledi’s shares were disposed of in the open market.
• The shareholding within Nthwese Investment Holdings Corporation (Proprietary) Limited (“Nthwese”) was reorganised during this period. As part of the reorganisation, Joe Mthimunye’s interest in Nthwese (and thus his beneficial interest in the company) was disposed of.
• Following the reorganisation of the shareholding in Nthwese, Reitumetse Jackie Huntley and Herbert Cedrik Theledi each currently hold a beneficial interest in Nthwese of 3,8% and 56,2% respectively, resulting in an indirect beneficial holding in Blue Label Telecoms of 1 368 998 and 20 246 763 respectively.
• As part of the preferential placement (see page 1 of the PLS) shares in Blue Label Telecoms were allocated to Gary David Harlow’s spouse (14 815 shares), to Neil Norman Lazarus’ spouse (177 778 shares) and to a company in which Sidney Ellerine has an indirect non-beneficial interest (2 222 222 shares).
• Reference was made to the SENS announcement of 15 November 2007, which provided details of the refinancing of Nthwese, Blue Label Telecoms’ BEE partner. Certain directors of Blue Label Telecoms purchased shares from Nthwese’s financier under a funding arrangement entered into by Nthwese pursuant to its purchase of the Public Investment Corporation’s interest in Blue Label Telecoms. In this regard Brett Marlon Levy purchased 4 115 755 shares, Mark Steven Levy 3 319 300 shares, Mark Vivian Pamensky 409 727 shares, Neil Norman Lazarus 509 660 shares, Gary David Harlow 199 866 shares and Larry Michael Nestadt 509 660 shares.
• The announcement referred to above further advised that Nthwese sold eight million shares into the market on listing, as part of its financing arrangements.

Resolutions

The company passed and registered a special resolution on 28 September 2007 approving the following:

1. The sub-division of the company’s shares.
2. A specific repurchase of shares to facilitate the listing.
3. The change of name of the company to Blue Label Telecoms (Proprietary) Limited.
4. The conversion of the company into a public company.
5. The adoption of new memorandum and articles of association.
6. The acquisition by the company or any of its subsidiaries of the company’s shares.

No other special resolutions, the nature of which might be significant to shareholders in their appreciation of the state of affairs of the group, were passed by the company or its subsidiaries during the period covered by this annual report.

Secretary

The company secretary is E Viljoen. The business and postal address of the company secretary appear at the end of the Notice of Annual General Meeting.

Auditors

PricewaterhouseCoopers Incorporated will continue in office in accordance with section 270 (2) of the Companies Act.